Jueves 12/03/15 ventas retail, inventarios de negocios

[Fenix]

Greenspan's Insulting Admission Of Fed Culpability
Tyler D.
03/08/2015

As if to thumb his nose at the millions of Americans who have undergone long-term financial distress since the late 1990s due to the interventionist monetary policies he implemented, former Federal Reserve Chairman Alan Greenspan, the original engineer of the Fed’s bubble/burst economic paradigm, indirectly admitted to CNBC’s Kelly Evans that the Fed has created unsustainable asset bubbles that could burst when it allows interest rates to rise.

“Mr. Bubble” defended the Fed’s promotion of these bubbles, though, stating though a smile, “It’s good, not bad”:

Greenspan noted that the Fed has been juicing the markets primarily because business investment has been weaker than it has been for any extended period of time since the Great Depression:

And, when asked if this period of asset bubbles will end as badly as the tech and housing bubbles did, Greenspan concluded:

We’re not yet there in a position where it’s crisis. However, the real issue here is going to be when interest rates start to move up.

That’s quite an (unintended) indictment of interventionist Fed policy. On one hand, Greenspan stated that the Fed has inflated asset bubbles, and, on the other hand, stated that the bubbles could burst when it allows interest rates to rise.

But, remember, Greenspan asserted that the bubbles are “good, not bad” because business investment has been so weak. The Fed, according to the former chairman, has therefore been inflating bubbles to promote the expansion of the sluggish Main Street economy. The data, however, say otherwise. There’s a preponderance of evidence that suggests that the Greenspan-Bernanke-Yellen Fed has been pumping torrents of liquidity over the last decade-and-a-half to stimulate Wall Street at the detriment of Main Street, as evidenced by the following charts. (Tap to enlarge explanations in the captions.)

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The evidence is pretty compelling. The Greenspan-Bernanke-Yellen Fed has almost certainly been pumping torrents of liquidity since the latter part of the last millennium to promote the expansion of business on Wall Street, not Main Street. But, even if Fed has had the interests of Main Street in mind when inflating bubbles (I don’t know how they possibly could given charts like those), the fact of the matter is, Greenspan started the destructive Keynesian tradition of pumping liquidity to stimulate the economy, and this tradition has created significant economic pain for Main Street in the form of long-term unemployment and underemployment, reduced wages, foreclosures, bankruptcies, reduced savings rates, shuttered businesses, and drained savings and retirement accounts. So, “Mr. Bubble” inferring that the Fed creates unsustainable bubbles for the benefit of Main Street is pretty insulting.

Perhaps even more insulting, Greenspan concluded that business leaders have been hesitant to make capital investments due to a number of external factors, none of which is the bubble/burst economic paradigm he created. Just minutes after indirectly admitting that the Fed has inflated unsustainable asset bubbles, Mr. Bubble implicated entitlement spending, tax rates, global warming, and instability in the Middle East as reasons for lack of business investment.

[Fenix]

Where The Hedge Fund Herd Was Parked Last Week: The Most Long And Short Net Specs
Tyler D.
03/07/2015

After 7 years of consistently failing to generate alpha, hedge funds as a group have become the vastly overpaid laughing stock of the asset management business (of course, there are still the occasional borderline criminal outliers); in fact after we first predicted their demise about 3 years ago (because in a world in which central banks are also Chief Risk Officers, who needs "hedging"?) the pension funds have finally figured out the futility of parking cash with the 2 and 20 crowd, and first Calpers and soon most other managers of other people's money are now pulling out their cash in droves from the hedge community.

However, hedge funds are still useful for one thing: observing where the fast money herd is parked, and doing precisely the opposite in advance of the herd dispersing (see "Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate "Alpha""). Because in a market as illiquid as this one, any and all fast, sudden moves by even the smallest group of traders results in dramatic price movement outliers.

So for those curious how to do the opposite of what the "smart money" is doing, here is the full breakdown. Presenting a list of the biggest outliers from the mean weekly position in the most popular assets in the speculative universe: everything from the massively, near-record, overbought US Dollar, all the way to dramatically oversold Aussie Dollar, the easiest proxy for the Chinese slowdown.

This is how JPM, the source of the chart above, calculates the data set: "Net spec positions are the number of long contracts minus the number of short using CFTC futures only data. This net position is then converted to a USD amount by multiplying by the contract size and then the corresponding futures price. To proxy for speculative investors, commodity positions use the managed money category, while the other assets use the non-commercial category. We then scale the net positions by open interest."

And in case that isn't enough, and one wishes to add insult to injury and go long the most shorted sectors (and vice versa), here is the breakdown of the S&P500 sectors with the highest and lowest percentage of short interests as a % of shares outstanding.


Bart Chilton: Since 2007's Rise Of The Machines, "Markets Have Not Been The Same"
Tyler D.
03/08/2015

The commodity markets impact almost everybody on the planet, every single day, because some derivative or variant of about everything that they consume is impacted by those prices. Whether it’s a home loan, or a piece of jewelry, or a fill up at the gas station, or a gallon of milk, or a loaf of bread -- commodity pricing is vastly more important than most people actually realize.



~ Former CFTC Commissioner Bart Chilton

In theory, regulation is supposed to set and enforce the rules of the game that market participants play by, in order to ensure that price discovery remains efficient, effective -- and most important -- fair.

In practice, there's plenty of debate to be had on how successful our regulators are in effecting their mission. And one investment class in particular, commodities, frequently comes under criticism for questionable price action.

So, this week we talk with Bart Chilton, former Commissioner of the Commodity Futures Trading Commission (CFTC), about price discovery within the commodity markets, and whether investors can have confidence in the "fairness" of the current system.

Perhaps it will come as little surprise that Commissioner Chilton, a longtime inside player, does not see the current environment as 'broken' or 'unfair', as some critics claim. And as a former regulator, there are certain topics he is not allowed to comment on. But that said, he's a vocal advocate for several reforms that he believes will reduce the chances for manipulation within the market -- particularly position size limits and better rules for high-frequency trading (HFT) algorithms:

[Position] size is an important thing to look at. That’s why in my career as a financial regulator I sought to have limits placed on speculative positions. And unfortunately, there haven’t been. Even though it’s law now, my former agency has not sought to finalize those rules.



Size does impact markets and it can push prices around. In electronic trading, even a small size can move prices just because they’re so quick. You don’t need just to have size. If you control 20% of the crude oil market, and I’ve seen that in the past, you make a big trade you can move a market. Well, today with electronic markets and high frequency traders you don’t have to have 20%. You just need 2-3%. If you put a price out there very quickly, it can move markets.

When asked directly if there's a manipulation problem in the precious metals market -- silver, especially -- he did not confirm or deny. Instead, he laid out the 4 pillars of evidence the CFTC looks for in determining whether manipulation can be proven: intent, size, trading action, and impact on price. From his experience during his tenure, it sounds like there were a lot of cases where many of the pillars were present, but few where all 4 were in enough abundance to overcome the "dueling economists" quagmire that ensued when bringing the case into a courtroom.

Commissioner Chilton is sympathetic to the perception many frustrated and bruised investors have about the precious metals markets -- he himself is on record saying that the large short position concentrations have been outrageous -- and he urges them to share their observations and demands for reform with their elected legislators. Why not the CFTC directly? Sadly, Commissioner Chilton notes, "regulators by and large aren't listening to average people".

[Fenix]

Blackstone Buys America's Most Iconic Skyscraper With Rent Collected As "America's Landlord"
Submitted by Tyler D.
03/08/2015

Blackstone, who already may be your landlord, is reportedly close to buying the nation's second largest skyscraper in a $1.5 billion deal.


Lord Rothschild Warns Investors: "Geopolitical Situation Most Dangerous Since WWII"
Tyler D.
03/07/2015

For Lord Rothschild, preserving wealth has "become increasingly difficult," recently, as he warns, rather ominously, "we are faced with a geopolitical situation as dangerous as any we have faced since World War II." Furthermore Lord Rothschild summarizes his thoughts briefly, eloquently, and ominously... as he touches on the global debasement of fiat currencies, disappointing growth (in light of massive monetary stimulus), and extreme stock market valuations. As Rothschild Wealth Management noted last year, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero... exposing equities to a potentially sharp correction.

Lord Rothschild summarizes his thoughts briefly, eloquently, and ominously...

Our policy has been clearly expressed over the years. Simply put, it is to deliver long-term capital growthwhile preserving shareholders’ capital; the realisation of this policy comes at a time of heightened risk, complexity and uncertainty. The economic and geopolitical environment therefore becomes increasingly difficult to predict.

The world economy grew at a disappointing and uneven rate in 2014 after six years of monetary stimulus and extraordinarily low interest rates.

Stock market valuations however, are near an all-time high with equities benefiting from quantitative easing.

Not surprisingly, the value of paper money has been debased as countries have sought to compete and generate growth by lowering the value of their currencies – the Euro and the Yen depreciated by over 12% against the US Dollar during the course of the year and Sterling by 5.9%.

In addition to this difficult economic background, we are confronted by a geopolitical situation perhaps as dangerous as any we have faced since World War II: chaos and extremism in the Middle East, Russian aggression and expansion, and a weakened Europe threatened by horrendous unemployment, in no small measure caused by a failure to tackle structural reforms in many of the countries which form part of the European Union.


Lord Rothschild's comments appear to confirm the concerns that Rothschild Wealth Management noted last year, that more muddle through was most probable but depression possible:

Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero...exposing equities to a potentially sharp correction."

Four main scenarios

We have identified four different scenarios that, in our view, are the most likely to occur.

For each scenario, the position of the bubble shows the combination of growth and inflation that we expect to see in the next one to three years.

The size of the bubble illustrates our view on the likelihood of this scenario occurring – this is subjective, and is intended just to illustrate our thinking.

Growth is expressed in relation to the potential for each country. For example, a growth rate of 4% would be low for China but very high for Europe. Similarly, inflation relates to a country’s individual inflation target.

We have adjusted the size of the bubbles to reflect our view that conditions in the global economy should continue to improve in 2014. We believe the world could begin to move away from our core “muddling through” scenario towards “economic renaissance” and that the “new monetary world” situation has become less likely.

(click image for huge legible version)

Implications for returns from asset classes

The table summarises the expected returns of the major asset classes under each of our four main scenarios.

The circles in the boxes show the expected return over the next three years, relative to the long-term expected returns*. Light green means higher than long-term expected returns*, while light red means lower.

These figures are an illustration of our thinking. They are based on an informed interpretation of our fundamental valuation models.

(click image for huge legible version)

Maintain portfolio hedges

Although we believe the “depression” scenario is the least likely, its impact would be so disruptive that it must be considered within our investment strategy. Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero.


Back to Lord Rothschild to conclude:

The unintended consequences of monetary experiments on such a scale are impossible to predict.

And yet it appears every talking-head on mainstream media knows better.

[Fenix]

Time For Some Mattress Padding
Tyler D..
03/08/2015

Can you imagine borrowing $1000 from the bank and receiving $10 per year interest from the bank? I didn’t think so. However, this is the happy situation facing some European countries and even a few Swiss companies. The Swiss, Swedish, and Danish governments and the food multinational Nestle are now borrowing money from lenders who are happy to pay them for the privilege. In what may signal the beginning of the end of the current financial system, we have moved beyond zero percent interest rates to negative interest rates.

Why are negative interest rates now making an appearance? They are a natural consequence of the rampant money creation undertaken by central banks in response to the global financial crisis. To look at Switzerland, as European savers lost confidence in the euro in 2010 and 2011 and started converting their euro into Swiss francs, the value of the franc against the euro began to rise rapidly. This increase in the value of the franc made Swiss-made products expensive compared to French- or German-made products. In order to keep Swiss companies in business (and Swiss workers in jobs) the Swiss National Bank committed to keeping the value of the franc at or below 83 euro cents.

In order to do this, it was necessary for the Swiss National Bank to do two things. First, it created billions of additional francs and exchanged them for euro on the foreign currency markets. Second, it set Swiss interest rates lower than European interest rates in order to make Swiss bank deposits unattractive to European savers and Swiss loans attractive to European borrowers. European companies and thousands of people in countries like Austria and Hungary, attracted by lower Swiss interest rates, took out loans and mortgages denominated in Swiss francs. These francs were then sold on the foreign exchange market in order to buy the euro needed to fund investment or buy property. The increased supply of francs courtesy of the SNB and European borrowers and the reduced demand for francs from European saver kept the value of the franc suppressed against the euro.

However, as the European Central Bank has responded to each new crisis with promises of additional money printing, last month the Swiss National Bank, no doubt alarmed at the prospect of having to accelerate their own program of money printing in order to keep pace, surprised investors by announcing that they would no longer intervene in the foreign exchange market to keep the franc’s value fixed against the euro. Almost instantly, the franc gained 30% against the euro before settling at around par.

This sudden policy reversal resulted in large losses. Perhaps the biggest loser was the Swiss National Bank, which saw its holdings of euro and euro-denominated assets lose 20% of their value in terms of Swiss francs. Similarly, European companies and individuals who had borrowed in francs saw the size of their loans increase significantly in terms of euro. Eager to prevent further losses, European companies who had borrowed francs began purchasing francs in order to allow them to make future loan payments.

However, while you or I might buy franc notes, corporations with billions of dollars in assets prefer to purchase and hold money using liquid instruments such as government bonds. Thus, the demand for Swiss bonds exploded last month. As more and more investors competed to lend money to the Swiss, they began to accept lower and lower rates until the rate on a one-year Swiss government bond fell to around negative 1%. Put another way, investors who bought a Swiss government bond for 1000 francs would only get back 990 francs a year later, which makes one wonder why buy bonds at all? Why not just buy Swiss currency notes and keep them under your mattress? Asking this question gives some insight into the future of the global financial system.

In Switzerland, so long as people had confidence that the Swiss National Bank would keep the franc pegged at 83 euro cents, they were happy to borrow francs (at a low interest rate) to finance speculation in Europe. However, the minute the peg was broken this dynamic was reversed. Suddenly people who had borrowed in francs became desperate to hold franc assets with which to service their loans. They became so desperate that they were willing to accept negative interest rates.

As Switzerland has gone, so too will go Japan, the EU, the US and every other country that has engaged in reckless monetary expansion since 2008. For the past 6 years, monetary authorities have created trillions of dollars, yen and euro in order to sustain an illusion of stability and recovery. However, the near-zero percent interest rates that have resulted have caused even the most prudent of savers to behave like speculators in search of decent investment returns. As a consequence, many stock market indices are at all-time highs and some individual stock market valuations are patently ridiculous – it was reported last week that a firm in California that operates four “gourmet” grilled cheese sandwich trucks was valued at over $100 million!

The fact is, though, that these valuations are almost entirely due to the efforts of central banks to, as Mario Draghi (the governor of the European Central Bank) put it a few years ago, “do whatever it takes” to bring stability to the financial markets. As investors know that whatever apparent stability that exists is dependent on central bank intervention, the minute that intervention ends (or is seen to be ending) there will be a rush to dump risky assets in favour of assets that will hold their value. The mania for yield irrespective of risk that has characterized markets for the past 6 years will instantaneously turn into a mania for safety irrespective of yield.

Sadly for many investors, there is a lot more newly-created money floating around the financial system than there are safe places to put it. As has happened in Switzerland, this will push interest rates on safe investments negative. As negative interest rates become steeper, people will begin closing their bank and investment accounts in order to hold cash. However, if there are not enough safe government bonds in the world to soak up the trillions of dollars that have been created with computer keystrokes over the past 6 years, there are certainly not enough bills and coins. A run on the banks would therefore be a catastrophe in which banks and central banks would fail and the savings of a great many people would be lost.

Interestingly, today is the third anniversary of the meeting of European finance ministers where it was agreed to bail out Greece for a second time to the tune of 130 billion euro. As can be seen from the headlines, economic conditions in Greece have only gone from bad to worse since then. The ever-more likely possibility of Greece leaving the euro zone is already causing individual Greeks to empty their bank accounts. The fact of a Greek exit could very well be the signal for investors worldwide to dump their risky assets and flee to safety. As in the globalized world of international finance a bank run or financial panic anywhere can easily become a bank run or financial panic everywhere, it might be a good time to give your mattress a bit of extra padding.

[Fenix]

The Threat To The Dollar As The World’s Primary Reserve Currency
Tyler D.
03/07/2015

(Following is the text of a speech given today at Drake University at the annual convention of the Iowa Association of Political Scientists.)

The Threat to the Dollar as the World’s Premier Reserve Currency

…but does it really matter?


My answer is that, “Yes”, it really matters. And that is why we need to take action today to protect all of our interests. The source of the threat may surprise you.

We refer to the dollar as a “reserve currency” when referring to its use by other countries when settling their international trade accounts. For example, if Canada buys goods from China, China may prefer to be paid in US dollars rather than Canadian dollars. The US dollar is the more “marketable” money internationally, meaning that most countries will accept it in payment, so China can use its dollars to buy goods from other countries, not solely the US. Such might not be the case with the Canadian dollar, and China would have to hold its Canadian dollars until it found something to buy from Canada. Multiply this scenario by all the countries of the world who print their own money and one can see that without a currency accepted widely in the world, international trade would slow down and become more expensive. Its effect would be similar to that of erecting trade barriers, such as the infamous Smoot-Hawley Tariff of 1930 that contributed to the Great Depression. There are many who draw a link between the collapse of international trade and war. The great French economist Frederic Bastiat said that “when goods do not cross borders, soldiers will.” No nation can achieve a decent standard of living with a completely autarkic economy, meaning completely self-sufficient in all things. If it cannot trade for the goods that it needs, it feels forced to invade its neighbors to steal them. Thus, a near universally accepted currency is as vital to world peace as it is to world prosperity.

However, the foundation from which the term “reserve currency” originated no longer exists. Originally the term “reserve” referred to the promise that the currency was backed by and could be redeemed for a commodity, usually gold, at a promised exchange ratio. The first truly global reserve currency was the British Pound Sterling. Because the Pound was “good as gold”, many countries found it more convenient to hold Pounds rather than gold itself during the age of the gold standard. The world’s great trading nations settled their trade in gold, but they might accept Pounds rather than gold, with the confidence that the Bank of England would hand over the gold at a fixed exchange rate upon presentment. Toward the end of World War II the US dollar was given this status by treaty following the Bretton Woods Agreement. The US accumulated the lion’s share of the world’s gold as the “arsenal of democracy” for the allies even before we entered the war. (The US still owns more gold than any other country by a wide margin, with 8,133.5 tonnes to number two Germany with 3,384.2 tonnes.) The International Monetary Fund (IMF) was formed with the express purpose of monitoring the Federal Reserve’s commitment to Bretton Woods by ensuring that the Fed did not inflate the dollar and stood ready to exchange dollars for gold at $35 per ounce. Thusly, countries had confidence that their dollars held for trading purposes were as “good as gold”, as had been the British Pound at one time.

However, the Fed did not maintain its commitment to the Bretton Woods Agreement and the IMF did not attempt to force it to hold enough gold to honor all its outstanding currency in gold at $35 per ounce. During the 1960’s the US funded the War in Vietnam and President Lyndon Johnson’s War on Poverty with printed money. The volume of outstanding dollars exceeded the US’s store of gold at $35 per ounce. The Fed was called to account in the late 1960s first by the Bank of France and then by others. Central banks around the world, who had been content to hold dollars instead of gold, grew concerned that the US had sufficient gold reserves to honor its redemption promise. During the 1960’s the run on the Fed, led by France, caused the US’s gold stock to shrink dramatically from over 20,000 tons in 1958 to just over 8,000 tons in 1970. At the accelerating rate that these redemptions were occurring, the US had no choice but to revalue the dollar at some higher exchange rate or abrogate its responsibilities to honor dollars for gold entirely. To its everlasting shame, the US chose the latter and “went off the gold standard” in September 1971. (I have calculated that in 1971 the US would have needed to devalue the dollar from $35 per ounce to $400 per ounce in order to have sufficient gold stock to redeem all its currency for gold.) Nevertheless, the dollar was still held by the great trading nations, because it still performed the useful function of settling international trading accounts. There was no other currency that could match the dollar, despite the fact that it was “delinked” from gold.

There are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value over time. These two factors create a demand for holding a currency in reserve. Although the dollar was being inflated by the Fed, thusly losing its value vis a vis other commodities over time, there was no real competition. The German Deutschemark held its value better, but the German economy and its trade was a fraction that of the US, meaning that holders of marks would find less to buy in Germany than holders of dollars would find in the US. So demand for the mark was lower than demand for the dollar. Of course, psychological factors entered the demand for dollars, too, since the US was the military protector of all the Western nations against the communist countries.

Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power and creating an opportunity for the world’s great trading nations to use other, better monies. This is important, because a loss of demand for holding the US dollar as a reserve currency would mean that trillions of dollars held overseas could flow back into the US, causing either inflation, recession, or both. For example, the US dollar global share of central bank holdings currently is sixty-two percent, mostly in the form of US Treasury debt. (Central banks hold interest bearing Treasury debt rather than the dollars themselves.) Foreign holdings of US debt currently total $6.154 trillion. Compare this to the US monetary base of $3.839 trillion.

Should foreign demand to hold US dollar denominated assets diminish, the Treasury could fund their redemption in only three ways. One, the US could increase taxes in order to redeem its foreign held debt. Two, it could raise interest rates to refinance its foreign held debt. Or, three, it could simply print money. Of course, it could use all three in varying amounts. If the US refused to raise taxes or increase the interest rate and relied upon money printing (the most likely scenario, barring a complete repudiation of Keynesian doctrine and an embrace of Austrian economics), the monetary base would rise by the amount of the redemptions. For example, should demand to hold US dollar denominated assets fall by fifty percent ($3.077 trillion) the US monetary base would increase by eighty percent, which undoubtedly would lead to very high price inflation and dramatically hurt us here at home. Our standard of living is at stake here.

So we see that it is in America’s interest that the dollar remain in high demand around the world as a unit of trade settlement in order to prevent price inflation and to prevent American business from being saddled with increased costs that would derive from being forced to settle their import/export accounts in a currency other than the dollar.

The causes of this threat to the dollar as a reserve currency are the policies of the Fed itself. There is no conspiracy to “attack” the dollar by other countries, in my opinion. There is, however, a rising realization by the rest of the world that the US is weakening the dollar through its ZIRP and QE programs. Consequently, other countries are aware that they may need to seek a better means of settling world trade accounts than using the US dollar. One factor that has helped the dollar retain its reserve currency demand in the short run, despite the Fed’s inflationist policies, is that the other currencies have been inflated, too. For example, Japan has inflated the yen to a greater extent than the dollar in its foolish attempt to revive its stagnant economy by cheapening its currency. Now even the European Central Bank will proceed with a form of QE, apparently despite Germany’s objections. All the world’s central banks seem to subscribe to the fallacious belief that increasing the money supply will bring prosperity without the threat of inflation. This defies economic law and economic reality. They cannot print their way to recovery or prosperity. Increasing the money supply does not and cannot ever create prosperity for all. What is more, this mistaken belief compounds a second mistake; i.e., that savings is not the foundation of prosperity, but rather spending is the key. This mistake puts the cart before the horse.

A third mistake is believing that driving their currencies’ exchange rate lower vis a vis other currencies will lead to an export driven recovery or some mysteriously generated shot in the arm that will lead to a sustainable recovery. Such is not the case. Without delving too deeply into Austrian economic and capital theory, just let me point out that money printing disrupts the structure of production by fraudulently changing the “price discovery process” of capitalism. Capital is allocated to projects that will never be profitably completed. Bubbles get created and collapse and businesses are suddenly damaged en mass, thus, destroying scarce capital.

Because of this money-printing philosophy the dollar is very susceptible to losing its vaunted reserve currency position to the first major trading country that stops inflating its currency. There is evidence that China understands what is at stake; it has increased its gold holdings and has instituted controls to prevent gold from leaving China. Should the world’s second largest economy and one of the world’s greatest trading nations tie its currency to gold, demand for the yuan would increase and demand for the dollar would decrease overnight.

Or, the long festering crisis in Europe may drive Germany to leave the eurozone and reinstate the Deutschmark. I have long advocated that Germany do just this, which undoubtedly would reveal the rot embodied in the Euro, the commonly held currency that has been plundered by half the nations of the continent to finance their unsustainable welfare states. The European continent outside the UK could become a mostly Deutschmark zone, and the mark might eventually supplant the dollar as the world’s premier reserve currency.

The underlying problem, though, lies in the ability of all central banks to print fiat money; i.e., money that is backed by nothing other than the coercive power of the state via its legal tender laws. Central banks are really little more than legal counterfeiters of their own currencies. The pressure to print money comes from the political establishment that desires both warfare and welfare. Both are strictly capital consumption activities; they are not “investments” that can pay a return. In a sound money environment, where the money supply cannot be inflated, the true nature of warfare and welfare spending is revealed, providing a natural check on the amount of funds a society is willing to devote to each. But in a fiat money environment both war and welfare spending can expand unchecked in the short run, because their adverse consequences are felt later and the link between consumptive spending and its harm to the economy is poorly understood. Thus, both can be expanded beyond the recuperative and sustainable powers of the economy.

The best antidote is to abolish central banks altogether and allow private institutions to engage in money production subject only to normal commercial law. Sound money would be backed one hundred percent by commodities of intrinsic value–gold, silver, etc. Any money producer issuing money certificates or book entry accounts (checking accounts) in excess of their promised exchange ratio to the underlying commodity would be guilty of fraud and punished as such by both the commercial and criminal law, just as we currently punish counterfeiters. Legal tender laws, which prohibit the use of any currency other than the one endorsed by the state, would be abolished and competing currencies would be encouraged. The market would discover the better monies and drive out less marketable ones; i.e., better monies would drive out the bad or less-good monies.

We need to look at the concept of a reserve currency differently, because it is important. We need to look at it as a privilege and a responsibility and not as a weapon we can use against the rest of the world. If we abolish, or even lessen, legal tender laws and allow the process of price discovery to reveal the best sound money, if we allow our US dollar to become the best money it can - a truly sound money - then the chances of our personal and collective prosperity are greatly enhanced.

We all have the same interest. We all want to have the highest standard of living for ourselves and our families. A sound money reserve currency offers us the best chance of achieving our shared goal; therefore, we should rally around every effort to make it so.

[Fenix]

The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different"
Tyler D.
03/08/2015

The last time the world was sliding into a US dollar shortage as rapidly as it is right now, was following the collapse of Lehman Brothers in 2008. The response by the Fed: the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The "swapped" amount went from practically zero to a peak of $582 billion on December 10, 2008.

The USD shortage back, and the Fed's subsequent response, was the topic of one of our most read articles of mid-2009, "How The Federal Reserve Bailed Out The World."

As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks' abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic "Dollar short" on the books of commercial bank desks around the globe: a shortage which in the aftermath of the Lehman failure manifested itself in what was the largest global USD margin call in history. This is how the BIS described first the mechanics of the shortage:

The accumulation of US dollar assets saddled banks with significant funding requirements, which they scrambled to meet during the crisis, particularly in the weeks following the Lehman bankruptcy. To better understand these financing needs, we break down banks’ assets and liabilities by currency to examine cross-currency funding, or the extent to which banks fund in one currency and invest in another. We find that, since 2000, the Japanese and the major European banking systems took on increasingly large net (assets minus liabilities) on-balance sheet positions in foreign currencies, particularly in US dollars. While the associated currency exposures were presumably hedged off-balance sheet, the build-up of net foreign currency positions exposed these banks to foreign currency funding risk, or the risk that their funding positions (FX swaps) could not be rolled over.

... And then the subsequent global public response:

The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.

The amount of the implied dollar short was also calculated by the BIS.

The 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. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).



One thing to keep in mind as reading the above (and the linked article as a refresher), is that the massive USD synthetic short, and resulting margin call, was entirely due to the actions of commercial banks, with central banks having to step in subsequently and bail them out using any and every (such as FX swaps) mechanism possible.

* * *

Why do we bring all of this up now, nearly 6 years later? Because, as JPM observed over the weekend while looking at the dollar fx basis, the shortage in dollar funding is back and is accelerating at pace not seen since the Lehman collapse.

The good news: said shortage is not quite as acute yet as it was in either 2008/2009 or on November 30 2011 (recall "Here Comes The Global, US-Funded Liquidity Bail Out") when just as Europe was again on the verge of collapse, the Fed re-upped the ante on its global swap lines when it pushed the swap rate from OIS+100 bps to OIS+50 bps.

The bad news: at the current pace of dollar funding needs, it is almost certain that the tumble in the dollar fx basis will accelerate until it hits its practical minimum of - 50 bps, which is the floor as per the Fed-ECB swap line.

But the real news is that unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks' own actions that have led to this global currency funding mismatch - a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place.

In other words, central banks have managed to corner themselves in yet another policy cul-de-sac, six years after they did everything in their power to undo the last one.

Here is how JPM's Nikolaos Panigirtzoglou frames the problem:

The decline in the cross currency swap basis across most USD pairs in recent months is raising questions regarding a shortage in dollar funding. 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. Figure 1 shows that the dollar fx basis weighted across eight DM and EM currencies, declined significantly over the past year to its lowest level since mid 2013, although it remains well above the lows seen during the depths of the Lehman or the Euro debt crisis.



It does indeed, for now, however read on for why the current basis reading just shy of -20 bps will almost certainly accelerate until and unless there is a dramatic convergence in the policies of the Fed and the other "developed world" central banks.

First, what are currency and fx swaps, and why does anyone care? "Cross currency swaps and FX swaps encompass similar structures which allow investors to raise funds in a particular currency, e.g. the dollar from other funding currencies such as the euro. For example an institution which has dollar funding needs can raise euros in euro funding markets and convert the proceeds into dollar funding obligations via an FX swap. The only difference between cross currency swaps and FX swaps is that the former involves the exchange of floating rates during the contract term. Since a cross currency swap involves the exchange of two floating currencies, the two legs of the swap should be valued at par and thus the basis should be theoretically zero. But in periods when perceptions about credit risk or supply and demand imbalances in funding markets make the demand for one currency (e.g. the dollar) high vs. another currency (e.g. the euro), then the basis can be negative as a substantial premium is needed to convince an investor to exchange dollars against a foreign currency, i.e. to enter a swap where he receives USD Libor flat, an investor will want to pay Euribor minus a spread (because the basis is negative)."

One read of a substantial divergence from par in the fx basis is that there may be substantial counterparty concerns within the banking system - this was main reinforcing mechanism for the first basis blow out of the basis back in 2008.

Both cross currency and FX swaps are subjected to counterparty and credit risk by a lot more than interest rate swaps due to the exchange of notional amounts. As such the pricing of these contracts is affected by perceptions about the creditworthiness of the banking system. The Japanese banking crisis of the 1990s caused a structurally negative basis in USD/JPY cross currency swaps. Similarly the European debt crisis of 2010/2012 was associated with a sustained period of very negative basis in USD/EUR cross currency swaps.

As noted above, the fundamental reasons for the USD shortage then vs now are vastly different. Back then, financial globalization meant
that "Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Japanese banking crisis of 1990s made Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert yen funding into dollar funding. Similarly the Euro debt crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage."

And as further noted above, while there is no banking crisis (at this moment) unlike virtually every other year in the post-Lehman collapse as commercial banks are flooded in global central bank liquidity (now that central banks are set to inject more liquidity in 2015 than in any prior year, 2008 and 20099 included) the catalyst for the current shortage are central banks themselves:

Given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis.

Who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don't answer that rhetorical question).

For those who are curious about where this mismatch is manifesting itself in practical terms, look no further than the amount of USD (expensive) vs non-USD (i.e., EUR, i.e., very cheap thanks to NIRP) denominated cross-border debt issuance:

Do we see these funding imbalances in debt issuance? The answer is yes if one looks at cross border corporate issuance. Figure 2 shows how EUR denominated corporate bond issuance by non-European issuers (Reverse Yankee issuance) spiked this year as percentage of total EUR denominated corporate issuance. Similarly Figure 3 shows how Yankee issuance, the share of USD denominated corporate issuance by non-US companies, declined sharply this year. In other words, cross border issuance trends are consistent with higher supply of EUR funding vs. USD funding. We get a similar picture in value terms. Reverse Yankee issuance totaled €47bn YTD which annualized is twice as big as last year’s pace. Yankee issuance totaled $41bn YTD which represents a decline of more than 30% from last year’s annualized pace.



Which makes sense: why would US multinationals, already hurting by the surge in the USD on their income statement, also suffer this move on the balance sheet abnd pay about 50 bps more for the same piece of paper issued in Europe? They won't, of course, however in the process they will hedge fx, and push the basis even further into negative territory. JPM explains:

Does this cross border issuance have a currency impact? It depends. For example, if a US company issues in EUR and swaps back into USD to effectively achieve cheaper synthetic USD funding rather than issuing directly in US dollar funding markets, the transaction has no currency impact. This synthetic USD funding especially attractive right now as credit spreads over swaps are much tighter in Europe than in the US by around 40bp-50bp for A-rated corporate currently in intermediate maturities, which more than offsets the negative fx basis. This means there is a significant yield advantage for US companies using synthetic USD funding (i.e. issuing in EUR and swapping back into USD rather than issuing in USD directly). In theory, the USD-EUR credit spread difference of Figure 4 suggests that the fx basis has room to widen by another 20bp, i.e. to decline to -50bp before the yield advantage of synthetic USD funding disappears. For the EURUSD, the basis cannot go below -50bp as this is the floor implied by the ECB’s FX swap line with the Fed.



And there you have it: all else equal, there is at least enough downside to push the fx basis as far negative at -50 bps: this would make the USD shortage the most acute it has ever been, at least as calculated by this key metric! And since this is essentially a risk-free arb for credit issuers, and since there are many more stock buybacks that demand credit funding, one can be certain that the current fx basis print around - 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater.

Unlike us, JPM hedges modestly in its forecast where the basis will end up:

Whether the above YTD trends continue forward is a difficult call to make. The widening of USD vs. EUR credit spreads shown in Figure 4 has the propensity to sustain the strength of Reverse Yankee issuance putting more downward pressure on the basis. On the other hand, this potential downward pressure on the basis should be offset to some extent by Yankee issuance the attractiveness of which increases the more negative the basis becomes.

JPM's punchline:

In all, different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed's cheerleaders couldn't hold their praise for the ECB's NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and "rest of the world" policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arbed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe's NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), watch as the Fed will once again scramble to flood the world with USD FX swap lines in yet another desperate attempt to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed's weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again.

Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed's actions, and its insistence that despite what is shaping up to be a 1% GDP quarter, that it has to hike rates. Well, as JPM just warned it in not so many words, be very careful what you wish for, and what you end up getting in your desire to telegraph just how "strong" the US economy is.