Currencies - Dollar Rises with QE
Updated
Idea for Currencies/Macro:
- Contrary to popular belief, since 2008, the dollar RISES with Fed Balance Sheet expansion.
- There is currently a large divergence which I speculate to close with the dollar rising.
Either the Fed Balance Sheet can be reduced, or the dollar will rise... Obviously the balance sheet will not be reduced for a long time, if ever.
Why is this so? Doesn't printing more money devalue currency?
1.
- Central Bank creates reserves, not a form of liquidity that directly enters the economy. It's still inflationary of course.
- G-SIBs and commercial banks can then either rebalance their holdings to purchase assets, or create credit based on this collateral which enters the economy.
- These swaps also lower rates, which creates the perception of invincibility and causes price inflation of risk assets (purely speculative!).
- However, when debt is serviced (credit impulse turns negative) this destroys liquidity.
2.
- A few trillion from the Fed is just a drop in the eurodollar market, it does not amount to much, relatively speaking.
- Other Central Banks have expanding their balance sheets more than the Fed. Since currencies are relative, this is bullish for the dollar.
- Eurodollar futures are declining, signaling a SHORTAGE of dollars and liquidity destruction elsewhere, at a greater rate than QE. QE has been ongoing since 2008.
Eurodollar market is the market, simply put. Over 90% of international trade is financed through the eurodollar market.
I don't think there is any question that a recession is coming when the monetary tightening inevitably comes.
Central Banks Balance sheets vs GDP is higher than it was before/during/after the Great Depression or WW2.
Total Assets to GDP:
IMO yields respond to credit impulse immediately, and their trend supports liquidity destruction in the Eurodollar market. Eurodollar futures are not a currency market but a reflection of LIBOR interest rates. It is an expression of inflation expectations:
What is actually happening?
- Interest rate driven QE is not working to create economic growth, and we are experiencing global deflation.
- QE is failing to create high quality collateral, but instead collateral is being sucked out of the international markets.
- Capital flows and credit impulse are negative (deflationary).
- Fed went all out, but international money markets did not respond. Real wealth is being destroyed and there is nothing the Central Banks can do about it.
Speculation:
- Since Credit Cycle leads currencies/collateral, and it is turning down, debtors are withdrawing collateral from risk assets to service their debt.
- High quality collateral is being sucked out from underneath the equity bubble (distribution).
- Leading institutions will service debt and sell risk before monetary deflation arrives. There will be a dollar shortage and a squeeze.
How does this trickle down and affect US equities?
It affects the EURUSD pair, which is synonymous with risk appetite (It is an indicator not the cause).
EURUSD:
Where EURUSD goes, oil and tech go... and where oil and tech go, the stock market goes.
Anyway, a relatively safe way to play this would be simply to long USD for the mid-long term (UUP etc.). You can try to short the bubble like me, but be ready for some pain as the timing is tricky and bubbles rise the most at the end. Keep in mind that this isn't really a trade signal but a trend.
However, the day of the rugpull is indeed coming.
Looking at the trend for DXY, 114-120 seems like a reasonable target.
GLHF
- DPT
- Contrary to popular belief, since 2008, the dollar RISES with Fed Balance Sheet expansion.
- There is currently a large divergence which I speculate to close with the dollar rising.
Either the Fed Balance Sheet can be reduced, or the dollar will rise... Obviously the balance sheet will not be reduced for a long time, if ever.
Why is this so? Doesn't printing more money devalue currency?
1.
- Central Bank creates reserves, not a form of liquidity that directly enters the economy. It's still inflationary of course.
- G-SIBs and commercial banks can then either rebalance their holdings to purchase assets, or create credit based on this collateral which enters the economy.
- These swaps also lower rates, which creates the perception of invincibility and causes price inflation of risk assets (purely speculative!).
- However, when debt is serviced (credit impulse turns negative) this destroys liquidity.
2.
- A few trillion from the Fed is just a drop in the eurodollar market, it does not amount to much, relatively speaking.
- Other Central Banks have expanding their balance sheets more than the Fed. Since currencies are relative, this is bullish for the dollar.
- Eurodollar futures are declining, signaling a SHORTAGE of dollars and liquidity destruction elsewhere, at a greater rate than QE. QE has been ongoing since 2008.
Eurodollar market is the market, simply put. Over 90% of international trade is financed through the eurodollar market.
I don't think there is any question that a recession is coming when the monetary tightening inevitably comes.
Central Banks Balance sheets vs GDP is higher than it was before/during/after the Great Depression or WW2.
Total Assets to GDP:
IMO yields respond to credit impulse immediately, and their trend supports liquidity destruction in the Eurodollar market. Eurodollar futures are not a currency market but a reflection of LIBOR interest rates. It is an expression of inflation expectations:
What is actually happening?
- Interest rate driven QE is not working to create economic growth, and we are experiencing global deflation.
- QE is failing to create high quality collateral, but instead collateral is being sucked out of the international markets.
- Capital flows and credit impulse are negative (deflationary).
- Fed went all out, but international money markets did not respond. Real wealth is being destroyed and there is nothing the Central Banks can do about it.
Speculation:
- Since Credit Cycle leads currencies/collateral, and it is turning down, debtors are withdrawing collateral from risk assets to service their debt.
- High quality collateral is being sucked out from underneath the equity bubble (distribution).
- Leading institutions will service debt and sell risk before monetary deflation arrives. There will be a dollar shortage and a squeeze.
How does this trickle down and affect US equities?
It affects the EURUSD pair, which is synonymous with risk appetite (It is an indicator not the cause).
EURUSD:
Where EURUSD goes, oil and tech go... and where oil and tech go, the stock market goes.
Anyway, a relatively safe way to play this would be simply to long USD for the mid-long term (UUP etc.). You can try to short the bubble like me, but be ready for some pain as the timing is tricky and bubbles rise the most at the end. Keep in mind that this isn't really a trade signal but a trend.
However, the day of the rugpull is indeed coming.
Looking at the trend for DXY, 114-120 seems like a reasonable target.
GLHF
- DPT
Trade active
Furthermore, International investors must hedge US asset investments with the underlying USD, so as US equities rise, more collateral will be withdrawn from the supply. If DXY is rising, it means collateral is being taken out of the supply of which inflationary credit can be created.This is probably the 'underlying condition' which will cause the reflexive regression to the mean.
Trade active
ECB Balance Sheet expansion relative to the Fed depreciates the euro against the dollar: sciencedirect.com/science/article/abs/pii/S0304393220300246Trade active
Here we go... Interest rate volatility (SRVIX) 40% move.USD interest rate swap market telling a monetary policy change coming. These coincide with big market reversals:
Trade active
SRVIX does indeed lead the DXY, supporting my thesis here: Trade active
Correction, it is interest rate swap volatility, but it does indeed signal tightening of credit.Trade active
Big sweep on IVOL 9/17 29/30c:Trade active
Couple of things:USD Inflation Swap Forward 5Y5 has hit the Fed's target for tapering:
US03M and US01M yields pricing in a credit default within the debt ceiling window:
Fed policy error signaled and getting priced in.
Trade active
Some thoughts:Bitfinex Securities announced today, basically you can just buy stocks directly with crypto now. Tether is printed for free by exchanges.
Bitcoin and Tether - The bottom line is that tether is not so different from subprime mortgage MBS's or CDOs of 08. They are just a new financial instrument marketed to retail to dump infinite margin risk on them. Implosion is inevitable in a credit/collateral crunch.
While I don't fully understand the plumbing of systemic liquidity, and I am not entirely sure if this scenario applies now, but I cant help but think it rhymes:
The proximate cause of the 2008 liquidity crisis was the differentiation of C2 collateral from C1 collateral. The major central banks and treasuries responded to the crisis by both increasing the monetary base and swapping superior for inferior collateral. This led to an exponential rise and subsequent crash in the ratio of total US financial sector liabilities to what we refer to as “ultimate liquidity”.
The nonfinancial sector has gone from holding bank liabilities to holding a diversified portfolio of securitized assets directly. While not backed by D, they were backed by C. As long as there is confidence in the assets comprising C, or as long as C1 remains a significant share of C, it may be assumed that these claims are "liquid", i.e., they can be converted into central bank money at fairly short notice.
This would appear to be happening now with the CB balance sheets effectively interfering with stock markets, and direct bond purchases.
So what happens in that economy when suddenly there are doubts about the underlying value of Exxon shares and other securitized revenue streams? Naturally they lose their attractiveness as investments and as liquid assets that are used as money. Suddenly there is deemed to be a liquidity shortage and this intensifies when it is clear just to what extent the value of pseudo liquid assets in the economy has expanded in relation to central bank money. Other collateral or money may continue to be acceptable, such as U.S. Treasuries, Bunds etc.
So there is a sudden split between cash and certain types of collateral, and everything else.
Everything else ceases to be liquid.
imf.org/external/pubs/ft/wp/2012/wp1295.pdf
Evergrande is rumored to be a non-trivial backer of tether. They are in the process of imploding. We will see how that plays out. I can't see how tether ends happily.
The global credit crunch is confirmed to have already begun, with global credit impulse collapsing. Foreigners and institutions should seek USD + UST as higher quality collateral.
China also does not have a floating currency rate, but it is pegged to the USD, and managed through their purchase of the USD. This is really the deflationary force which will take supply of collateral and drive the dollar higher.
With China beginning monetary easing, it should correlate to a lower CNYUSD, with yuan being sold and dollar being bought, further sending the dollar up and removing supply.
Thinking back on GPIF slashing US Treasurys, the rising yields of foreign institutions had fooled US investors into believing their economy was booming and reflation was accelerating.
With foreigners selling US debt, I don't foresee the Fed being able to stop Treasury purchases any time soon.
The asset bubble will inevitably burst with the dollar rising, and it will be such that bond purchases can continue. US economy can't handle rising yields. There will be a sudden rush for dollars and high quality collateral, for which there is no supply because of the leverage of liabilities on the dollar.
Trade active
More property companies capitulating:Dollar bonds are the canary.
Property companies' debt defaults are cascading into tightening credit conditions in the Chinese economy because the PBOC's assets being 2/3~ FX reserves.
China has been easing to increase credit/M2 growth recently. It's to try and counteract monetary tightness resulting from USD shortage (assets) pressuring PBOC liabilities (base money supply for domestic economy).
Source: Maroon Macro
This will lead to demand for the dollar.
Note
We are in a demand zone, and have retested the reversal breakout. I don't think we are going back to 80 (unless US defaults - watch the debt ceiling approaching), but in that case equities would fall anyway:
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