“There's Something Weird Going On”: Jeff Snider On The Global Dollar Shortage

The first time we explained that one of the biggest risks facing a world in which the dollar is the reserve currency is a global USD shortage, was in mid-2009, when we wrote “How The Federal Reserve Bailed Out The World.”

At the time, the IMF calculated that just ahead of the financial crisis, “major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars.” The IMF then extrapolated that “were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion.”

Since then the shortage, which some have dubbed a potential multi-trillion dollar margin call, has only grown and became a prominent issue back in March of 2015, when this phenomenon was used to explain why the cross-currency swap had plunged to multi-year lows. As JPM explained at the time, “the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and a very negative basis currently points to relative shortage of USD funding or relative abundance of funding in other currencies. Such supply and demand imbalances can create big shifts in the fx basis away from its actuarial value of zero.”

Fast forward a year and a half later, when none other than the Bank of International Settlements, or the “Central canks’ central bank”, warned last November that it was no longer the VIX that was the widely accepted barometer of market “fear”, it was now the dollar’s turn to become the global fear gauge: “just as the VIX index was a good summary measure of the price of balance sheet before the crisis, so the dollar has become a good measure of the price of balance sheet after the crisis. The mantle of the barometer of risk appetite and leverage has slipped from the VIX, and has passed to the dollar.”

Shortly thereafter we once recapped the main risks emerging from this increasingly more prominent threat to global financial stability, and wondered at what point would the Fed finally address this risk pointed out not only by this website for nearly 8 years, but also by the BIS, in a post which piggybacked on the recent work by ADM ISI’s Paul Mylchreest, who has made tracking the global dollar shortage one of his primary objectives.

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Now, in an exhaustive, 70 minute interview, submitted by Patrick Ceresna at MacroVoices.com, another prominent analyst who has been closely tracking the global dollar shortage, Alhambra Partners’ Jeffrey Snider sat down with Erik Townsend to explain – once again – why this is such a critical topic, even if it comes at a time of unprecedented global complacency (it’s amazing what record high stock prices will do to concerns about the future, or lack thereof).

As Snider puts it, while most other risk indicators imply smooth sailing, “there is ‘something’ weird going on” when it comes to dollar funding and global imbalances of the world’s reserve currency, i.e., dollar shortage.

  • In the interview, among the many topics covered, are
  • Understanding the Eurodollar Money Market
  • Swap Spreads and Interbank Hierarchy
  • Dimensions in the Eurodollar Futures and Eurodollar Money Supply
  • Why does the World Need So Many Dollars?
  • How the Eurodollar market supplanted the Bretton Woods System
  • U.S. Dollar and the Dollar Funding Gap
  • Reflation Trade Debunked
  • Interest Rates Trapped
  • Failing Global Currency System

While we urge readers to listen to the full interview below, here are some of the highlights, starting with “why the Dollar shortage a symptom of an inherently unstable system.”

As Snider explains, “the dollar shortage isn’t so much the shortage per se, it’s the fact that it’s a symptom of what is an inherently unstable system.” He notes that “the reason banks are withdrawing from the system is that it’s just is no longer tenable” and “so there has to be some kind of – whether you want to look at it like another Bretton Woods – conference, a global monetary system, a global monetary get together where people start to analyze solutions to the problem as they are rather than keep trying to apply band aids that are not going to work. “

But, he concludes, “step one of that task is to actually recognize the problem as it is and so doing more stimulus or doing more QE isn’t going to solve anything it isn’t do anything just like prior QEs and prior stimulus haven’t done anything either because the problem is an unstable system.”

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Snider focuses on the Eurodollar system, which he defines as a problem of “decay and dysfunction” and explains that “nothing ever happens in a straight line even the Eurodollar problem has not been a singular event. It’s not been a decade long straight line of decay and dysfunction.” 

He goes on to say that the fact that after enough time these markets have adjusted to the fact that the economy’s going to be bad for a very long time until something actually changes and so true reflation is predicated on something actually changing rather than the hope that something might change.

Looking at history, Snider observes that “what happened in July 2008 obviously was the fact that everyone decided almost all at once that wasn’t the right interpretation of what the Fed was doing nor was it the right interpretation of the dollar system overall. So, that reflation ended in reality which was the dollar system was eroding and it was eroding in a very dangerous way and that’s why oil prices essentially crashed from July till I think January 2009.”

An implication of the ongoing reserve currency funding shortage is that, according to Snider, despite the occasional blip (arguably funded by massive Chinese credit creation), “reflation is going to fail and there’s nothing the Fed can do about it.” He goes on to state that “until they fix the global dollar problem we’re not going to fix the global economy and so we’re kind of stuck gyrating between various levels of really bad. We go from the lack of recovery to what looks like a global recession to the lack of recovery and back again” as a result he thinks that “reflation is going to fail.”

Snider also said that “because of how they’ve defined the last ten years” even the Fed “no longer believes that it’s in its interest to do anything.” He agrees and sais that “there’s nothing that the Fed can do about it.”

“In other words, we want them to start considering the global currency system and how it actually is operating and failing rather than their stylized academic approach which doesn’t apply. And until they’re actually convinced that there is a role for the central bank in that condition output gap or not, we’re kind of stuck.”

The failure to stimulate benign inflation is captured on the next two charts which show “why this version of ‘reflation’ is so far less than even 2013’s version.

His troubling assessment: “I hate to think of what the next decade might look like because history is not very kind in these kinds of situations where you have prolonged periods of stagnation.

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Putting it all together, Snider goes on to say that the Eurodollar futures market in particular is saying is that “if the Fed is going to raise rates it’s not to raise rates for a long or it’s not going to be able to raise rates for long.” Echoing a warning we – and many others have made on many occasions – Snider says that if the yield curve happens to invert again “if they ever get that far” then it will “immediately be like in 2005 or 2006 all over again it won’t stay that way for very long either the market will force the Feds’ hand or the Fed will realize the error and correct it. What’s important about this is that “in each of these reflation episodes you can clearly see the market’s faith in that reflation diminishes each time for these very reasons that we’re talking about because these markets have become attuned to the fact the Fed isn’t exactly what everybody thought it was, monetary policy isn’t what everybody thought it was.”

Snider summarizes by saying that “the fact that these markets realize that there’s a problem in Eurodollar system, there’s no banking to be had, no additional marginal banking capacity being added and without it none of these stuff really matters, none of these other stuff really matters. That’s the only thing that truly matters” and concludes gloomily that “the probability scenarios for economic and financial future are much darker now than they were three years ago.

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Snider’s full interview can be heard below (Here is a link to the entire podcast transcript):

The embed code for this episode can be found here.


We also urge listeners to follow along using Snider’s prepared slides presented below.

The FBI Is Pursuing Three Separate Probes Into “Russian Hacking” Of The Elections

While it has been previously documented that the FBI has launched an investigation into Russian “hacking” of the elections, today Reuters provided more details on the ongoing effort to scapegoat Hillary Clinton’s loss on the Kremlin, when it reported that the FBI is pursuing at least three separate probes relating to alleged Russian hacking.

The details according to Reuters, which cites unnamed officials, are as follows:

  • the FBI’s Pittsburgh field office, which runs many cyber security investigations, is trying to identify the people behind breaches of the Democratic National Committee’s computer systems. Those breaches, in 2015 and the first half of 2016, exposed the internal communications of party officials as the Democratic nominating convention got underway and helped undermine support for Hillary Clinton. The Pittsburgh case has progressed furthest, but Justice Department officials in Washington believe there is not enough clear evidence yet for an indictment, two of the sources said.
  • the FBI’s San Francisco office is trying to identify the people who called themselves “Guccifer 2” and posted emails stolen from Clinton campaign manager John Podesta’s account, the sources said. Those emails contained details about fundraising by the Clinton Foundation and other topics.
  • FBI counterintelligence agents based in Washington are pursuing leads from informants and foreign communications intercepts, two of the people said. “This counterintelligence inquiry includes but is not limited to examination of financial transactions by Russian individuals and companies who are believed to have links to Trump associates. The transactions under scrutiny involve investments by Russians in overseas entities that appear to have been undertaken through middlemen and front companies”

Among the topics pursued by the counterintelligence investigations are the alleged contacts between members of the Trump campaign and current and former Russian intelligence officers prior to the November election, as previously reported by the New York Times.

When reached by Reuters, Scott Smith, the FBI’s new assistant director for cyber crime, declined to comment this week on which FBI offices were doing what or how far they had progressed. The White House likewise had no comment on Friday on the Russian hacking investigations. A spokesman pointed to a comment Trump made during the campaign, in which he said: “As far as hacking, I think it was Russia, but I think we also get hacked by other countries and other people.”

It was unclear if any FBI bureaus were investigating the leaks emanating from the US government which Donald Trump repeatedly slammed in the past week, and which led not only to the resignation of Michael Flynn but to constant disclosures into the inner workings of the Trump cabinet. While many of the opponents of the Clinton, Podesta and Democratic leaks – broadly grouped under the “Russians hacked the election” umbrella – have slammed “Russian interference” in the US electoral process, they have been far less troubled by similar leaks impacting Trump, and – of course – vice versa.

Trump Supporters Rally In Downtown Atlanta With Semi-Automatic Weapons

As Trump was preparing to address an audience in Florida on Saturday afternoon, in a speech which Reuters summarized as “returning to the campaign trail to attack the media again and tout his accomplishments in the friendly atmosphere of a rally with supporters”, a group of supporters gathered for a pro-President Trump rally in downtown Atlanta armed with semi-automatic weapons.

The crowd met at Centennial Olympic Park. Those there told Channel 2 Action News that they are part of an area militia group, III% Security Force, which was also serving as security for the event.

As WSB-TV reports, members of the militia group said they were there to protect President Trump supporters. 

“We’re using our second amendment rights to protect the first amendment rights,” Chris Hill said.

“Throughout the day we’re going to have more people, more Trump supporters come to this corner, showing their support for President Trump. We are going to make sure that these people are safe and have the right to have their voices heard without fear of violence or intimidation from any opposing groups.” 

Hill said he has seen counter-protesters circling the block, but he and his group want to make sure things stay peaceful. 

“We want to make it known that this is a peaceful event and we’re going to do everything in our power to make sure that remains the case,” he said. Hill said he expected 20 to 30 people to show up for the rally. He said a permit is required if there are more than 35 people, but he did not think that would be the case.

There were no reports of any confrontations or violence during the rally.

In an interview on its website with one of its founding members, the “Three Percenter” militia explains that it is “is comprised of men and women as citizens in esch state which come together to form a chapter.  Each chapter is classified as being part of the “Unorganized Militia,” we are officially a civilian volunteer organization.

We will come to the defense of public and private property, lives, and liberty to exercise God-given rights, seen plainly in the laws of Nature, and codified in the Declaration of Independence and Bill of Rights.

 

All local laws (not in violation of the U.S. Constitution and/or State Constitutions) shall be observed by members of III%SF. Each and every member and personnel within III%SF shall always conduct himself/herself with professional aptitude, integrity, and respect of others at all times. III%SF and its members shall not and will not ever cause or create any attempt to attack or overthrow any local, state, or federal department. We will never advocate or promote violence towards any organizations, groups, or persons.

 

GSF III% has a zero tolerance policy regarding racial discrimination.  The Constitution says a militia is necessary for the security of the free state.  The State of Georgia says  the militia is comprised of all males between 17 and 45 and physically capable of acting in our common defense.

A video showcasing the group is shown below.

The Shadow Government's Destruction Of Democracy

The ‘Deep State’ has one simple rule – “do it my way… or else!”

Source: Ben Garrison

And on the heels of Dennis Kucinich’s warnings, The Intercept’s Glenn Greenwald, who opposes Trump for a variety of reasons, warns that siding with the evidently powerful Deep State in the hopes of undermining Trump is dangerous. As TheAntiMedia’s Carey Wedler notes, Greenwald asserted in an interview with Democracy Now, published on Thursday, that this boils down to a fight between the Deep State and the Trump administration.

Though Greenwald has argued the leaks were “wholly justified” in spite of the fact they violated criminal law, he also questioned the motives behind them.

“It’s very possible — I’d say likely — that the motive here was vindictive rather than noble,” he wrote. “Whatever else is true, this is a case where the intelligence community, through strategic (and illegal) leaks, destroyed one of its primary adversaries in the Trump White House.”

According to an in-depth report by journalist Mike Lofgren:

“The Deep State does not consist of the entire government. It is a hybrid of national security and law enforcement agencies: the Department of Defense, the Department of State, the Department of Homeland Security, the Central Intelligence Agency and the Justice Department. I also include the Department of the Treasury because of its jurisdiction over financial flows, its enforcement of international sanctions and its organic symbiosis with Wall Street.”

As Greenwald explained during his interview:

“It’s agencies like the CIA, the NSA and the other intelligence agencies, that are essentially designed to disseminate disinformation and deceit and propaganda, and have a long history of doing not only that, but also have a long history of the world’s worst war crimes, atrocities and death squads.”

Greenwald believes this division is a result of the Deep State’s disapproval of Trump’s foreign policy and the fact that the intelligence community overwhelmingly supported Hillary Clinton over Trump because of her hawkish views. Greenwald noted that Mike Morell, acting CIA chief under Obama, and Michael Hayden, who ran both the CIA and NSA under George W. Bush, openly spoke out against Trump during the presidential campaign.

Greenwald asserts the the CIA preferred Clinton because, like the clandestine agency, she supported regime change in Syria. In contrast, Trump dismissed America’s practice of nation-building and declined to tow the line on ousting foreign leaders, instead advocating working with Russia to defeat ISIS and other extremist groups.

“So, Trump’s agenda that he ran on was completely antithetical to what the CIA wanted,” Greenwald argued. “Clinton’s was exactly what the CIA wanted, and so they were behind her. And so, they’ve been trying to undermine Trump for many months throughout the election. And now that he won, they are not just undermining him with leaks, but actively subverting him.”

 

“[In] the closing months of the Obama administration, they put together a deal with Russia to create peace in Syria. A few days later, a military strike in Syria killed a hundred Syrian soldiers and that ended the agreement. What happened is inside the intelligence and the Pentagon there was a deliberate effort to sabotage an agreement the White House made.”

Greenwald, who opposes Trump for a variety of reasons, warns that siding with the evidently powerful Deep State in the hopes of undermining Trump is dangerous. “Trump was democratically elected and is subject to democratic controls, as these courts just demonstrated and as the media is showing, as citizens are proving,” he said, likely alluding to a recent court ruling that nullified Trump’s travel ban.

He continued:

“But on the other hand, the CIA was elected by nobody. They’re barely subject to democratic controls at all. And so, to urge that the CIA and the intelligence community empower itself to undermine the elected branches of government is insanity.”

He argues that mentality is “a prescription for destroying democracy overnight in the name of saving it,” highlighting that members of both prevailing political parties are praising the Deep State’s audacity in leaking details of Flynn’s conversations.

As he wrote in his article, “…it’s hard to put into words how strange it is to watch the very same people — from both parties, across the ideological spectrum — who called for the heads of Edward Snowden, Chelsea Manning, Tom Drake, and so many other Obama-era leakers today heap praise on those who leaked the highly sensitive, classified SIGINT information that brought down Gen. Flynn.”

He also points out the left’s hypocrisy in condemning Flynn for lying when James Clapper, Director of National Intelligence during the Obama administration, perpetuated lies without ever being held accountable.

Goldman: Investors Will Soon Realize They Were Too Optimistic

Goldman Sachs really wants the market lower.

After several increasingly more comprehensive critiques of Trump’s fiscal policies (most recently this past weekend), on Friday, just as the S&P closed at fresh all time highs propelled by a late day ramp, Goldman’s chief equity strategist who has a 2,300 year end target on the index, cautioned that “cognitive dissonance exists in the US stock market” as “investors must reconcile S&P 500’s performance with negative EPS revisions from sell-side analysts.” Specifically, Kostin notes that the “S&P 500 has returned 10% since Election Day while consensus 2017E adjusted earnings have been lowered by 1%“, and predicts that “investors will soon de-rate their expectations of potential 2017 EPS growth as they face the reality that the accretive impact from tax reform will not occur until 2018.

In short, “Financial market reconciliation lies ahead: We are approaching the point of maximum optimism and S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.

First, Goldman points out that the underlying current of optimism unleashed with the Trump election is no longer warranted:

Cognitive dissonance exists in the US stock market. S&P 500 is up 10% since the election despite negative EPS revisions from sell-side analysts (see Exhibit 1). Investors, S&P 500 management teams, and sell-side analysts do not agree on the most likely path forward. On the one hand, investors, corporate managers, and macroeconomic survey data suggest an increase in optimism about future economic growth. In contrast, sell-side analysts have cut consensus 2017E adjusted EPS forecasts by 1% since the election and “hard” macroeconomic data show only modest improvement.

 

 

Some of the optimism has to do with a jump in Q4 earnings, however much of that has to do with a slowdown in energy company writedowns.

On an operating basis, EPS grew by 24% aided by a recovery in Energy profits. Energy operating EPS recovered from -$2.43 in 4Q 2015 – the lowest level on record since 1967 – to $0.29 in 4Q 2016 as asset write-downs slowed. Energy contributed 13 pp of 24 pp to 4Q S&P 500 EPS growth. Index-level operating EPS grew by roughly 6% in 2016; we expect 10% growth in 2017.

While there has certainly been an earnings rebound, the future is far less exciting than the recent rally will make it appear.

Investors are optimistic about an improvement in economic growth and the prospect of increased corporate EPS.
All 11 sectors contributed to the 10% rise in the S&P 500 index,
with Financials and Information Technology contributing 30% and 22% of
the 208 point gain. Decomposing the strong performance shows reduced EPS
growth has been more than offset by P/E expansion which accounts for
all the index gain (Exhibit 2).

 

Goldman then notes that while corporate management team commentary from Q4 earnings calls substantiates some of this optimism, forward EPS do not justify it, and indeed “analyst EPS estimates paint a different picture. Consensus 2017E adjusted EPS has been revised downward by 1% over the last 3 months. Sell-side analysts appear hesitant to incorporate potential tax reform and deregulation into their estimates given elevated policy uncertainty. Positive revisions to aggregate S&P 500 EPS estimates are rare – during the last 33 years, consensus EPS estimates have been revised upward from their starting point just six times.”

Kostin then points out something we have shown on various occasions in the past month: the recent “recovery” has been all in soft economic indicators such as sentiment and outlook. Hard data has for the most part, faded the entire bounce since the election:

 

“Hard” macroeconomic data has shown only modest improvement. Housing indicators have flashed mixed signals with a notable decline in the latest reading of new home sales. Industrial Production was weaker-than-expected in January (-0.3% vs. median forecast of flat) and the December reading was revised down.

Just as Congressional Republicans are likely to use the reconciliation process to pass fiscal policy legislation this year, so must investors reconcile S&P 500 performance with corporate earnings. We are approaching the point of maximum optimism regarding policy initiatives. Our US Economics team expects a tax reform package may not pass until late 2017 or early 2018. Even so, the tailwind to corporate earnings from tax reform will be constrained by the unwillingness of certain Congressional Republicans to significantly expand the federal budget deficit.

Kostin’s conclusion: “We expect investors will soon de-rate their expectations of potential 2017 EPS growth as they face the reality that the accretive impact from tax reform will not occur until 2018. Many investors have incorporated lower taxes in a 2017 S&P 500 earnings estimate of roughly $130, reflecting 11% growth. In contrast, our S&P 500 adjusted EPS estimate for this year remains $123, just 5% above the flat earnings of 2014, 2015, and 2016. We forecast S&P 500 will peak in 1Q at 2400 before slipping to 2300 by year-end.”

It’s perhaps worth noting once again, that every time Goldman has warned that a market turnaround is imminent, the S&P has proceeded to surge to new highs. For those expecting Trump’s first market correction, or worse, they may have to hold their breath until the bank that spawned most of Trump’s economic advisors finally throws in the towel and says to buy at any price.