Prepare for Currency Chaos

By: Michael Pento | Tue, Jan 28, 2014
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On November the 25th I published the following warning about the effects from the Fed's imminent tapering of asset purchases:

"There is a good chance that the beginning of tapering will lead to a reversal of the trade to sell gold ahead of the news. But the major averages have priced in a sustainable recovery on the other side of QE, which will not come to fruition. For the Dow, S&P 500 and NASDAQ the end of QE will be especially painful. A unilateral removal of stimulus on the part of the Fed will send the dollar soaring [especially against emerging market currencies] and risk assets plunging -- you could throw in emerging market equities and any other interest rate sensitive investment on planet earth."

The entire piece can be found here.

That prediction unfortunately came into fruition as the calendar turned the page to 2014 and tapering of asset purchases began. The sad truth is that global central banks have partaken in unprecedented intervention into the functionality of markets and that has now set the stage for massive and destructive moves in currencies and interest rates.

We are currently suffering through a huge correction in the equities of emerging market economies. The threatened end of Fed stimulus has caused these currencies to plummet against the dollar, taking their markets down for the ride.

But it's not just emerging markets that will feel the pain. I next predict the unwinding of the colossal Yen carry trade in the near future. The Yen has lost 25% of its value against the dollar in a little over one year. The Abe regime has been successful in weakening the Yen against the Greenback, despite the fact that it has withstood the assault of over a trillion dollar increase in the size of the Fed's balance sheet in the past year alone. Yen weakness is clear evidence that currency traders anticipate the imminent end of Fed money printing and an increase in Treasury yields.

The investment world has poured into investments that short the Yen and go long the Japanese stock market. Think about the Japan Hedged-Equity ETF (DXJ): Investors have piled over $12.6 billion into this fund, which has soared 25% in the past year.

Japan illustrates the current competition amongst central bankers to see who has the best ability to destroy their currencies. However, the U.S. Federal Reserve has kept interest rates at zero percent for over five years and has monetized $3.3 trillion of debt during that same time frame.

Global central banks will soon learn a painful lesson that for every action there is an equal and opposite reaction. The Fed's unilateral unwinding of QE -- in the nation that owns the world's reserve currency -- is an addiction extremely difficult to overcome. I expect massive disruptions in equities, interest rates and currencies this year as the baneful consequences of massive central bank manipulation of markets begins to manifest.

 


 

Michael Pento

Author: Michael Pento

Michael Pento, President
Pento Portfolio Strategies

Michael Pento

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS) and author of the book "The Coming Bond Market Collapse." PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.

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