S3 E5: The Perfect Storm

A multitude of macro-monetary storm fronts are converging on the US Dollar and are coming from a variety of directions, putting the US currency on the defensive, and opening the door for a technically significant violation of the multi-year bull market trend.

Indeed, the US Dollar is on the verge of executing a major long-term, secular-trend-reversal to the downside, one that would (will) carry serious, game-changing consequences for ALL major markets, particularly as Germany and France move towards fiscal loosening, debt expansion, and money printing to pay for increased defense spending, driving the EUR sharply higher, and as Eastern European currencies soar on hopes for an end to the Russo-Ukraine War.

Throw in a US consumer who remains in the chokehold of inflation and is ready to "tap out", as Tariff Wars pushes inflation expectations dramatically higher, AND mix-in a mini-meltdown in asset prices linked to Semiconductor sector and Crypto...and BAM, the Perfect Storm is forming!

In today’s episode of Money, Markets & New Age Investing, "The Perfect Storm". I will share with you where you might seek "cover" from the storm!

Transcript

Trump Effect and Eastern European Currency Surge

Speaker 1 0:01

Hi, greg Weldon here with Season 3, episode 5 of Money Markets and New Age Investing. Today we're going to do one we call the Perfect Storm, and I talk about the Perfect Storm as it relates to the US currency. We have multiple storm fronts that are cycling, circling, converging in a way that has pummeled the dollar and could pummel the dollar further, and that has far-reaching ramifications for the investment horizon. We kind of start with the Trump effect and in a way that I don't hear a lot of people talking about, when it comes to currency. Sure, the currencies against which we're proposing to or have imposed tariffs the Canadian dollar, the Mexican peso, the Chinese renminbi, south African rand and a host of others these currencies have come off hard. The dollar's, you know, been bid on that but this has kind of happened over the past month or so, since January, since the inauguration leading into this. But what we've seen since then was an unintended consequence of this, with a potential peace in Ukraine, with the potential end to the Russo-Ukrainian war, with the potential dynamic of the currencies that have been most hurt by that war in Eastern Europe, that have no trade with the US to begin with, so they weren't even in harm's way with the tariffs, aka the Polish Lodi, hungarian Forint. You also look at the Czech Korona, the Bulgarian Lev. I mean, there's a whole host of currencies here that have skyrocketed. Not only that, but these are currencies where inflation was really high.

Germany's Fiscal Shift and Market Impact

Speaker 1 1:44

In these countries. The central banks were really aggressive in raising rates, which has brought inflation way down, where now they have very strong underlying economies manufacturing sector, retail sector, employment sector all gelling because they got so hurt by the war and then hit the currencies took by inflation and these are hot places. All of a sudden these currencies are strong and that is hurting the dollar, which is an unintended consequence, and one number storm. Then you have germany and france. All of a sudden, us going to pull aid from the ukraine and germany and france not this laughing, but it kind of is look at each other and go oh, you know shit, we got to pay for our own defense because we've gotten so far so long on the back of NATO and US spending. We have to now expand debt and to do so in the EU, they basically have to change the Constitution for all intents and purposes to allow them to become fiscally loose.

Speaker 1 2:44

Austerity is over and what's interesting about this is you know, I'm concerned about some land exchange from Ukraine going to Russia and that's going to embolden Russia to take further steps and they have to get up their defense spending. Well, that's kind of narrowly focused. A lot of that might even be imported, I dare to say. But what's interesting about it is that when you look at the situation in Germany, which is considered the bedrock of Europe when it comes to austerity, when it comes to debt, when it comes to deficits, if you remember like I do, like it was yesterday the Maastricht Treaty 1992, which the prelude to that was the exchange rate mechanism and all the rules around how they were going to converge all these currencies for European Union in 1990. Many of these countries needed really strict, tight monetary policy to bring inflation down, to get their currencies in line within a band around the German D-Mark, and then that would become the new Euro, which is, of course, the way it happened.

Speaker 1 3:41

But if you know, the big thing was, you know, debt, and especially after. You course is the way it happened, but if you know, the big thing was debt, and especially after the sovereign debt crisis of 2011,. Because in 1992 they had all these rules on debt. Nobody followed them. They were supposed to be penalized If you were greater than 60% debt-to-GDP ratio and increasing. You're supposed to be penalized If you had a budget deficit greater than 3% of GDP and you expanded that the following year. You were supposed to be penalized.

Speaker 1 4:08

Of course, 2008 blew that out, 2011 completely blew that out and all of a sudden, you have a sovereign debt crisis, to the extent to which Germany, the stalwart, the solid figure may not be so solid, and it may be a relative solid as opposed to bedrock solid, all right. First of all, germany is not one of the seven EU nations that have a debt-to-GDP ratio currently below 60. Okay, latvia, Lithuania, croatia I mean, I forget all the countries but only two main countries, the Netherlands and Ireland. All right, not Germany, all right. Germany is 62.9 and now going to expand All right.

Speaker 1 4:54

But what makes this interesting is German debt is already 2.489. Let's call it 2.5 trillion euro. It's up 31% in the last five years since 2019. All right, it had come down from its highs in 2011 to 2019 on the back of a string of budget surpluses for eight years in a row. And again, this is the German bedrock, and it was at one time for a very brief period of time, okay, but in the last five years, after COVID, all right, 31% increase in debt to a record 2.5 trillion, five years in a row.

Speaker 1 5:29

Now you're talking about budget deficits, all right. This past year, 2024 deficit, 2.7% of GDP that was deeper than the last two years and the fourth deepest single year budget deficit in 15 years in Germany. And they haven't even started this program yet. I mean, come on, that's kind of crazy. But let's dig deeper, because the deficit got worse despite the fact that they cut spending last year. So what does that imply? Duh, it implies that revenues plummeted in 2024. Which, of course, we also know to be true. So in that context, you're going to now expand spending, expand debt, and yeah, they need to, I get it.

Speaker 1 6:15

But let's look at the math and the impact on the markets versus the real reality of the security issue, all right. Then again, keeping in mind the debt, public debt, government, you know, federal government debt in Germany 2.5 trillion euros. The Bundesbank's balance sheet is 2.4. It's a 90 billion difference in trillions of dollars of debt and balance sheet. In essence, I could say I could make this argument in a debate that the Bundesbank has monetized 96% of German government debt. That is a very high number and that is kind of a problem when you're considering doing what you're considering doing here.

Speaker 1 7:01

Let's take it a step further. Look at commercial banks 1.9 trillion in loans outstanding. M3 is 3.9 trillion. Gdp is 4.5 trillion and, worse than that, gdp has been down negative contracting year over year for the last five quarters. Germany is in a recession and inflation is well above the ECB's target. The definition is stagflation. I've been talking about that since season one in the podcast. All right, we're talking about the only three other times in German modern monetary history that you have had five straight quarters of GDP negative the pandemic 2009 and 10, and 2002 and 3 after the tuck bubble crash. And now and now and now they're going to expand spending.

Speaker 1 7:49

So what happens? Well, bond yields skyrocketed I mean, they just went crazy and as a result of that, you have US yields coming down a little bit which we'll talk about in a second on the back of a consumer that's sick, on the back of a stock market that's sick, all of a sudden, and you have the US yield premium over Germany coming way down. Because US yields are coming down, german yields are going up, the differential shrinks because we still have a premium. That has been the second major storm that no one predicted, coming right at the dollar and has knocked the dollar for a loop. Why is this important? Because it knocked the dollar for a loop. That's why. Because that means that now the year-over-year rate of change in the dollar is pushing negative territory. And what does that mean? It is something that is almost always a signal of higher inflation to come.

Tariffs and Rising Inflation Expectations

Speaker 1 8:43

Now let's go back to tariffs. All right, because the bottom line with tariffs is that they are going to boost inflation. I have done the math on this. On every different type of import that we will assess tariffs on. What is the dollar value of those tariffs? What is the tariff they're going to mean in terms of dollars? More it's going to cost, and I've applied that to the CPI. It's a pretty straightforward thing. It's 0.6 to 0.7. Add to year-over-year inflation. That puts inflation in the four range on CPI. That puts inflation on PCE three and a half-ish, certainly well above three. That is moving the other way from the Fed's inflation target. So this is the kind of the bigger storm that's merging here for the dollar. But even more than that is the fact that the macro backdrop in the US is crumbling very much. Like I've said it would right in the context of the way of which I said it would do it too.

Speaker 1 9:46

The consumer is choking. It's really that simple. We get the latest data on the US and just imagine this we're talking about now higher inflation from tariffs. Okay, on a consumer, that's already choking and pretty much I could say, bleeding out, on the verge of being bled out, on the verge of choking out. I mean certainly at this point, tapping out, that's the best way to look at it Tapping out. He's in a chokehold and he's tapping out.

Speaker 1 10:15

The latest data, which came Friday after the markets closed consumer credit, consumer credit up 18 billion in January Huge number. What's even more amazing is the previous month, december, was twice that, one of the largest in history of $37 billion. In the last two months combined, you're talking about $55 billion in consumer credit created, a 4.3 year-over-year rate with revolving credit 8.2 annualized. Holy mackerel, consumers on fire, consumers really healthy, and that's what all the bank CEOs, especially the guy from Bank of America, I mean. Holy mackerel, consumer's on fire, consumer's really healthy, and that's what all the bank CEOs, especially the guy from Bank of America, I mean. Holy mackerel Capital One too. I mean these two combined.

Speaker 1 10:55

I mean it's really a travesty in terms of consumer service justice. It's an injustice when you see what the credit cards are all about and the bottom line too is, by the way, just as an offshoot in this report, the Fed did not report the interest rates charged on credit cards for a second consecutive month, which I don't remember ever them doing that. That means they've gone higher. The Fed doesn't like that. They're already at record highs and this could be something interesting.

Speaker 1 11:23

But beside that, we get back to a $55 billion two-month increase in consumer credit with huge rates of change. This is really a sign of strength, right? Well, first of all, it's not a sign of strength if it's desperation and second of all, if it's a sign of desperation, that is not even real. Okay, because this rise can be accounted for, when you dig into the details, by an increase in federal government lending of student loans. The entire increase, and then some, was in non-revolving credit for student loans $22.4 billion non-revolving credit, $25.9 billion Revolving credit, aka credit cards in the last two months down $25 billion. And within that context, depository institutions have cut credit by $20.6 billion, they said in the fourth quarter senior loan officer survey. They would tighten credit further and they have Dramatically so. Federal government credit $ 22.4 billion increase, all which was student loans made up the entirety of the rise in consumer credit. All right now. Revolving credit was, in fact, up nominally for the month, but over the last three months it's down significantly. Again. It's down over $50 billion. Not only that, but the year-over-year rate, the 12-month rate, is now minus $2.4 billion. The year-over-year rate has only been negative on two other occasions, on only two other occasions in the last 40 years 2009, 2020, and now that's it. That's it, all right.

Speaker 1 13:23

So we talk about tariffs, increasing prices and inflation. What is the consumer going to do if inflation goes up even more? Well, when we look at the surveys all right, the ISM and the LMI, which is Logistics Managers Survey, and the ISM, the Institute of Supply Side Management Survey. All right, very popular surveys. The LMI is picking up steam. I'm one of the first to really follow it that religiously, because it's logistics managers that tells you where the supply chain dynamics are right now.

Consumer Credit Crisis and Employment Concerns

Speaker 1 13:46

All of these surveys, every single one of them to a T, show a monthly and several month dramatic slowing in delivery times. Now a lot of this is front loading because of tariffs, I'm afraid tariffs imports are huge. They're over 400 billion in December excuse me, in January. I mean that's a record high by far, because everyone's bringing them in front loading, which causes inventory to rise, which causes inventory cost to rise, which causes warehousing cost to rise as capacity gets utilized all right which is causing transportation to rise. The prices for all of these, all three inventory, warehousing and transport all followed by the LMI prices, are skyrocketing and higher than they were in the pandemic on a short-term basis, all right. Some of this is front-loading, but not all of it all right. So if inflation and this is in the ISM too, I mean they're both above 50, they're inverse indexes for the second month in a row, and it's both service sector and manufacturing. Not only that, but within the price indexes in the ISM, both surveys show a price index above 60 and rising New multi-month highs. It did exactly what you said it would do Inflation bottomed in October and has been on an increase ever since. But here's the really cool thing about the ISM both surveys Combining the service sector and the industrial manufacturing survey.

Speaker 1 15:08

In service sector it was 14 commodities. In the manufacturing sector it was 11 commodities In total between the two surveys. In a single month, ism firms added 25 commodities that were up in price that were not up in price a month ago, 25 key component commodities in their businesses that rose in February that were not up in January. Think about that. That's massively broad-based, massively broad-based.

Speaker 1 15:37

Now, of course, on the back of this, it's actually happening, but so too is the anxiety around consumers, because consumer inflation expectations in the various surveys have so hard man, the Fed Powell, keeps coming out and telling us inflation expectations are anchored. I say anchors away, dude, the anchor is broken, the ship is drifting. Okay, from the Fed's own New York household survey of consumers, the one year ahead median point prediction. So in other words, what are consumers predicting that inflation will be a year from now? 3.9. Up from 2.9 in October, 3.9, almost 4. Within that survey, the percentage of people expecting inflation to be greater than 4% rose to 42%, up from 37% a month ago. That's a big one too. In the University of Michigan survey, 4.3% one year ahead inflation expectation for February, up from 3.3% in January, up from 2.6% in November. I mean consumers are expecting inflation to rise dramatically at a time they can least afford to pay more for anything and they have already cut back discretionary spending, as we've seen in retail sales, where eating and drinking establishment sales are negative year over year, which again a very rare thing.

Speaker 1 16:55

But in the context of eating and drinking establishment sales being down, let's look at the employment numbers, because in the service sector we've had three upside leading groups of employment gains that have just failed, one of which leisure and hospitality linked back to eating and drinking establishment sales, second month in a row, with the decline in jobs in leisure and hospitality industry. That's the first time since the pandemic. Okay, you had just reached the february pre-pandemic high in total employment of $16.97 million and now you're dumped two months in a row. Not only that retail employment down and especially temporary help down two months in a row. Temporary help is a forward tell and we see hours declining. And within that context, of course, we saw that average weekly earnings Everyone talks about average hourly earnings doesn't matter, it doesn't matter.

Speaker 1 17:51

You get paid more an hour but you're working less hours. You're taking home less pay at the end of the week. Weekly average earnings is the number to watch is 3.4% year over year. It just declined again it was four, now it's 3.4, whereas the core CPI is 3.3. There's no wage gains. There's no wage gains, you know, and when you talk about some of these things in the report I'm doing for my clients on Monday with this same data, I mean when you compare, you know, credit card debt to savings, I mean it really is amazing.

Tech Sector Collapse and Market Leadership Vacuum

Speaker 1 18:24

I mean you don't have savings, you don't have real wage growth. You've tapped out in savings, you borrowed on the credit card the maximum amount of money at the highest rate ever to borrow, and the delinquency rate, by the way, reaching new highs. Not only is the 90-day late, seriously late delinquency rate, but so too is the transition to 30-day delinquent, in other words, new people now starting to be delinquent on their payments. That rose as well, and especially for auto loans. So you have both auto loans and credit cards now at levels last seen in 2009. Hello McFly. So what do we do with all this in terms of the markets? Because that's kind of what we want to do here Now.

Speaker 1 19:05

If you recall, I was warning about the chip sector, the XLK Infotech sector, the entire NVIDIA dynamic for basically the last two months, and man did that not come to fruition. All right, nvidia from its peak to where it closed on Friday and it bounced on Friday, all these shares in the SMH semiconductor on Friday today is the 8th, so I'm talking March 7th, you know made lows and bounced and they're going to try and save this market. But some of these stocks I mean I did a piece for my clients called Chips and Crypto because there are the tells, that's kind of the leading edge of all this and they both got whacked. I mean let's. I mean nvidia, down 26 since july. Amd, uh uh, down 46 percent. Amat down 39. Asml down 33. Micron down 40. Intel, down 60.

Speaker 1 19:58

But how about some of the crypto? I mean Solana, from its peak just in January, is down 47%. That's a primary token. If you will, I don't call them currencies, they're commodities to me. Polkadot, since peaking in December, is down 59%. Doge, since peaking in december, is down 60 percent. Trump coin, since peaking in in january, is down 73 percent.

Speaker 1 20:27

All right, and of course I have to mention fart coin. I have to because you know we've talked about it before since the 19th of january it's down 86.3%. Even Ripple, which might be the one that might have a chance to kind of come out of this and still be a survivor, was down 27% since its high at 331 on the 17th of January. It lasted 232. It's kind of holding up relatively speaking. But you see how this is the front edge of this and we know the consumer discretionary sector has gotten blasted, just blasted. The XLY, the XRT, the PNQI, which is the internet retailers all down, big all have broken down, all at new lows against the S&P and all imply 20 to 25 to maybe even more decline in the S&P 500.

Speaker 1 21:19

To catch up to kind of where the consumer is, where's the leadership coming from? Where? I mean? Powell is always calm and says, hey, we'll get inflation down. It may go up a little bit more again, but in the next year or two, and that's why he said next year or two. How nonchalant is that? That's a problem, man. He called labor market. Solid was his word. We can have patience here.

Speaker 1 21:43

But the bond market's reading it differently. All right, it sees finally, this erosion in leadership. It's in tech? No, it's in housing. No, I mean housing is just a nightmare. All right, I mean the purchase index still, you know, at near lows that we've seen since 1996 from the Mortgage Bankers Association. All right, the mortgage market remains frozen.

Speaker 1 22:01

There's a slight little bit of potential thaw here, but you need rates a lot lower to get that one going to be a leader. Right? Is it going to be China going to be a leader? Not with tariffs. Is the consumer the leader? No, Is it chips? No? Quant, that's just an element of juice, I don't think.

Speaker 1 22:18

Where's the leadership here? There isn't any. Where are you going to hide? Well, the two-year Treasury note just took out 4% on the downside, meaning the price is rallying, the yield is falling. I kind of like it. I can leverage it in the futures market, but it's not an exciting trade. And if you buy a T-bond, well, you get paid 4%, but it doesn't protect you against the perfect storm which is blowing away the purchasing power of the dollar.

Speaker 1 22:42

Because that is what it's all about here. This is the perfect storm on the dollar, let alone the black holes we talked about, with public debt higher than GDP by 186 to 1. Right, or 186 to 100, I should say. When you're talking about the consumer, disposable income versus spending being out of whack and in a black hole, when you talk about credit card debt versus savings being in a black hole, all of these things have transitioned to where it is so much more difficult to make headway when headway is what you need economically to continue to service the debt or it's going to be a bigger problem. They will choose to reflate every single time. I said in my book in 2006, when staring into the debt deflation abyss, they will print money. They will do whatever they have to to reflate at any cost.

Speaker 1 23:31

Acquiescing to higher inflation is what this is all about. That was episode two. And here it is again Stagflation. We see it in the US. Consumer inflation expectations have soared. At the same time, the decline in consumer economic expectations. From the University of Michigan, same survey dropped to 64. It was just 76. And anything below 70, again recession. You're talking 2008. You're talking 2000, tech bubble crash. You're talking 1990 for that indicator below 70. And here it is there again, along with the pandemic. The writing is on the wall. The evolution has come to this point. What's going to happen? We can see it in the yield curve. Short rates are coming down because people aren't going to anticipate. The Fed will acquiesce to higher inflation to save the stag, the stagnation in the economy, because they need growth. All right, the long end. Thus the curve steepening the long end. Yields go higher or lag, at the very least in an easing scenario, if not just outright diverge, which I think is what happens and the curve steepens because the long end takes the brunt of the higher inflation dynamic, which is definitely part of this.

Gold Mining Shares: The Emerging Safe Haven

Speaker 1 24:38

Where do you hide? Well, we see action in the gold mining shares. Gold's had a huge run, but people are not involved. Gold has been bought by central banks. They're hoarding it. If you look, actually, when I do a piece on Germany, I notice the Bundesbank's balance sheet. All right, their official reserves have skyrocketed and it's all in the price of gold because they hold gold in reserve. So central banks have smartened up. They've hold gold. They're increasing their allocation of gold because they know what they have to do. They see what's coming, they know what they're going to have to do and in this case you know it's great to buy a T-bill at 4%. It's not going to keep pace. It's nice to buy stocks here, and some stocks may do well and some stocks won't. The overall market will probably go up in a dollar down scenario, but less so than the dollar goes down in its purchasing power.

Speaker 1 25:25

This is where gold and I think again, this is a case where it's a rotation, even out of high tech. Where are they going to go? I mean, one place they could go is into the mining shares. They're hugely under-owned. The GDX, the gold mining share ETF, just broke out on a long-term basis against the S&P 500. This is a downtrend that is 15 years. That was just violated, a two-year exponential moving average which has turned up for the first time in a decade. I mean, then you're talking about the gold mining shares actually outperforming the price of gold over the last six months. Whoa, isn't that a shocker? I mean, you're talking about that kind of thing.

Speaker 1 26:06

I have said repeatedly on most of the interviews I'm on, and certainly on this podcast as well, that the time you have to be really patient with the mining shares, because the mining shares won't go until the dollar goes. And guess what? The dollar just went. The perfect storm is hitting it and in this case that is the rotation, that is the reallocation, that is some of these mining shares. And guess what? Some of these mining shares are skyrocketing. And here's the kicker the GDX gold mining share index ETF is outperforming the S&P Information Technology ETF over the last 52 weeks by double digits. Even the SLV, the silver ETF, is on my list now when I run my quantitative analysis on the mining shares.

Speaker 1 26:54

When I combine the top-down macro-monetary thing that we're talking about right here, certainly the perfect storm. We talk about the bottom-up long-term technicals where the dollar it gets below par 50, below 99.50, is a major breakdown on the monthly trends that you should see the charts. Shoot me an email, I'll send you the piece we just did on all of this. The monthly chart of the dollar is really eye-opening. And dollar, you know, in gold adjusted terms already at a record low Dollar and gold in most other currencies already a record high. It's coming in dollar terms now and that will relate into the mining shares as well. All right, when I tie this all together, I've come up with my top picks. Lately it's been the Canadian Aussie dollars and I think I've talked about that. The mining shares priced in those currencies have been the best performers. But you're starting to see dollar-based stocks come into the mix on my list of quantitative hot bullish trends and it's kind of interesting. Not going to give it away here because it's for my clients, but if you want this you can email me and as a SoPoL trial subscriber, I'll just send it to you. But it is the piece coming out on Monday with all these picks on what are the hot mining shares and really just doing this to try and help people keep pace with what's coming next, to protect the value and the purchasing power of your money, wealth, income, so on and so forth.

Speaker 1 28:18

Email me at gregweldon G-R-E-G-W-E-L-D-O-N, at Weldon Online that's one word Weldon, w-e-l-d-o-n. Online O-N-L-I-N-E dot com. Follow me on Twitter at Weldon Live. Follow the podcast on Twitter at money underscore podcast. Follow me on YouTube at Gregory underscore Weldon and stay tuned for our next episode. And lock and load man. The perfect storm is here. It's time to take action. First action you should take honestly. Shoot me an email, I'll try and help you out.