On the Verge of Breaking...
But Not Quite Broken...Yet
On Friday, the British Pound (GBP) lost more value vs. the US Dollar (USD) than the Nasdaq (QQQ) did.
The Pound lost about 3.5% of its value vs. the Dollar…
…while the QQQ Index (which tracks the Nasdaq) only lost 1% of its value vs. the Dollar.
And this last leg down for GBP vs. USD is part of a broader trend.
Here’s a zoomed out view of the first chart:
The former Queen must be rolling over in her grave knowing that the money those rebellious colonists created is sucking the life out of her precious Sterling.
But it’s not just the Pound that weakening compared to the Dollar; all other fiat currencies are feeling the pain.
(And of course the great irony remains inflation is still over 8% in the United States.)
Some bigger names in the finance space have talked about the Dollar blowing up or being abandoned not because of its weakness, but because of its strength.
The Dollar is so strong because:
Over 80% of the world’s debt is denominated USD
Oil markets are predominantly settled in USD (which is why the Dollar is sometimes called the “Petrodollar”)
While indebted countries can’t do much about the first issue, they can do something about the second, which is why we are starting to see some countries start to settle oil transactions in a currency other than USD.
If the Dollar remains this strong or continues to grow in strength, we will likely see this trend accelerate.
So, the big question remains: how much higher does the Fed want the DXY to climb?
Because if it wants to send it into what would basically be price discovery (above 121), we’re talking about not just developing countries getting crushed, but major economies.
To get a better gauge of what sentiment regarding this issue is like outside of the US, I texted a former S. Korean student of mine who is trained as an economist to ask her if people S. Korean were nervous about the S. Korean Won (KRW) losing value against the Dollar.
Her response: “Many people worry about it”
As I’ve been following this trend with the Dollar, I’ve also been noticing more and more tweets about how previous metals are on the verge of a massive breakout.
Here are a few of said tweets:
If precious metals break out, bitcoin (BTC) will likely move with them.
I’m sharing all of this mostly because I feel my Spidey senses tingling (which, in reality, probably means very little).
If the Fed keeps pushing as hard as it has been, though, things will likely break.
The main questions currently on my mind are: Does the Fed induce the crash or does it let markets out of the chokehold it’s trying to keep them in and let them melt up before they crash on their own? Or is the situation out of the Fed’s control at this point?
My answer to these questions: I don’t know.
I’m doing the best I can to listen to people who have been in this game much longer than I have, and most of them agree that the Fed is on the verge of breaking major financial and economic systems. What the Fed does from here, though, is anyone’s guess.
I do think we see the S&P 500 between 1800-1900 (50% drop from current levels) within the next year or so, though. I’m just not sure which route we take to get there: melt-up or melt down.
As always, I don’t share any of this as financial advice. I just share it for educational purposes. Please be careful and err on the side of caution in your financial decisions.
We’re living through some very chaotic times. This is some really wild stuff to document/analyze.
Best,
Frank
Twitter: @francorva
