Taiwan's *SUDDEN* Dollar Collapse **MAJOR WARNING**

If we see some of the economic weakness

that I believe could happen, you will

start to see impairments pick up and

then and then the discounts will be very

large. Discounts very large. Well, that

doesn't sound very good. We're going to

review not only this video, but first

we're going to start by talking about

the Taiwanese dollar, a really critical

piece in the Wall Street Journal about

what could happen in the economy and

what to watch for. Uh, and then we'll

get into this private credit comment

which relates to the other two. And

that's because the foreign currency

market really matters. Right now, the

Taiwanese dollar is skyrocketing at a

faster pace than we have ever seen since

the 1980s, specifically 1988. And when

the Taiwanese dollar increases, it

increases the cost of things that we're

trying to import from Taiwan, like

advanced chips, which isn't great. But

there are also other distortions that

happen with this. So quickly just to

understand currency markets and how

these things might operate. It's useful

to just I always like to think about a

European vacation. Okay. So let's say

you have a

$100 and the dollar is really really

strong like it was in the summer of 2022

as rates started rising and people were

buying bonds because they wanted these

high yields in America. uh and uh uh and

and uh they therefore they were

converting into US dollars to take

advantage of some of these higher

yields. The dollar was actually pretty

strong. What you found was if you had

$100, you could buy somewhere around

$102, the euro was trading for less than

the dollar. It was wonderful. And what

did that mean for us when our dollar was

strong and the euro was weak? It meant

it was cheaper for us to go on a

European vacation. In other words, it

was cheaper for us to buy European

goods. Now, if the reverse happens,

let's say a Taiwanese vacation, just to

relate to this three sigma event that's

happening right now in the Taiwanese

dollar, 2-day increase, largest two-day

increase since 88. Volatility way off

the charts, and it's going to lead to

some

distortions. Well, now let's say we want

to go on a Taiwanese vacation. What does

that mean for us? Well, weaker US

dollar, stronger Taiwanese dollar by a

good chunk. It means that Taiwanese

vacation just got more expensive, which

to relate it to our broader economy, it

means imports from Taiwan semiconductors

just got more expensive. Now, some of

this could be because of the lutnic 25%

sectoral tariffs that could be as high

as in some cases 100%. somewhat like

we've seen with the movie industry

where, you know, everybody's like, "Oh,

you know, Disney and uh Netflix are

going to be immune to tariffs and then

boom, out of nowhere, 100% import tariff

on movie production." Still not exactly

sure how they're going to pull the

mechanics of that off, especially with

online streaming. But I guess they're

going to try to figure out where the

movies are produced. Anyway,

um this sectoral tariff worry could be

getting priced into currency markets

prematurely, but you know, probably

that's exactly how the market wants to

work anyway to try to offset some of the

damage or pain of US tariffs that are

coming potentially as soon as Wednesday

on things like semiconductors. So, think

about this for a moment. When the

Taiwanese dollar increases, it

strengthens the Taiwanese dollar and

then actually weakens the cost of

US-based tariffs, which is kind of

interesting because if, let's say,

something is going to get tariffed at uh

$1,000 shipment gets tariffed at

$250, well that's tariffed in US-based

dollars. Well, if the Taiwanese dollar

strengthens in anticipation of that, it

actually gives people with Taiwanese

dollars more capability of paying for

that tariff because they can buy cheaper

dollars. And this is actually how

currency markets can sometimes weaken or

enhance the strength or the pain of

tariffs. In this case, the Taiwanese win

uh in in this sort of speculative

movement and uh the US importers get

hurt. uh you actually when when the

dollar weakens, you potentially increase

the inflation that we suffer because now

it takes even more US dollars to import

the underlying Taiwanese product. So in

other words, a lot of that that gets a

little complicated with currency

markets, but this sudden skyrocketing of

the Taiwanese dollar could be because of

the sectoral tariffs rumored to be

coming Wednesday. Uh however, they could

also be because

of institutions being caught off sides

with US dollar exposure in Taiwan. Now,

this could be because of treasuries or

whatever else, you know, stocks, you

name it. But this is actually a very

common issue that we've been facing. In

April, for example, we saw the largest

retail by the dip of US stocks, but we

saw an institutional unwinding of stock

positions. Some of this could be because

of recessionary fears, though I don't

really think the stock market or bond

market is actually pricing in any real

recession protection right now. It's

kind of like the markets are implying a

10 to 20% chance of recession, which is

indistinguishable from a normal year,

which is crazy given the economic

headwinds that we have. So maybe

potentially a little too much euphoria

in markets right now, but but it's okay.

You know, set trailing stops and let it

be. But what's fascinating is if Asian

markets or European markets or others

are trying to offload US assets,

especially unhedged assets like US

treasuries, then you could also

potentially see this surge in the

Taiwanese dollar. So, for example, if

Taiwanese life insurance companies are

dumping US treasuries, then what they're

doing is they're selling those US

treasuries. They're getting US dollars.

Then they sell the US dollars, driving

the US dollar value down. Then they buy

Taiwanese dollar to repatriate that

money back home. Boom. Taiwanese dollar

up, US dollar down. That could be one of

the explanations here. So the bottom

line of this whole currency movement is

that while you could

see some form of shock out of the

suddeness of this movement, which is not

unlike the Japanese carry trade where

when you have a really sudden shift in

market fundamentals or or some form of

trades unwinding really rapidly, you

could see shockbased pricing in stocks

or bonds or whatever. But beyond that,

what's more important

is is this potentially the start or a

continuation of an escape away from US

dollar assets leading to greater and

greater liquidity problems. That is a

potentially bigger issue I think for our

US economy than just worries about this

Taiwanese dollar. Now, this isn't to say

that, you know, Taiwanese dollar isn't

important, okay? It's just simply to say

that as Americans uh in the American

market, we probably want to pay more

attention to liquidity concerns like

that video I talked about at the

beginning. But also, this Andy Kesler

piece, now this is an op ed, the economy

is in a pickle, but what he describes is

really fascinating about the economy.

Take a look at this. What worries me is

that as with the derivatives, so like

credit default swaps or whatever during

the 2008 financial crisis, we have no

idea how private credit will do in a

downturn and it's starting to get funky.

Default rates rose in February before

the tariff tantrums. A weakened economy

could send default rates or flying and

liquidity could get even worse. So, not

only do you have foreign countries

potentially dumping US assets, reducing

liquidity, but now you also have

universities like Harvard and Yale

dumping money as much as they can out of

bonds or stocks because they want

liquidity to get through potentially

lack of funding from uh you know, other

sources. Talked about that yesterday. If

you want my opinion on the whole Harvard

and whatever debacle that's going on

with universities, for what that opinion

is worth, you can look it up on YouTube.

me Kevin and then just type in Trump and

you'll see it for yesterday. But anyway,

a weakened economy could send default

rates flying. Liquidity could get worse.

No wonder stocks of KKR, Blackstone,

Apollo, and the Carile Group are down 20

to 25% this year. Plus, all isn't right

on Wall Street. The window for IPOs is

more or less closed. Retail investors

now trade crypto elsewhere. Wall Street

F, in other words, not on on sort of

like public markets like the stock

market solely, right? Uh, and if things

get rough, the Federal Reserve will cut

interest rates and buy Treasury bonds

via quantitive easing, right? Not so

fast. Even with rates steady, the dollar

has dropped 9% since Trump took office,

the administration prefers a weaker

dollar on the belief that it would boost

exports. Mistaken belief, he says that's

an opinion. Uh, meanwhile, imports,

especially intermediary parts used in

manufacturing, are then more expensive.

That along with tariffs will likely

drive inflation higher, which means

cutting rates could further weaken the

dollar. Remember when I said in 2022 the

dollar rose because rates were going up?

People wanted access to our bond market.

So they buy dollars to buy our bonds.

Well, if rates were going down, go get

your yield elsewhere, right? What do you

need the dollar for? You could go invest

in euros, which some people say might be

the new dollar of the future thanks to

some of the uh actions that we're seeing

in markets right now. But a cutting

interest rates could actually serve to

worsen that near-term inflation in a

stagflationary environment while at the

same time other you know foreigners or

institutions are cutting their exposure

to bonds which potentially puts us into

a self-induced pickle. Consumer consumer

sentiment facing 10-year lows. Capital

spending plans way down. Cargo shipments

from China to the US are down by about a

third. retail layoffs may start as you

know empty trucks are here because

trucks don't end up you know getting

hired to to deliver empty uh you know

freight obviously but anyway Apollo

predicts a recession by the summer blah

blah blah a potential scenario this is

the doomsday here the economy nose dives

inflation rises that's stagflation

obviously after inflation goes up in an

economic nose dive you'll see

substantial deflation but inflation

could happen first temporarily profits

plummet private credit implodes this is

a big one cuz we're about to watch a

video on just this. I feel like I'm in

high school. Are y'all ready to watch

the video? Bill Nye the signs. Okay,

sorry if you were watching that in high

school. Maybe that's a bigger problem.

But anyway, interest rates fall, the

dollar drops further, liquidity dries

up, and dicey markets lead to struggling

times. How do we avoid this? Go back to

zero tariffs. Now, I can't disagree with

that. Okay, we should be going back to

zero tariffs. I totally agree. Or at

least lower tariffs. And hey, if we can

negotiate the other tariffs lower,

fantastic. I'm worried that Donald Trump

is too convinced that tariffs are great

and you know we're going to raise so

much money. We're gonna bring down the

debt with all the tariffs and we're

going to cut taxes. All right, we'll

see. But this is interesting to me

because this right here, I think, is

what nobody's paying attention to.

liquidity. You know, with with people

buying the dip in the most aggressive

manner that we've ever seen in American

equities in April, I fear that the

people's access to liquidity is drying

up because people you see money and it

burns a hole in their pocket and oh my

god, I need to buy stocks and uh you

know, then all of a sudden you don't

have liquidity when you need it. I think

that's why we're seeing Warren Buffett

sit on the cash pile that he's sitting

in or sitting on or I guess now

Birkshshire is sitting on. So sad. But

anyway, uh Liquidity drying up is a

really big problem and it has been

drying up. What you're seeing with the

Taiwanese dollar is a liquidity issue uh

and potentially in part a hedging issue

which is also liquidity based. But

anyway, I want to see the full twominute

commentary here by the Oak Tree co-CEO

about liquidity and private credit and

how that could be a canary in the coal

mine. Let's listen in here and we'll

have some commentary. In public markets,

you've seen some spread widening.

Nothing crazy, but but it's there. In uh

private markets, sorry, in spreads

widening, by the way, increase of risk.

Public markets, you saw the wedding and

decrease of liquidity. In private

markets, you gave me an amazing

statistic that you're seeing some funds

being sold 90 cents on the dollar, as

little as 70 cents on the dollar. And

you told me that this is before the

tariff. No. The reason by the way things

would be sell sold for 70 or even 50

cents on the dollar is because of

liquidity. When people need access to

capital, they don't mind taking a loss

on a certain asset if it means they get

cash. This is why Buffett always sits on

cash negotiations started. That's

correct. In fact, I I probably misqued

the low end. I think it's even lower

than that in some cases. We've seen and

done trades at, you know, in the 50cent

range. So what I would say is this. If

you look at all the major asset classes

that we focus on, we're primarily

subinvestment grade. It's high yield

leverage loans. It's uh private credit

uh and triple B's. We occasionally look

at tripleB's as well. Um high yield is

about 3 385 basis points over right now.

It got as low as 260. It's got as high

as 460. So it's right in the middle of

its its range. Loans is a little is

wider of that. Those would imply we're

at a very normal state in the credit

markets, which I find ironic because

this is anything but normal. These are

unprecedented economic times. So, as you

look, I think it is starting to

create some some desire on the part of

large institutional credit holders to

get out of this before maybe there's

something, you know, before I fall. And

that's where you that I think is exactly

right. this idea of, okay, yeah,

retail's buying the dip in April, but uh

we're going to get out before it gets

worse. You got the credit secondaries.

They've been pushing their their GPS to

get liquidity out of the funds. The GPS

haven't done it at the pace that they

would like and now the LPs are taking

matters into their own hands and putting

credit secondaries out there uh to for

for folks like us to that that gives me

shivers to think about that the 50 cents

on the dollar funds are being sold right

now. And again, we have not potentially

even seen the worst of this economy yet.

What does it say about potentially

problems that are being masked in

private markets given that we're not

seeing daily marks on these types of

assets? Yeah. So, I I think what it says

is to date we haven't seen forced

selling. There haven't been really dire

liquidity situations that people need to

address. And so, these have been mostly

trades of convenience where they're

trying to clean up a portfolio that they

have. Um, I think we're going to get

into more sort of anxious points in time

where where LPs will want to trade and I

think those discounts will go out

further and they don't again those

occurred in points in time where there

wasn't a lot of credit impairment going

on. If we see some of the economic

weakness that I believe could happen,

you will start to see impairments pick

up and then and then the discounts will

be very large.

Now they're already seeing discounts as

much as 50 cents on the dollar and now

they expect this could be even worse. So

I think the the you know catchphrase of

the day is liquidity. Uh you know this

is something that I think every investor

should really be thinking of. Uh I think

there are two ways to look at liquidity.

Number one is yield bearing assets. I

usually don't encourage, you know, yield

bearing because, you know, you pay taxes

on that. But in recessionary times, I

actually think they're great. Like, if

you could lock in, you know, a six-month

Treasury bond or a one-mon Treasury bond

or sorry, a one-year Treasury bond and

lock in that, you know, four four and a

quarter% or whatever, I think that's

great because you get your principal

back at the end, but then you're also

getting the yield in the meantime. Uh,

and that could be good if you go into a

recessionary time where you need to

supplement some of potentially uncertain

job income or entrepreneurial income.

It's one of the reasons why we created

the 5% bond at house hack uh where you

know not only do you get 100% of the

upside in the stocks or as our valuation

grows investors get 5%. We created that

because we think that in a recessionary

style environment, investors should be

rewarded with yield uh and uh and and

and still have, you know, partaken

upside uh with downside. I mean, I I

think what we're doing with the house

hack bond is is incredible, but you can

read more about that over at house

hack.com. It's open to nonacredited

investors. Uh but you know the other

option too is sort of a combination

where you look and you say okay well I'm

going to have yield bearing assets in

some extent because I don't want to be

completely un invested in things that

could actually do really well in a

recessionary time. Uh but then you also

raise cash on the other hand. See, I

actually think that recessionary times

present really good business

opportunities and and if you're an

entrepreneurial individual or maybe

you're employed and and you want to do a

side hustle or whatever, uh recessionary

times are really interesting for that

because if businesses the businesses

that survive in a recession, they

usually face less competition coming out

of a recession. you know, as as an

example, I I think a lot of real estate

companies that are way overleveraged are

going to have, you know, a little poopy

dupy to face, especially some of the,

you know, flippy companies. Uh, if we do

hit a recession here, you know, I'm not

going to be very happy about Open Door,

uh, as an investor. I'm not an investor

in Open Door. If I were, I wouldn't be

surprised if you could potentially knock

on a bankruptcy door and and their

software gets picked up for pennies on

the dollar. Maybe I'll buy it. Uh but uh

but beyond that

um recessions create opportunities and

so you know I like the uh Buffett quote

the the biggest call option that you

could have for an opportunity is cash

and then of course I always say the

number two one of that

is cash flow hence yield. Anyway, thanks

so much for watching. Hopefully this was

insightful to you and uh beware of the

liquidity swamp. Why not advertise these

things that you told us here? I feel

like nobody else knows about this. We'll

we'll try a little advertising and see

how it goes. Congratulations, man. You

have done so much. People love you.

People look up to you. Kevin Praath

there, financial analyst and YouTuber.

Meet Kevin. Always great to get your

take.