If the US Sneezes, the World Catches a Cold?
If the US Sneezes, the World Catches a Cold?
Is this old adage still valid? Or has globalization made us all susceptible and exposed to multiple risks? The short answer is of course the world would catch a cold if the U.S sneezes, but at some point this became a 2-way street, and now it has morphed into a 20-lane highway.
“The whole world is simply nothing more than a flow chart for capital” – Paul Tudor Jones
This is an absolute truth, and with everyone swimming in debt, the risks to the global economy have never been more intense. If you are trading, investing, or taking any risk in capital markets, you have to understand the macro framework and how it all works. It does not matter if you’re trading pork-belly futures, currency futures, or candy, every market gets rocked by global shocks, and the more you know, the better off you will be.
Long gone are the days where certain markets were insulated and traded independently. Correlations are huge, and yes, when the proverbial stuff hits the fan, it spreads high and wide. So yes, if you are trading Bitcoin and there is an oil shock, that price will be affected by it, and so will cotton futures, currencies, global equities and bonds. So you better look at your models and start adding lines to your spread-sheets, because it matters, and it matters quite a bit.
Having said that, here are a few hot-spots I am keeping my eye on, not in any particular order.
Let’s start with Europe and their current energy crisis, which I think is about to get significantly more acute. As we all know by now, the war in Ukraine has unleashed a big chain reaction, which has led to this imminent energy crisis that has hit the European continent like a ton of bricks. The Europeans were counting on cheap Russian energy for growth, without it they simply cannot grow. And no instrument has borne the brunt of that fact more than the EUR. We all know that the EURUSD chart is a horror show, but have you seen EURCHF lately? Here is a chart: it has moved almost 10% since the war started, in FX terms that is quite a bit.
Now, some may call the EUR cheap, but do you really want to catch a falling knife? So, if we think about it, what happens if the EU catches a cold? Does the US get sick? I think so, and it would be pretty awful.
Another hot spot I’m paying close attention to is obviously China and its real estate headache. Most of us remember 2008 right? Remember the trigger and what ensued after that bubble burst. I think China is living its 2008 moment as we speak, with one major difference. The Chinese consumer is significantly weaker than the US consumer, now and then, and the percentage of wealth destroyed in a major bubble bursting in China will absolutely devastate their finances, for a very long time.
Here is a chart of CHIR, an ETF that tracks the performance of the MSCI China Real Estate 10/50 index. It is not doing very well.
Now, if you know me and my style of trading, you know I apply one basic principle to all the investing I do: Price leads narratives. To me this chart is trouble.
So what happens if China catches a BIG COLD? Does the US get sick? How about the EU?
It really doesn’t matter who sneezes, we are all riding the same bus, and it is crowded and messy. So to be successful and stay out of trouble, you have to be aware of all risks when building a portfolio. Make sure there is balance. Yes – that means cash. The biggest risk one can take is to be pointing in the same direction, and that is a risk that many traders make. Thinking you are diversified and being diversified are two very big, very different things. Broaden your risks, widen your scope, look at the whole picture and pay attention to price. Don’t let your neighbors cold get you sick.
Founder, Managing Partner
BCM Partners, LLC
https://biscuitcapital.com/bcm-partners/
20220823
