Operation Meltdown

Engage Maximum Safety Mode, Keep Calm and Carry On

(Source: Getty Images)

Joel Bowman, checking in today from Armação dos Búzios, Brazil...

It’s days like today when nobody wants to be the messenger... 

Stocks ended down for the fourth time in five days (and the fourth time in five weeks) on Friday. The Dow Jones Industrial Average fell almost 500 points to close the session down 1.6%, the S&P 500 slid 1.7% and the Nasdaq, dragged lower by the tech swooners, fell 1.8%.

The US indices were down 4.5, 5.2 and 5.5%, respectively, for the week. Their year-to-date performance is similarly bleak. 

The Dow is now tickling official bear market territory, off 19% and change for the year. The S&P 500 is already there, down 23% year-to-date. The Nasdaq finds itself lower by almost one-third, off by 31.4%. 

Where to hide?

Oil is lower... West Texas Intermediate (WTI) slid beneath $80 per barrel on Friday... this comes even as, according to documents “seen by Bloomberg,” Russia plans to cut gas exports by as much as 40% over the next three years... 

Elsewhere, gold is off... the Midas Metal fell to $1,650 per ounce on Friday, down 8.4% for the year...

Crypto is bleeding... Bitcoin slid to $18,800 yesterday... the digital bellwether is now down roughly ~70% from its all time high of less than a year ago. 

Meanwhile, the USD continues its international dominance (ahem... not counting the Russian Ruble)...

This time last year, the Greenback would have bought you 0.85 euros. Today, it’ll snag you just over 1.03. 

It’s also up against the Australian dollar (from 1.37 to 1.53), the Japanese Yen (from 1.10 to 1.43), the Chinese Renminbi (from 6.47 to 7.13) and the British Pound (from 0.73 to 0.92). 

So, is this the time to cash in your high flying Greenbacks and retire to a little cabin, say, somewhere on the Brazilian coastline? (After a bit of up and down, the Brazilian Real and the USD are more or less where they were this time last year, at about 5:1.)

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Here’s BPR’s Investment Director, Tom Dyson, in his note to members this past Wednesday...

The US Dollar is on top of the world right now, at multi-decade highs against the Yen, the Euro, the Pound and nearing multi-decade highs against the Renminbi.

But to most Americans, the dollar's strength against other paper currencies doesn't matter. Why is the dollar so strong when the economy is entering recession, the stock market is in correction, and the government is $31 trillion in debt?

The key to making sense of the price action is that the Federal Reserve is taking interest rates much higher than investors expected months ago. It’s a real surprise. Earlier this week, the Fed hiked rates 75 basis points, to over 3%. More rate hikes are likely.

A cascade of consequences follows from this, in stocks and natural resources, in the currency markets, and in the bond markets. It is all linked together. 

Treasury bonds are a $24 trillion market. They are the bedrock of the global financial system, considered to be the safest and most liquid asset in the world, and the main source of funding for the U.S. government. The market must function smoothly. If it doesn’t, the whole system breaks down chaotically.

The only other time we’ve seen a trading breakdown in the Treasury market was in the early days of the pandemic. That time, the Fed was able to restore order. But it took the largest and fastest central bank intervention in history to do it.  

Now the dysfunction in the Treasury bond market has come back. 

The corporate bond market is showing signs of distress, too. Dysfunction and illiquidity in bond markets is exactly what I’d expect to see in the beginning stages of a financial crisis. This is something we must watch closely.  

In short, there’s a giant financial storm approaching. It edges closer every day. No landfall yet, but the rain is getting heavier and the gusts are getting stronger. 

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So where does that leave us, dear reader? 

“We remain in maximum safety mode,” Dan reiterated he and Tom’s investment strategy in his Friday research note to members. Dan’s eying the credit markets for signs of stress... in particular the inverted yield curve (where the cost of borrowing money short term is higher than the cost of borrowing long term) as a sign of deepening, protracting recession.

“The recession started in the first quarter of this year,” he reminded members. “It may continue in 2023...”

If you’re not already receiving Tom and Dan’s research, we invite you to jump on board below. If you’re already on the list, the message is simple: Engage Maximum Safety Mode, Keep Calm and Carry On. 

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And now to Bill Bonner’s daily missives from this past week…

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And that will do it for today. It’s pelting rain outside our little cabin here in Brazil and the wind is whipping in across the Atlantic. Luckily, we grabbed provisions – a deck of cards, a bag of limes and a bottle cachaça - earlier this morning…

We’ll be back tomorrow with your regular Sunday Session, in which we’ll take a look (with your help) at a kind of golden ratio we haven’t seen explored before, but that we think you’ll find most interesting…

Until then, stay dry…

Cheers,

Joel Bowman