Signs of deflation have been popping up all over global asset markets for the past year, ever since the US dollar broke-out on its tear higher.
US dollar index – 2 years
But this doesn’t even tell the whole story. The US dollar index represents the value of the US dollar against a basket of Developed Market currencies like the Euro, British Pound and Japanese Yen. While the dollar index seems contained in a consolidation pattern, the real story seems to be in the Emerging Market currencies. EM’s tend to get whipsawed the most during times of crisis because the US dollar is the world’s reserve currency and they tend to borrow and trade in US dollars, making their financial systems largely affected by US monetary policy. Numerous currencies are breaking down to multi-year lows, including the Mexican Peso, Indonesian Rupiah, South African Rand, South Korean Won, etc., etc. The best picture is simply to look at a basket of EM currencies, which continues to breakdown to new lows.
WisdomTree EM Currency Fund (CEW) – 1 year
We’re basically seeing the same deflationary forces across the board in asset classes. These charts are all starting to look pretty similar…
Oil – 1 year
High Yield (junk) bonds – 1 year
Emerging Market Stocks (EEM) – 1 year
USD denominated EM bonds (EMB) – 1 year
Fortunately we’ve had very little exposure to the above asset classes and I have no plans of adding much exposure any time soon.
As I discussed last week, the US PMI continues to hold-up showing modest expansion but I’m really starting to wonder how long it can last with the amount of weakness we’re seeing throughout the world. Global exports are falling hard, global PMI is still moving lower and the velocity of money continues to fall. I’ve been adding to US treasury bonds as a hedge against deflation. I’m not planning on holding these for the next 30 years – just a hedge into the next recession which unfortunately is starting to look like it could be right around the corner.
-Nick