🗞️ Konichiwa (Crash Incoming)

WHILE YOU POUR THE JOE… ☕️
Carried Out on a Stretcher

That is the S&P 500 chart, and what I am looking for right now is for it to head lower to bear market status 📉.

Per Wall Street, this is defined as a 20% or more selloff from recent high prices, so for the S&P, it would be roughly $4,520 or $452.20 on the ETF 🎯 symbol $SPY.

The sharp selloff resulted from the abandonment of the so-called “Carry Trade” with Japan’s currency 💴 versus our own. This very complex trade, if unwound, will cause a crash in the United States Dollar.

It’s not like this is news to you; I’m assuming you read our post on why nations are now stockpiling gold reserves, all in a bet for a crashing Dollar.

Speaking of a crashing Dollar, let’s get on with today’s email 📧…

NEXT DOMINO
Japan Isn’t Alone

So, what exactly is a carry trade? It’s a popular but complicated trade and risk management practice that banks and hedge funds tend to employ when central banks shift their interest rate outlooks and policies.

Japan's interest rate was set to near zero, which means you can borrow money in a cheap or low-interest currency (like the Yen 💴) to then invest in a more expensive and higher-interest currency (like the Dollar 💵).

If interest rates are near zero in Japan but above 5% in the United States, then you can essentially make an absolutely risk-free 5% per year. But of course, there are no free lunches on Wall Street.

The risk comes when either one of these banks decides to change interest rates, triggering a massive unwind of the carry trade, which, of course, affects stock markets.

This is the USD/JPY exchange rate, which has been on an upward trajectory since 2021 when the Federal Reserve (the Fed) in the U.S. started to mention concerns about inflation and possible interest rate hikes to follow.

Fast forward to today, when the Bank of Japan decided to raise interest rates and when the Fed is looking to cut interest rates.

** Quick Tip 🔎: Currency values are typically driven by interest rates, where rates go, and where currency trades go.

This shift means that the Yen will soon become stronger than the Dollar, and traders aren’t known for waiting around; they typically get ahead of the curve.

You can probably guess that’s why the USD/JPY has sold off so aggressively lately, and guess who was behind it the whole time: Us 🎯!

We were four months early, but, I never said we were wizards here. Here’s the crazy part though, it’s not over.

Mexico’s interest rates have been below America’s since 2022 to make another carry trade like Japan’s. Now that the gap is closing, the carry trade is being swapped the other way.

All told, and to save you time figuring out which domino will fall next, all the evidence points to the dollar keeping collapsing, but that doesn’t have to be a bad thing.

STOCK OF THE WEEK
If This, Then That

You can buy a gold watch or bullion or collect some Canadian or American gold coins. Once you’ve done all this shopping, you just sit and wait until the world goes up in flames.

Or

Here’s an exchange-traded fund (ETF) that does all of that for you and then makes its value public so you can invest and enjoy the benefits of all its gold holdings.

SPDR Gold Shares (NYSEARCA: GLD)

Those at Goldman Sachs think that gold prices can reach up to $2,700 an ounce 🔥 by the end of the year; this could be much - much - higher.

Since gold prices are quoted in Dollars, a weakening currency could send them to a potentially new high.

Go ahead and study when the dollar has been weak, especially when combined with deteriorating economic data like today.

The result is a near triple-digit rally in the price of gold. So, by investing in this ETF, we are directly positioned to profit from this trend. However, as you know, our timing is not impeccable. We were four months early on the Yen.

So, we're going to do something different here. We're going to sell cash-secured puts on the ETF so that we have both the upfront cash and none of the timing issues.

Why? Options expire worthless, so we can afford to wait whatever time it takes for gold to rally without losing any money or tying any of our capital other than the cash collateral.

Now, we realize that this ETF is on the more expensive side, as a single cash-secured put requires up to $23,000 in cash 💰️ collateral to sell.

So, here's a cheaper and more accessible alternative.

iShares Gold Trust (NYSEARCA: IAU)

You're welcome. This ETF is nearly 10x cheaper 🤝. You can also sell cash-secured options on it, which only require roughly $4,500 in cash collateral, or simply buy it slowly but surely over the following months.

Remember, currency values go where interest rates go, and the Fed is looking to cut rates by September 2024. There's a gauge called the FedWatch tool, which measures the likelihood of when (and by how much) the Fed will cut interest rates; here's what that looks like:

There is a 30% chance of a 0.25% cut and a 69.5% chance of a 0.50% cut. I don’t know whether they will keep this promise, but I know everyone is buying gold for a reason.

It’s a vote of no confidence (Succession style) on the dollar index and our entire economy, so I urge you to stick to dollar-based commodities like gold and oil.

NOW GO AND MAKE IT HAPPEN
Why Escape the West?

I've been saying it since 2020, the United States economy is in for a rude awakening in the coming years. Who is going to take over? My guess is China and its surrounding nations.

Personally, that's why I've considered investments in Australian stocks, Chinese stocks, and other Asian regions. Today's book recommendation 📖 will explain how this thesis might play out in the coming years and what you can do about it.

To your success,

G. 🥃