The Great Dollar short squeeze

06/09/2020 in finance, economics using tags unstoppable force, immovable object

What we are seeing is what happens when an unstoppable force meets an immovable object. The immovable object is the growing amounts of debt, while the unstoppable force is the degree of money printing to satisfy that debt. The dollar short squeeze will persist for sometime until we decide to “get back to work”, causing pretty much everything to slowly appreciate in value, even depreciating assets like used cars! Honestly this is the last opportunity to buy a cheap/imported used clunker!

How is this possible, and is printing this much currency even a good idea?
Well, if the real economy lacks the capacity to spend, the only thing this is really doing is creating bank reserves, and the primary dealers have to put this money somewhere. The recent stock rally is mostly driven by banks/hedge funds buying equities to allow corporations to live another month as their interest payments come due.

I liken this situation to a vehicle that has jumped off a ramp and the driver is flooring the throttle. There is no road beneath the wheels, so the vehicle isn’t really accelerating. As soon as the rubber hits the road, either the tires will burst (inflation) or if we’re flying off a cliff we’ll see deflation, at which point there isn’t really any point to flooring the throttle.

It’s going to be an amazing feat to drop unemployment back down to 6%, which gets us back to 2008 levels of unemployment. Despite this, there are exogenous effects such as the crime and poverty caused by the sudden spike in unemployment. Add inequality to the mix and this will likely cause more disruption, but main street will suffer more, as they typically do in these situations. As relief tapers off, we’re going to have to assess the damage, and the stock market surge will likely be used to cover the damage done in a subsequent sell off. Some corporations that see growth beyond this will be able to borrow against their own stock, resulting in increased debt without needing to sell stocks, but most corporations will seek to selling off stocks all while laying off excess labor. Labor corrections are coincided with economic recessions.

Despite this, I am still long on some US equities. This is a wonderful opportunity for oil and plastic stocks, which are at insanely low valuations. US energy has been suffering for years, and this is a great time to nibble on some oil and plastic stocks. I wouldn’t touch tech. Rather I would buy stocks in older tech companies like Xerox and IBM as they continue to dominate in their respective sectors. IBM seems to be a promising pick as their new CEO seems to be competent unlike the last one. I also see opportunity in the possibility that we may return to using paper as tech becomes even more expensive. Manufacturing may make a surprise return as we may see cheaper American products in a couple of months. Chinese goods will definitely become more expensive as trade relations sour. It might be a good time to kickstart the 4th industrial revolution, so any companies that produce manufacturing equipment as well as steel and aluminium stocks should be doing well. I actually made money in this environment :-).

I expect tech stocks to correct again, and I would not touch Chinese stocks with a 10-foot pole given that their debt problems are much worse than ours. Also, China has yet to face their own 1929 style depression, as they are relatively new to debt bubbles/capital management. As they lack any sort of accountability in financial markets, I still have no clue why anyone would buy a Chinese ADR with zero rights to claim property.

On a personal note, I was able to successfully sell my condo! It was a nice piece of property in Seattle. Sadly, Seattle will go back to being a dump after this, as the city council is run by socialist clowns. I expect city real estate demand to pretty much dry up, as it always does after riots. A Chinese equity crash will likely result in US real estate devaluation as they are stuck with force selling their overseas assets to cover their debts at home. This will continue to devalue real estate, making it more affordable for the next generation! I see a real estate crash as a break for the millenial generation.

Hopefully by the end of this, we can see the return of manufacturing jobs! I am incredibly bullish for midwestern real estate as many of these manufacturing jobs will return to the US. The poor/working class have only gotten the bad end of these free trade deals, and it is high time to return many of these jobs back to the US. It may take a couple of years to return back to 3% unemployment though.

comments powered by Disqus