There's something going on in Europe that you need to know about. It could directly impact your portfolio, and not in a good way. And no one else is telling you about it. Here's what you need to know to protect your assets and profit on the short side.
Unlike Vegas, what happens in Europe doesn't stay in Europe. In fact, European banks and investors play a huge role in U.S. markets. This is nothing new. After all, it was European investors who financed the exploration of the New World. French money helped finance the American Revolution. And so on.
While Europeans don't play nearly as large a role in U.S. markets as the Federal Reserve does, at the margin their participation is critical to the direction of the U.S. Treasury market. And as the money used to purchase Treasuries passes into U.S. dealer accounts, it then has an impact on stock prices as well.
Bottom line: European money directly influences the bond market and indirectly influences the stock market. And if they start pulling their cash out of our system... then what's good for Europe could be very bad for the United States.
In fact, it could help trigger a massive stock market crash this fall. Here's how.
Europe Is Already Quietly Pulling Its Money Out of the U.S.
This one chart illustrates how European money directly impacts the bond market. When the ECB prints money through its QE or its occasional, massive lending programs, European bank deposits rise. Some of those deposits flow out of Europe and into the United States when European dealers and investors purchase U.S. Treasury bonds, notes, and bills. After all, five of the 23 U.S. primary dealers are European. And the other 18 all have European operations. Money flows freely and instantly between European and U.S. markets.
The correlations between ECB money printing, European bank deposits, and the behavior of the U.S. bond market were very strong through mid 2016. The amount of European deposits increased or decreased in tandem with the size of the ECB balance sheet. The direction of the price of the 10-year U.S. Treasury Note (price is the inverse of yield) moved in tandem with bank deposits.
But two strange things happened beginning last year. First, deposits stopped growing apace with the size of the ECB balance sheet. Then, since late last year, Treasuries began to lag behind surging European deposits.
Might the U.S. election have had something to do with that? I spend eight months a year outside the United States in Europe and Canada, and I have seen that negative feelings toward the Trump administration are especially strong both in Europe and in our neighbor to the north.
It would not surprise me at all that foreign investors might be pulling their cash out of the United States. Since Trump was inaugurated, the U.S. dollar has lost 10% of its value against the euro. That's an indication that Europeans are repatriating their capital out of the United States.
We're also seeing evidence of this repatriation in European bank deposit data. The evidence is not showing up in total bank assets or total deposit growth because the European financial sector is shrinking itself as fast as it can.
But it is definitely showing up somewhere else.
Here's Where Europe Is Putting Its Cash (Instead of America)
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.