On Tuesday global equities were down a very modest amount. The U.S. DOLLAR continued it move higher as the growth story and positive nominal yields is enough to push global investors into the U.S., the center of complacency. Commodity prices started off weak but OIL, grains and even COPPER found some buyers.
The most significant moves were in the PRECIOUS METALS: GOLD, SILVER, PLATINUM and, the darling of all speculators, PALLADIUM, all put on significant rallies. The $225.00 rise in PALLADIUM prices perplexed those who perceived that the demand shock potential from COVID-19 would have the GREATEST impact on global auto production. It seems that Tuesday PALLADIUM and PLATINUM cared not about any concerns about their industrial uses. Why?
The global financial system seems to be gearing up for massive actions by the global central banks in an effort to calm the potential headwinds that a deflationary fallout would force upon the world. There is a NEGATIVE FEEDBACK LOOP in motion as the U.S. DOLLAR rally against the emerging market currencies will force corporate debtors in emerging economies to push goods out at depressed prices, from commodities to manufactured goods. Regardless of how slow economic growth turns the DEBT has to be repaid.
There is TRILLIONS of U.S. dollar-denominated debt coming due over the next 18 months. There was an opinion piece in the Financial Times Tuesday by IMF Director Kristalina Georgieva titled, “IMF CHIEF: We Are Rethinking Our Advice to Emerging Markets.” In the piece, which I believe is long overdue, Georgieva raised this critical point:
“New research indicates that while emerging markets are deeply integrated in global trade, their trade is disproportionately INVOICED IN DOLLARS and consequently flexible exchange rates provide limited insulation. Similarly, while emerging markets are substantially integrated in global capital markets, their foreign debt is denominated EXTENSIVELY IN DOLLARS. That can cause exchange rates to become SHOCK AMPLIFIERS as they can suddenly increase debt service costs and liabilities.”
This is the negative feedback loop that can send the global financial system into a deflationary spiral.
It is for this potential feedback that Federal Reserve Chairman Jerome Powell needs to CUT INTEREST RATES/OR OPEN MASSIVE SWAP LINES TO EMERGING MARKET CENTRAL BANKS that don’t already have access. There is a GLOBAL FINANCIAL CRISIS LOOMING. The recent price action in GOLD, COMMODITIES and, of course, the flattening of the yield curves portend GLOBAL CONCERNS about what the IMF director warns.
It is not inflation driving GOLD higher but concerns about central banks panicking in an effort to fight their dread of deflation in a fiat currency world. If Powell did this correctly he could head off some of the immediate fears by maintaining the cuts would be immediately removed if the COVID-19 virus proved to be a short-lived drag on global growth and potential financial impacts.
This potentially has much larger implications for the world’s financial system. Again, who is this guy Jerome? It’s time to be forthright and explain this is not meant to assuage equity investors but those economic actors with DOLLAR liabilities. Jerome do the math. Again, GOLD made even higher highs against many of the world’s currencies. Powell, it’s time to heed the wisdom of Paul Volcker and listen to the wisdom of market signals: gold, dollar, yield curves et al.