Complex Made Simple

Matein Khalid: World financial markets are at an inflection point in mid-June 2019

These are very dangerous times for the global economy- here's why

The US and China, the world’s two biggest economies, are both caving into their worst protectionist impulses When $11trn in debt offers negative interest rates, when entire banking systems seem bankrupt, when crude oil falls 20% in a month, something is dangerously wrong King Dollar will take an epic hit in late 2019

By Matein Khalid: Chief Investment Officer and Partner at Asas Capital 

Oscar Wilde once spoke of his friendship with Lord Alfred Douglas, the fabled Bosie, as “the love that dare not speak its name”, in Victorian London, when Sherlock Holmes and Jack the Ripper roamed amid the fog and the gaslights! The love that dare not speak its name in my life is, of course, my obsession with foreign exchange markets, a love that mesmerizes me from sunrise in Singapore to sunset in Manhattan. F. 

Scott Fitzgerald, the creator of Jay Gatsby in Jazz Age New York, once said that life is lived forward but only understood backwards. So true. I look back on my life as a series of epic dramas, loves won and loves lost – the Plaza and Louvre Accords, the Mexican peso crisis, Black Wednesday, sterling’s humiliating exit from the ERM, Turkish hyperinflation, the Russian rouble default, the Thai baht floatation, the Indonesian rupiah crash, the dollar bear market of 2001 – 2008, King dollar since 2014, the recent plunge in the Pakistani rupee, Turkish lira, Argentine peso, and post Crimea Russian rouble.

More by Matein: Storm clouds darken over emerging markets

My fascination with global currency markets is primordial, visceral, passionate, and instinctive. This is the ultimate game of four-dimensional chess, a rollercoaster life lived in the second derivative, full of intense drama and occasional terror. Planet Forex gives this FX gnome of Dubai a reason to roam the world, to dissect its economics, politics, capital flows, and monetary policies. Some of my best trades in life came to me while I was hanging out on the beaches of Mykonos or in a chalet hut in the Obersalzberg, amid the exquisite Omani milieu of Muscat or in Lebanon’s Beit Mery mountain resort. I just believe it is impossible to make money in equities, oil, gold or debt without a nuanced grasp of the post Bretton Woods gladiatorial pits of global finance – FX.

So I embrace the green phosphorescent flicker of my Bloomberg screen, as invaluable to me, as much a work of art, as Picasso etching, a Verdi operetta, a Dostoevsky novel, a Von Neumann mathematics game, a La Bardot film.

More by Matein: Does the Chinese Yuan’s fall presage an emerging markets crash?

I am convinced the world financial markets are at an inflection point in mid-June 2019 – the rules of the Currency Bazaar (Namaste Andy Krieger!) have changed. Two big themes dominate global markets. One, the US and China, the world’s two biggest economies, are both caving into their worst protectionist impulses. Trump’s Art of the Deal meets Mao’s Little Red Book – economic sado-masochism in Beijing and Washington. Two, large parts of Europe and the emerging markets are in deep recession, with systemic banking crises and draconian property bear markets. This is not a slowdown. It is something far, far worse, the aftershock of the post Lehman trauma of 2008, another embryonic Great Depression. Lord Keynes spoke about animal spirits – but I only hear animal death rattles. Entire economies are dying. This time the wolf is here.

The plunge in global bond yields prove that epic Obama-Trump business cycle is now living on borrowed time. Was May’s 75,000 non-farm payrolls rise in the US an augury of something dark and vicious ahead? Where is the poetry in the algorithmic madness that moves the trillion dollar daisy chains of the money souk? When $11 trillion in debt offers negative interest rates, when entire banking systems seem bankrupt (India Rising?), when crude oil falls 20% in a month, when a single Trumpian tweet can spread havoc from Wall Street to the Arabian Desert – something is dangerously wrong with this world, our world of June 13, 2019, a Gemini world. Trump’s tariffs, Smoot Hawley 2.0, will be the greatest tax hike in history. Could this trigger the biggest deflation the world has ever seen, something that makes 1931 and Creditanstalt seem like a Sunday school picnic?

More by Matein: My Long Canadian dollar trade idea was a strategic winner!

Are retail sales the next iceberg (after jobs) for the USS economic Titanic? The inverted US Treasury debt yield curve predicts a deflation Big Chill. The Chicago January 2020 Fed Funds futures implied rate is 1.60%. This implies three, even four FOMC (Federal Open Market Committee) rate cuts, not just the two that is Wall Street consensus. Tighter US fiscal policy, but a Federal Reserve capitulation trade, easy money, can mean only one thing: King Dollar will take an epic hit in late 2019.

I see the two year US Treasury yield curve spread collapse against British gilts, German Bunds, Japanese JGB’s, Canada’s (Maple Leaf?) government bonds. So I gaze into my digital currency chessboard – King Dollar will be toast. Stay long the loonie for my 1.30 target. Accumulate sterling at 1.26 for my 1.32 – 35 target, no matter BoJo or Bozo moves into Downing Street. So I remember Freddie Mercury with moist eyes. We are the champions my friends, we will keep on trading till the end.

More by Matein: Prime Minister Bo Jo and the sterling bulls