Did it really matter if the economic data was “so so” these past 6 months – as the continued efforts by both The Fed and The Bank of Japan just kept pushing equity prices higher and higher regardless?
I don’t know how many times I pulled up charts, pointed out facts, figures, levels etc suggesting these last “several hundred” SP points where merely a “last-ditch effort” to keep the spin “positive”, and keep the story “believable” just a little while longer. Did it matter?
Absolutely not.
Regardless of any of the underlying “fundamental factors” suggesting slower global growth, until it’s “in the news” and the media machine, The Fed, and the Wall Street algorithms switch to “sell” – the data doesn’t matter one hill o’ beans.
The contraction phase has clearly begun, with the Fed sticking to its guns ( for now ) and stock price set to “re adjust” reflecting prices a little closer to those of us down on Earth.
If you didn’t know back “then”…………where in the graph below do you think we are “now”?
forex_kong_economic_cycle
Remember this beauty?
US_Macro_Data
And this one, with respect to the movement of supposed “smart money” ( the big boys) vs “dumb money” ( retail investors )….essentially suggesting “selling” the entire last year and a half.
Smart_Money_Forex_Kong
It’s really no surprise at all that markets are finally making the “obvious turn” lower, considering everything we’ve learned / seen over the past couple of years.
When you consider they’ve had no business being this elevated in the first place.
If we aren’t on the other side of the mountain now ( after 5 straight years of Fed induced stock prices ) resulting in essentially “zero” new economic growth, and now entering a macro phase of “tightening and contraction” I really can’t wait to see what they pull out of their hats next.
Watch for the next “retail bounce” likely already here, and if I was doing anything ( other than trading currency ) I’d be using the opportunity to sell.
The Currency Wars Have Only Just Begun
While equity markets finally wake up to reality, the real battle is playing out in the currency markets. The Fed’s tightening cycle isn’t just crushing stock valuations—it’s setting up the biggest currency realignment we’ve seen in decades. Every central bank on the planet is now forced to choose between defending their currency or protecting their economy. Spoiler alert: most will choose wrong.
The dollar’s strength through this initial phase of tightening was predictable, but what comes next will separate the smart money from the sheep. When the Fed eventually pivots—and they will—the dollar’s collapse will be swift and merciless. Those positioning now for this inevitable reversal will feast while retail traders scramble to catch up.
JPY Weakness: The Carry Trade Renaissance
The Bank of Japan’s stubborn commitment to ultra-loose policy while the Fed tightens has created the most obvious trade in decades. The yen’s weakness isn’t a bug—it’s a feature. Japanese policymakers would rather watch their currency crater than face the reality of their debt burden in a higher rate environment.
This divergence in monetary policy creates a golden highway for those willing to ride the USD/JPY rally. But here’s what most traders miss: when this trade finally reverses, it’ll happen faster than you can say “risk off.” The smart money knows this and is already planning their exit strategy while retail piles in at the top.
EUR: Dead Money Walking
The European Central Bank finds itself in an impossible position. Raise rates too fast and you kill an already fragile economy. Stay loose and watch the euro disappear into irrelevance. Their half-hearted attempts at hawkishness fool nobody—the euro is trapped in a slow-motion collapse against the dollar.
But don’t count out the single currency entirely. When energy prices stabilize and the Fed’s aggressive tightening starts breaking things in the US, the euro could surprise to the upside. It’s all about timing the pivot and recognizing when USD weakness becomes the dominant theme.
Emerging Market Carnage
While developed market currencies dance around each other, emerging market currencies are getting absolutely demolished. Higher US rates combined with a stronger dollar creates a toxic cocktail for countries that borrowed heavily in dollars during the zero-rate era.
The real pain hasn’t even started yet. As credit conditions tighten and dollar funding becomes scarce, we’ll see currency crises that make the Asian Financial Crisis look like a warm-up act. Smart traders are already shorting the most vulnerable currencies while everyone else focuses on the Fed’s next 25 basis points.
The Crypto Connection Nobody’s Talking About
Here’s where it gets interesting: as traditional currencies race to the bottom through competitive debasement, digital assets suddenly look less crazy. Not because crypto has found religion, but because fiat currencies are revealing their true nature as political instruments rather than stores of value.
The next phase of this cycle won’t just be about which currency falls fastest—it’ll be about which assets survive the transition. Gold, bitcoin, and other hard assets will benefit as confidence in the existing monetary system erodes. This isn’t some libertarian fever dream; it’s simple math. When every central bank is printing to solve problems created by printing, the endgame becomes obvious.
The market bottom in traditional assets might be here, but the currency chaos is just getting started. Position accordingly, because when this unwinds, you want to be holding the right assets in the right denominations. The next twelve months will determine who understood the game and who was just along for the ride.
Beauty post. I just went over similar info with a buddy in Friday because he has had some good gains over the past few years. Trying to urge him to lighten up a little and be happy he made good gains.
All about decisions eh man?
Some will decide to bank and be thankful, others will attempt to buy the dip ( but then you think they’ll actually time selling at the exact top ? – never ), and others will completely disregard any of this, and actually just look to hold.
Very few…..veeeeeeery few! are able to walk away with the money in their pockets….er sorry….the money they have “on paper” – “before” a turn. Most will just sell in panic “after” its far , far too late..
That’s the way she works!
Hi JSkogs,
Trying to save someone’s bacon is often a futile and frustrating gesture, despite your good intentions.
You’ll often hear, “I told my broker what you said and he said….so I’m staying put”.
I tried to enlighten three brothers that just inherited $500K each. It is a once in a lifetime windfall and they couldn’t live long enough to ever earn back a big loss. They are in the early 60’s and will be out of the workforce soon.
Last time, folks that held on recovered in “only” 4 years. They thought they were making 15% a year when they were only working back to even.
Next time, it could take 10 years or more. The days of market cycles may be over. Now we are into markets evolving into new creatures that we’ve never seen before.
We will be buying their nest egg assets for $0.25 on the dollar. I will make one helluva slum lord.
That is absolutely 100% right on the money Dev.
I too had a friend who hel thru 2008, with money held in some “fund” from his local bank. Looking back on 5 years worth of it’s performance now….it lost 37% right off the top, then additional 18% er so the following year….and has spent the last 3 years clawing back to being just shy of break even now.
5 full years with zero return / likely loss, 5 years of grief and worry – and five years of capital completely held up / useless with countless other opportunities passed by.
The next one could “easily” be longer so…..I don’t really understand “buy n hold” in this crazy world we live in.
What’d think is the fate of gold, silver, miners near-term, Senor?
I’ve suggested many times that gold and silver could just as easily bounce around down here for an extended period, and that in the current “environement” it’s an investment not a trade. Ugh…..now and “again” and “still” these two hang near the lows, as investors still see no real “need” to own them. Smart investors? Already buying I’m sure.
The miners “relative strength” is absolutely fantastic in my view, with many hanging in great – and even advancing.
Fed action still the key in my view – in that…….we’ll need to see market reaction if / when they ditch this taper non sense, and are forced to print more.
Looking like maybe another spx low before any upward action.
I’m really just keeping my eye on USD here, after a full day of watching paint dry. Great.
I won’t likely be trading any “upward action in SP / risk” – short of taking a couple pot shots at it, and likely just taking a holiday / break.
At this point….”buyers of risk” ( in my view ) may very well get “another kick at the can” sure…as this thing “still” continues to grind.
I’ll be focusing on the coming months, and stepping lightly around any kind of “Fed speak” / news event where BOOM! In the blink of an eye the language suggests “QE to continue” or something like that.
I’m catching “wiffs” of it already out of Japan where talk is now “getting out in front” of my original idea of more QE in late March..(now maybe sooner?)
As well on my CNBC watch…..all “they” keep talking about as well is a “tapering of the taper”.
I don’t like it….and with this “emerging market fiasco” it sets up perfectly – Fed saves the day, and hits print. USD tanks and stocks fly.
I can’t help but be sceptical knowing full well the U.S economy can’t stand on it’s own so……I still can’t put my foot on the gas – in “either” direction.
Yup. I’ll probably trade this potential move up with a couple light positions but with a pretty tight reign. Its probably somewhat sensible to think that this is the first 5% or more correction in awhile and it will likely get bought up for a ride. Even with declining fundamentals I am sure there will be a lots of “well the fed and japan have us anyways”…kinda buying. We’ll see…I’m not really too committed to anything long until we get a nice intermediate correction….and perhaps some intervention.
My bullish argument…and not necessarily from these levels, is that we might have seen a secular low back 5 years ago. So, given that, and all the juice on the table, we might not see any corrections beyond 15 or 20% in quite some time. Again…mental masturbation so who knows. If you take some time off enjoy yourself!