January 31, 2018

US Futures Rebound After Trump's SOTU Speech; Dollar Slide Resumes Ahead Of Fed

S&P futures rebounded 0.3% from the worst two-day selloff since Sept. 2016, and European and Asian stocks rose modestly from early weakness after Trump's SOTU address did not deliver any major surprises, while traders were cautious ahead of the Fed’s last rate decision under Janet Yellen’s leadership expected to lean on the hawkish side.

On Tuesday, U.S. stocks tumbled amid concerns about a recent sharp rally in bond yields. Health-care shares slumped after Amazon.com, Berkshire Hathaway and JPMorgan agreed to collaborate on ways to offer health-care services to their employees; drugmakers will be in the spotlight again as Trump says prescription drug prices will come down "substantially."

Despite the recent drop, it’s been a stellar month for stock markets, with major gains across most major gauges that were followed this week by the MSCI All-Country World Index’s biggest two-day slide since September 2016. Investors will now focus on Wednesday’s Federal Reserve rate decision, the ongoing earnings season and more big economic data points to see if the uptrend can resume.

On Tuesday night, Donald Trump sought to connect his presidency to the nation’s prosperity in his first State of the Union address, arguing the U.S. has arrived at a “new American moment” of wealth and opportunity. Trump vowed the “era of economic surrender is over,” but stopped short of naming the targets of his efforts to narrow the U.S.’s ballooning trade deficit, which prevented a major market reaction.

Trump also stated the US is finally seeing rising wages and that unemployment claims have hit a 45-year low. Trump also called on Congress to produce a bill that generates at least USD 1.5tln for new infrastructure investment and said that they will work to fix bad trade deals.

Read the entire article

January 30, 2018

"Financing A War" With Whom? Balance Sheet Expansion Reaches Uncharted Territory

How difficult will it be for central banks to normalize monetary policy in practice, and what will be the consequences of such policies for investors assuming that the central banks’ commitment to balance sheet reduction is maintained?

The answer, according to Chris Wood's new Grizzle.com blog, is ominous:

This is uncharted territory.

The only precedent for the scale of the central bank balance sheet expansion of the past nearly 10 years was during World War II, with government debt and government guaranteed assets now accounting for at least as large a share of central bank balance sheets as during World War II.

Clearly, Wood explains, the purpose of such central bank balance sheet expansion in the 1940s was to assist the fiscal authorities in financing a war.

Which made us wonder, what 'war' are authorities financing this time?

The answer is simple - a war against reality!

Read the entire article

January 29, 2018

Bonds Finally Noticed What Is Going On... Stocks Are Next

It is safe to say that one of the most popular, and important, charts of 2017, was the one showing the ongoing and projected decline across central bank assets, which from a record expansion of over $2 trillion in early 2017 is expected to turn negative by mid 2019. This is shown on both a 3- and 12-month rolling basis courtesy of these recent charts from Citi.

The reason the above charts are key, is because as Citi's Matt King, DB's Jim Reid, BofA's Barnaby Martin and countless other Wall Street commentators have pointed out, historically asset performance has correlated strongly with the change in central bank balance sheets, especially on the way up.

As a result, the big question in 2017 (and 2018) is whether risk assets would exhibit the same correlation on the way down as well, i.e. drop.

We can now say that for credit the answer appears to be yes, because as the following chart shows, the ongoing decline in CB assets is starting to have an adverse impact on investment grade spreads which have been pushing wider in recent days, in large part due to the sharp moves in government bonds underline the credit spread.

Read the entire article

January 26, 2018

Mastercard Pushes Biometrics, Banks Follow

Mastercard has set a deadline for widespread use of biometric identification for its services across the whole of the EU: April 2019. Mastercard Identity Check, currently available in 37 countries, enables individuals to use biometric identifiers, such as fingerprint, facial, and iris recognition, to verify their identities when using a mobile device for online shopping and banking. The technology is not mandatory for customers, but from next year it will be vigorously promoted throughout the EU and many consumers will welcome it.

The impact will be felt not just by consumers but also by most European banks, since any bank that issues or accepts Mastercard payments will have to support identification mechanisms for remote transactions, alongside existing PIN and password verification. The deadline will also apply to all contactless transactions made at terminals with a mobile device.

Citing research it carried out with Oxford University, Mastercard says that 92% of banking professionals want to introduce biometric ID. This high number shouldn’t come as much of a surprise given the vast untapped value consumer data holds for banks and corporations as well the preference most banks have for electronic transactions. The study also claims that 93% of consumers would prefer biometric security to passwords, which is a surprise given the array of thorny issues biometrics throws up, including the threat it poses to privacy and anonymity and its deceptively public nature.

“A password is inherently private,” says Alvaro Bedoya, Professor of Law at Georgetown University. “The whole point of a password is that you don’t tell anyone about it. A credit card is inherently private in the sense that you only have one credit card.”

Read the entire article

January 25, 2018

Mnuchin Backs Weak-Currency Comments After Lagarde Demands Clarification

Following speculation that Steven Mnuchin's market-moving Wednesday comments were misconstrued, with none other than Wilbur Ross saying that the Treasury Secretary did not suggest the US was now pursuing a weak-dollar policy, Mnuchin was back on the wires again this morning in a panel appearance at Davos, where he mostly repeated his previous comment, stating that "a weaker dollar is good for us as it relates to trade and opportunities," and in terms of trade imbalances, which of course is factually true although it was still unclear if equates with new US policy. For the answer, we may need Trump who just landed at Davos, to weigh on that.

Addressing whether the US has a dollar target he said, "My comments have been that in the short term, where the dollar is not a concern of mine, that it will fluctuate. In the short term there’s obviously benefits and issues of a lower dollar."

After that confusion "explanation", Mnuchin was confused how there could be any confusion over his remarks: "I thought my comment on the dollar was actually quite clear yesterday, I thought it was balanced and consistent with what I said before" he told reporters in Davos. He further said that "It’s a very very liquid market and we believe in free currencies. There’s both advantages and disadvantages on where the dollar is in the short term."

Addressing the elephant in the room, he said that "we want free and fair and reciprocal trade. So I think it’s very clear. We’re not looking to get into trade wars. On the other hand we are looking to defend America’s interests."

Mnuchin's clarification came shortly after IMF Managing Director Christine Lagarde spoke to Bloomberg at Davos and said USD value is determined by the market, while suggesting that Mnuchin should explain his comments in which he appeared to back a weak dollar, adding that U.S. tax cuts will probably cause the world’s reserve currency to rally.

Read the entire article

January 24, 2018

Dollar Tumbles After Mnuchin Endorses Weaker Currency, Ross Speaks Of Trade Wars

Caught in a relentless downward spiral which has puzzled many a trader, it wasn't as if the US Dollar needed any help in accelerating its decline, yet that's precisely what happened this morning in Davos when none other than the US Treasury Secretary Steven Mnuchin "broke with tradition" of supporting the US currency, and said that he endorsed the dollar’s decline as a benefit to the U.S. economy.

"Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters on Wednesday at the World Economic Boondoggle in Davos. "But again I think longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency."

Well, if China's ambitions are unchallenged, the dollar's reserve currency status may not be primary for long, but we're not there quote yet.

Meanwhile, the dollar tumbled on the news, with the Bloomberg dollar index sliding to its lowest level in three years, extending the recent slide amid investor concern over President Donald Trump’s protectionist agenda and a special counsel investigation stemming from his 2016 campaign.

Mnuchin shocked Davos participants because while it echoed Trump's own doubts over a strong currency, the Treasury Secretary's "mini QE" came as U.S. officials confront the global elite with their "America First" agenda.

Read the entire article

January 23, 2018

"We Can't Pretend Interest Payments Aren't Rising Anymore..."

Is anyone paying attention? I don’t know, but the cost of carrying debt has been rising and it’s already showing measurable impacts despite the Fed Funds rate still being very low.

My concern of course is that the global debt construct will bring global growth to a screeching halt (see also The Debt Beneath).

As the 10 year is already piercing above the 2.6% area now I want to pay attention to the data coming in as the Fed is dot plotting more rate hikes to come:

I repeat: “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.”

That’s a problem given the Fed’s dot plot. Before you know it consumers will be handing over a good portion of their tax cuts to credit card companies. Winning.

Is the government carrying record debt immune to this? Nope.

Read the entire article

January 22, 2018

Nomi Prins: "The Fed Is Scared To Death Of Crashing The Global Financial System"

The media discusses this as a major tightening move.  Somehow all of our economies have finally worked because of central bank activity.  Growth is real.  It’s all positive.  The markets are evidence of that because of the levels they are at; and, therefore, these central banks, starting with the Fed, are going to reverse course of these last 10 years. 

"The reality is if you look at the actual activity of the central banks, beyond the Fed raising rates by a little bit, there hasn’t been and there isn’t being a reversal of course because they are scared to death that too much of a reversal is going to cause a major crash throughout the financial system.

Everything is connected.  All the banks are connected.  Money flows around the world in less than nanoseconds, and all of it has the propensity to collapse if that carpet the central banks have created is dragged from beneath the floor of all this activity.”

Prins, who just finished traveling the globe to research her upcoming book, thinks there is one big thing that can take the entire system down. Prins, a former top Wall Street banker, contends:

“There hasn’t been any real growth in the real economy.  That is an indication of the misfire of this entire plan.  There has been tremendous growth in stock markets and bond markets. 

Read the entire article

January 19, 2018

The "World's Most Bearish Hedge Fund" Has A "Stunning" Theory What Happens Next To The Dollar

After a rollercoaster year, the clients of Horseman Global, which in 2016 we dubbed  the world's most bearish hedge fund when its net exposure hit over -100%

...... finally got some good news when in his December letter, CIO Russell Clark announced that after returning 5.54% for December, the month emerged back in the green for the full year, up a modest 2.27%.

However, what caught our attention was not the fund's performance, which after a -24% 2016 barely closed in the green in 2017 (and suffered a dramatic plunge in AUM as a result), but Russell Clark's comments on the plunging USD, a topic which seemingly everyone has an opinion on.

Specifically, we found his comments notable because if he is right, the dollar slide will only accelerate, and will have profound consequences not only for assets, but for the US and global economy in the not too distant future.

Here is Clark's "fascinating" - as he puts it - theory about the source of dollar weakness, and more troubling, why what is about to happen next will make the recent collapse in the USD seem like a walk in the park.

Read the entire article

January 18, 2018

Cryptocurrencies - Questioning The Value Proposition

1) Is Bitcoin Netscape?
2) How limited is the supply of cryptocurrencies?
3) If Bitcoin crashes what happens to other alt-currencies?
4) What asset market lacunae do cryptocurrencies fill?
5) Why mine?
6) Why distribute the ledger? 
7) Do cryptocurrency transactions need coins or tokens?
8) Can you make cryptocurrencies KYC and AML compliant?

Concluding comments

Cryptocurrency technology is likely to serve as the basis for executing asset transfers and storing the record of transactions and contracts. Mining, anonymity, and the distributed ledger are not relevant for most of these purposes. The case is not really made that cryptocurrencies are assets and that means that the current pricing proposition is shaky. It is possible that a private issued ‘fiat’ cryptocurrency will trade alongside other assets, but it is still not clear what would give it value.

The underlying proposition is like the Marxist interpretation of history. The intellectual breadth and audacity are breathtaking. The ability to think through ex ante how a new, decentralized currency asset could be constructed and maintained is remarkable.  But that doesn’t mean that the underlying premises are correct, or that it solves a problem anyone really worries about.

Read the entire article

January 17, 2018

US And China Brace For Trade War That Could Rattle Global Economy

As we reported last week, the US non-petroleum trade deficit with China and Mexico - two of its largest trading partners - climbed to its highest level for a 12-month period in December, an embarrassing development for the Trump administration, which has repeatedly promised to protect US industry by raising trade barriers.

However, the rising deficit, bolstered by a weakening US dollar, could ratchet up the political urgency of the Trump administration’s trade agenda. And as the Wall Street Journal points out, the White House is preparing a mix of tariffs and quotas to confront the growing economic threat from China. Though this confrontation could be potentially disruptive for the global system of free trade, even potentially leading to the collapse of the World Trade Organization, a group the Trump administration believes China should never have been allowed to join.

In his column, the WSJ’s Andrew Browne points out that the last time the US became embroiled in a trade war, Ronald Reagan was president. And its adversary was a close US ally: Japan.

At the time, Japan’s economy was much smaller than the US economy. Today, the Chinese economy has by some measures eclipsed the US. Such an unprecedented trade showdown between the US and China could have far reaching ramifications.

A trade war isn’t a certainty, but if it comes, it will look nothing like the battles that raged in the 1980s over Japanese semiconductors, cars and TV sets.

Read the entire article

January 16, 2018

As Petro-Yuan Looms, Bundesbank Adds Renminbi To Currency Reserves

Just days after China's (denied) threat to slow/stop buying US Treasuries, and just days before the launch of China's petro-yuan futures contract, Germany's central bank confirmed it would include China's Renminbi in its reserves.

The FT reports that Andreas Dombret, a member of Deutsche Bundesbank’s executive board, said at the Asian Financial Forum in Hong Kong on Monday that the central bank had “decided to include the RMB in our currency reserves”.

He said: “The RMB is used increasingly as part of central banks’ foreign exchange reserves; for example, the European Central Bank included the RMB [as a reserve currency].”

The Bundesbank’s six-member board took the decision to invest in renminbi assets in mid-2017, but it was not publicly announced at the time. No investments have been made yet; preparations for purchases are still ongoing.

The inclusion in the German central bank’s reserves basket underscored China’s increasing prominence in the global financial landscape, and reflected policies aimed at making the currency more freely tradable internationally.

Mr Dombret said:

Read the entire article

January 15, 2018

These Are The 10 Companies That Dominate the Global Arms Trade

The world puts $1.69 trillion towards military expenditures per year, and about $375 billion of that goes towards buying arms specifically.

Whether it is guns, tanks, jets, missiles, or ships that are on your shopping list, in the international arms community, as Visual Capitalist's Jeff Desjardin notes, there is a supplier for any weapon your country desires.


While it is common knowledge that the United States plays a big role in the global arms trade, the numbers are still quite astounding.

Of the top ten companies by sales, firms based in the U.S. make up seven of them. That includes the clear #1, Lockheed Martin, which had $40.8 billion in arms-related sales in 2016, as well as the remaining constituents of the top three: Boeing and Raytheon.

Further, on SIPRI’s wider top 100 list, a good proxy for total arms sales globally, U.S. defense companies accounted for a whopping 58% of total global arms sales. That adds up to $217.2 billion in 2016, a 4.0% rise over the previous year.


Only three companies make the top 10 leaderboard from outside of the United States.

Read the entire article

January 12, 2018

Henry Ford, Dot.com & Bitcoins

Why history matters

Is ‘history more or less bunk?’ It provides valuable lessons

Henry Ford once said that “history is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history that we make today”. And yet, Ford was aware that he was making history, and his remarks were aimed at the orthodoxy.

What has Henry Ford to do with bitcoins? In 1900 when he was experimenting with cars, there were around 2,000 car makers globally that were producing 10,000 vehicles (some powered by steam). However by 1920, the number of car makers shrunk to around 200, and the industry was manufacturing 2.5m cars and by the 1930s in most DMs, horses were dead and buggy makers were out of business. By the 1980s, the number of car makers dropped below 50 and the industry was making over 30m vehicles. Today, there are over 1,000 cryptocurrencies and their combined value (depending on time of day) is ~US$600-800bn, or ~1% of global money in circulation. Will cryptos follow the same trajectory as their early 20th century cousin and within a decade or so become the dominant force in transactions and store of value?

The key that links cryptos with Henry Ford and the main difference between (say) bitcoin and tulips is that cryptocurrencies are based on sustainable and evolving technological foundations (just as cars were in the early 20th century). To argue that the blockchain is good but cryptos bad is to forget that without various forms of ledger balances (or cryptocurrencies), blockchain is an empty vessel. As in the case of the 17th century Dutch Tulip Mania, the growth of cryptocurrencies is also turbocharged by creeping monetary debasement. It is the marriage of technology and the perceived need for insurance that is likely to guarantee cryptos’ LT role, irrespective what the governments think.

Read the entire article

January 11, 2018

Party While You Can - Central Banks Are Ready To Pop The 'Everything' Bubble

Many people do not realize that America is not only entering a new year, but within the next month we will also be entering a new economic era. In early February, Janet Yellen is set to leave the Federal Reserve and be replaced by the new Fed chair nominee, Jerome Powell. Now, to be clear, the Fed chair along with the bank governors do not set central bank policy. Policy for most central banks around the world is dictated in Switzerland by the Bank for International Settlements. Fed chairmen like Janet Yellen are mere mascots implementing policy initiatives as ordered.  This is why we are now seeing supposedly separate central banking institutions around the world acting in unison, first with stimulus, then with fiscal tightening.

However, it is important to note that each new Fed chair does tend to signal a new shift in action for the central bank. For example, Alan Greenspan oversaw the low interest rate easy money phase of the Fed, which created the conditions for the derivatives and credit bubble and subsequent crash in 2008. Ben Bernanke oversaw the stimulus and bailout phase, flooding the markets with massive amounts of fiat and engineering an even larger bubble in stocks, bonds and just about every other asset except perhaps some select commodities. Janet Yellen managed the tapering phase, in which stimulus has been carefully and systematically diminished while still maintaining delusional stock market euphoria.

Now comes the era of Jerome Powell, who will oversee the last stages of fiscal tightening, the reduction of the Fed balance sheet, faster rate increases and the final implosion of the 'everything' bubble.

As I warned before Trump won the election in 2016, a Trump presidency would inevitably be followed by economic crisis, and this would be facilitated by the Federal Reserve pulling the plug on fiat life support measures which kept the illusion of recovery going for the past several years. It is important to note that the mainstream media is consistently referring to Jerome Powell as "Trump's candidate" for the Fed, or "Trump's pick" (as if the president really has much of a choice in the roster of candidates for the Fed chair). The public is being subtly conditioned to view Powell as if he is an extension of the Trump administration.

This could not be further from the truth. Powell and the Fed are autonomous from government.

Read the entire article

January 10, 2018

Morgan Stanley: "People Have A Hard Time Even Imagining How The Market Could Decline"

A calm complacency never before seen has fallen blanket-like over US equity markets.

"The behavior of volatility has entirely changed since 2014," noted BAML in a a recent note thanks to major central banks keeping interest rates near historic lows (and printed more money than ever before).

As The Wall Street Journal points out, One sign of that: VIX closed below 10 more times last year than any others year in its history, and until today, closed below 10 for the first 5 days of 2018...

As JPMorgan's infamous quant guru Marko Kolanovic wrote, "the first four Fed hikes in a decade have failed to generate the revival of volatilities that many had expected at the end of last year," and a wave of political uncertainty linked to U.S. tensions with North Korea and the new presidential administration also raised the prospect that market tumults could occur with greater frequency... but no...

In fact worse still for The Fed, financial conditions eased as they tightened and vol collapsed to levels never seen before...

Read the entire article

January 9, 2018

Iran Sanctions Will Help China's Petro-Yuan

In a few days, U.S. President Trump may try to re-impose sanctions on Iran, a dramatic step that could heighten tensions between the two countries. Some analysts believe the move could contribute to a much broader global economic power shift from the U.S. to China.

The connection between the issues may not be obvious at first glance, but by seeking to isolate Iran from the international market, Iran could look elsewhere.

Because the global oil trade is conducted in greenbacks, the U.S Treasury was able to restrict Iran’s ability to access the global financial system in the past. That made it extremely difficult for Iran to sell its oil prior to the thaw in relations in 2015, which kept millions of barrels of daily oil production on the sidelines.

This time around, however, the U.S. will likely go it alone. The Trump administration won’t have the backing of the international community in its campaign to resurrect sanctions against Iran, which will make isolation much more difficult. A few months ago, Goldman Sachs predicted that unilateral sanctions from the U.S. could affect a few hundred thousand barrels per day from Iran, but without help from the rest of the world, the effort would not curtail nearly the same amount of oil as the last time around.

Moreover, some analysts argue that the Washington crackdown could merely push Iran to begin selling oil under contracts denominated in yuan rather than dollars.

Read the entire article

January 8, 2018

2018 Market Outlook - Reality Dawns At The End Of The Artificial Liquidity Rainbow

This 2018 market outlook is building on recent articles I’ve published as they lay the foundation to the technical discussion I’ll be outlining below. Hence I won’t be repeating them here, but I may make occasional reference to them. If you haven’t read them I highly encourage you to have a read for the additional context & background. Specifically: 2017 Market Lessons, Yearly Charts, The Debt Beneath, and Welcome to Gap Land.

In this analysis I’m outlining upside market upside targets I see from a technical perspective as well as select examples of signs I’m watching that would signal a change from the current uninterrupted trend in market prices. Additionally I’ll be looking at some specific price risk zones should the trend change. It is my intent to follow-up on this analysis on a regular basis here in the public section of the site throughout the year.

I’m approaching 2018 with eyes wide open in regards to the market conditions we find ourselves in. From my perspective global markets are engaged in the largest asset bubble in our lifetimes (the artificial liquidity bubble) the eventual unwind of which during the next recession will unfortunately hurt a majority of people. Again.

Consider the context:

8 years after the financial crisis we remain in an environment that is entirely dependent on artificial liquidity, be it via central bank liquidity driven low rates and/or QE or now US fiscal stimulus in the form of tax cuts. And while a reduction in central bank stimulus is anticipated for 2018 the $1.5 trillion US tax cut is the next active artificial boost to hit markets. You can view it perhaps this way: When the US ended QE3 Europe and Japan took over the stimulus baton, and now that Europe is reducing stimulus the US again is taking the lead, this time with fiscal stimulus.

It is a bizarre dance that excels in one aspect in particular: It never ends. Consider: German unemployment is at all time lows, and European PMIs are at their highest in over 7 years:

Read the entire article

January 5, 2018

Tesla's Model 3 deliveries fall short of estimates

Tesla Inc (TSLA) delivered 1,550 of its new Model 3 electric cars in the fourth quarter, missing Wall Street expectations as it tries to overcome production issues that have hampered the roll out of its most affordable sedan.

Shares of the Palo Alto, California-based company fell 1.7 percent to $312 in after-market trading.

The electric-car maker Opens a New Window. on Wednesday pushed back for the second time its target of producing 5,000 Model 3 sedans per week to the end of the second quarter.

Tesla Opens a New Window. had initially predicted to reach the milestone in December, but in November deferred the target to the end of the first quarter.

The latest sedan is critical to Tesla’s long-term success, as it is the most affordable of its cars to date and is the only one capable of transforming the niche automaker to a mass producer amid a sea of rivals entering the nascent electric vehicle market.

Read the entire article

January 4, 2018

Petro-Yuan Looms - How China Will Shake Up The Oil Futures Market

The "huge story",as Graticule's Adam Levinson called it, will, it appears, be a "wake up call" for the West that seems to happily be ignoring this potential bombshell that is China's looming launch of domestic oil futures trading.

Additionally, Levison warns Washington that besides serving as a hedging tool for Chinese companies, the contract will aid a broader Chinese government agenda of increasing the use of the yuan in trade settlement... and thus the acceleration of de-dollarization and the rise of the Petro-Yuan.

“I don’t think there’s any doubt we’re going to see use of the renminbi in reserves go up substantially”

China has been planning this for a number of years and given rising tensions, now seems like a good time for China to flex a little.

The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest -- a first for China’s commodities markets -- because the exchange is registered in Shanghai’s free trade zone. Even  Bloomberg admits there are implications for the U.S. dollar’s well-established role as the global currency of the oil market, as Sungwoo Park sums up some of the key questions...

Read the entire article

January 3, 2018

"Everything Is Overvalued": Public Pensions Face Dangerous Dilemma In 2018

As  we discussed  a few weeks ago, being a pension investor these days has absolutely nothing to do with "investing" in the traditional sense of the word and everything to do with gaming discount rates to make their insolvent ponzi schemes look more stable than they actually are.  Here was our recent take on CalPERS' decision to hike their equity allocation to 50%:

CalPERS' decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better.  You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities...a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. 

The new allocation, which goes into effect July 1, 2018, supports CalPERS' 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

The lower the rate of rate means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund's board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Read the entire article

January 2, 2018

The Great Dollar Short-Squeeze Is Coming

In Part III of MacroVoices’s conversation about the twilight of the dollar’s dominance over the global financial system, Jeff Snider elaborates on a theory we initially referenced in our writeup on Pt. II: The notion that, as the supply of dollars to certain economies contracts, the greenback could see its relative value climb, even as it cedes its dominance over the financial system to the Chinese yuan, or a consortium of rival currencies.

Snider describes this phenomenon as a short squeeze: Because so many central banks predicate their monetary policy on the dollar, and because so many foreign governments and corporations need dollars to finance trade and pay down debts, the global economy is effectively net short dollars.

So, when the Federal Reserve stops the money presses and the supply of greenbacks becomes less pliable, certain parts of the financial system – Snider points to BRICS countries like Brazil and Russia as examples – will begin finding it increasingly expensive to roll over their funding, pushing the greenback higher, as Snider explains.

Yeah, I think a better terminology would be short squeeze. It’s sort of a dollar short squeeze. And, again, if we think about the Eurodollar development from things all the way back as – some things like banker’s acceptances – it’s essentially a short dollar system, where every participant in it is short the dollar.

They roll over funding every day, whether it be in repo or unsecured or in FX – or however it’s done – essentially everybody around the world needs dollars and therefore they’re short of them. So when the dollar supply becomes less malleable, less pliable, less dynamic, it becomes a problem for certain parts of the system being able to roll over their commitments.

And what happens when you have to roll over your commitment and it’s not as easy to do so, the price of it goes up. And, in terms of currencies, a short squeeze in the dollar means a rising dollar or a falling counterpart currency.

Read the entire article

January 1, 2018

The Rise And Fall Of The Eurodollar

In Part II of MacroVoices’s holiday special - which is all about examining the dollar’s hegemony over the world’ financial system and analyzing different theories pertaining to how much longer the greenback will reign as the world’s reserve currency.

In the previous installment - one of five segments that we will be sharing this week - the discussion centered around the question of how much longer the dollar will hold its position as the world’s reserve currency.

While the petrodollar regime is largely responsible for justifying the dollar’s position as the world’s reserve currency, the eurodollar system is the mechanism by which the US has maintained its dominance over the world financial system. It stands to reason that, if foreign banks can’t offer dollar deposits to their business clients then those clients wouldn’t be able to support the dollar’s hegemony by using the greenback as one of the main currencies to settle trade.

Snider posits that the eurodollar system began to break down in 2007 as the housing crisis unfurled across the US. The crisis forced foreign companies and governments to confront the risks inherent in holding dollars and US government debt.

Read the entire article