I heard a knock at our door recently.
Under normal circumstances, that wouldn’t be that odd. But in the age of compelled social distancing, where marching orders are to maintain a 6-foot buffer zone, it’s at least unexpected.
After a quick initial risk assessment, I was moderately surprised to see my neighbor when I finally opened the door.
“Hey Matt,” he said.
“Hey Mortimer,” I said (totally not his name, by the way). “How can I help you?”
“Well this is kind of a weird question, but could I borrow a printer?”
Frankly, it wasn’t as weird as it looks reading it back right now, as the process of fighting COVID-19 means we all work from home these days.
“Uh, sure,” I said. “I actually have one still in the box that you can use until we can all go back to work. Just get it back to me whenever we go back to our offices.”
“Ah fantastic. What a stroke of luck, thank you… I so appreciate this.”
So why am I telling this story?
Because the International Monetary Fund now expects 170 out of 189 member countries to “experience negative per capita income growth” in 2020 due to knock-on effects of COVID-19.
That’s a fancy economist way of saying “decline.”
And worse, 90 countries – nearly half the entire world – have already reached out to the IMF and asked for assistance.
To combat that massive risk, the IMF is preparing to tap into its U.S. $1 trillion lending facility — at this stage essentially U.S. dollar swap lines for small countries that are fully backstopped by the Federal Reserve.
Unfortunately, the IMF has warned that financial needs of emerging markets could exceed U.S. $2.5 trillion, so they are underfunded by at least 60%.
In other words, they are essentially knocking on our door and asking to borrow our money printer.
This has a couple of effects.
First, and somewhat counterintuitively, it increases the demand for US dollars – a theme I will likely discuss often.
When demand for dollars rises, so does its value relative to other currencies – including and most especially the currencies of smaller countries.
And although the Fed announced yet another round of U.S. $2.3 trillion in aid to businesses this morning, pushing the US Dollar Index down more than half a point, it doesn’t change the fact that the world needs more dollars than exist right now.
So rest assured, the US Dollar will bounce back.
Making that trade isn’t as simple as holding cash, though. Instead, one must be short the counterparty.
And in this case, that means the emerging markets. After all, much like the proverbial canary in a coal mine, it’s the smallest entities that suffer first.
The easiest way to do that is through Direxion’s Daily MSCI Emerging Markets Bear 3X Shares ETF (NYSEArca: EDZ). It has come off almost 50% from its recent highs, so it’s perfectly reasonable to begin legging in at current levels.
However, deploy no more than ¼ of any intended investment right now, and await further instructions on the remainder.
I say that because the Fed previously announced it will try to prop up the bond market by purchasing ETF’s and there’s no reason to think they’ll stop there.
I also want to consider building a short position in the Euro through ProShares UltraShort Euro ETF (NYSEArca: EUO)… just not when Jay Powell’s printer is this overworked.
All the best,