Charts of the Month - September '22

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Global Currency Crisis

Unless you’re still on a European holiday or spent all last week with your head buried deep in the sand, you likely saw something truly remarkable, even considering all the truly remarkable events that’ve taken place over the last few years.

The currency of the world’s 5^th largest economy, already falling at a concerning rate this year (vs the US Dollar), absolutely fell off a cliff.

The British Pound, which began the year at an exchange rate of 1.4, is as of this morning trading closer to 1.1 (after sliding all the way down to 1.05 just a couple of days ago)… inching closer to the psychological ‘parity with the USD’ threshold that the Euro just broke a couple of months ago (triggering the collective creative genius of every meme account on the internet).

The most concerning part, however, is that the Pound is just the latest of the world's major currencies to get, in non-hyperbolic terms, shellacked this year.

Why does this matter so much?

There are many reasons, very complex in nature, that I’m not fully qualified to delve into. But, from a high level (my preferred vantage point), there’re two significant issues a country faces when its currency gets crushed:

• Debt – todays governments, corporations, and households are sitting on the largest piles of debt in history. Where things get dicey, is when that debt needs to be repaid in a currency that is not their own (read our Eurodollar Primer if that doesn't make sense to you) – which is the case for many countries and corporations (not so much for households). If a country issues debt in USD but doesn’t earn in USD (tax revenue for governments and operating revenue for corporates), then they need to convert their local currency into USDs to repay the debt. If their currency is depreciating, then more of their local currency will need to be used (sold) to convert into USD. If the local currency is rapidly depreciating (which is what the chart above is showing), then a LOT more of the local currency will need to be converted (sold). This is a vicious cycle that can lead to (again, not trying to be hyperbolic), a sovereign debt crisis.
• Trade – This impacts all three constituents (governments, corporates, and households), but ultimately, the brunt will be felt most by households. As a local currency depreciates, more of it is needed to import the goods and services a country relies on. But again, as a currency depreciates, more of it is needed to import the same level of goods and services. This forces the cost of goods up in local currency terms, which temporarily may be absorbed by corporates, but eventually, those costs will be passed down to consumers.

Keep a close eye on these developments. Because in a market this big and this important, small moves are frightening, and large moves can be paradigm shifting.

The Mother of All Macro Charts

For the pros out there, you’ve seen this chart a thousand times. For our non-pros who actually have a life outside finance, this may be new to you.

Depending on which circle you run in, the US 10-Year Yield, and the seemingly endless downward funnel it’s been trading in over the last 40 years, is the most impactful chart there is. If you’re a macro aficionado, the ‘long bonds’ trade has been the only game in town for a long time.

This downward trend (making capital cheaper as the years went on), is the primary reason for the growth in the private equity market (which typically requires cheap debt financing for deal-making), why growth stocks have been in a seemingly perpetual bull market, and why financial speculation continuously compounded on itself which led to the Dot Com bust and the Great Financial Crisis.