Highlights of the Week of March 9, 2015

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 9, 2015:

• The rising Dollar and importing deflation in the USA.
• US-Markets drop for third week in a row.

THE RISING US-DOLLAR AND DEFLATION:
The Labor Department said on Thursday, March 11 that import prices gained 0.4 percent after a revised 3.1 percent plunge in January, after seven months of declines.

On a year-over-year basis, import prices tanked 9.4 percent in February. That’s the biggest drop since September 2009.

Crude Oil prices were a big factor in the decline of import prices. The cost of imported crude plunged 43 percent from a year earlier. But ex-petroleum prices sank 0.4 percent on the month and 1.8 percent from a year earlier.

A separate report on producer prices showed they sank 0.5 percent in February after dropping 0.8 percent a month earlier. That was much worse than the 0.3 percent rise that economists expected. The year-over-year wholesale inflation rate sank to negative-0.6 percent, the lowest since records began in 2009.

Again, it wasn’t all oil. The “core” PPI that strips out food and energy dropped 0.5 percent as well, compared with the expected 0.1 percent rise.

The rising dollar is importing deflation,which causes all those foreign imports to get cheaper in dollar terms and as the dollar goes up, the price of contra-dollar assets like commodities goes down in order to match value.

Simultaneously, the already fragile USA exports become more expensive on a relative basis versus those sold by foreign competitors based in countries with falling currencies.

Bottom line is that, the current surge, which is the biggest, fastest increase in more than three decades of record-keeping is creating an inherently unstable situation. It’s destabilizing emerging market economies.

Traders, based on expectation of a FED rate increase this year, continue to push the US-Dollar higher, as consequence of which the U.S. Dollar Index rose above 100 for the first time since March 2003 as can be seen from below chart.

The grey areas in above charts show the USA recessions since January 1973.

USA MARKETS DROPPED FOR THE THIRD WEEK IN A ROW:
The USA stock market was hit hard on Friday, capping a third week of declines as investors reacted to a steep drop in oil prices and a jump in the value of the dollar.

The sell-off came at the end of a volatile week, utilities, major exporters and companies that make basic materials like steel had the biggest declines.

On Friday, March 13, the Dow Jones industrial average fell 145.91 points, or 0.8 percent, to 17,749.31. The Standard & Poor’s 500-stock index lost 12.55 points, or 0.6 percent, to 2,053.40, and the Nasdaq lost 21.53 points, or 0.4 percent, to 4,871.76.

As can be seen from below chart, the Dow Jones Industrial as well as the S&P-500 are are now down for the year.

PGM CAPITAL COMMENTS:
The rising US-Dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead.

The stronger US-Dollar is also wreaking havoc on emerging markets that are on the hook for US$5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate.

Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only add oil to the fire.

Emerging market currencies were hit hard on Tuesday, March 10:

• The euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year.
  
• The Turkish Lira has fallen so far 13 percent against the US-Dollar this year, and closes on Friday, March 13 at is lowest level since January 1st 2005 as can be seen from below chart.
  
• The South African rand fell as much as 1.5 percent to a 13-year low at around 12.2700 per dollar.
  
• The Brazilian real fell over one percent to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar.
  

The above mentioned once more proves, that the easy money policies of of the USA FED, have touched off a financial cyclone that has reversed capital flows and put foreign markets in a downward death spiral.  As a consequence this might lead to a crash of the emerging markets this year, leaving behind a trail of bankrupt industries, soaring inflation and decimated economies.

The blow back from the catastrophe is bound to push global GDP into negative territory which will intensify the currency war as nations aggressively compete for a larger share of dwindling demand.

At the end this story will prove the Exter’s pyramide.

John Exter (a former Fed official, ironically) thought of the post Bretton Woods financial system as an inverted pyramid resting on its apex, emphasizing its inherent instability compared with a pyramid resting on its base. Within the pyramid are layers representing different asset classes, from the most risky at the top down to the least risky at the bottom.

We think that Exter’s Pyramid went “live” in in late-may 2014 when the US-Dollar index began to strengthen as can be seen from below chart.

Until next week.

Yours sincerely,

Eric Panneflek