From Minimalism To Tech

Is Europe About To Collapse?

Posted in Trading on August 27th, 2016

The following article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may h ave changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure.


In 2014, The U.S. Securities and Exchange Commission changed one big rule involved in money market funds – these would begin to float in value instead of being fixed at one dollar and there would be limitations to redemptions in some situations. What some investors forget is that during the financial crisis, there was a rush to money market funds for safety and they were perceived as a safe investment. Safe investments don’t exist, though this latter point is a topic for a different day. While some of the impact of this SEC law is outside of the scope of this article, we will briefly look at how this will impact banks outside of the United States, since many of these institutions relied on these funds for liquidity and this could create a massive dollar shortage. We also want to stress that what should happen does not always happen because leaders may intervene or create new rules, even though we suspect the latter will create even more instability for some regions. We also want to point out that by collapse we do not mean end, but face enormous financial pressure.


The Libor continues to reflect liquidity pressure:

Month 1 Month 3 Month 6 Month 1 Year
July 2015 0.20 0.33 0.52 0.85
July 2016 0.49 0.74 1.07 1.37
August 2016 0.52 0.83 1.23 1.52
October 2016 0.54 0.89 1.26 1.57
November 2016 0.57 0.92 1.27 1.62
December 2016 0.75 1.00 1.32 1.70
January 2017 0.77 1.00 1.32 1.69
December 2017 1.47 1.57 1.75 2.03
January 2018 1.55 1.70 1.87 2.15

In the advanced Millionaire Guide To Hedging, we’ll be discussing our view on how this will play out, strategies for investors, and what else to be searching for (this will be only included in the limited-time only content).

A Few Money Market Changes

  1. The NAV floats. Instead of money market funds being fixed at a $1 and earning interest, after these changes apply in October, money market funds will float in value. This means that they may be more or less than $1, which means that it’s possible they won’t be as safe for investors as investors think. Note that we don’t believe any investment is safe because life is inherently unsafe, so this is irrelevant, but it doesn’t mean that investors won’t seek something they perceive as safe.
  2. Gated redemptions. Money market funds may gate a redemption either by imposing a fee, or by limiting redemptions for up to ten days. If an investor is in a bind and needs liquidity immediately, this rule is designed to limit withdrawals.
  3. Taxing changes. The IRS will tax money market floating NAVs at buy and sell prices relative to value. This means that these funds will need to keep cost basis moves for investors.

Some of you may have noticed that recently your brokerage switched from using a money market fund as the core account to using a government bond fund, as the core account (or some other derivative). The changes made by the SEC explain why.

Is A Dollar Short Squeeze On?

Consider a company that needs US dollars, but primarily makes money in other currencies. Due to the money market changes, this company will be impacted the most, as non-US fiat will be affected. Given the libor rates, some suspect that the first shoe to drop will be Europe, but actually the banks in Japan seem to be taking the first beating on this. We emphasize that our economic system is driven by debt, so when rates begin to rise, this impacts people with in high multiples. Think of an example of a hedge fund manager leveraged 40 to 1 on 1 billion dollars: a one percent interest increase means that he pays $400 million more dollars in interest a year; another way of typing this is that he needs $400 million dollars to pay that interest – the demand for dollars rises. But what if this hedge fund primarily earns money in non-US dollars, while needing dollars to pay interest and other bills? The impact begins to amplify. Now, this hedge fund manager must be ready to face the squeeze of lacking US dollars since he earns other currencies.

Imagine this on a scale of companies and companies that are all tied to each other and you begin to imagine the impact. A few experts think that Europe will be hit first, and this may be true, but more than just Europe will be impacted by this. Libor rates are rising rapidly, though we’ll see if these rises continue. With the one year breaking 1.5%, we have to wonder if it will rise to 2% in a short period of time and what the impact of this will be. For myself, shorting non-US fiat temporarily may be less of a move than finding companies that will face a dollar-squeeze temporarily and shorting them – however, these are both very high risk moves that face a high probability of loss since we could see interventions.

Could Companies Rush To Bitcoin To Cover?

As the US Dollar breaks higher (DXY measurement), bitcoin has responded by rising even faster. This may seem unrelated, but some companies might notice this and for good reason: if bitcoin outpaces the DXY this year and next, some companies might decide to move some of their profits into bitcoin so that they outpace their debt expense. Stated in a numerical manner: if a company makes $1 billion a year in profits and owes $500 million in interest on their debt, by swapping some profits to bitcoin (which may outpace the US Dollar rise), their interest payments actually shrink, when some of their profits are tied to a rising bitcoin. This assumes that bitcoin rises faster than the Dollar in the next few years. This could actually create a massive supply shock with bitcoin, if enough companies do this, as miners short bitcoin will have to cover their shorts.

To my knowledge, no company has done this yet, but it’s possible, especially if bitcoin continues to outpace the Dollar’s rise and if companies believe that bitcoin makes a great cover. If enough companies do this, it’s hard to imagine bitcoin at a cheap price anymore and it further validates the idea. Still, this has not happened, and it may not happen as many companies don’t know that much about bitcoin and we haven’t seen any “crypto-positions” open at most companies, so there is a major skill gap present in most companies at the moment.

Consider how firms could do this, like a company offering discounts for using bitcoin. We will see several derivatives of this and I fully expect that the firms that benefit the most from this will be companies who borrowed heavily in US Dollars. Still, most companies could simply take a portion of their earnings and swap to bitcoins as a hedge without needing to discount profits. With bitcoin averaging about $550-600 in the last few months, this may make a decent hedge if facing pressure.

The G20 Meets Soon

The G20 meets in China a few weeks from now hosted by President Xi of China. If we will see intervention, this will be the meeting where it’s discussed. I suspect that many of the members of the G20 have already seen the impacts from the SEC on banks and other institutions. While nothing may come of it, the timing of this meeting is interesting and we’ll see what happens.

What I know is that in the long run, the US dollar is headed South, whether soon or later. I strongly doubt the Federal Reserve will raise interest rates in September and my prediction this year is that the Fed won’t raise rates at all (my latest interest rate prediction post US election). A strong dollar is not in the interest of the Fed at the moment and they are looking at various ways to weaken it significantly over the long run to assist with paying for the US national debt. Therefore, any dollar run up in price is only temporary in the grand scheme of events.

The Real Culprit

If we do see a crisis and economies begin to deteriorate, I will remind readers that the cause of this is too much debt and fiat money. Fiat money requires debt – every $1 in existence is backed by debt, which when you consider fractional reserve banking, is backed by even more debt. This is the problem. If a crisis occurs and mainstream media tries to spin it as the fault of people, a person, or the lack of leadership, consider that none of this is correct. These crises only occur because the current economic system refuses to use a monetary standard that inherently requires integrity.

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