...and broke medium term uptrend.
Why does the S&P 500 priced in Euros matter?
Critical to understanding this idea is understanding that due to the nature of cross-border investment flows, debt markets and equity markets in other countries are about to have a massive impact on the United States markets.
Since the markets melted down last March, market valuations have gone sky high along with global debt. In the book Panics, Manias, and Crashes seventh edition, the authors talk about how bubbles as a fundamental feature of human history. But, specific to the last 4 decades since currencies have completely dislocated from gold have, bubbles have accelerated to occur every 10 or so years. The bubbles have occurred every 10 years is an imbalance in the flow so investment capital to countries and the impact on currency. Foreign investment capital flows into a country when its exports rise—which means its companies are growing in sales, which makes these companies attractive investments to foreign investors. When money flows into a country to invest in its companies, the country’s currency appreciates as foreign investors buy the currency of the host country. This presents a dilemma to the country’s exporters companies as a currency increase makes the cost of their exports go up. What ends up happening is the country’s companies and investors, either by choice or by a government mandate, buy foreign assets which has the effect of making their currency and their export prices go down. This is how foreign exchange rates are balanced, however, the imbalance does not go away it simply gets transferred to the debt market. Simply put, the new fortunes of the companies in a country that receives massive and flows of capital cause investors to borrow more than they should. Debt is not a problem until it is. When it becomes a problem, investors need to sell their assets faster than they can find buyers. This causes the price of assets to go down.
We are living in a time of extreme asset valuations and debt. Just look at the rise of bitcoin, Tesla, GameStop, and so many other junk assets in such a short time coinciding with the rise of margin debt and record corporate debt. The reason for such a historic rise in prices is the money printing done by governments around the world during covid. This cannot go on forever in every country. Perhaps the federal reserve in the United States can keep it going till 2023 like they say they’re going to do. But other governments have already stopped their massive eating programs due to inflationary pressures and other pressures. This is likely to cause an in balance in cross-border investment flows. This in balance is likely to cause currencies to rapidly rise and fall against each other, which might result in mispriced debt to assets which could make debt be worth more than its underlying assets triggering margin calls and unexpected interest rate rises. When buyers cannot afford their assets, this triggers a deleveraging.
Much of the world plays the American markets in Euros -- think German savers who are getting negative interest rates on their personal savings, Middle East wealth funds, and European institutions. (Europe is the largest importer of US goods.)
My theory is that international investors are in charge of US markets at this time, and given that the S&P 500 priced in Euros has broken a medium term uptrend and 50-day support, we may be staring down the barrel of a deleveraging event.
Why does the S&P 500 priced in Euros matter?
Critical to understanding this idea is understanding that due to the nature of cross-border investment flows, debt markets and equity markets in other countries are about to have a massive impact on the United States markets.
Since the markets melted down last March, market valuations have gone sky high along with global debt. In the book Panics, Manias, and Crashes seventh edition, the authors talk about how bubbles as a fundamental feature of human history. But, specific to the last 4 decades since currencies have completely dislocated from gold have, bubbles have accelerated to occur every 10 or so years. The bubbles have occurred every 10 years is an imbalance in the flow so investment capital to countries and the impact on currency. Foreign investment capital flows into a country when its exports rise—which means its companies are growing in sales, which makes these companies attractive investments to foreign investors. When money flows into a country to invest in its companies, the country’s currency appreciates as foreign investors buy the currency of the host country. This presents a dilemma to the country’s exporters companies as a currency increase makes the cost of their exports go up. What ends up happening is the country’s companies and investors, either by choice or by a government mandate, buy foreign assets which has the effect of making their currency and their export prices go down. This is how foreign exchange rates are balanced, however, the imbalance does not go away it simply gets transferred to the debt market. Simply put, the new fortunes of the companies in a country that receives massive and flows of capital cause investors to borrow more than they should. Debt is not a problem until it is. When it becomes a problem, investors need to sell their assets faster than they can find buyers. This causes the price of assets to go down.
We are living in a time of extreme asset valuations and debt. Just look at the rise of bitcoin, Tesla, GameStop, and so many other junk assets in such a short time coinciding with the rise of margin debt and record corporate debt. The reason for such a historic rise in prices is the money printing done by governments around the world during covid. This cannot go on forever in every country. Perhaps the federal reserve in the United States can keep it going till 2023 like they say they’re going to do. But other governments have already stopped their massive eating programs due to inflationary pressures and other pressures. This is likely to cause an in balance in cross-border investment flows. This in balance is likely to cause currencies to rapidly rise and fall against each other, which might result in mispriced debt to assets which could make debt be worth more than its underlying assets triggering margin calls and unexpected interest rate rises. When buyers cannot afford their assets, this triggers a deleveraging.
Much of the world plays the American markets in Euros -- think German savers who are getting negative interest rates on their personal savings, Middle East wealth funds, and European institutions. (Europe is the largest importer of US goods.)
My theory is that international investors are in charge of US markets at this time, and given that the S&P 500 priced in Euros has broken a medium term uptrend and 50-day support, we may be staring down the barrel of a deleveraging event.
Comment:
I forgot to mention, it's also broken to the downside of its RSI triangle and is bouncing off a key level in ATR.