1. The price of oil has fallen by more than half from its recent peak in mid-2014 and continues to remain in relative free fall in 2015;
2. The US dollar, in which oil is denominated, is soaring against almost all asset classes and currencies to break its multi-year trend range; and
3. The world's financial system remains on a dollar standard, not a euro, yen, sterling or renminbi standard. Majority of global loans continue to be in dollars.
What Connects These Three Key Dots?
You will have read about the oil price fall, OPEC, shale fracking, oil glut, Saudi Arabia, Iran, Russia, energy supply and demand, geo-strategy and geo-political risk, alongside myriad conspiracy theories. They all may have some truth in them, but they are relative side issues against the major story that ought to be followed and dissected: the explosion of the near $8+ trillion US dollar carry trade.
Of that $8+ trillion, $5.7 trillion is emerging market dollar debt, a global reserve currency those countries can neither print nor control. Dollar hard-currency debt of emerging market economies has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in corporate bonds. In the last two hundred years, very few cross border lending binges equate in size and scale to this dollar denominated debt colossus fuelled by first world quantitative easing on an unprecedented scale and with near Zero Interest Rate Policy (ZIRP).
What is the carry trade?
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