The Macro Market Wrap Up With The Mad Genius, Vol. 33

As promised I have a forecast for you for this year. Before I get to that, there is one thing I neglected to mention in my 2018 forecast review, and that is what would happen to financial institutions and emerging markets because of Fed rate hikes.

As the Fed raises rates here in America, the first thing you may notice is the dollar will at least stay strong against other currencies, if not gain strength. The dollar gained nearly 8% 2018, with the dollar index was trading in a tight range near 90, and around May it began rising to where it is now, trading in a range around 97, nearly 8% higher. But the big picture is more important than that, because we’re interested in how that affects not just Americans but the rest of the world.

So there were two outcomes that I forecast on a rising dollar. One is that by definition, foreign currencies would fall against the dollar. The outcome I forecast and happened is the companies in emerging markets who took loans denominated in USD, either directly from banks or as bonds, will still have to pay back those loans in USD. As their own local currencies fall, and interest rates rise, that should be a double whammy to any company who took a loan in USD. I said that should translate into increasing pressure on the balance sheets and income and cash flow statements of emerging market economies, and we should expect to see many of them fail and go bankrupt, especially if they couldn’t refinance their loans and roll them over.

What we saw was by the middle of the year, over 10% of all EM companies were already zombie companies, or companies that had to roll over the old debt into new debt, just to be able to maintain payments and stay open. And that is much worse now. Emerging market indices are off by 20–30%, and in some cases over 50%. And bond holders are taking haircuts as we speak.

The second outcome I forecast, and happened, would be that all the major American and European banks who lent that money into the EM countries in USD would see catastrophes on their own balance sheets and cash flow and income statements. Deutsche Bank is the poster child for bankrupted banks these days, but they aren’t the only victims of their own foolish lending practices. All the major bank indices are down by 10–20%, but look at the major players…peak to trough in the last 12 months BofA is down 20%, Citi is down 37%, Wells Fargo 26%, Chase 23%, Goldman Sachs 43%, Deutsche is down 60%.

Well that’s it for now. Stay tuned for my 2019 forecast, coming up in the next several volumes. Thanks for reading Volume 33 of the The Macro Market Wrap Up With The Mad Genius. If you have any questions, leave those in the comments. And remember that there is always a bull market somewhere in the world, and on the opposite side of crisis there lies opportunity.

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