It seems like the only thing I hear in the financial media these days is talk about when the Fed will raise interest rates but I think people are missing the forest for the trees. The US dollar continues to surge higher and by letting it rise, effectively the Fed is already tightening. I don’t think stocks fell on Friday because investors are worried that the Fed may raise rates soon – I think the market is finally realizing the negative impact of a rising US dollar.
I’ve been increasing exposure to long-term bonds lately and added more yesterday during the drop. Regardless if/when the Fed raises short-term rates I don’t think the long end of the yield curve is going anywhere but down (a flattening curve).
The mountain of debt the world has piled on the past few years is very deflationary because it takes an ever-increasing amount of money to service the debt (interest payments and inevitably repayment). This means less money available for productive means of investment for the future. This is why Central Banks can print as much money as they want and we aren’t seeing any inflation. All you have to do is take a look at the collapse of commodity prices over the last year as confirmation. Stocks and commodities are telling two very different stories and it will be interesting to see who is right.
At this point, I think it’s all but a matter of time before we see any number of the following risks unfold:
- Greece exits the eurozone
- Another Emerging Market crisis hits (good chance it occurs in Asia) – bad for both EM stocks and bonds
- Defaults from high-cost producers in the energy industry
- And the big one… China devalues the Yuan. Which, at this point, I think they’ll simply call it “revaluing” to a trade weighted basis against everyone else. The peg to the US dollar means the Yuan has appreciated almost as much as the dollar against every other currency at exactly the wrong time now that China is on the verge of a credit crunch. The size of which no one actually knows.
This means the possibility of credit markets tightening up is very high so I’ve been reviewing our holdings the past few weeks to assess their amount of leverage (debt on the balance sheet) and future problems if/when this debt comes due whether they’ll need to return to the markets to issue new bonds. Might not be so easy for them… so I completely sold out of a few stocks (Dow Chemical & Equinix) this past week. These problems won’t arise in the immediate future but better to be early than late when money is on the table.
I also sold Agrium and Hain Celestial – more from a valuation perspective, not a debt concern. I will gladly revisit either at lower prices. And I started buying stock in a new company but I’ll touch on that in my next post. I hope everyone enjoys the weekend! It looks like some warmer weather is finally coming. Funny when 45 degrees feels “warm.”
-Nick