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Eric Peters: “This Is How You’ll Know The Cycle Is About To Turn”

Courtesy of ZeroHedge. View original post here.

Yesterday, we showed that according to Macquarie strategist Viktor Shvets, the biggest danger facing investors in the next 12 months is a sudden, explosive move higher in the dollar, as a result of a quiet shrinkage in global dollar supply and an inability of the US to materially widen its current account deficit, which could precipitate a violent dollar short squeeze, which in turn would result in a sharp, deflationary hit on global asset prices.

24 hours later, we share a somewhat different perspective, this time from One River CIO Eric Peters, whose rationale for why an explosion in dollar vol is imminent we presented earlier; Peters – like Shvets – believes that the dollar is the definitive inflection point catalyst, or perhaps indicator, however unlike Shvets, Peters is more concerned with the dollar losing value over the medium-term as foreign pull capital out of the US – the catalyst for the next downcycle -  rather than a surge in the USD higher as dollar shorts are hit with a barrage of margin calls.

And, at the center of this cycle, is the creation of financial assets by Americans, which is promptly converted into an asset bubble, sold throughout the world, at which point a deflationary crisis follows, and the system is reset, to wit:

“Basically, Americans create financial assets and/or buy them cheaply, pump them up, dump them to Japanese and Germans savers, suffer a crisis, rinse and repeat.” That’s how the system finds its balance.

More importantly, to Peters this transition in confidence, or rather capital flows, marks the cycle inversion point:

“when strains emerge in the US credit markets, and the Japanese and Germans start to pull capital home to park in their domestic bond markets, lowering those yields, you know the cycle is turning.”

And, if Peters is correct, the best indicator of this phase transition is the relative value of the dollar, only unlike Macquarie’s thesis that a sharp spike in the DXY will precipitate the next crisis, to Peters it is the resumption of the dollar’s relentless grind lower that will be the catalyst: “this perpetual dynamic leads to strengthening currencies in Japan and Germany, and the long, inevitable decline in the US dollar.”

* * *

More inside the latest Weekend Notes by Eric Peters:

Anecdote

“Americans are unwilling to save,” said the CIO.

“The Japanese and Germans are unwilling to spend,” he continued. “If the latter two could generate exceptional investment returns on their savings they’d have all the money in the world within two business cycles.” They haven’t, and won’t.

“The US model is credit-driven, with Americans in perpetual search of the sucker, like buyers of Tesla and Netflix bonds.” They look for investors willing to accept very little upside in exchange for a lot of the downside.

“America has a credit driven model. Companies issue junk. And banks make loans, hold onto good ones, securitize bad ones, selling those off. They’re masters at passing losses onto investors.” The more they do this, the more profit they make. This incentive structure ensures America supplies ample credit securities for the world, many of dubious value.

As cycles turn, they blow up.

“The Germans and Japanese have a bank-driven model; lending their nation’s vast savings pools, holding onto both good and bad loans. When they run out of domestic borrowers, they lend abroad.”

European and Japanese banks take losses onto their balance sheets and raise equity capital to pay for them – the equity gets destroyed, diluting shareholders from one cycle to the next.

“Basically, Americans create financial assets and/or buy them cheaply, pump them up, dump them to Japanese and Germans savers, suffer a crisis, rinse and repeat.” That’s how the system finds its balance.

So when strains emerge in the US credit markets, and the Japanese and Germans start to pull capital home to park in their domestic bond markets, lowering those yields, you know the cycle is turning,” he explained.

“And this perpetual dynamic leads to strengthening currencies in Japan and Germany, and the long, inevitable decline in the US dollar.”


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