Everyone wants to know the answer to one question: What’s the next big financial market crisis?
Get it right and you can dine out on the story for years.
Just ask famed investor Jim Rogers. Every time you see his name mentioned, the report always mentions how he picked the top of the market in 1987.
We’re sure Mr Rogers has done a lot before then and since, but that’s the event that solidified his reputation.
But what’s next? Will it be a new crisis in Europe? Or perhaps something to do with oil? Or what about China? That last one is the big one, right.
Quite frankly, it could be any number of things, but only one thing will cause the complete and utter collapse of the world markets…and that isn’t about to happen yet…
What I’m about to tell you probably won’t be news to you. But even so, it’s worth repeating considering all the noise going on in the press right now.
Every man and his dog wants to be the one to call the next big crash.
So anytime there’s even a whiff of trouble in the financial markets, the busybodies on TV are quick to label it a crisis.
Most of the time, the ‘crisis’ turns out to be a big pile of nothing.
The fact is there’s only one crisis investors and the markets need to look out for, and that’s a money crisis. To be precise, a US dollar crisis.
Keeping quiet on Swiss franc profits
It’s important to understand this.
The US dollar and its well-being is the only thing that matters to financial markets.
Nobody really cares about the Swiss franc.
Sure, there was a lot of shouting and hollering and panicking when the Swiss National Bank cut the peg to the euro.
And there was a lot of crying and wailing about the millions and billions lost by traders and trading firms.
But what you didn’t hear so much were the traders and trading firms who made millions and billions from the SNB’s move. That’s not surprising. Making money is a dirty word these days.
And given the amount of regulatory scrutiny, the last thing any bank or trading firm is about to do is shout from the rooftops about how much money they made from the Swiss franc-euro trade.
Regardless, in the scheme of things, the Swiss franc doesn’t mean all that much. Yes, it means something for those trading it. And it means something for Swiss businesses or those who transact with Swiss businesses.
But does it mean much for 99% of Aussie firms or consumers? No.
Nor does it mean much for US businesses or consumers, or Chinese businesses or consumers.
What would mean a lot for everyone is if there were a major crisis involving the US dollar. Why? Because as the world’s reserve currency, everything everywhere derives its price from the value of the US dollar and US interest rates.
Risky but risk-free
The price of everything — your mortgage, that new car, even the groceries in the supermarket and the petrol at the bowser — in some way reflects the value of the US dollar and US interest rates.
In the financial markets, the whiz kids on Wall Street and in the City of London use the US dollar and US interest rates as the basis to calculate the risk of an investment.
You may have heard the expression, the ‘risk free interest rate’. The ultimate risk free interest rate is the interest rate earned on US government bonds.
That’s because there is almost zero chance that the US government will ever default on its debts. It shouldn’t need to. It can just order the US Federal Reserve to print more money.
Other countries have a risk free interest rate too. However, on a global basis, the market will likely always view non-US government debt as riskier than US government debt.
That’s why you see investors flee to the US dollar and US government bonds during times of high anxiety.
But what happens if a genuine problem arises for the US dollar? What would investors do then? During the early 2000s, many thought the euro would replace the US dollar as the world’s reserve currency.
The 2008 financial meltdown and the subsequent European debt crisis quashed that idea. And considering the European Central Bank is about to begin multi-hundred billion euro money printing program, there is no chance of the euro taking centre stage.
Weakness makes the dollar stronger
So now, everything is back on the shoulders of the dollar.
Arguably, that simultaneously makes the dollar stronger, while also putting the world’s investment markets at risk of an even bigger crash than in 2008.
After all, if things go pear-shaped for the US dollar, where do investors go to keep their money safe? Gold?
We’d like to think so. During the last crash, investors ditched gold because they could flee to the safety of the US dollar. But if the next crisis is the US dollar itself, it’s hard to imagine investors scrambling to hold dollars.
But that could be some time off. With the ECB just beginning a trillion euro money printing program and low oil prices set to give the US economy a boost, those looking for an immediate US dollar crisis may face disappointment.
US interest rates may be close to zero, but there is little doubt that the Fed has other plans if the US economy takes a turn for the worse. And those plans aren’t complicated — the Fed’s printing presses may have stopped for now, but it won’t take much to restart them and give the world’s markets another stimulatory boost.
PS. When central banks stimulate, the knee-jerk reaction of investors is to buy stocks, especially dividend-paying stocks. One of the key strategies in Tactical Wealth is to hunt down quality large, mid, and small-cap dividend stocks. If you don’t yet subscribe to Tactical Wealth, check out how you can join here.