It is a sign of the times that Bitcoin is doing so well

The past week or two has seen quite a rally in the price of Bitcoin and as I type this it is US $16.700. This gives various perspectives and let me open with a bit of hype, or at least what I think is hype.

An independent report from Citi Bank’s Managing Director argues that Bitcoin is the digital gold of the 21st century. The devaluation of the worlds’ reserve currency—the U.S. dollar—formed the basis of the commentary. ( Crypto.Com)

As a starter Citibank have suggested that the US Dollar will fall or depreciate by 20% which has created something of a stir in itself. There are bears around for plenty of currencies tight now as others suggested that the expected December move by the ECB might put the skids under the Euro. Both roads would look bullish for Bitcoin as it is an alternative. The Citibank view starts with a comparison with Gold post Bretton Woods.

With a relatively free currency market, gold’s price grew enormously for the next 50 years.

The monetary inflation and devaluation of the greenback are the basis of Fitzpatricks’ comparison of Bitcoin with gold. ( Crypto.Com)

This is then linked to what we have seen with Bitcoin.

Bitcoin move happened in the aftermath of the Great Financial crisis (of 2008) which saw a new change in the monetary regime as we went to ZERO percent interest rates.

The next step is this.

Fitzpatrick pointed out that the first bull cycle in Bitcoin from 2011 to 2013 when it increased by 555 times resulted from this.
Currently, the COVID-19 crisis and the government’s associated monetary and fiscal response are creating a similar market environment as gold in the 1970s. Governments have made it clear that they will not shy away from unprecedented money printing until the GDP and employment numbers are back up.  ( Crypto.Com)

He then applies his technical analysis.

“You look at price action being much more symmetrical or so over the past seven years forming what looks like a very well defined channel giving us an up move of similar time frame to the last rally (in 2017).”

Which leads to this.

Fitzpatrick did not stop there; his price prediction chart sees Bitcoin price at $318,000 by December 2021.  ( Crypto.Com)

That in itself will no doubt be contributing to the present rise as it puts us in what is called FOMO or Fear Of Missing Out territory.

The Economics

The issue of the money supply and its growth is an issue of these times whereas the situation for Bitcoin is different.

Bitcoin’s total supply is limited by its software and will never exceed 21,000,000 coins. New coins are created during the process known as “mining”: as transactions are relayed across the network, they get picked up by miners and packaged into blocks, which are in turn protected by complex cryptographic calculations. ( coinmarketcap.com)

So there are two differences. Firstly there is a cap and with the present number in circulation being 18.5 million it is not that far away. Secondly whilst there is growth the process of creation is likely to be slower rather than fiat money which as I am about to discuss has been rather up,up and away.

If we start with the world’s reserve currency which is the US Dollar I note a reference to money printing in the Citibank report which we could argue is QE.

Consistent with this directive, the Desk plans to continue to increase SOMA holdings of Treasury securities by approximately $80 billion per month……Similarly, the Desk plans to continue to increase SOMA holdings of agency MBS by approximately $40 billion per month. ( New York Fed)

So we have US $120 billion a month from the main two efforts where bonds are swapped for electronically produced money.

My preferred way of looking at this is the money supply and if we do that we see that in the year to the 2nd of this month the narrow measure of the US money supply has risen by 41% over the past year. This sort of measure used to be called high powered money although right now due to the plunge in velocity it is anything but. However it has been created and I also note that having gone through US $2 trillion in August the amount of cash in circulation is also rising and was US $2.04 trillion in October. So mud in the eye for those predicting its death,especially as we note the switches to using electronic money in retail. As the Belle Stars put it.

This is the sign of the times
Piece of more to come

If we go to the wider money supply measure called M2 we see that it has grown by 23.9% in the year to November 2nd. That is quite something for a number that is now just shy of 19 trillion. So there is a money supply argument in the background. We can add to it by noting fast rises in other types of fiat money. Japan has been at the game for some time and we have seen notable expansions in Euros and UK Pounds as well.

Interest-rates

There was a time that the lack of an interest-rate from Bitcoin was a weakness. The 0% compared unfavourably to what you could get in fiat currencies. After all pre credit crunch many of the major currencies provided interest-rates of 4 to 5%. But now life is very different as we have seen the US Federal Reserve cut interest-rates to just above 0%. Indeed in some cases now Bitcoin has a relative advantage because the spread of not only negative official interest-rates but of negative bond yields ( which total around US $17 trillion now) makes it look much more attractive than before.

Who would have thought that a 0% interest-rate would be attractive? But increasingly that is true.

Comment

When we look at something like this we see that it requires a combination of reality and psychology/belief. The former gets reinforced because as I have pointed out over the past decade the direction of travel has been both clear and consistent. This morning has seen an example of part of this journey.

Italy’s Ruling 5-Star: ECB Should Cancel Covid-Related Debt It Owns – Party Blog Doing So Would Be “Not Only Fair But Easily Achievable” ( @LiveSquawk )

These sort of proposals appear and will no doubt be denied and rejected. But in a year or two’s time past history suggests it may well be on the agenda and then get implemented. It is quite a cynical game but we see it played regularly and feeds into our “To Infinity! And Beyond” theme.

Also there will be demand from those looking to park what are considered to be ill gotten gains. The official response will be around crime but it is probably more likely to be another version of this.

Many Turkish companies and individuals bought foreign currency last week even as the lira registered its biggest weekly gain in almost two decades, Bloomberg reported, citing currency traders it did not identify. ( Ahval )

Turks are using the Lira rally as a chance to buy more US Dollars in a clear safe haven trade. People will disagree about how safe that is but there will be similar flows into Bitcoin. It has its own risks as we note the issues around security and the wide swings in price. The latter are something of an irony because they are exacerbated by a strength which is the supply restrictions and limit. But this is a time of risk in so many areas.

Another way of looking at the change in perception of Bitcoin is the way that central banks are now looking at Digital Coins in a type of spoiler move as it poses a potential challenge to their monopoly over money.

I will be particularly interested in reader’s thoughts on this topic

 

 

More QE will be on the agenda of the US Federal Reserve

Later today the policymakers of what is effectively the world’s central bank meet up to deliberate before making their policy announcement tomorrow evening UK time. Although there is a catch in my description because the US Federal Reserve goes through sustained periods when it effectively ignores the rest of the world and becomes like the US itself can do, rather isolationist. The Financial Times puts it like this.

US coronavirus surge to dominate Federal Reserve meeting…..Central bank policymakers face delicate decision on best way to deliver more monetary support.

As it happens the coronavirus numbers look a little better today. But there are clearly domestic issues at hand which is a switch on the initial situation where on the middle of March the US Federal Reserve intervened to help the rest of the world with foreign exchange liquidity swaps. We were ahead of that game on March 16th. Anyway, that was then and now we see the US $446 billion that they rose to is now US $118 billion and falling.

The US Dollar

There has been a shift of emphasis with Aloe Blacc mulling a dip in royalties from this.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

This was represented back in the spring not only by a Dollar rally that especially hit the Emerging Market currencies but the Fed response I looked at above. Since then we have gone from slip-sliding away to the Fallin’ of Alicia Keys. Putting that into numbers the peak of 103.6 for September Dollar Index futures on March 19th has been replaced by 93.9 this morning.

If we look at the Euro it fell to 1.06 versus the Dollar and a warning signal flashed as the parity calls began. They had their usual impact as it is now at 1.17. Actually there were some parity calls for the UK Pound $ too so you will not be surprised to see it above US $1.28 as I type this. In terms of economic policy perhaps the most significant is the Japanese Yen at 105.50 because the Bank of Japan has made an enormous effort to weaken it and looks increasingly like King Canute.

There are economic efforts from this as I recall the words of the then Vice-Chair Stanley Fischer from 2015.

Figure 3 uses these results to gauge how a 10 percent dollar appreciation would reduce U.S. gross domestic product (GDP) through the net export channels we have just discussed. The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years.

We have seen the reverse of that so a rise in GDP of 1.5%. Of course such moves seem smaller right now and they need the move to be sustained but a welcome development none the less.

Whilst the US economy is less affected in terms of inflation than others due to the role of the US Dollar as the reserve currency in which commodities are prices there still is an impact.

This particular model implies that core PCE inflation dips about 0.5 percent in the two quarters following the appreciation before gradually returning to baseline, which is consistent with a four-quarter decline in core PCE inflation of about 0.3 percent in the first year following the shock.

Again this impact is the other way so inflation will rise. For those unaware PCE means Personal Consumption Expenditures and as so familiar for an official choice leads to a lower inflation reading than the more widely known CPI alternative.

Back Home

Interest-Rates

This is a troubled area for the US Federal Reserve which resembles the shambles of General Custer at Little Big Horn. We we being signposted to a “normalisation” where the new interest-rate would be of the order of 3%+ or what was called r*. I am pleased to report I called it out at the time as the reality was that the underpinnings of this particular Ivory Tower crumbled as the eye of Trump turned on it. The pandemic in this sense provided cover for the US Federal Reserve to cut to around 0.1% ( strictly 0% to 0.25%).

Back on March 16th I noted this and you know my view in official denials.

#BREAKING Fed’s Powell says negative interest rates not likely to be appropriate ( @AFP )

I also not this from Reuters yesterday,

With U.S. central bank officials resisting negative interest rates,

How are they resisting them? They could hardly have cut much quicker! This feels like a PR campaign ahead of applying them at some future date.

Yield Curve Control

This is the new way of explaining that the central bank is funding government policy. Although not on the scale some are claiming.

Foreigners have levelled off buying US Debt. Federal Reserve buying has gone parabolic. This tells us all this additional debt the govt is issuing by running HUGE budget deficits is being purchased by directly the Fed. That is what they do in “banana republics”. #monetizethedebt

That was from Ben Rickert on Twitter and is the number one tweet if you look for the US Federal Reserve. Sadly for someone who calls himself The Mentor actual purchases of US government bonds have declined substantially.

the Desk plans to continue to increase SOMA holdings of Treasury securities at that pace, which is the equivalent of approximately $80 billion per month.  ( New York Fed.)

That is less in a month than it was buying some days as I recall a period when it was US £125 billion a day.

If Ben had not ramped up his rhetoric he would be on the scent because Yield Curve Control is where the central bank implicitly rather than explicitly finances the government. Regular readers will have noted my updates on the Bank of Japan doing this and there have been several variations but the sum is that the benchmark ten-year yield has been kept in a range between -0.1% and 0.1%.

There is an obvious issue with the US ten-year yield being around 0.6% and we may see tomorrow the beginning of the process of getting it lower. On the tenth of this month I pointed out that some US bond yields could go negative and if we are to see a Japanese style YCC then the Fed needs to get on with it for the reasons I will note below.

Comment

As the battleground for the US Federal Reserve now seems to be bond yields it has a problem.

INSKEEP: Senator, our time is short. I’ve got a couple of quick questions here. Is there a limit to how much the United States can borrow? Granting the emergency, its another trillion dollars here. ( NPR)

Even in these inflated times that is a lot and the Democrat opposition want treble that. With an election around the corner we are likely to see more grand spending schemes. But returning to the Fed that is a lot to fund and $80 billion a month looks rather thin in response. So somewhere on this yellow brick road I am expecting more QE.

Oh and if you look at Japan if it has done any good it is well hidden. But that seems not to bother policymakers much these days. Also another example of Turning Japanese is provided by giving QE  new name. After all successes do not need one do they?

Still at least the researchers at the Kansas City Fed have kept their sense of humour.

Based on the FOMC’s past use of forward guidance, we argue that date-based forward guidance has the potential to deliver much, though not all, of the accommodation of yield curve control.

The Lebanon poses a problem for central banks and the belief they cannot fail

There is a lot going on in the Lebanon to say the least so let me open by offering my sympathy to those suffering there. My beat is economics where there is an enormous amount happening too and it links into the role of the new overlords of our time which is,of course, the central banking fraternity. They have intervened on an enormous scale and we are regularly told nothing can go wrong rather like in the way that The Titanic was supposed to be indestructible. If you like me watched Thunderbirds as a child you will know that there were few worse portents than being told nothing can go wrong.

The State of Play

The central bank summed things up in its 2019 review like this.

The Lebanese economy has moved into a state of recession in 2019 with GDP growth touching the negative territory. The International Monetary Fund projected Lebanon’s real GDP to shrink by 12% in 2020, a new double-digit contraction not seen in more than 30 years. In comparison, the IMF forecasted real GDP to contract by 3.3% in the MENA region and by 3% globally in 2020. Inflation in Lebanon recorded 2.9% in 2019, and it is expected to reach 17% in 2020, according to the IMF.

As you can see we have two double-digit measures as output falls by that as we note that the ordinary person will be hurt by double-digit inflation. This poses yet another question for output gap theory. I have to confess I am a little surprised to note that the IMF has not updated the forecasts unlike the government. From the Financial Times.

The government says the economy shrank by 6.9 per cent of GDP last year and expects a further contraction this year of 13.8 per cent — a full-blown depression with an estimated 48 per cent of people already below the poverty line.

The next feature is a currency peg to the US Dollar as we return to the Banque Du Liban.

At the monetary level, the year was marked by noticeable net conversions in favor of foreign currencies, a decline in deposit inflows, a shortage of US dollars and a lack of local currency liquidity. As a result, BDL’s assets in foreign currencies witnessed a contraction of 6% to reach $37.3 billion at end December 2019.

Troubling and a signal that if you control the price via a currency peg the risk is that you have a quantity problem which is always likely to be a shortage of US Dollars.

Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me ( Aloe Blacc)

This led to what Taylor Swift would call “trouble,trouble,trouble”

It is worth mentioning that in the last quarter of 2019, the Lebanese pound has plunged on a parallel market by nearly 50% versus an official rate of 1507.5 pounds to the dollar. The Central Bank is still maintaining the official peg in bank transactions and for critical imports such as medicine, fuel and wheat.

This leads to the sort of dual currency environment we have looked at elsewhere with Ukraine coming to mind particularly.

The present position is that the official peg is “Under Pressure” as Queen and David Bowie would say as it has been above 1500 for the whole of the last year. There was particular pressure on the 4th of May when it went to 1522. Switching to the unofficial exchange rate then Lira Rate have it at 3890/3940. I think that speaks for itself.

The official Repo rate is 10% and rise as we move away from overnight to 13.46% for three-year paper. Just as a reminder the United States has near zero interest-rates so this is another way of looking at pressure on the currency peg and invites all sorts of problems.For example the forward rate for the official Lebanese Pound will be around 10% lower for a year ahead due to the interest-rate gap. So more pressure on a rate which is from an alternative universe.

It looks like there has been some currency intervention as in the fortnight to the end of May foreign currency assets fell from 51.6 trillion Lebanese Pounds to 50.5 trillion.

Corruption

We start with the Financial Times bigging up the banking sector but even it cannot avoid the consequences of what has happened.

The banks, long the jewel in Lebanon’s economic crown, and the central bank, the Banque du Liban, are at the heart of this crisis. The banks long offered high interest rates to attract dollar deposits, especially from the far-flung Lebanese diaspora. But Riad Salameh, BdL governor since 1993, began from 2016 offering unsustainable interest returns to the banks to lend on these dollars to the government, through the central bank.

That has led to a type of economic dependency.

In sum, 70 per cent of total assets in the banking system were lent to an insolvent state. The recovery programme estimates bank losses at $83bn and “embedded losses” at the BdL at $44bn (subject to audit). Together that is well over twice the size of the shrinking economy.

One of the worst forms of corruption is where government and the banks get together. For them it is symbiotic and both have lived high on the hog but they have a parasitical relationship with the ordinary Lebanese who now find the price is inflation and an economic depression.

Bankers are protesting at government plans to force mergers and recapitalisation, through a mix of wiping out existing shareholdings; fresh capital investment for banks that wish to stay in business, especially by repatriating dividends and interest earnings; recovered illicit assets; and “haircuts” on wealthy depositors.

Or as Reuters put it.

But the banks were not responsible for the devastating waste, pillage and payroll padding in the public sector – about which this plan has little detailed to say.

Comment

We find that this sort of situation involves both war and corruption. Big business, the banks and government getting to close is another warning sign and one we see all around us. But as we review a parallel currency, an economic depression and upcoming high inflation there is also this.

The sources say the plan focuses overwhelmingly on the banks and the central bank, which together lent more than 70% of total deposits in the banking system to an insolvent state at increasingly inflated interest rates put in place by central bank governor Riad Salameh. ( Reuters)

Ordinarily we assume that a central bank cannot fold as the stereotype is of one backed by the national treasury to deal with losses. There is a nuance with the Euro area where the fact there are 19 national treasuries adds not only nuance but risk for the ECB. But in general if you control the currency you can just supply more to settle any debts.the catch is its overseas value or exchange rate as we note that Mr and Mrs Market have already voted on the Lebanese Pound. But there is more as I noted on Twitter last week.

Auditors are asking banks to take a provision of ~40% against exposure to its central bank. This has to be a first in history. ( @dan_azzi)

We have become used to that being the other way around. The next bit is rather mind boggling as we mull the moral hazard at play here.

Even funnier is that BDL is about to send a circular asking banks to take a 30% provision on their exposure to BDL.

Frankly both look too low which means for the ordinary person that there is a risk of bail ins.

Podcast

 

The 2020 Currency War and the role of the US Dollar

As we step into June we have an opportunity to reflect on what has been on the media under card but only because so much has been happening elsewhere. Also we can note yet another fail for economics 101 because the advent of large-scale asset purchases or QE was supposed to cause a currency decline and maybe a large one. A higher supply of money leading to a fall in the price. The Ivory Towers of the central banks were keen on that one as they originally justified QE on the basis of being able to hit their inflation target partly via that route. Of course that has not gone well either as we noted with the ECB that has been on average some 0.7% below its holy grail of just below 2% per annum.

The US Dollar

So on that reading the world’s reserve currency the greenback should be in trouble as we observe this.

The Federal Reserve added $60 billion to its balance sheet last week, now totaling $7.097 trillion. Much of the increase this time (over $41 billion) was in corporate credit and commercial paper facilities. ( @LynAldenContact )

There is a sort of irony in US $60 billion in a week not seeming very much! Anyway the heat has been on.

The Federal Reserve’s balance sheet has expanded a staggering $1.9 trillion since February 26, just days after the S&P 500 peaked. ( @USGlobalETFs )

So plenty of new US Dollar liquidity and as part of that we recall what we might call the external supply which are the liquidity swaps for foreign central banks or US $449 billion.

To that can add an official interest-rate just above 0% ( roughly 0.1%)

Added to those factors the Financial Time has decided to put on its bovver boots and give the Dollar a written kicking.

That begs a question that has been seen as controversial — are we entering a post-dollar world? It might seem a straw-man question, given that more than 60 per cent of the world’s currency reserves are in dollars, which are also used for the vast majority of global commerce. The US Federal Reserve’s recent bolstering of dollar markets outside of the US, as a response to the coronavirus crisis, has given a further boost to global dollar dominance.

The FT writer has rather fumbled the ball there and later again emphasises a US Dollar strength.

Among the many reasons for central banks and global investors to hold US dollars, a key one is that oil is priced in dollars.

Indeed and we have looked at efforts to make ch-ch-changes from the supply side ( Russia) and the demand side ( China) but it remains dominant. There are of course plenty of other commodity markets which have a US Dollar price.

Next is something which intrigues me because if it is true in the US how do you even start with Japan and then of course you get a really rather long list of other countries doing exactly the same.

Finally, there are questions about the way in which the Fed’s unofficial backstopping of US government spending in the wake of the pandemic has politicised the money supply.

Oh and for those of you with inflation concerns ( me too) then this is close to an official denial.

The issue here isn’t really a risk of Weimar Republic-style inflation, at least not any time soon.

Actually the main inflation risk is in asset markets with the S&P 500 above 3k, the Nikkei 225 above 22,000 and the FTSE 100 above 6100 I think we can see clear evidence tight now. But of course the economics editorial line under Chris Giles is that asset prices are not part of inflation and should be ignored as part of his campaign to mislead on this subject.

Emerging Markets

If they were hoping for a US Dollar decline then such hopes have been dashed. One country which has been under the cosh is Brazil where an exchange to the US Dollar of 4 as we began the year has been replaced by one of 5.35 and even that is a fair bit better than the 5.96 at the nadir. Things have been less dramatic for the Argentine Peso but it had a bad 2019 to a move from 60 to the US Dollar to above 68 is further pain and of course an interest-rate of an eye-watering for these times of 38% has been required to restrict it to even that.

India

We have a sub-category all to itself as we note the currency of over a billion people. Let me start with something being debated in so many places, and here is the Economic Times of India from last Tuesday.

The government stimulus package of Rs 20 lakh crore seems to be inadequate to revive the economy, as a large part of it accounts for liquidity-boosting measures by RBI. It is clear that the weak fiscal position forced the government to restrict the stimulus. It is in this scenario, that the need for monetisation of deficit has been widely debated.

In layman’s language, monetisation of deficit means printing more money. In other words, monetisation of deficit happens when RBI buys government securities directly from the primary market to fund government’s expenses.

The Rupee has been a case of slip-sliding away as we note it nearly made 77 and is now 75.3 and that is in spite of the impact of the lower oil price ( and for a while much lower) on India.

Euro

This has not done much at all as I note an annual change of all of -0.38%! We did see some moves as it went to 1.14 at the height of the pandemic panic as the Euro’s “safe haven”  role was stronger than the Dollar’s one. But we then had a dip and now a bounce. So loads of column inches about the world’s main currency pair have led to a net not very much as we stand here today.

Yen

This is really rather similar to the above as we note an annual change of -.0,52% this time after a safe haven spell. Actually 107 or so for the Yen feels strong for it as we remind ourselves that the QE, negative interest-rates and equity purchases of Abenomics were supposed to keep it falling.

UK Pound

The annual picture ( -2%) is a little more misleading here as we have seen swings. The UK Pound £ has been following equity markets so went below US $1.15 at the nadir but has hit US $1.24 as we have bounced. Troubling if you are like me wondering about the equity market bounce. Still we could be the UK media that once again declared this at the bottom.

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine.

Places like the FT and BBC have proved very useful as when they have a “panic party” about the £ and claim it is looking over a cliff is invariably the time to buy it.

Comment

So we see that the situation is in fact one of where the various QE and interest-rate moves have offset more often than been different. In some ways the central banking “More! More! More!” culture means that differences in pace or size get ignored because they are all rocking a “To Infinity! And Beyond!” vibe as shown by the official denial below.

‘Comfortable’ Now, But On B/Sheet ‘Cannot Go To Infinity ( Jerome Powell via @LiveSquawk )

Let me conclude with another perspective which is the world of precious metals and another form of precious. One way of judging a currency is in this vein and as someone who recalls studying mercantilism which essentially revolved around country’s holdings of silver this provided some food for thought.

Those of us with longer memories have no faith in US paper dollars.  Prior to 1964, US coinage was made of 90% silver.  Today, a roll of 40 quarter dollar coins made of 90% silver, worth $10 in 1964, will cost you about $165.  The real purchasing power of the US dollar has plunged. ( h/t ahimsaka in the FT comments )

Podcast

Is Hong Kong really over as a financial centre?

Today I thought I would take a slightly different tack and look at a potential shift in world financial markets. It concerns a place that for many years has had an economic party based on “location, location, location” as Hong Kong has been a sort of add-on to China. We have previously looked at the economic consequences of the unrest there and now the ante is being upped by China. This poses the question can it survive as one of the world’s major financial centres?

BEIJING (Reuters) – China’s parliament on Thursday overwhelmingly approved directly imposing national security legislation on Hong Kong to tackle secession, subversion, terrorism and foreign interference in a city roiled last year by months of anti-government protests.

Also I do not know about you but the 6 were brave and the 1 was courageous.

The National People’s Congress voted 2,878 to 1 in favour of the decision to empower its standing committee to draft the legislation, with six abstentions. The legislators gathered in the Great Hall of the People burst into sustained applause when the vote tally was projected onto screens.

If we switch to Hong Kong itself there is plainly trouble ahead.

Earlier on Thursday, angry exchanges in the city’s assembly, the Legislative Council, during debate on the anthem bill saw some lawmakers removed in chaotic scenes and the session adjourned.

If we look wider there is of course The Donald to consider.

WASHINGTON (Reuters) – U.S. President Donald Trump said on Tuesday the United States was working on a strong response to China’s planned national security legislation for Hong Kong and it would be announced before the end of the week.

So quite a bit of realpolitik and this adds to the Trade Wars issue. Not exactly what you want when you are a hub for financial trade.

Rich Chinese are expected to park fewer funds in Hong Kong on worries that the security law could allow mainland authorities to seize their wealth, bankers and other industry sources said.

That is quite damning for Hong Kong’s future on its own. So many things have rolled out of this and I remember Rolex watches being bought as collateral and then sold as well as if course the Bitcoin purchases. So there are more questions than answers before we even leave China.

The Equity Market

There is of course a Trump Tweet for this now the market is rallying.

Stock Market up BIG, DOW crosses 25,000. S&P 500 over 3000. States should open up ASAP. The Transition to Greatness has started, ahead of schedule. There will be ups and downs, but next year will be one of the best ever!

They are of course a bit thinner on the ground in declines but there is an issue here if we switch to the Hang Seng Index. This is from rthk on the 22nd of this month.

Hong Kong stocks dropped 5 percent in the noon session after Beijing said it plans to push through a national security law for the city, adding to tensions with the US and fuelling fears of fresh civil unrest.

The Hang Seng Index sank 5 percent, or 1,204 points, to 23,075, midway into the second session.

Although it slipped a little today it has not done much overall since then as it closed at 23,132. That is a relative loss at a time other markets have rallied. If we move on from the cheerleading of The Donald I note that the Nikkei 225 has over the past week gone from below the Hang Seng at circa 20500 to above it at this morning’s 21,916.

Exchange-Rates

Let me briefly hand you over to the Hong Kong Monetary Authority.

The Linked Exchange Rate System (LERS) has been implemented in Hong Kong since 17 October 1983. Through a rigorous, robust and transparent Currency Board system, the LERS ensures that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to one US dollar.

The LERS is the cornerstone of Hong Kong’s monetary and financial stability.  It has weathered many economic cycles and has proved highly resilient in the face of regional and global financial crises over the years.

Oh dear “resilient” looks like being as applicable as it is to the banks! Anyway we have a currency peg in action which seems to be news to some. That means they follow US interest-rates too athough you can pick-up a bit more than 0.5% a year.

The Federal Open Market Committee of the US Fed announced last night to adjust downward the target range for the US federal funds rate by 100 basis points to 0-0.25%. In light of the Fed’s decision, the Hong Kong Monetary Authority (HKMA) also adjusted downward the Base Rate today. The Base Rate is set at 0.86% today according to a pre-set formula ( 16th of March)

Actually it has been edging higher and is now 1.11% so maybe a little heat is on.

In terms of any response to pressure the HKMA would intervene first and at 3.6 trillion Hong Kong Dollars worth it has quite a war chest. Trouble is reserves never seem to be quite enough however large and in a panic interest-rate rises do not achieve much either. Well apart from applying a brake in the economy.

It could use the liquidity swaps system of the US Federal Reserve to get US Dollars and sell them but the lifespan of that would presumably be until The Donald spotted it.

Moving onto the Yuan and its offshore variant there has been a lot of talk about it but it has been remarkably stable considering the times ( that is a translation of the Chinese ave obviously been intervening) and is at 7.15 versus the US Dollar.

The Economy

This was in a bad way and things have got worse.

Hong Kong’s coronavirus-ravaged economy has suffered its worst decline on record, shrinking 8.9 per cent year on year in the first quarter and sparking an appeal from the city’s finance chief for unity to face the grim months ahead…….Hong Kong’s coronavirus-ravaged economy has suffered its worst decline on record, shrinking 8.9 per cent year on year in the first quarter and sparking an appeal from the city’s finance chief for unity to face the grim months ahead. ( South China Morning Post )

In case any central bankers are reading here is their priority.

Hong Kong SAR (China)’s Real Residential Property Price Index was reported at 189.610 2010=100 in Sep 2019. This records a decrease from the previous number of 194.800 2010=100 for Jun 2019 ( CEIC)

It will be lower now as I note this from the HKMA.

The Hong Kong Mortgage Corporation Limited (HKMC) announces that, the pilot scheme for fixed-rate mortgages will start receiving applications from 7 May (Thursday). In response to the change in market interest rates, mortgage interest rates under the pilot scheme are lowered, as compared to the levels previously announced in the 2020-21 Budget (Budget). The interest rates per annum for 10, 15 and 20 years of the Fixed-Rate Mortgage Pilot Scheme are as follows:

2.55%, 2.65% and 2.75% respectively in case you were wondering.

Comment

The situation is a bit like a dam which invariably looks perfectly secure until it bursts. Indeed there are some bouncing bombs in play.

TRUMP ADMN TO EXPEL CHINESE STUDENTS WITH TIES TO MILITARY SCHOOLS: NYT ( @FirstSquawk )

Financial markets are more likely to be troubled by this from Secretary Pompeo.

Today, I reported to Congress that Hong Kong is no longer autonomous from China, given facts on the ground. The United States stands with the people of Hong Kong.

This is the real question will they be able to operate freely? Next comes the issue of where will the business go? This begs lots of question as I have a friend who works there.

Looking at Hong Kong itself the currency peg looks vulnerable in spite of the large foreign exchange reserves. It so often turns out that Newt from the film Aliens was right.

It wont make any difference

The real ray of hope is that the Chinese may adapt their bill which lacks detail.

Harmful elements in the air
Symbols clashing everywhere
Reaps the fields of rice and reeds
While the population feeds
Junk floats on polluted water
An old custom to sell your daughter
Would you like number twenty three?
Leave your yens on the counter please
Ho-oh, ho-oh-oh-oh
Hong Kong Garden
Ho-oh, ho-oh-oh-oh
Hong Kong Garden ( Siouxsie and the Banshees )

As to the housing market is this how Nine Elms ( confession my part of London) finds some new buyers?

How many US Dollars are enough?

The issue of what you might call King Dollar is not one which gets the coverage it deserves. Instead the media coverage tends to highlight claims that its period of rule is on the way out with China demanding more use of the Yuan or Russia the rouble and so on. Or we get the various proclamations that we need some sort of world currency which to my mind are more like pie in the sky thinking than blue sky thinking. When we looked at the IMF on the I noted the suggestions that its SDRs ( Special Drawing Rights) could become the world currency but there are all sorts of flaws there.

So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

If we look at the issues of the Euro can anybody even imagine trying to apply a fixed exchange-rate to the whole world? We would have all sorts of individual booms and busts before we even get to the idea of a joint interest-rate. That is before we get to the track record of the IMF after all can you imagine trying to get its currency accepted in Argentina and Greece.

Supply of US Dollars

It is not as if the taps have been turned off.

The numbers: The Federal Reserve’s balance sheet expanded to a record $6.6 trillion in the week ended April 22, an increase of $205 billion from the prior week, the central bank said Thursday.

What happened: Holdings of U.S. Treasurys rose by $120.5 billion to $3.9 trillion. The central bank has been purchasing Treasurys at a rapid pace in a bid to restore functioning to this key U.S. financial market. The central bank’s holdings of mortgage-backed securities rose $54 billion to $1.6 trillion. ( MarketWatch)

As you can see the balance sheet is expanding at a rapid rate and let me just add that if you really think the US Federal Reserve is buying US Treasury Bonds to “restore functioning to this key U.S. financial market.” I have a London bridge to sell you. The truth is that it is implicitly financing the US Budget Deficit as we note that the ten-year yield is a mere 0.58% and the long bond is a mere 1.17% in spite of surging expenditure.

We can now switch to the money supply for further insight because we have noted in the past that QE does not go straight into the numbers as one might assume. Looking at the ECB data has shown that what should be clear cut narrow money creation seems to sometimes go missing in action. However we are seeing quite a surge in the money supply as we note that the narrow money measure ( M1) only went through US $4 trillion as March began but by the 13th of April was already US $4.73 trillion.

I’ll be back in the high life again
All the doors I closed one time will open up again
I’ll be back in the high life again
All the eyes that watched me once will smile and take me in ( Steve Winwood )

Putting that another way the annual rate of increase is 11.6% the annualised six-monthly one is 15.7% and the quarterly one is 23.4%. You can see which way that is going and I would point out that only a month or so ago 11.6% would be considered very high.

Peering into the detail we see that the surge in narrow money is mostly deposits, There has been a rise in cold hard cash, dirty money as Stevie V would say but deposits have risen by around US $700 billion over the past couple of months.

Sending Dollars To Friends Abroad

This a subject I have covered throughout the credit crunch and NPR seem to have caught up with.

As the global economy shuts down, the U.S. Federal Reserve has begun sending billions of dollars to central banks all over the world. Last month, it opened up 14 “swap lines” to nations such as Australia, Japan, Mexico, and Norway. A “swap line” is like an emergency pipeline of dollars to countries that need them. The dollars are “swapped,” i.e., traded for the other country’s currency.

The numbers here have ballooned and are the missing link so to speak in the balance sheet data above. As of last night some US $432.3 billion have been supplied to foreign central banks. I will let that sink in and then point out that it means banks in those countries or regions either cannot get US Dollars at all or can only get them at an interest-rate which challenges their solvency.

As to the demand then we always expected it to be mainly from the following too although not always in this order. Bank of Japan US $215 billion and the ECB $142 billion. Particularly troubling from the Japanese point of view is that as well as being the leader of the pack they are needing ever more. When we note that the Bank of England has only asked for US $27.3 billion which is low when you look at the size of the UK’s banks we see the Bank of Japan needed another US $19 billion overnight.

One factor of note is that the Norges Bank requested some US $3.6 billion for 84 days yesterday. So the heat is on for at least one Norwegian bank.

Also the extension of the swaps to Emerging Markets as requested by @trinhonomics has been used. The Bank of Korea has taken US $16.6 billion, the Bank of Mexico some US $6.6 billion and the Monetary Authority of Singapore some US $5.9 billion.

Exchange Rate

In spite of the balance sheet rises and the effort to become in effect the world’s central bank by supplying US Dollars the exchange rate remains firm. We can look at it in terms of the broad index being 123.2 as opposed to the 114.7 it ended 2019 or simply that it was set at 100 in 2006.

Comment

There are plenty of influences here but one thing we can be sure of is that the US Dollar is in demand. Let me give you some examples.

Kenya shilling hits a new all-time low of 107.6500 against the US dollar according to data from @business

 

Rupee falls to all-time low of 76.87 against US dollar in early trade ( Press Trust of India from Wednesday)

 

At the start of the year, $1 bought you 4.00 Brazilian reals. It now buys you 5.53 reais. That’s a 38% rise for the dollar (27% fall for the real) in less than four months. ( @ReutersJamie )

We have looked at India before and back then going through 70 seemed significant. As to Kenya an interest-rate of 7.25% is not helping much is it? Then we have Brazil showing how the Dollar has impacted South America.

So economics 101 is having another bad phase because a massively increased supply is not pushing the price down. In come respects it may even be creating more demand because if you know there is a ready supply then you may then use it more. Ouch! After all the much lower oil price should be reducing the demand for US Dollars and indeed the negative price such as it applied should be depth-charging it.

Once I built a tower up to the sun
Brick and rivet and lime
Once I built a tower, now it’s done
Brother, can you spare a dime? ( Bing Crosby )

 

The Emerging Markets Problem and debt jubilees

Some familiar topics are doing the rounds and making a few headlines and today I shall use the focus of the problems of many of what are called Emerging Markets to focus in on them. So let me open with the issue of the apparent lust for US Dollars that keeps popping up and return to an issue we analysed on the 18th of March.

*Bank Indonesia Governor Says New York Fed Will Provide $60B Repo Line ( @VPatelFX )

So we see another country on its way into the US Federal Reserve liquidity swaps club so let us ask the Carly Simon question which is why?

Indonesia’s foreign exchange (forex) reserves dropped US$9.4 billion in March to $121 billion as Bank Indonesia (BI) stepped up market intervention to stabilize the rupiah exchange rate amid heavy capital outflows, according to the central bank.

Forex reserves have continued to decrease since February,  when they dropped from $131.7 billion in January, the second-highest level in the country’s history. March’s figure is enough to support seven months of imports and payments of the government’s short-term debts and is above the international adequacy standard of about three months of imports. ( Jakarta Post

Di you notice how Bank Indonesia reports its foreign currency reserves in US Dollars? That is a slap in the face for those reporting its hegemony is over and as an opening salvo confirms the issue at hand. The secondary issue is that the level of foreign exchange reserves is only $10 billion below the second highest ever and yet if not panic stations there are clear worries. Next comes something I have pointed out before when a crisis hits it is the rate of change of reserves which worries people more than the size left. So in fact only a certain percentage of reserves are what one might call “usable” in that you them have to do something else as well. Finally we get to the nub of the issue which is how long you can pay for your imports and finance your debts. Of course borrowing in US Dollars in size is something that is on our checklist of trouble as well.

The Jakarta Post goes onto point out that the heat is on.

The fear has induced capital outflow and amplified exchange rate pressures on the rupiah, especially in the second and third week of March 2020,” BI wrote in a statement on Tuesday.

The rupiah lost around 15 percent of its value against the dollar in March as investors rushed to sell riskier assets and flock to safe haven assets amid fears over COVID-19’s rapid spread.

Also on March 19th I did point out that QE ( Quantitative Easing) seems to be spreading everywhere.

The central bank has purchased Rp 172.5 trillion in government bonds, including Rp 166.2 trillion from foreign investors in the secondary market.

Indeed if we switch to Fitch Ratings this morning another response to this crisis is the beginning of what is literal printing money.

Another extraordinary measure is the decision to give Bank Indonesia (BI), the central bank, the authority to buy government securities in the primary market…….However, the move raises a number of risks, including central bank financing of the fiscal deficit (which could increase the monetary base and raise inflationary expectations), increased political interference in monetary policy decision-making and the erosion of the market’s ability to price Indonesian public debt.

As a counterpoint the extent of the crisis is shown by the fact that by one metric Indonesia has been quite conservative in economic terms.

 We believe that the fiscal loosening will push general government (GG) debt to a peak of 37% of GDP in 2022, from about 30% in 2019,

As an aside it is interesting that Bank Indonesia will be applying QE at an interest-rate of 4.5% I will be looking later at how they account for that as it is a long way from ZIRP or around 0%.

Argentina

On the 19th of March the International Monetary Fund summarised a grim situation as follows.

Since July 2019, the peso has depreciated by over 40 percent, sovereign spreads have risen by
over 2700 basis points , net international
reserves fell by half, and real GDP contracted more
than previously anticipated. As a result, gross public
debt rose to nearly 90 percent of GDP at end-2019,
13 percentage points higher than projected at the
time of the Fourth Review.

A 27% increase in sovereign spreads! This was all very different from the words of Christine Lagarde when she was managing director of the IMF.

These efforts are starting to yield results, and should lay the foundation for the return of confidence and growth.

That was then and this is now or rather the Buenos Aires Times from yesterday.

The government has issued a decree to postpone close to US$10 billion in dollar-denominated debt payments issued under local law, cancelling all such actions until the end of the year.

The move, which should relieve pressure on payments due this year, does not impact Argentina’s wider bid to restructure around US$70-billion worth of debt in foreign currency issued under international law.

So it is the dollar denominated debt which sings along with Lindsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

I would have thought that reporters in Argentina would be familiar with the concept of default but apparently not.

Some experts warned that the move could be interpreted by creditors as putting Argentina in “technical default,” as it implies a change in the conditions under which those bonds were issued.

Anyway a sign of the trouble Argentina is in is show by two separate factors. Firstly how much it saves.

And by allowing the government to save some US$8.5 billion in local payments this year, it could actually be a boon for holders of foreign-law debt by freeing up cash.

Secondly it has tried to avoid affecting these foreign bonds presumably knowing that just like The Terminator “I’ll be back”

Argentina has already been unilaterally delaying payments on some peso-denominated debt, even as it kept current on overseas obligations and embarked on restructuring talks over its overseas notes.

Comment

We have looked at two different ends of the spectrum today as we see why so many what we call Emerging Markets are in trouble. There are quite a few metrics where Indonesia is strong but the US Dollar is making it creak and of course poor Argentina is at the basket case end of the spectrum. Indeed I rarely quite from Zerohedge but this is a masterpiece.

There is a saying: three things in life are certain: death, taxes and another Argentina default.

Also it reminds me of something that bemused me at the time as I note this from the 21st of May last year.

The 100 year bond is trading at 68.5, but I suppose you have 98 or so years left to get back to 100.

They still have 97 or so years to go but with a price of 28.5 now a lot further to go.

The pressure is leading to two suggestions. Firstly from DebtJubilee.

Borrower governments have it within their power to stop making debt payments but they should not suffer any penalties for doing so. All lenders should therefore agree to the immediate cancellation of debt payments falling due in 2020, with no accrual of interest and charges and no penalties.

It has its strengths but ignores what happens to those who were relying on the interest payments as you may simply be kicking the problem can elsewhere.

There is also this from the Brookings Institute.

Last week, we put forward a proposal for a major issuance of the IMF’s Special Drawing Rights (SDRs) as a key tool to attack the worldwide spread of the financial fallout. In essence, we proposed that IMF members agree to an allocation of the equivalent of at least $500 billion as part of the global response to the crisis generated by the corona virus pandemic.

The catch is that you can create money as this does. But there are two problems that immediately occur to me. If you have more money but as we stand fewer goods and services you are solving one problem by creating another ( inflation) for others. That may be asset inflation ( look at equity markets right now) more than consumer inflation. Next is the way that non elected bodies get power and distribute it, who are they responsible too?

 

It is all about the banks once again

As so often we find ourselves returning to the topic of the banks as they are at the heart of the financial system. They are the group which most exemplify the dictum if you want to enrich yourself get as close as you can to flows of money. The best description of this was provided by Matt Taibbi some years ago.

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

Now we find ourselves in a situation where central banks are hurriedly devising schemes to protect the banking sector which is odd in a way for something they have kept describing as “resilient”. Of course the original medicine of interest-rate cuts has turned into an overdose as the banks remain terrified of the consequences of reducing interest-rates for the ordinary depositor below 0% in case it creates a run on deposits. Such a thing which expose some of the illusions that banking relies on. So now we have other policies such as more Quantitative Easing of which there will be an extra £4.5 billion in the UK today for example. Also we are in an era of “credit easing” with what is called the Term Funding Scheme for Small and Medium-sized Enterprises or TFSME as below.

 In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate……….Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Last time around the money leaked straight into the mortgage market thus providing a double boost for the banks as they were able to lend out funds they got cheaply as well as boost their balance sheet as the consequent higher house prices improve their mortgage book.

But in spite of that there are plenty of signs of this.

Trouble, trouble, trouble
Oh, oh
Trouble, trouble, trouble ( Taylor Swift).

Lloyds Bank

Let me give you a different perspective on this with some news that flashed a warning sign yesterday.

*LLOYDS BANK STARTS CASH TENDER FOR 12% PERPETUAL CAP SECURITIES Wow, this is stunning. ( @jeuasommenulle)

These securities are part of the capital of a bank and some US $2 billion was issued. As junior subordianated debt it is not at the top of the line but this is hardly the time for a buyback of any sort of capital especially when we note the news below. Switching to the interest-rate well that is what banks had to pay when the credit crunch was raging in last 2009.

This poses a question of why the Bank of England is allowing this? Which leads to the conclusion that one of the holders of the bond may be desperate for cash/liquidity and is being offered a type of out or if you prefer an olive branch. Regular readers are unlikely to be surprised by this being in US Dollars.

Dividends

According to the Financial Times these are something for yesterday and some unspecified date in the future but not now.

The UK’s largest lenders bowed to pressure from Britain’s top financial regulator and halted their dividends after they were warned against paying out billions of pounds to shareholders during the coronavirus pandemic. In a series of co-ordinated statements on Tuesday evening, Lloyds, RBS, Barclays, HSBC, Santander and Standard Chartered said they would cancel their dividends for 2019 and refrain from setting cash aside for investor payouts this year. They also pledged not to carry out any share buybacks.

So the banks will save the amount below and accordingly get a capital boost.

By bowing to the regulator’s wishes on dividends, the banks have avoided being subjected to formal action. But the decision to cancel last year’s payouts — worth £7.5bn — will prove unpopular with some investors, especially retail shareholders who rely on the payout for their income.

Investors though who have been hoping for dividends will lose out. Now whilst owning a share is supposed to be risky there is an awkward optic here in the era of central bank put options for equities as well as the fact that some of these had been announced.

The Asia-focused bank had been due to pay a dividend totalling $4.2bn on April 14. HSBC’s Hong Kong-listed shares fell as much as 9.9 per cent on Wednesday morning…….Barclays had been due to pay a full-year dividend of 6p per share on Friday, worth roughly £1bn.

Bonuses

These too are supposed to be put on hold.

The regulator also said it “expects” the banks and Nationwide, the building society, to refrain from paying any cash bonuses to senior staff and signalled they should stop setting money aside for variable pay during the “coming months”. ( Financial Times )

As someone who is suspicious of such announcements it immediately occurs to me that bonuses in shares are not excluded according to that statement. Furthermore bank shares are very cheap right now, of which more later. So bonuses would probably have been in shares anyway.

If North Man is correct there is also another issue.

Absolute scandal – the banks have just paid their 2019 bonus pools in the LAST 2 WEEKS (e.g. c http://1.bn Barc and c. 3bn HSBC paid out). If a capital cushion is required, why didn’t the PRA ensure these were stopped as well?…….Why doesn’t the FT article mention this – any serious financial article would question why 19 bonuses can be paid, but the 19 dividend can’t and challenge this glaring inconsistency. Surely has to be same treatment for both whether it is pay, cut or suspend.

He has a point I think.

The US Dollar Shortage

I have been writing for a couple of years or so now about the apparent shortage of US Dollars. It would appear that the US Federal Reserve is coming around to my point of view. It was only on the 16th of last month I noted the expansion of its liquidity or FX Swaps. As of last week’s update some US $206 billion was drawn on them. But it seems that was not enough. The emphasis is mine.

The FIMA Repo Facility will allow FIMA account holders, which consist of central banks and other international monetary authorities with accounts at the Federal Reserve Bank of New York, to enter into repurchase agreements with the Federal Reserve. In these transactions, FIMA account holders temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.

 

Comment

The financial system is plainly creaking and clearly so are some of the banks. I have looked above at the issue of US Dollar liquidity and it is not necessarily a shortage of them outright but that now some are considered too risky to be lent them. As banks rely in such flows there is a danger of a financial form of contagion. I doubt it is a coincidence that the bond Lloyds Bank are planning to redeem is US Dollar denominated.

On the other side of the coin the banks are under pressure to support the economy. There must be extraordinary demands on them to support smaller businesses for example. I see the big read in the Financial Times is this.

Will the coronavirus crisis rehabilitate the banks?

I would not be any sort of son if I did not point out that my father’s ashes will be spinning at maximum speed. For newer readers I looked at his experiences with the banks during economic slow downs last Thursday. This from the FT piece is really rather extraordinary.

We are the doctors of the economy now.

If that is a parody then please forgive me for missing it.

Returning to the UK banks we see in an irony of the times the Bank of England remaining a follower of the ECB as it was it who started the dividend suspension theme. However there is a catch which is the effect on already weak bank share prices as we learn there are a lack of free gifts in this area. For example Barclays Bank is at 88 pence as I type this down another 6 pence today. Meanwhile Royal Bank of Scotland in which the UK government invested UK taxpayers money at a bit over £5 is at £1.07 as I type this also down 7 pence today.

Yet Lloyds Bank can apparently buy a bond back? With a share price of 30 pence?

Meanwhile the owner of Brewdog when asked by CNBC if the banks were doing all they can replied.

No I don’t

The world wants and needs US Dollars and it wants them now

In the midst if the financial market turmoil there has been a consistent theme which can be missed. Currency markets rarely get too much of a look in on the main stream media unless they can find something dramatic. But CNN Business has given it a mention.

The US dollar is rallying against virtually every other currency and it seems like nothing can stop it.

There are lots of consequences and implications here but let us start with some numbers. My home country has seen an impact as the UK Pound £ has been pushed back to US $1.20 and even the Euro which has benefited from Carry Trade reversals ( people borrowed in Euros to take advantage of negative interest-rates) has been pushed below 1.10. Even the Japanese Yen which is considered a safe haven in such times has been pushed back to 107.50. We can get more thoughts on this from The Straits Times from earlier today.

SYDNEY (REUTERS) – The Australian dollar was ravaged on Wednesday (March 18) after toppling to 17-year lows as fears of a coronavirus-induced global recession sent investors fleeing from risk assets and commodities, with panic selling even spilling over into sovereign bonds.

The New Zealand dollar was also on the ropes at US$0.5954, having shed 1.7 per cent overnight to the lowest since mid-2009.

The Aussie was pinned at US$0.6004 after sliding 2 per cent on Tuesday to US$0.5958, depths not seen since early 2003.

So there are issues ans especially in a land down under as an Aussie Dollar gets closer to the value of a Kiwi one. In fact the Aussie has been hit again today falling to US $0.5935 as I type this. No doubt it is being affected by lower commodity prices signalled in some respects by Dr. Copper falling by over 4% to US $2.20

Sadly the effective or trade-weighted index is not up to date but as of the 13th of this month the official US Federal Reserve version was at 120.7 as opposed to the 115 it began the year.

Demand for Dollars

It was only on Monday we looked at the modifications to the liquidity or FX Swaps between the world’s main central banks. Hot off the wires is this.

BoE Allots $8.210B In 7 Day USD Repo Operation ( @LiveSquawk )

This means that even in the UK we are seeing demands for US Dollars which cannot be easily got in the markets right now. Maybe whoever this is has been pushing the UK Pound £ down but we get a perspective by the fact that this facility had not been used since mid-December when the grand sum of $5 million was requested. There were larger requests back in November 2008.

I was surprised that so little notice was taken when I pointed this out yesterday.

Interesting to see the Bank of Japan supply some US $30.3 billion this morning until June 11th. Was it Japanese banks who were needing dollars?

Completing the set comes the European Central Bank or ECB.

FRANKFURT (Reuters) – The European Central Bank on Wednesday lent euro zone banks $112 billion at two auctions aimed at easing stress in the U.S. dollar funding market, part of the financial fallout of the coronavirus outbreak.

The ECB said it had allotted $75.82 billion in its new 84-day auction, introduced by major central banks last weekend in response to global demand for greenbacks, and $36.27 billion at its regular 7-day tender.

Actually it was good the ECB found the time as it is otherwise busy arguing with itself.

With regards to comments made by Governor Holzmann, the ECB states:

The Governing Council was unanimous in its analysis that in addition to the measures it decided on 12 March 2020, the ECB will continue to monitor closely the consequences for the economy of the spreading coronavirus and that the ECB stands ready to adjust all of its measures, as appropriate, should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions.

So we see now why the Swap Lines were reinforced and buttressed.

Oh and even the Swiss Banks joined in.

*SNB GETS $315M BIDS FOR 84-DAY DOLLAR REPO ( @GregBeglaryan )

Emerging Markets

This is far worse and let me give you a different perspective on this. During the period of the trade war we looked regularly at the state of play in the Pacific as it was being disproportionately affected.

Let me hand you over to @Trinhnomics or Trinh Nguyen.

Swap lines to EM please (also to Australia – we like Australia in Asia too as it’s APAC). “the supply of liquidity by central banks is beneficial only to those who can access it,

Her concern was over that region and EM is Emerging Markets. I enquired further.

Operationally, the bid for USD in Asia and squeeze in liquidity reflects the massive role of the USD in the global economy & finance. For example, 87% of China merchandise trade is invoiced in US. and the loss of income from export earnings will further push higher the demand of USD. To overcome the global USD squeeze, the Fed must step up its operational support via swap lines with economies such as South Korea.

That was from a piece she wrote for the Financial Times but got cut from it. On twitter she went further with a theme regular readers will find familiar

Guys, the reason why we have a dollar shortage is because we have levered!!!!!!!!!!! So when income collapses, we got major problem because we have leveraged & so debt needs servicing etc. Aniwaize, the stress u see is because we live in a world that’s too leveraged!!!

And again although I would point out that leverage can simply be a gamble rather than a hope for better times.

Don’t forget that low rates only lower interest expense, u still got principal that is high if ur debt stock is high. When u lever, u think the FUTURE IS BETTER THAN TODAY. Obvs very clearly that whoever thought there was growth is in for a surprise given the pandemic situation.

She looks at this from the perspective of the Malaysian Ringgit which has fallen to 4.37 versus the US Dollar and the Singapore Dollar which is at 1.44.

Comment

We are now seeing a phase of King Dollar or Holla Dollar and let me add some more places into the mix. We have previously looked at countries which have borrowed in US Dollars and they will be feeling the strain especially if they are commodity producers as well. This covers quite a few countries in Latin America and of course some of those have their own problems too boot. I also recall Ukraine running the US Dollar as pretty much a parallel currency.

The beat goes on.

In times of stress, capital flees emerging markets to seek safety in $USD . This crisis is no different. ( @IceCapGlobal)

which got this reply.

Investors have yanked at least US$55bn from EMs since January 21, according to the Institute of International Finance, exceeding the withdrawal in 2008. ( @alexharfouche1 )

Let me finish by reminding you that ordinarily we discuss matters around the price of something. But here as well as that we are discussing how much you can get and for some right now that people will not trade with you at all. That is why we are seeing what is effectively the world’s central bank the Federal Reserve offering US Dollars in so many different ways. It is spraying US $500 billion Repo operations around like confetti but I am reminded of the words of Glenn Frey.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

The Investment Channel

What is the outlook for the US economy?

We see plenty of rhetoric about challenges and changes but the two biggest players in the world economy are the United States and the US Dollar. So it is time for us to peer under the bonnet again and let me open with the result from the third quarter.

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the third quarter of 2019 , according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( BEA )

There are several implications here of which the first is simply that this is better than we are seeing in most places with Germany and Japan reporting growth rates much lower in the last 24 hours. In general this is , however, weaker than last year although the last quarter of 2018 was particularly weak.

A supporting element for the US has been a strong labour market.

 Real disposable personal income increased 2.9 percent, compared with an increase of 2.4 percent.

Has the easier fiscal policy of President Trump been a factor? Yes but we simply get told this.

federal government spending,

If we shift to a potential consequence which is rising debt well actually the ability of the US to repay it looks strong too.

Current dollar GDP increased 3.5 percent, or $185.6 billion, in the third quarter to a level of $21.53 trillion. In the second quarter, GDP increased 4.7 percent, or $241.4 billion.

As you can see there has been an element of inflating away the debt in there.

What happens next?

The now cast system uses the latest official data to look ahead and just like last year it looks like being a weak end to the year.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases decreased the nowcast for 2019:Q4 by 0.1 percentage point.

Negative surprises from lower than expected exports and imports data accounted for most of the decrease.

Another factor in play is that the labour market is not providing the push it was.

Earnings growth is still below late 2018 levels……Payroll growth was moderate in October, but remained solid year-to-date.

Money Supply

Back on the 22nd February I posted my concerns about the prospects for 2019.

So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme…….So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Of course that was then and this is now as the reference to the now ended QT programme. For example this happened at the end of last month.

the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Yesterday saw Repo operations from the New York Fed which provided some US $73.6 billion of overnight liquidity and US $30.7 billion of 13 day liquidity. Thus the cash is flowing rather than being reduced and like so many things what was presented as temporary seems to keep going.

In accordance with the most recent FOMC directive, the Desk will continue to offer at least $35 billion in two-week term repo operations twice per week and at least $120 billion in daily overnight repo operations.

The Desk will also offer three additional term repo operations during this calendar period with longer maturities that extend past the end of 2019.  ( NY Fed )

That is for the next month and there will be more to come as they catch up with something we have been looking at for a couple of years now which is the year end demand for US Dollars.

These additional operations are intended to help offset the reserve effects of sharp increases in non-reserve liabilities later this year and ensure that the supply of reserves remains ample during the period through year end.

Returning to the money supply data you will not be surprised to read that the numbers have improved considerably. The outright fall of US $42 billion in the narrow money measure in March has been replaced by growth and indeed strong growth as both the last 3 months and 6 months have seen growth at an annual rate of the order of 8%. Back in February I noted that cash growth was strong and it was demand deposits which were weak and it is really the latter which have turned around. Demand deposits totalled US $1.45 trillion in March but had risen to US $1.57 trillion at the end of October.

Talk of the demise of what Stevie V called

Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

continues which is rather the opposite of official rhetoric.

Thus a monetary stimulus has been applied and for those of you who like to look at this in real terms might now that the inflation measures in GDP have faded making the impetus stronger for say the opening and spring of 2020.

Have the Repo operations influenced this? If you look at the September data I think that they have. But this comes with a cautionary note as QE operations do not flow into the monetary data as obviously as you might think and at times in the Euro area for example have perhaps taken quite a while.

Credit

By contrast a bit of a brake was applied in September.

Consumer credit increased at a seasonally adjusted annual rate of 5 percent during the third quarter. Revolving credit increased at an annual rate of 2-1/4 percent, while nonrevolving credit increased at an annual rate of 6 percent. In September, consumer credit increased at an annual rate of 2-3/4 percent.

Those sort of levels would have the Bank of England at panic stations. It makes me wonder if fears over the financial intermediation of the banks was a factor in the starting of Repo operations?

If you are wondering if car loans are a factor here we only get quarterly data and as of the end of the third quarter the annual rate of growth was 4.3% so definitely, maybe.

The US Dollar

The official view is expressed like this.

NEW YORK (Reuters) – President Donald Trump on Tuesday renewed his criticism of the Federal Reserve’s raising and then cutting of interest rates, saying the central bank had put the United States at a competitive disadvantage with other countries and calling for negative interest rates.

He wants lower interest-rates and a lower US Dollar. What we have seen is a trade-weighted index which has risen from 116 in February of last year to above 129 as I type this. So not much luck for the Donald

Comment

As you can see things are better than some doom mongers would have us believe. The monetary situation has picked up albeit with weaker consumer credit and there is the fiscal stimulus. But that is too late for this quarter and there are ongoing issues highlighted by the weak data we have seen out of China this week which the New York Fed summarises like this.

China’s monthly economic activity data is steady at a lower level.

Then there is the ongoing sequence of interest-rate cuts around the world which rose by 2 yesterday as Mexico and Egypt got on the bandwagon. That makes 770 for the credit crunch era now.

Meanwhile for those who have equities the Donald thinks that life is good.

Hit New Stock Market record again yesterday, the 20th time this year, with GREAT potential for the future. USA is where the action is. Companies and jobs are coming back like never before!