Hey There Income Hunter,
Yesterday’s first quarter -1.4% GDP is the type of news that shows the pain points of a strong dollar …
A strong dollar means foreigners must pay higher prices for US goods relative to their own… That creates the trade deficit that increases our debt burden.
With the Bank of Japan doubling down on modern monetary theory (MMT), the Yen has broken out above a key psychological level, which is disrupting FX price stability and may add even more tightening to the financial system.
MMT is a popular policy mechanism deployed when a government is experiencing heightened debt crisis conditions similar to Japan. At a debt-to-GDP ratio of 250% Japan is in a debt trap that could turn into an economic suicide if interest rates rise …
When a country reaches levels of debt to GDP above 100%, the debt level grows simply based on the new money (increased debt) that needs to be printed just to pay the interest payments on the debt.
When debt/GDP gets above 100% you’ve reached the point of no return …
Because that large of a debt burden suffocates the economy from growing as debt interest payments absorb excess income … making it impossible to GROW your way out of the debt burden.
From here a government must choose between:
- Letting the economy go through a total collapse with debt defaults and restructuring
- Continuing to print to create high inflation while holding down interest rates …
The US is now at 125% debt/GDP and No. 2 will be our only choice as well in the years ahead …
Today we will look at the dire situation in Japan and what this means for the US economy and markets
A Melt-up in the Dollar/Yen
The dollar has reached its highest level since 1999 (130) and it is approaching the highs reached during the dot-com crisis at 135 …
The Bank of Japan is keeping local yields anchored to the floor (.25%) while their US Treasury equivalents surge on expectations for aggressive Federal Reserve rate hikes (2.87%).
This gap in Japan/US yields of 2.62% is the widest in 3-years, as the Fed’s tough talk on inflation has put pressure on Treasury bonds.
Now, the BOJ’s aggressive money printing – to buy all Japan's securities, and hold the bond rates below .25% – is finally lifting consumer prices …
The reason why this policy achieves Japan’s objective of higher inflation to reduce debt is because the weaker Yen forces consumers to buy foreign goods at higher relative prices …
The BOJ has said it won’t change policy until inflation is stable above its 2% target. It is currently at 1.2% …
US Ramifications of Stronger Dollar
Yesterday’s negative print for US growth shows how damaging a soaring dollar can be for growth.
Think about it this way …
If the US currency strengthens as Japan’s currency is weakening, then Japan’s goods are cheaper for US consumers to buy than buying from firms here in the US.
So, the US exports decline and imports grow. That means the US Trade Deficit is getting worse and the US needs to print more money to fund that deficit …
The graph below illustrates the economy moving into negative growth territory for the first time since Covid hit. One more quarter and the US will officially be in recession …
Bring It Home
Let’s remember how the Fed fought the inflation narrative with their “transitory” message until they were forced to admit inflation was sticky …
Well, now it is there pounding the table on how strong the economy is, which it isn’t.
I am sure they will try and write yesterday’s number off with their usual ignorance but they will have to admit that our economy is not strong in the months ahead and hint at an end to the tightening cycle …
I expected the US economy to suffer a recession that would begin as early as this quarter – and this GDP report says the recession may have already started.
Under this scenario, bond ETFs like IEF backtest to provide excellent gains, and consumer discretionary stocks also provide excellent gains from the short side …
But as long as the Fed fights hard to convince investors they are still in control and this GDP report is a temporary blip, it may take a while for these trends to kick in … It is prudent to wait for technical patterns to support the fundamentals so you can better manage the trade.
Live and Trade With Passion My Friend,
Griff