Hunting for Dollars ‘Breaks’ Markets
Joining in the dash for cash have been many investors, both domestic US and global, who are now paying the price for years of complacency and greed. The hunt for yield has led them into excessive valuations of otherwise conventional instruments as well as riskier assets such as covenant-light leverage loans High Yield (formerly junk) bonds and even distressed loans. Ramping up leverage through both exotic and standard derivatives and reliance on margin loans has spiced the gains and is now souring the losses. Many thought they had mastered volatility with so-called risk parity strategies but, as pioneer investor Ray Dalio, has (sort of) admitted they do not work when everything falls together and there is no safe place to go. Sure enough, since mid-February all asset classes have been falling and even US Treasuries, gold and the yen have lost their safe haven status. Other more mundane casualties have been Momentum and Passive Investing.
A theme common to all these losses is excess borrowing by investors and the entities in which they have been investing and from which the dash for cash has been to escape. In particular demand has been for dollars to pay down that debt even if the original proceeds had been used to finance spending and investment outside the US at times when dollars were plentiful and cheap. In fact, dollar exchange rates are currently unusually volatile since investors rushed to sell US assets funded by carry trades in the euro and yen. Now it is all about dollar liabilities and foreign borrowers are having to compete with US consumers, companies, investors, municipal, state and federal governments. It is not necessarily one-way traffic, however, as anything that can be sold is being sold and that includes US assets that do not seem as attractive as they were up to only 4 weeks ago.