Notes From Underground: Central Bank Poker

This week, three G-7 central banks had meetings and all decided to CHECK and leave policy unchanged. This was widely expected as there was little reason to UPSET the incoming Biden administration with any idea of currency manipulation. However, the Bank of Canada, Bank of Japan and European Central Bank all discussed the fear of a further slowdown from an increased spread of covid-19.

It is interesting that both the BOC and the ECB mentioned currency valuations but in different contexts. The BOC was not overly concerned as it said, “Global financial markets and commodity prices have reacted positively to improving economic prospects.A broad-based decline in the US exchange rate combined with stronger commodity prices have led to a further appreciation of the Canadian Dollar.” It seems as long as a basket of currencies are RALLYING versus the DOLLAR the BOC is comfortable with a stronger currency, especially with elevated prices for raw materials.

The ECB and President Christine Lagarde seem to have some concerns about a stronger EURO having a NEGATIVE impact on eurozone inflation as a strong currency will prevent the bank from achieving the vaunted 2% inflation target. Lagarde stressed they are “monitoring the exchange rate very carefully” and that “all instruments can be adjusted and nothing is off the table.”

This is NONSENSE because Secretary Yellen has put all central banks on notice that the U.S. will be opposed to any manipulation of exchange rates to secure an advantage in trade. The Biden Administration wants the market to determine exchange rate levels. Lagarde will be reticent to raise the ire of her longtime friend. If U.S. policy is deemed to be looser and irresponsible the U.S. dollar will be driven lower by global investors. The race to the bottom of fiduciary responsibility is the final outcome.

***Two issues to consider: First, the rise in commodity prices over the last six months appears to be not a result of great economic activity but the appearance of Chinese stockpiling. Copper, iron ore, grains, as well as other industrial raw materials have risen as the Chinese YUAN has rallied almost 14% of its lows made May 25. It appears that the Chinese promoted a rally of the YUAN in asymmetrical fashion for a stronger currency is a great benefit to a nation importing massive amounts of raw materials.

In addition, if the Chinese government is pursuing a policy of enhanced domestic consumption a stronger currency enriches its consumers/middle class. A test of this HYPOTHESIS will be when the YUAN reaches the 6.25 level, the low against the DOLLAR made three years ago.

Second, we have to talk about Bitcoin. In the last two weeks there have been statements from Yellen and Lagarde that appear synchronized. In her testimony to the EU last week, Lagarde said the following: “Bitcoin is a highly speculative asset, which has conducted some funny business and some interesting ad totally reprehensible money laundering activity. There has to be regulation. This has to be applied and agreed upon at a global level because it there is an escape,the escape will be used.”

Yellen happened to use very similar language about BITCOIN during her confirmation hearing before the Senate. And just last week the British regulator, the Financial Conduct Authority said “be prepared to lose all your money. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.”

In a podcast I recorded in October 2016 with Rick Santelli and Anthony Cruedele I was asked about BITCOIN. I maintained that the BLOCKCHAIN element was interesting and needed more consideration but a currency aspect made me nervous BECAUSE SOVEREIGN GOVERNMENTS WOULD PROTECT THEIR CURRENCY MONOPOLY. That is, a sovereign’s duty and obligation. I said I feared that if the U.S. said a terrorist attack was funded by BITCOIN the government would make it illegal for after all the U.S. government made owning gold illegal in 1933-34.

It was YELLEN who suggested Congress curtail the use of BITCOIN amid terrorism concerns. My advice is trade it but be careful making it an investment. I am suggesting to be careful with this asset class even as it soars. Governments hate competition. Article 1, section 8, clause 5 of the U.S. Constitution: “To coin money, regulate the value thereof, and of foreign coin.”

Tags: , , , , , , , , , ,

13 Responses to “Notes From Underground: Central Bank Poker”

  1. andrew perry Says:

    Great post Yra, – I agree on BTC, if you didn’t know how you made the money, you wont be able to keep it!

  2. Frederick Havell (@fwhavell) Says:

    As your know sir, before her recent prominent positions Mme Lagarde was head of a major law firm here in Chicago–her words (probably as translated) sound simplistic, but do not doubt the thoughts behind them.

    • Yra Says:

      Frederick–thanks for the post and I an very aware of her history at Baker Mckenzie in Chicago—and your analysis is spot on –she is cautious with her words and why she refers to herself as an OWL–not a dove or hawk

  3. Bosko Says:

    Hey Yra, I’ll trade you bitcoins for tulips.

  4. Financial Repression Authority Says:

    […] LINK HERE to the Blog Post […]

  5. Arthur Says:

    Bitcoin. Great insight!!

  6. Arthur Says:

    Paul Singer, founder of Elliot Capital Management.

    Among the topics covered in this extremely rare and endlessly fascinating conversation are Paul’s thoughts on the importance of understanding markets are little more than mass experiments in psychology, the fallacy of ‘sitting passively’, the creation of value for clients and the corner into which the Fed and other central banks have painted themselves.

    Podcast
    https://www.grant-williams.com/gw_podcast/the-end-game-ep-14-paul-singer/

  7. Arthur Says:

    Paul Singer, founder of Elliot Capital Management.

    Among the topics covered in this extremely rare and endlessly fascinating conversation are Paul’s thoughts on the importance of understanding markets are little more than mass experiments in psychology, the fallacy of ‘sitting passively’, the creation of value for clients and the corner into which the Fed and other central banks have painted themselves.

    Podcast
    https://www.grant-williams.com/gw_podcast/the-end-game-ep-14-paul-singer/

  8. Kevin Says:

    Thank you for another thought-provoking post Yra.

    When we look at the US in isolation, we miss the second order impacts from the policy responses in the other currency blocks, EUR, JPY and of course CNY. A weak dollar? Yes, but weak against what, and what will the response be?

    “Weak against bitcoin” has been the rallying cry, and your points are well made. One thing to mention is the tether/bitcoin arbitrage has grown to be the majority of all bitcoin volume. This calls into question the underpin to the current price. 2 corroborating articles:

    From Research Affiliates:
    https://www.researchaffiliates.com/en_us/publications/articles/820-bitcoin-magic-internet-money.html

    https://crypto-anonymous-2021.medium.com/the-bit-short-inside-cryptos-doomsday-machine-f8dcf78a64d3

    If they are correct, combined with the regulatory risk you highlight, a bloody reckoning in crypto lies ahead.

    Back to good old gold and silver!

  9. Arthur Says:

    Yra & Co:

    1. Biden “Carter” (?)
    2. Biden geopolitical implications/insights (?)

    Thanks!

  10. TraderB Says:

    Professor- Thanks for sharing this stuff about Tether. Seems like they could ease a lot of concerns by just allowing an audit to confirm that every Tether issued is backed by $1 in their bank account.

  11. TraderB Says:

    I remember a long time ago when the Fed had a dual mandate. Managing interest rates to achieve some sort of balance between full employment and price stability. Well whatever…

    • Yra Says:

      TraderB–that was as flawed as the Phillips Curve especially when you are the world’s reserve currency and Richard Clarida resolved that almost two years ago with his speeches about the global situation and then of course we got the swap lines with all types of central banks

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: