by Ivan Martchev

June 30, 2020

A few decades ago, some trading software had a feature right next to the last quote which showed 10 to 15 colored bars. If there was buying pressure, the bars would flash mostly green. If there was selling pressure, the bars would flash mostly red, and if there were lots of ups and downs in a short period of time, the bars would flash yellow, red, and green. It was a crude early warning system for momentum.

If one would put the Brazilian real vs. the dollar (USDBRL) on this old-time quote screen right now, those bars would be flashing mostly yellow, flowing towards red, and the way this coronavirus pandemic is going in Brazil, pretty soon those bars may be flashing only red. By the time you read this, the Brazilian real may be ready to take out its all-time low of 5.99 to the dollar (we closed Friday at 5.48).

Real Veersus Rupee

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Brazilian real is somewhat more free-floating than the Indian rupee, which sees significantly more intervention from the Reserve Bank of India, but both the rupee and the real have taken out their 2018 lows (when the Fed was tightening) and are both rather weak, even though the Fed is doing unlimited QE.

The Brazilian real has weakened significantly in the past two weeks – to the tune of 10% since it was designated my “real-time COVID indicator” right here in this column. I think it may weaken some more, given that the Brazilian economy is expected to contract 6.4% this year, and the pandemic is not yet under control there. Brazil has over 1.3 million cases, second only to the U.S., which has over 2.5 million cases.

The CDC confirmed last week that the likely number of infected people in the U.S. is perhaps 10 times bigger, which means that the mortality rate is smaller than presently estimated (125,000 U.S. deaths out of 25 million infected people is one in 200, or 0.5%). I don’t know if Brazil is doing as much testing as we do in the U.S., but it’s clear that this pandemic does not respect warm weather and doesn’t appear to have a flu-like seasonality. India has 528,000 cases and is accelerating at a rate similar to Brazil’s. Neither nation appears to be plateauing, so more damage to their currencies and economies is to be expected.

The Fed’s Balance Sheet Expansion is Currently on Pause

The Brazilian real and Indian rupee are both weak despite the most extreme form of quantitative easing in the world’s major central banks. That is caused in part by that $12.1 trillion synthetic short position against the dollar at the end of 2019, as reported by the Bank of International Settlements.

Balance Sheet vs Govt

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Dollar borrowing equals dollar shorting against the local currency of the foreign borrower. They borrow dollars, sell those dollars, and use the proceeds in their local economies, but then they have to buy those dollars back when they have to pay off their loan. This is why the dollar tends to rise as those nations scramble to repay their loans. It is not the level of U.S. interest rates that is driving the dollar higher, but the weak cash flows that foreign borrowers face as they service those record-high U.S. dollar debts.

Jerome Powell & Co. leaned against the dollar short squeeze by growing the Fed balance sheet by $3 trillion in about three months, in effect flooding the global financial system with newly minted electronic dollars. (“We print it digitally,” as J. Powell so eloquently put it in his latest 60 Minutes interview.)

In this case, he had to print more “digital dollars,” as the dollar still has reserve currency status, yet this voluminous digital printing may work against the dollar’s status in the not too distant future.

In this low interest rate environment, the relative action of dividend stocks to a high-beta index like the Nasdaq 100 is off the cliff. In a normal recession, it should be the other way around, but this is not a normal recession. Since no one is sure which dividends will be cut, all dividend payers suffer.

Anvesco ETF

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is an extreme situation, and I think it will mean we must “revert.” I don’t have a problem with technology stocks being defensive (as they are not as affected by COVID shutdowns; Amazon absolutely cleaned-up in this mess), but when markets are pushed to such extremes they tend to revert to the mean.

If you had asked me in early March if 20 million people would be out of work by the end of the second quarter, or would it be possible to see the Nasdaq 100 hit a fresh all-time high in early June, I would have told you that you might be missing some marbles. But the Fed flooded the financial system with so many digitally printed dollars that some of those electronic greenbacks found their way into the Nasdaq 100 stocks.

Since the Fed’s balance sheet has been shrinking in the past two weeks, will that fact rub off negatively on stocks? We’ll find out soon enough.

Navellier & Associates does own Amazon in some managed accounts.  Ivan Martchev and his family do not own Amazon in a personal account

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
My Real-Time COVID Indicator is Flashing Red

Sector Spotlight by Jason Bodner
Go with the Flow (Newton’s 3rd Law of Motion)

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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