PARA QUÉ SE ESTÁN PREPARANDO REALMENTE LOS SAUDÍES (DESDOLARIZACIÓN)

And there it is... the Breaking of the Saudi Riyal's peg to the USD has begun.https://t.co/1kdki19Ihe

— Tom Luongo (Head Sneetch) (@TFL1728) November 20, 2023

 

 

With Ukraine Lost, What's The Latest Neocon Strategery?

Mark Wauck

21 nov 2023

 

 

 They [the Neocons] most certainly are flying by the seat of their pants, Mark [his conclusion]. What is happening now is pure desperation as they try to figure out how to extend and pretend this war through the election cycle to maintain the possibility of the ages-old enmity versus Russia.

But the KSA flip is real. Swap lines are a precursor to intervention. My tweet was high concept but it goes like this:

1) Announce swap lines
2) Start taking real amounts of yuan for oil
3) This breaks the peg of the Riyal to the USD when oil is relatively strong, not in crisis mode
4) The substitution of the CNY for the USD is existential for the US who then attacks the KSA exchange rate, pulling money out of the country…
5) SANCTIONS ON KSA.
6) Expanded swaps to convert USD encumbered assets with Riyal assets, once USD are verboten in KSA.
7) China provides them, with loans repayable in CNY.

The announcement of the swap lines is likely a pre-announcement of an Economic Hitman-style attack on Saudi Arabia by the US.  It’s not really that difficult to foresee.  

For historical context, Russia was hit hard in 2014/15 by the collapse in oil prices. In retaliation for “stealing Crimea” an attack on oil prices was organized by President Obama and the gaggle of usual suspects to trash the oil price.

In June of 2014 oil closed at $112.36. And the price began dropping the first trading day of July 2014 and didn’t stop until the end of 2015.

 

Saudi Arabia helped that process by expanding production, thinking they would take Russia’s market share as the Russian ruble collapsed and Russia’s foreign exchange reserves were drained.

The key to the anticipated win was that Russian companies, mostly the big State Owned Enterprises like Gazprom and Rosneft, had a lot of dollar-denominated debt which was about to mature and needed rolling over.  So, the US sanctioned Russia such that companies like Gazprom couldn’t roll the debt over, because they couldn’t sell the bonds to US or European investors anymore.  The current bondholders had to be paid off… to the tune of north of $50 billion in Q4 of 2014, and another $50 billions in Q1 2015.  

This “rollover risk” would plague the Russian government’s finances for the next 18 months as the price of oil dropped relentlessly.

The Russian ruble dropped from the high 20’s/low 30’s versus the dollar rose to a high above 80 in late November, but it only happened after Putin personally ordered Bank of Russia President Elvira Nabiullina to let the ruble float. Before that there had been a soft peg to the US dollar in place, which was easy to maintain while oil was trading above $100 per barrel.

(...)

 

So, to summarize before I go any further:

1. China is using their US Treasuries and US dollar surpluses to loan them to Emerging Market trade partners of significance to CHINA!
2. They are asking for yuan in repayment.
3. This stabilizes the yuan/usd exchange rates while China can and is rapidly expanding the money supply to deal with their sagging property markets as a result of the Fed’s aggressively tight monetary policy.
4. In order for China to expand the yuan into the new dollar vacuum without also losing their gold (Luke Gromen’s point during the conversation), they have to create a demand cycle for their debt, keeping borrowing costs low.
5. Since they have cross-currency swap lines with their SE Asian partners and offshore yuan settlement around the region, i.e. in places like Singapore, this is how they manage the expansion without creating a runaway inflation problem.
6. Yuan replace dollars without a massive shift in exchange rates and/or bond yields.

The 2014/15 ruble/rollover crisis was the test run for this.

 You have to see this stuff in hindsight now, but in this case I think the past is prologue for the future.

The US keeps attacking the ruble thinking it will bankrupt Russia but it won’t. Certainly now that they hold zero dollar-denominated debt and zero US treasuries as foreign exchange reserves. Attacking the ruble now is just petulance.

The KSA, on the other hand, as a riyal pegged tightly to the US dollar. Their COGS, EBITDA, everything may as well be in dollars, including labor costs, government subsidy costs, etc.

The solution, of course, is to break the peg of the riyal to the dollar.

Et voila, instant budget balancing at lower oil prices, just add foreign buyers offering not dollars.

The Saudis need/want a put under the oil price of $80 per barrel.  They need that to maintain their budget (see above).

China offers the Saudis a swap line to ensure breaking the peg goes smoothly. In other words, China will loan the Kingdom dollars to be repaid in yuan, just like they did for Russia and are currently doing today for their Southeast Asian trading partners trying to defend their currencies against the Dollar’s milkshake suction.  

If we look back to history with Russia and Power of Siberia guaranteeing a big flow of yuan and rubles between Russia and China, might we see something that would grease the skids of riyal/yuan flow?

 

(...)

This OPEC+ meeting meant that a whole lotta schmoozing by Davos through the Biden administration to break the cartel and let the price of oil drop is happening. It’ll be the same tired ploy as what they pulled with a willing KSA in 2014 and Trump worked them over for in 2018:

“We’re taking oil lower. Everyone else will suffer unless you pump like mad to us and we’ll reward you with increased market share in the US. After we let the price rise, you’ll be the new king.” 

In the end all 2018’s attack did was finally get Crown Prince Mohammed bin Salman (MbS) to realize that the US is an unreliable and vindictive partner. He hitched the KSA’s and OPEC’s future on Putin and the Russians. He’s been rewarded for that choice to date.

The Saudis are preparing for an attack on the oil price to punish them for their lack of vision by the Neocons who never learn anything from their past failures.

Guess what? If Nigeria, Angola and Congo are hearing the sweet nothings of the West today I’d say they about to get rolled by Russia and China, but this time they will be joined by MbS and the Saudis, who are getting ready for the inevitable.

TOM LUONGO

POWELL EXPONE LA GUERRA OCULTA DE EUROPA EN LOS MERCADOS DE BONOS

 

In January (2024), suspension of the Maastricht Treaty budget rules ends, meaning harsh ‘austerity’ comes back into play for the 28 members of the EU. In short, it means targets for budget deficits of no more than 3% of GDP and a debt-to-GDP ratio of 60% are the law of the land…

Unless you’re France.

This is the thing hotly debated during last week’s European Commission summit in Brussels. How do we, as the EU, engineer a soft landing on budget rules while not alienating what’s left of our investor base?

 The EU got the last big lot of blood and treasure after the COVID operation from its investor class, who are now sitting on massive losses. Some of these investors, of course, were the member central banks themselves.

Don’t believe me? A €7 billion 0.1% coupon SURE bond maturing in October of 2040 is now trading at a yield of 3.867%. Now that doesn’t look so bad until you grep the price of that bond, which is trading with a bid/ask spread of 0.54/0.55… or a 45% loss.

 

The leaders of the European Union met last week to discuss how to rearrange the deck chairs on their political Titanic. While the decisions to continue to monetarily support Ukraine and now Israel dominated the headlines, the real story is that what they have to get right is the new budget rules.

And that discussion is important in the context of continued tight monetary policy by the Fed and now the potential for fiscal sanity coming from Capitol Hill with new Speaker of the House Mike Johnson than it was a year ago.

There is also a major push happening offscreen for these bonds to become indexed next to everyone else’s, i.e. to more easily sell them to Muppet investors, through the imprimatur of them being official and backed by the full faith and credit of the EC. Of course, the initial investors in them have lost their ass as the bulk of them were issued when the ECB was at -0.6%. (See Here).

The ECB just held rates at 4.5%. The bond math doesn’t work. So, the EU got the last big lot of blood and treasure after the COVID operation from its investor class, who are now sitting on massive losses. Some of these investors, of course, were the member central banks themselves.

Well, when I say trading, I really mean quoted, because no one actually trades this hot garbage, certainly not with yields rising globally, inflation not tamed anywhere for anything that really matters, and the euro clinging to the cliffside of a precipitous fall against everything that isn’t the Japanese yen.

And the Bank of Japan is intervening daily to shift its monetary policy to defend the yen. And they will.

But don’t feel too bad folks, because the EU is so creditworthy you’ll get your money back in 17 years paid in full plus 0.1% compounded annually.

If these people actually had blood in their veins they would feel at least a modicum of pressure from the investors they swindled out of billions. But they don’t.

What they want now is to get more fiscal integration in order to reassure investors that their more perfect union will be that great bet for 2040.

This is why ECB President Christine Lagarde lobbied hard going in for more fiscal unity.

Ensuring a deal about the implementation of the Stability and Growth Pact would be an important signal of unity, Lagarde said — according to an official familiar with the conversation — observing that the bloc’s framework must promote both debt sustainability and investment.

 If you want to understand why the world hasn’t completely given up on the Eurobond markets it is precisely because of these budget rules, designed to reassure investors that they are the responsible party at the geopolitical table, at least compared to the Clown World that is Capitol Hill.

There’s only one problem with this, FOMC Chair Jerome Powell.

These SURE and NGEU bonds, much to the consternation of the EU Commission, continue to trade at far higher yields at similar maturities to German bunds, for example. Here’s a link to the latest report to the EC on the development of this market. The tone is anything but euphoric.

 These SURE and NGEU bonds are meant to be the beginning of a real central EU borrower. But without direct taxing authority, slapping a AA+ rating on a bond doesn’t make it creditworthy.

And now you should be able to understand why this is the real war they need the kinetic war not just to cover up default and/or stricter capital controls but also for the US to fight that war alone.

Why else do you think France is sending support to Gaza?

The problem, of course, with the Maastricht rules is the euro itself. Without the ability of the European Commission to have cross-border tax and spend authority, the ECB’s interest rate policy puts undue burden on those countries with lower labor efficiency.

It creates the very dynamic the rules were supposedly designed to prevent, fiscal disintegration. For countries like Greece or Italy, where a local lira or drachma would be cheaper than a German mark thereby normalizing the differences between them when they trade, the euro is too strong for Italian or Greek merchants and too cheap for German.

The former run perpetual, structural trade deficits relative to the other

Germany had been the prime beneficiary of the euro until Powell began raising rates and acting like he runs the Fed for America’s benefit not Germany’s or China’s.

As predictable as the movements of the sun across the sky, German Chancellor Olaf Scholz demanded tighter fiscal rules while France and Germany are negotiating with themselves to screw the rest of the continent over.

It’s why their plans to sell the world on unlimited spending to fight Climate Change isn’t working either. Without the Fed giving them the buy in, global investors aren’t going to pony up the cash. The whole EU air of inevitability just starts to reek like three-day-old fish, or a house guest.

Because, in this model of the world, the Bank of Italy may be subordinate to the ECB but the ECB is subordinate to the Fed.

The EC is trying to supplant individual sovereign bonds with their own bonds. They have to get the next round of fiscal integration going this winter or lose the race for global capital to the US and/or China. If they pull it off — which I suspect they have no choice but to — it’s a signal the are trying to outlast Powell in the hope that they can present a unified front to European investors long enough for the US economy to implode while also hoping the Israeli Firsters in Congress ensure that the US goes to open war with someone… anyone … somewhere! Dammit!

That will keep bond spreads positively biased towards them versus the US as the US enters the throes of Silly Season and the reality TV shitshow as Davos et.al. pull out all the stops for sweeps week. 

 It’s not a bad bet, sadly.

Powell Exposes Europe’s Hidden War in the Bond Markets

Tom Luongo 

APROXIMÁNDONOS AL HORIZONTE DE SUCESOS DEL RENDIMIENTO DE LOS BONOS (TOM LUONGO, 23-09-2023)

The signs are piling up everywhere that Project Ukraine is ending and all that’s really left now is to squeeze the final drops of blood from the US taxpayer stone

(...) Only a select group of commentators and myself believed Powell could make it into and possibly through 2024 with rates north of 5%. 

(...) 

The inverted US Yield Curve is the thing that is sticking out right now, but it’s normalizing, albeit slowly. It’s being fought every basis point of the way by Janet Yellen at Treasury, Christine Lagarde at the ECB, Bailey at the BoE and Joachim Nagel at the Bundesbank. 

Because Powell has been alone the Bond Vigilantes hadn’t been fully convinced of Powell’s fortitude. I believe they are now. The movement in yields in the six-month to two-year band confirm this. 

In effect he kept telling the “2 and 20 carried interest” guys in private equity that there are no cheap dollars for them. You want them? Go find projects worth the 6% vig. Otherwise, the money is going back to Main St. through reinvestment in savings at higher rates to raise their purchasing power. 

 All of this begs the question, with what money is Yellen going to intervene in the bond market? Well, of course, with the money she’s raising this fall to cover the massive budget shortfall, but only if there’s some concessions to Gaetz on spending. She will buy back underwater US Treasuries at 40-50% haircuts to issue new bonds at higher yields than the ones she’s buying. 

But what is Yellen actually doing? Well, it’s called Yield Curve Control, folks.

Promise you. Cross my heart and Hope to die. If they can’t get inflation to stabilize at a lower level and they can’t raise interest rates anymore, they must let inflation manifest in the long term bond yield. After that happens, then we see YCC. We’re just getting started folks.… pic.twitter.com/PrpSocmcO0

— VBL’s Ghost (@Sorenthek) September 19, 2023

 

The first trading day of October, Q4, has all the earmarks of a disaster for Europe. 

Right now everything looks calm, the tides are flowing out. But just below the surface something is boiling ready to explode. That explosion is coming in the sovereign bond markets. 

There is no avoiding this, only postponing it. 

Today the ECB is holding on for deal life. It is the vanguard of a system on the edge of collapse… And with it the fate of multiple centuries-spanning empires. 

I also know it feels pointless to talk about these things because nothing ever seems to change. But           they are, slowly. This is an inertia problem more than it is an intention problem.

[Powell] did the hard work this summer.  By raising interest rates in July, he left himself optionality in September.  He was clear that he expects one more hike this year and is still open to another one in Q1 2024. 

Slowing rate hikes here gives banks a little more time to repair their balance sheets and force them to jettison underwater commercial real estate loans.  Powell continues to throw private equity under the bus.

He is also forcing Congress to face the music on their egregious spending.  The dirtiest secret in Washington is that we could cut the budget between 25% and 40%, reducing the waste, fraud and, frankly, welfare for useless bureaucrats and no one would see a drop in functionality of efficiency. 

Everyone knows it.  Powell can’t say any of this but that’s exactly what he’s targeting.

We’re staring at the black hole and are about to cross the event horizon into a period of, at best, stagflation and, at worst, outright deflation. No matter what happens, it won’t be hyperinflation. The USDX is very clear on this folks.

You know who wins when prices fall? You do. You know who loses? The ones who stole your futures with free money.

Yes, the Fed created this problem during COVID, on this point I wholly agree with both Hunt and Booth (see linked interview above). But at the same time if Powell’s thinking is let’s take everyone to the edge of the abyss and see who jumps, then that wouldn’t be so bad either.

 

Nos estamos aproximando al agujero negro y a atravesar el horizonte de sucesos en un período de, en el mejor escenario, estanflación y en el peor de pura deflación.Suceda lo que suceda no será una hiperinflación.El USDX es muy claro en ello, amigos.

¿Sabemos quién gana cuando los precios caen?. ¿Sabemos quién pierde? Aquellos que roban vuestros futuros con barra libre de dinero 

Sí, la Fed creó un problema durante el COVID, en eso estoy de acuerdo con Hunt y Booth. Pero al mismo tiempo si el pensamiento de Powell es llevar a todos al borde del abismo y ver quién salta, ello tampoco sería tan malo

https://tomluongo.me/2023/09/23/approaching-the-bond-yield-event-horizon/

 

 

#JAPAN'S FINANCE MINISTER SUZUKI: WE'RE CLOSELY MONITORING #FOREX MOVES WITH A GREAT SENSE OF URGENCY. https://t.co/bd7bMmiW77

— Guillermo Ruiz Zapatero (@ruiz_zapatero) September 26, 2023

#BankofAmerica’s #UnrealizedLosses on HTM Debt #Securities Total $106 Billion; 34 Percent of All Such Unrealized Losses Reported by 4,645 Banks https://t.co/QMgwfhhvn5 pic.twitter.com/AK7zbE6VSB

— Guillermo Ruiz Zapatero (@ruiz_zapatero) September 27, 2023

Um... Brussels we have a problem... pic.twitter.com/trWqCHhDDp

— Tom Luongo (Head Sneetch) (@TFL1728) September 28, 2023

This is very important. The #euro was constructed to create a counter to the #USD dominance. The #Eurozone consists of 20 developed democratic countries, with a rule of law, a functioning capital market and one central bank (#ECB) to oversee it. Moreover, it’s the second biggest… https://t.co/G5kkspipmv

— Michael Nicoletos (@mnicoletos) September 28, 2023

OOPS! #Italy's 10y risk spread over Germany rose >2OObps, for the 1st time since March w/Italy 10y yield on course to 5%. pic.twitter.com/OnExnuFcXV

— Holger Zschaepitz (@Schuldensuehner) September 28, 2023

#spain#spreadgermany https://t.co/6X5wJrotVi pic.twitter.com/NGsaewcJEG

— Guillermo Ruiz Zapatero (@ruiz_zapatero) September 28, 2023

#bankofjapan https://t.co/YGPIBuxDmo

— Guillermo Ruiz Zapatero (@ruiz_zapatero) September 29, 2023

LA DESDOLARIZACIÓN NO ESTÁ SUCEDIENDO DE LA FORMA QUE TODO EL MUNDO PIENSA (TOM LUONGO)

Once it was mutually assured nuclear destruction that deterred two superpowers from going to war. Today, it is mutually assured financial destruction. That is a big difference between Cold War I and Cold War II. https://t.co/UoxHyAy0v5

— Niall Ferguson (@nfergus) September 10, 2023

Nuclear catastrophe hovered over Cold War I. Economic catastrophe hovers over Cold War II, writes @nfergus https://t.co/g4NPlFtVaT

— Bloomberg Opinion (@opinion) September 10, 2023

Oops.

Here's the right link:https://t.co/fEYfBOSLbs https://t.co/8OIu4qxG3A

— Tom Luongo (Head Sneetch) (@TFL1728) September 12, 2023

Gary North is one of my personal heroes because of essays like this. https://t.co/BkhrHhZo4V

— Tom Luongo (Head Sneetch) (@TFL1728) September 12, 2023

Do you really think they control those things or do they control the money which then, in turn, controls those things.

Power, food, energy are all produced locally. Only so long as local populations play by the rules of overlords do these rules matter. You just stop complying…

— Tom Luongo (Head Sneetch) (@TFL1728) September 13, 2023

LA #DESDOLARIZACIÓN NO ESTÁ SUCEDIENDO DE LA FORMA QUE TODO EL MUNDO PIENSA (#TOMLUONGO) https://t.co/Tvf4u5S42G @TFL1728 #Luongo explica entre otras cosas cómo financieramente la #UE, el #Bundesbank y el #BCE están atrapados en un callejón sin salida y la deuda en cuestión

— Guillermo Ruiz Zapatero (@ruiz_zapatero) September 14, 2023

QUIÉN GANA: LA BATALLA GLOBAL SOBRE EL DINERO (TOM LUONGO)

Tomorrow morning! It will be too early for a cigar but that means I'll also try to be on my best behavior. :)@nakedhedgie @AMercouris https://t.co/mNnDoFx5U2

— Tom Luongo (Head Sneetch) (@TFL1728) May 19, 2023

TUCKER, BLACROCK Y EL DOBLE PASO DE LAS INSTITUCIONES FINANCIERAS DE IMPORTANCIA SISTÉMICA (TOM LUONGO)

 In my opinion, BlackRock reflects the renunciation of the welfare state. Its rise in power goes hand-in-hand with ongoing structural changes; changes in finance, but also in the nature of the social contract that unites the citizen and the state.”

 All of that AUM rests on a very slim pile of shareholder equity, $38.2 billion to be precise.

As longtime Patrons know, when I do a balance sheet analysis of a company I strip out things like “Goodwill” and “Intangible Assets” from the asset side of the balance sheet.  These are simply piles of ‘value’ leftover from previous M&A activity, brand equity, etc., that may or may not have any real value.

Stripping out the $33.6 billion BLK has in these two ‘asset’ classes that leaves Fink with less than $5 billion in shareholder equity.

 So I’m asking the question no one really wants asked, “Does Blackrock actually have any equity today?” Or is this all a big psy-op based on them voting our proxy for us?

 If Blackrock is in real trouble here because of falling asset prices, ESG backlash, rising rates, and falling cash flow then that would necessitate a change in the rules to allow it to be bailed out.

 Remember, last year when the UK pension crisis developed which took out Prime Minister Liz Truss and forced the Bank of England to intervene, the one holding the bag on the failing assets there was none other than Blackrock.

 In short, Blackrock as a SIFI becomes a protectorate of the Treasury department and it circumvents a bankruptcy.

 Why would they do that?  Why would Fink do this?  Well, if you want to nationalize the US pension system and end the old US dollar system then you do that during a major crisis.
How did they tie Powell’s hands during COVID?  The CARES Act. 

 
How will they tie Powell’s hands during the European Sovereign Debt Crisis? Making Blackrock a SIFI before it happens.

 I can easily see Blackrock sacrificed on the alter of the Great Reset once it’s control over corporate interests has been turned over to the Treasury and the ECB.

 Which is why Tucker Carlson’s firing is important but really the side show in all of this.

Tucker, Blackrock and the SIFI Two-Step

 https://tomluongo.me/2023/05/01/tucker-blackrock-and-the-sifi-two-step/

 

JANET YELLEN Y EL BALANCE DEL BANCO CENTRAL EUROPEO

Why do you think @secyellen is buying the long end of the YC? It's not to 'improve liquidity conditions'...

... it's to suppress US yields to keep EU Sov. Debt afloat.
85% of the ECB's balance sheet is subject to a rate shock.
Neither Gold nor Bitcoin can fix this. Only going… https://t.co/FMp0QTRDHD pic.twitter.com/emGYTPWd4C

— Tom Luongo (Head Sneetch) (@TFL1728) May 5, 2023

TOM LUONGO Y CAITLIN LONG: #138 (TOCANDO LAS PROFUNDIDADES DEL EURODOLAR)

 

 

 

 

 

 

 

Long-time Bitcoin advocate and Wall St. vetern Caitlin Long joins me for one of my favorite conversations in the history of this podcast. We tryto come to grips with contradictory behavior from the Federal Reserve and the reasons why these moments are so critical to the future of not just money but humanity itself.

The FED was 100% right to try to push the USD floating rate interest rate market away from LIBOR to SOFR, which it controls… designed to kneecap the Eurodollar market, over which the fed had very little control… @CaitlinLong_

Credit- @TFL1728 pic.twitter.com/nvtzOemBuM

— Bitcoin 200T (@Bitcoin200T) April 8, 2023

"LA FED ESTÁ TRATANDO DE DERRIBAR A LOS BANCOS EUROPEOS" (TOM LUONGO)

Yup. https://t.co/IpVUcUmSoh

— Tom Luongo (Head Sneetch) (@TFL1728) April 7, 2023

"The Euro-French-German visit to Xi was to save the EU. Too bad it didn't work: the big three agree to abolish the EU in favor of a new tripolar Yalta, between Moscow, Beijing and Washington (With France close to social disaster)"

I agree. This was a watershed event. https://t.co/6WfIdunf50

— Tom Luongo (Head Sneetch) (@TFL1728) April 7, 2023

LA FED Y EL BANCO CENTRAL EUROPEO ( THE MATRIX (EXPLODED),TOM LUONGO 23-03-2023))

The Matrix (Exploded) “There is no route out of the maze. The maze shifts as you move through it, because it is alive.” — VALIS, Philip K. Dick 

(Subscribe to the newsletter here) 

With the implosion of Silicon Valley Bank the Fed set in motion the next phase of their demolition of the old, corrupt monetary system.

 The fake world generated by nearly a generation of zero-cost money is collapsing. 

The fallout from this will be immense. But it is also necessary. 

 FOMC Chair Jerome Powell is wholly aware of this fallout, but, for the first time since The Maestro, Alan Greenspan, left the scene, the FOMC is led by a man who is committed to returning the US to the center of its concerns.

 And the globalists who got fat using our money to destroy us are furious. 

Now it’s time to begin rebuilding the real world from the ashes of the fake one. 

 Philip K. Dick would be flabbergasted that someone with power would be the one to tear it down. 

 The big question now is if enough people will believe this is what’s happening or will they retreat into The Matrix? 

This month’s Gold Goats ‘n Guns Investment Newsletter focuses on this struggle and Davos’s next moves to rewrite history with their false vision. 

 Available now to download through Patreon, this issue of Gold Goats ‘n Guns … 

 

 

 

It is a bit more complicated: a real fight & no mockery@TFL1728 has detailed it
With the implosion of SVB the Fed set in motion the next phase of their demolition of the old, corrupt monetary system
The fake world generated by a generation of zero-cost money is collapsing https://t.co/9uq3Oo8tl6

— Guillermo Ruiz Zapatero (@ruiz_zapatero) March 24, 2023

#EUROPA SIN RUMBO DISTINTO DE SU #CRISIS MÁS GRAVE DESDE LA SEGUNDA GUERRA MUNDIAL https://t.co/gJUHTXkSL0

— Guillermo Ruiz Zapatero (@ruiz_zapatero) March 24, 2023

LA GUERRA DEL DOLAR ESTÁ TERMINADA (TOM LUONGO (II): ¿LA MOSCA O EL PARABRISAS?)

 

More than a decade ago I looked at the responses to President Obama cutting Iran out of the SWIFT system as the beginning of the end of the petrodollar system. The goal was to take Iran out of the global oil markets by shutting Iran out from the dominant dollar payment system.

Out of necessity Iran opened up trade with its major export partners, most notably India, in something other than dollars. India and Iran started up a ‘goods for oil’ trade, or as Bloomberg called it at the time, “Junk for Oil.”

The stick of sanctions created a new market for pricing Iranian oil and a way around the monopoly of US dollar oil trading. India, struggling with massive current account deficits because of their high energy import bill, welcomed the trade as a way to lessen the pressure on the rupee.

Iran needed goods. They worked out some barter trade and the first shallow cuts into the petrodollar system were made.

Turkey eventually joined the fray, seeing the opportunity to act as a middle man by accepting gold into its banks from Iran’s customers and settling up with Iran in dollars or whatever.

Turkey was the first country to make gold a 100% reserve asset in defiance of Basel I capital rules to facilitate this trade. Turkey’s gold ‘reserves’ skyrocketed because of this.

More than 10 years later we’re now looking at the lynchpin of the petrodollar, Saudi Arabia, seriously considering taking other currencies for their oil. The petrodollar was never going to die overnight, it was always going to die as the cost of doing business in dollars rose to make using other currencies a better path to buying/selling oil.

Every time the US went to the sanctions well to coerce conformity, the more “star systems slipped through its fingers,” to quote Princess Leia. While we joke today about never ‘going full retard,’ this is just another way of saying that you should never threaten to nuke someone either.

Trump went sanctions nuclear on Iran in 2018. He failed.

“Biden” and Davos went nuclear on Russia in 2022, going further than even Trump. And they failed even harder. All they did was raise the cost of using dollars in the minds of the dollar’s best customers.

When the cost/benefit framework flips, behavior changes accordingly.

In the world of money, since we don’t have anything close to resembling real capital markets, rather politicized ones, policy is the thing that alters that cost/benefit structure the most. This means while analyzing the market reaction to day-to-day data the listening to the tea-leaf reading by commentators becomes an exercise in chasing your tail through a wilderness of rhetorical mirrors if you don’t include policy changes.

So, with that in mind we have to analyze structural changes to markets from a policy perspective to see what the future really looks like. It’s not that the markets don’t have a say in the matter, it’s that if you analyze the policy through the lens of capital flowing to where it is treated best, then the future outcome is pretty predictable if there isn’t a competing policy put in place to redirect that capital flow later.

In this sense, financial analysis in politicized markets is better described  by court politics than spreadsheet output cells.

The Davos solution to their problems of overpromising the deliverables of socialism financed through the dollar is to default on those promises through global monetary inflation using war with Russia and China as the cover and Climate Change as the reason why it’s necessary.

This is to save themselves and secure totalitarian control for their posterity into the next cycle of history.

But history will prove them wrong. Because, in the end, you can’t fight a flowing river any more than you can alter the mass of human behavior with respect to their preferences. If they want to drive a car, eat a steak, live in a house, own a gun or have a child, they will.

You can delay it or make it more expensive but that expense is a double-edged sword, because as Margaret Thatcher famously said, “The problem with socialism is that eventually you run out of other people’s money.” (OPM)

Think of the Eurodollar system as the ultimate expression of OPM, which is a homophone for ‘hopium.’

But back to Diminishing Marginal Utility. The law simply states that the acquisition of the next unit of a thing, any thing (water, money, food, credit dollars, etc.), is worth less to a person than the previous unit. We act to alleviate our perceived need to hedge against future uncertainty. So, in hurricane season, we Floridians stock up on bottled water, propane, toilet paper, preserved food, etc.

Price is supposed to tell us when to stop stocking up and really assess what’s important to us. I’ll leave my rant about ‘anti-gouging’ laws on the cutting room floor.

It is this verity about human action in the face of both scarcity and abundance that creates the Newtonian ‘opposite reaction’ to rising/falling costs.

So, while you can bully people into acting against their preferred outcomes for a while by raising the costs of disobedience to be greater than the marginal return of defiance, eventually a reversal of that cost/benefit framework takes place.

For the Fed and the domestic banking interests, the best way to get to their preferred end, a domestically-driven cost structure to the US dollar, it meant offering the market gradually a better alternative to the old system or Eurodollars.

SOFR is a collateralized rate, delivered to the market by the market for dollars. It’s a fundamentally superior interest rate product than LIBOR, which is a number picked out of thin air by 18 banks of dubious character and even more dubious motivations.

Eurodollar futures are set based on LIBOR and because of LIBOR being written previously into every old debt and debt derivative instrument out there, LIBOR was the tail wagging the monetary policy dog.

The five-year roll out of SOFR was done to introduce the better system and phase it in allowing the market to come to the ‘right’ conclusion that it is superior. If SOFR wasn’t a superior product to LIBOR no matter how much the Fed tried to force it onto the market, the market would have rejected it.

Eurodollar futures would have remained a vibrant and liquid market up to the last day and call the Fed’s bluff.

But SOFR was a superior product, gradually weaning the markets off LIBOR. Now there is still a whole lotta LIBOR-indexed debt out there and a lot of people are holding out hope this is all just a bad dream, but it’s not.

Caught between the Scylla (a 25 bps spread over LIBOR) and Charybdis of prime, 3.50% over that, the outcome is inevitable. Anyone holding out is likely hoping for a last-minute policy change to help them out. If I had to guess those holdouts are at Blackrock trying to blackmail the Fed like they blackmailed the Bank of England last summer over UK pension obligations.

I don’t know that the situation is analogous but it certainly smells that way.

 Powell reiterated his ‘higher rates for longer’ mantra. But, unlike in the past, the markets are now actually listening to him. There are still holdouts, trying to undermine the Fed, but I’ll leave the ECB and BoJ out of the discussion for now. The bond markets are grudgingly accepting this but the yield curve on US Treasury debt is still stubbornly inverted.

1/2

Interesting passage from Powell's testimony today: pic.twitter.com/SuKSba2oJW

— Jim Bianco biancoresearch.eth (@biancoresearch) March 8, 2023

Moreover, what’s unspoken by Powell and others in the position to support him is what’s lurking on the other side of the International North South Transport Corridor (INSTC), a growing international framework for trade wholly outside the control or threats of the western political establishment and their slap-happy sanction monkeys we call heads of state.

Powell can see the de-dollarization writing on the wall and he knows now is the time to slow down that trend and find a way to make the dollar more trustworthy. But, again, he can only deal with one side of that equation — the monetary policy side. The Fiscal and regulatory side are still firmly controlled by, frankly, shitbag commies; old, terrified colonial interests in Europe and the northeast US who see their time passing and refuse to accept it with grace.

People who would rather burn the world to the ground than let it fall into the hands of those they consider ‘the help.’ 

 But ‘the help’ are no longer helpless in the face of a big bully US dollar. They have a plan and they are executing it. That plan clearly involves the return of gold as the asset to balance the trade books to rebuild global trust and if the US and Europe don’t stop acting like entitled, spoiled children on the world stage, they will drop the gradualism and one day we will wake up in a different reality.

This was Powell’s real message to Congress this week. It is the clear geopolitical imperative staring us all in the face. But if we don’t start down it now voluntarily, the superior monetary system will eventually outcompete and capital will flow to where it is treated best.

This is the future policy choice we have to make our peace with. Because if we don’t I’m reminded of an old, bad joke I first heard as a teenager. “What’s the last thing that goes through a fly’s head before it hits the windshield of your car?”

“It’s ass.”

TOM LUONGO

"¿Qué es lo último que atraviesa por la cabeza de una mosca antes de estrellarse en el parabrisas?"

"Su culo"

 We can move from boom to bust
From dreams to a bowl of dust.
We can fall from rockets red glare
Down to — “Brother can you spare…”
Another war — another wasteland —
and another lost generation…”
— RUSH, “Between the Wheels”

 

LA GUERRA DEL DOLAR ESTÁ TERMINADA (PARTE 1, TOM LUONGO: NO EURODOLARES PARA TI)

 

 

One of the biggest complaints about the Fed’s policies since the 2008 financial crisis has been that it has acted as the Central Bank of the World, rather than the Central Bank of the US. What I find hilarious, honestly, if not a little pathetic, is that the moment the Fed starts acting like a domestic central bank, the wailing and gnashing of teeth comes from all corners.

I expect that from globalists and vultures who love taking the Fed’s zero-cost dollars and levering them up to feather their own nests to build their own private empires in the shadow banking system. I didn’t expect that from the alternative economics space, however.

It’s like the Fed had just become everyone’s punching bag and that was that.

Ok, rant off. Back to the avalanche at hand.

Think back to 2021, or even the beginning of 2022, and remember that no one could even conceive of where we’d be today — the Fed Funds Rate at 4.75%, likely going to 5% in less than two weeks, and the term structure of dollar futures markets reluctantly admitting to a terminal rate between 5.50% and 5.75%.

I argued strenuously that in order for FOMC Chair Jerome Powell to make this new sovereign US monetary policy stick, he would have to ‘pull a Volcker’ and raise rates aggressively. This would expose the lies of the “Biden” administration about deflation and the need for trillions more in COVID-19 relief funds — the Build Back Better bill.

It would uncover who on Capitol Hill was aligned with the Fed and the New York Banks it represents, or, at least, who had their backing — Kyrsten Sinema (D-AZ) and Joe Manchin (D_WV) — and who was actively working against them. — Joe Biden, Federal Reserve Vice-Chair Lael Brainard, the Democratic Party and most of the Republican Party and Treasury Secretary Janet Yellen.

Even as I was making these arguments I never thought Powell would actually do it.

Then he did it.

And here we are today (well, March 3rd’s closing). 

 

When I say markets reluctantly acceded to the Fed’s program I mean that just one month ago these curves were all signaling a Fed “Pivot” at 5% and that it would happen in June. Now the Fed Funds Futures is essentially flat at 5.45% until December.

But these curves are highlighting for me exactly what I’ve been preaching for the past two years. The Fed, through aggressive rate hikes and fundamental changes to its transmission of monetary policy, has placed the biggest burden on on US dollar markets overseas, not domestically.

Moreover, every major shift in policy, the statements coming from Powell, and the upcoming changes to US dollar markets themselves have supported this idea.

All of this was taking place against a gradual change in the foundation of US dollar markets phased in over a five-year period; the shift from LIBOR as the debt-indexing rate in US dollars globally to SOFR.

As of today there are three major futures markets to coordinate the supply of US dollars through time, the Eurodollar, the Fed Funds, and now SOFR.

But all of these ultimately were subservient to LIBOR because that’s where the overnight money markets took their cues directly from. The futures markets reacted to the LIBOR call out.

Remember in January 2022, the penultimate phase of SOFR’s replacement for LIBOR took place. That was when all new US debt had to reference SOFR as the baseline rate, rather than LIBOR. LIBOR was ending in June 30th, 2023.

Keep that date in mind. Because it looms large over everything currently happening.

 

Go back to what I’ve been saying for over a year, the Fed is not raising rates to combat inflation. The Fed is raising rates to drain offshore dollar markets and force the offshore dollar trade to take its cues from the domestic cost of dollars as priced by SOFR, not LIBOR.

If you still haven’t been convinced of this argument, fair cop, but then why is the Eurodollar futures curve, at the first sign of bond markets finally believing the Fed is serious about not “pivoting,” trading significantly above both the Fed Funds and the SOFR futures markets? (see graph of yield curves above).

The spread being positive (26 basis points positive!) means the demand for US dollars overseas is far greater than the demand for them domestically. That spread is the pain threshold not for the Fed but for, primarily, the ECB and the Bank of England.

 

Bye Bye Eurodollars, Hello SOFR

Two years ago the idea that SOFR would successfully replace Eurodollars as the global market yield curve for US dollars was laughable. When SOFR was introduced in 2017 it was phased in with a five-year rollout plan, culminating in January 2022’s mandate. SOFR was the indexing rate of the US and that was that.

In December of 2021 SOFR futures traded around 290,000 contracts per day. By this report by IFR going from numbers from the CME, volume surged to 964,000 contracts. 

 That was last year, less than a month before Powell began squeezing the Eurodollar markets to death.

 Still not convinced? Why would you be, a year ago SOFR was doing 37% of the mighty Eurodollar’s business. Then let’s flash forward to February of this year with a press release from the CME itself.

 

 CME Group, the world’s leading derivatives marketplace, today announced new milestones in the growth of its SOFR derivatives contracts, with a single-day record of 7,558,467 SOFR futures and options traded and record open interest (OI) of 35,698,298 contracts on January 12…

…In the first two weeks of January 2023, the average daily volume (ADV) of SOFR futures and options traded reached 4,674,007 contracts. Month-to-date January 2023 SOFR futures ADV is equivalent to 572% of Eurodollar futures ADV and SOFR options ADV is equivalent to 1,334% of Eurodollar options ADV.

 

Ooops.

If this was a prize fight they would have called it on a technical knockout two rounds ago.

Oh, but wait, they already did. You see, this is why I sandbagged you for this entire article. One, because I’m an asshole and two, because so are the guys running the CME.

The CME announced back in October that it was suspending trading in its former champion Eurodollar Futures and Options on Futures contracts dated after (wait for it) June 30th, 2023. The last day of trading will be April 14th. For a little more fun you can check out the CME’s daily SOFR Futures report.

I think that avalanche is now so loud it could be heard from space. Poor pebbles.

 

SOFR knocked out the Eurodollar because that was the Fed’s and New York’s ultimate goal; to replace the global rate for dollars with a domestic one where the capital would have to trade here. The globe takes its cues, not from what Europe or Hong Kong wants, but what America needs.

This stabilizes our banking system, taking back power the Fed had ceded under Greenspan, Bernanke and Yellen and reminding everyone else just who runs Bartertown.

Most importantly, it pulls liquidity from around the world back into US markets, providing a foundation for a future where Davos doesn’t control DC. There are further implications of this but I’ll leave that for Part II.

The question I leave you with is the following, “Is there another, bigger avalanche further up the mountain?’

 https://tomluongo.me/2023/03/05/war-for-dollar-already-over-no-eurodollar/