this is the thing people aren’t talking about – we live in a global economy. If the dollar strengthens too much too quickly, global borrowers who borrowed in U.S. dollars because U.S. interest rates were the lowest in the world, which adds up to about $9 trillion in loans, would be facing higher debt service costs as their currencies fall in value relative to the dollar.
Then consider what would happen if those foreign borrowers have to earn revenue in their own currencies selling commodities like oil, copper, iron ore, or steel, the prices of which keep falling as global growth slows and the U.S. dollar appreciates.
No one really knows what would happen, who would default, if countries saw massive capital flight and their currencies collapsed, what kind of recession or depression we might enter, or which countries would be at risk of social unrest, or worse.
The Fed can’t normalize rates any time soon. All they can do is raise rates a small amount and see what happens.
But just because the Fed can’t raise rates much or for long, doesn’t mean even a small raise wouldn’t upset financial markets here and globally. It could happen.
If the Fed doesn’t raise rates at their next meeting, we’ll have to watch the financial markets to see how they react. They could rally, or they could sell off… but no one knows because we’ve never been here – or anywhere near here – before.
If they raise rates and markets sell off, the dominos will begin to fall – stocks will tumble, bond prices will take a hit, and commodities could see fresh new lows. The dollar will rise, hitting emerging economies particularly hard.
And what would be a better play than being long on volatility. I really like TVIX in this environment. All the best...
