The European energy crisis is creating some really unexpected effects in the markets right now.
We’ve got “lopsided inflation” happening which is leading the Euro to sell off strong against the Dollar…
But we’re just getting started, take a look at what’s happening with the Dollar against the Yen:
The faster this moves, the more “tail risk” is created in the markets.
Inflation is kind of like a horse race… normally having a 3-legged horse is not a good thing…
But if you’re only racing against other 3-legged horses… it’s a different picture.
Even if inflation rolls over, it’s not like it’s going to sink back to 2% levels any time soon.
We’re probably looking at systemically high inflation for the foreseeable future.
The only “saving grace” (if you can call it that), is that every other major economy is in worse shape.
Here’s a few good quotes from Schwab analysis:
“There simply aren’t many alternatives to the dollar that will fill these needs. The euro plays a large role in financial transactions, but its fragmented bond markets and long period of negative interest rates have limited its usage. Japan’s zero-interest-rate and yield-curve-control policies make it unappealing.
There is always speculation about China’s yuan becoming more prominent as a global currency, but it’s not even freely convertible due to capital controls.”
“We suggest investors keep allocations to non-U.S. fixed income securities to a minimum.”
The pain that this will bring to emerging market currencies will be brutal!
They take on dollar-denominated debt in order to secure superior rates…
But they sell goods and earn in their local currency.
Like the Turkish Lira:
So what does all this mean?
If the Dollar keeps getting stronger… large international companies get hammered since they can’t export.
So net-net…as bad as it seems… the US consumer may be less screwed than everyone else.
And if deflation picks up in economies outside the US, the Fed could cool their jets before a deeper panic sets in.
The most intriguing aspect of this trade is that it’s so contrary to most expectations.
Almost everyone is gearing up for markets to take a major nosedive which means the upside might be under priced.
It’s something I call “Dark Deep Value”… it’s like a shiny gold coin in a pitch black room.
You need night vision goggles to see it.
If you want to know more about this… including how to play it… check this out:
Original Post Can be Found Here