Financial Health Update

For those who have asked what they can be monitoring to gauge how much pressure the global economy is facing, I can suggest keeping an eye on the Euro and Yen. Both have fallen mightily against the USD because while the U.S. central bank continues to raise its fed funds rate to combat inflation, the European and Japanese central banks have little choice but to continue printing their respective currencies to buy their own government bonds to keep yields low enough to avoid mass insolvencies.

Put another way, most countries face the same choice: They can stop printing money to buy their own government bonds, and allow free markets to determine yields, in which case interest rates will skyrocket, leading to mass defaults on all types of debt. Or they can continue to print money to buy their own bonds to keep interest rates low, which helps prevent mass defaults but weakens their currency.

My view is that the U.S. central bank will continue to raise their fed funds rate until we get closer to midterm elections in the States. By then, inflation prints will be lower via demand destruction, and the U.S. central bank will be able to pause and possibly even reverse rate hikes since they can say that they have been able to tame inflation. Until the markets smell such a pivot, notwithstanding relief rallies, my base case is that we will continue to see downward pressure on all assets including real estate, which makes it prudent to have a healthy cash position.

Like it or not, monetary and fiscal policies are heavily influenced by politics. Until there is a massive debt jubilee, a global reset on the order of the Bretton Woods Agreement of 1944, populism will largely dictate how governments rule. Thus, I see more universal basic income measures coming, including additional tranches of student debt cancellation i.e. redistribution of student loans to all taxpayers.

At some point, the momentum will turn against populist measures. Leaders in Germany won't be happy about Christine Lagarde deploying her newly created Transmission Protection Instrument to use Germany's AAA balance sheet to back much weaker rated debt in Italy, Spain, and Greece. People in the States who paid off their own student loans or chose not to take on massive student loan debt won't be happy with the Biden administration for shifting the burden of other people's student loans to all taxpayers. All highly predictable events that are coming our way as we approach the end of our current long term debt cycle as described by Ray Dalio.

Some highly intelligent people to follow on Twitter if you have interest in understanding macroeconomics:

Luke Gromen
Preston Pysh
Lyn Alden
James Lavish
Lawrence Lepard
Greg Foss
Dan Tapeiro

Raoul Pal
Ray Dalio
Stanley Druckenmiller

I typically share the most insightful threads that I come across at my Twitter account, so if you have interest in macroeconomics and financial health, please feel free to connect with me there:

Ben_Kim @ Twitter