The Three Horsemen of Fintwit

Here’s what’s spooking the market… the last one may make you laugh. August 05, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The Three Horsemen of Fintwit SEAN RING Dear Reader, Last Friday, I was hopeful for a quiet weekend. I wrote this in that edition of the Rude: We’ve got nonfarm payrolls and the unemployment rate. Barring any massive deviations from the consensus, we should close the week in relative peace. However, the market had other plans. It was a tumultuous Friday, and today seems to be following suit. Friday the Bloody: NFP and Unemployment The First Horseman is unemployment. The Fed has been monitoring inflation for so long that it has neglected the other important issue: unemployment. Nonfarm payrolls came in weak for the first time in ages. The market was expecting 185,000 new jobs to be added, but only 114,000 were created. Also, June’s number was revised downward from 206,000 to 179,000. It’s the lowest level in three months, below the average monthly gain of 215,000 over the prior 12 months, signaling the labor market is cooling off. The nation’s unemployment rate also jumped to 4.3% from 4.1%. Now, Jay Powell is under immense pressure to take action. Thanks to the current situation and the factors at play, a significant 50 basis points (0.5%) cut could be possible before the next FOMC meeting. This decision could have far-reaching implications for inflation. Next, we cross the Pacific. [Claim a copy of the most dangerous book in America right now.]( This is the only book I’ve ever read that brings to life the horrifying fallout of a massive international currency war. A war that’s playing out as we speak. In fact, this book is so hair-raisingly accurate… I’m offering to send you a copy for free today as a way to help prepare you for what could happen next. But with only 500 copies in stock, once we are out, they could be gone for good. [Simply click here now]( and I’ll show you what to do. [Click Here To Learn More]( Japan and the Carry Trade The Second Horseman is Asian. In today’s trading in Japan, the Nikkei 225 closed down 12.30% after Friday’s 5.8% drop. After over thirty years of waiting to recapture its all-time high, the Nikkei is down nearly 12,000 points off its peak. The chart below shows it didn’t take long. Credit: Trading View After years of negative interest rates, the Bank of Japan's decision to hike rates earlier this year seemed to be a turning point. However, the unexpected hike to 0.25% on August 1st sent shockwaves through the market. Suddenly, the yen was crushing the dollar. Notice how similar the charts look. Credit: Trading View In FX terms, the USDJPY was rising. The first currency (USD) in the pair is the base currency, and the second currency (JPY) is the variable currency. So when we say, “Dollar-yen is going up,” the dollar is going up, and the yen is going down against each other. It’s never yen-dollar to avoid confusion. I wrote last week: If Japanese interest rates keep increasing, the flow may reverse. Japan may start importing capital from other countries. If that happens, US Treasury bonds would have to offer more of a return to keep investors interested. That means increasing US interest rates and falling US treasury bond prices. But this will take a lot of time to bleed into the markets. That last sentence was incorrect, clearly. I can’t believe how quickly this has crushed the markets. Let me explain why. When you’re in finance, you know the fixed income markets dwarf the equity markets. You need to watch that market, not equity markets, to see signals of impending catastrophe. In 2007-2008, the fixed income markets fell apart long before the equity markets. Lehman going bankrupt and the stock market capitulating were practically the last events of the Great Financial Crisis of 2008. So what’s happening now? Because the Bank of Japan increased rates unexpectedly, USDJPY (and Aussie Yen, in particular) have been crushed. This hurts everyone who has the carry trade on. The carry trade, a common practice in banking but often unfamiliar to the general investing public, is a crucial element of international finance. Let’s take a currency with a very low interest rate, like the Japanese yen (JPY), and pair it with the Aussie dollar (AUD), which has a much higher relative interest rate. Commodity currencies like the AUD tend to have higher interest rates because, among other things, when commodity prices shoot up, the Reserve Bank of Australia, their central bank, needs higher interest rates to quell inflation. It makes sense: - To borrow the yen for practically nothing. The yen is the “funding currency.” - Then, convert the yen into Australian dollars, earning a higher interest rate. The AUD is the “target currency.” - When the deposit term is up, reconvert the Australian dollars into Japanese yen. The idea is to capture the interest rate differential. (That’s one reason interest rate differentials matter so much in macroeconomic analysis.) However, this isn’t a risk-free trade. If the AUDJPY exchange rate falls (the JPY strengthens), you can lose a ton of money on the reconversion. Let me give you an example. Let’s say today, AUDJPY trades at 109.00. So we’ll borrow JPY 109,000,000 for one year at 0.235%. We then convert those yen into AUD 1,000,000 and deposit that for one year at 4.175%. At the end of the year, we’ll have AUD 1,041,750. We need to convert that back into JPY 109,256,150 to pay off the JPY loan. Here are a few scenarios: - If AUDJPY stays at 109.00, we’ll make the initial interest rate differential of AUD 39,400. - If it's higher than 109.00, we'll make even more money, as converting back to JPY will be cheaper. - If AUDJPY falls to 104.88, we’ll break even (AUD 1,041,750 x 104.88 = JPY 109,256,150). - Anything below 104.88, and we’re losing money. The cost of reconversion to pay off the loan eats up all the profit – and more – of the trade. Where is AUDJPY now? 91.47. So if we didn’t get out of the trade yet – which we surely would’ve by now – we’d have to convert AUD 1,041,750 at 91.64, giving us only JPY 95,290,435. We’d have to convert another AUD 152,000 or so to make up the difference! That’s why everyone and his mother is selling AUD, USD, CAD, and any other target currency they used in the carry trade to buy back JPY. This is what’s called the carry trade unwind. It happens every few years, and a fair few traders get “carried out” (figuratively, on a stretcher). These losses, combined with the ongoing losses of holding US treasuries, weigh heavily on Wall Street. The Kamala Factor The Third Horseman is really a woman. Finally, I’ve got friends around the world who say, “Your stupid country can’t be serious about Kamala!” One friend, who runs a hedge fund, wrote, “I think the market is spooked by the fear of a Kamala win.” He continued, “Imagine America’s enemies licking their lips at the prospect of her… The West is f*cked if Kamala gets in.” This may be a part of what’s going on, as a Harris victory will continue Biden’s policies. And Biden’s policies are Democrat Deep State policies. If you want to know where that leads domestically, look no further than the riots all over the United Kingdom. To know where that leads globally, check out Ukraine, Israel, and Taiwan (perhaps soon). Wrap Up These aren’t the only things spooking the markets. The yield curve is now steepening at an alarming speed, initial jobless claims have trended upward, and copper has fallen out of bed. And although the dollar has been crushed, oil has also moved down. Crypto and gold have also fallen. But if Powell cuts in between FOMC meetings, we’ll know the game is up. But first, we’ll have a face-ripping rally. That’s why it’s still important to remain calm for now. Have a great week ahead. All the best, Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( Rate this email Like Dislike Thanks for rating this content! Looks like something went wrong. Please try to rate again. In Case You Missed It… The Red Sea and Denial SEAN RING My colleague Alan Knuckman, Paradigm’s options expert and eternal optimist, would chastise me for even suggesting this could end the market rally. And Alan’s worth listening to because his Panglossian outlook has made his subscribers mucho dinero. The Fed is Now Political Because They Didn’t Listen Shall we start with the premise that The Powers That Be would not let the market crash during an election year? I think that’s appropriate. After all, there’s a reason we hang onto Jay Powell’s every word. And the Federal Open Market Committee, the wise people who set our interest rates, has some dry powder ready for the first time in ages. They can cut rates quite a bit before painting themselves into a corner again. Sure, the FOMC left rates too high for too long. But that’s part and parcel of a team of “analysts” who get stuck in the weeds and cannot quickly decide on anything. They seem like the kind of people who annoy dinner companions and waitresses the world over by asking if the chef adds heavy cream to the Spaghetti Carbonara. Hurry up and pick something already! On Wednesday, I interviewed Jim Rickards, the man himself, about the state of things. He, too, agreed the Fed should’ve cut ages ago. Before you think we’ve lost our Austrian minds, remember the national debt is north of $35 trillion, and interest expense is the second largest line item in the U.S. budget. Powell simply can’t raise rates; the USG cannot afford it. Not only do I stick to my story that Jay Pow should’ve cut rates in June, but it seems I’ve got a couple of journos who’ve jumped on the bandwagon. Yes, I paid for a Wall Street Journal subscription to tell me that. Who’s dumber: them, for being so far behind? Or me, for paying to read what I wrotete months ago? NikiLeaks, try to keep up! Yesterday’s Economic Maelstrom In yesterday’s Monthly Asset Class Report, all was shiny and happy. But before the market opened, the economic numbers came out. They certainly frightened a fair few. Initial jobless claims, which we don’t want to see tick up, ticked up. The consensus was 236,000 new claimants, but the actual was 249,000. Last month, it was 235,000 claimants. You would’ve seen this in Monday’s [Rude](. In it, I wrote: When a recession is about to kick off, the yield curve steepens, and jobless claims pick up. Jobless claims have risen since the beginning of this year. Well, that uptrend is maintained. Continuing jobless claims came in at 1,877k, while only 1,860k was expected. June’s number was 1,844k. In short, more people are claiming unemployment, and more are staying unemployed. Then, the manufacturing PMIs came out later in the day. To refresh your memory, courtesy of [Investopedia]( The Purchasing Managers' Index (PMI) indicates the prevailing direction of economic trends in the manufacturing and service sectors. It is a diffusion index that summarizes whether market conditions are expanding ( >50), staying the same (=50), or contracting (<50), as viewed by purchasing managers. The purpose of the PMI is to provide information about current and future business conditions to company decision-makers, analysts, and investors. Both the S&P Manufacturing PMI and Institute of Supply Management (ISM) Manufacturing PMI not only came in worse than expected, they came in below 50, indicating a contraction in manufacturing. (S&P’s was supposed to stay above 50, but came in at 49.6.) As for the ISM, it was supposed to be a dismal 48.5 but came in at a dreadful 46.8. The reason why the PMIs matter so much is that they have some predictive power. That is, we’re probably already in a recession. If not, we’re on the edge of one. [Exposed: Democrats’ Secret Plan to Keep Trump Out of the White House]( Former advisor to the CIA, the Pentagon and the White House Jim Rickards just released… [This shocking new video exposing Democrats’ secret plan to keep Trump out of the White House…]( Even if he wins the election. [Click here to see the details and learn how to prepare…]( Because this could trigger the biggest constitutional crisis in our nation’s history. [Click Here To Learn More]( Yesterday’s Market Melee Then, the Red Sea didn’t part, it arrived: Credit: StockCharts.com The markets opened and got hit in the face with a frying pan. Everything got hit. It was “Sell, sell, sell” all day long. Then, good friend and Paradigm colleague Bob Byrne wrote this in our editorial Slack channel right after the market closed: “INTC just died. Ouch.” Right now, for Intel (INTC) investors, medicinal cannabis wouldn’t go amiss. INTC was having a bad day as it was, down 5.50% during market hours. Then, their results came out after the close, knocking a further 18.90% off the stock price. Intel CEO Pat Gelsinger plans to lay off thousands and suspend INTC’s dividend. Is this a dead company or an excellent buying opportunity? I hate this company so much right now that it may just be a good buy. Blood on the Street, right? The hardest-working man in the newsletter business thinks so. Dan Amoss wrote this: Doing the right thing - being in rehab from over-financialization, as Gelsinger is - is costly in the short run but worth it to rebuild a great American company in the long-run. What’s Up For Today? We’ve got nonfarm payrolls and the unemployment rate. Barring any massive deviations from the consensus, we should close the week in relative peace. That said, as of writing, Japan’s stock market is down 5.8% on fears of a global sell-off and another BoJ rate hike in October. In the U.S., SPX is on its 50-day moving average, the Nazzie is slightly below that, and the Russell 2000 is still well in its consolidation range. The VIX, a measure of the SPX's volatility, is still below 20. So, while we’ve sold off, we’re not at panic stations yet. Wrap Up Right now, I’m with Alan Knuckman. Stay positive. There’s no reason to sell as yet. That day may come soon, but it’s not here yet. U.S. stock futures are down as of writing. Let’s get this week over this already! Have a wonderful weekend! All the best, Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. 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