Notes From Underground: Before I Break

On Sunday, we acknowledge the 50-year anniversary of Richard Nixon’s decision to close the GOLD EXCHANGE WINDOW and put an end to the post-World War monetary system known as Bretton Woods. I can say exactly where I was: A bus station in Afula, Israel buying ice cream in dollars and the price rose as it was the day after the announcement. The proprietor told us prices increased because the dollar bought less. I truly had no idea but just remember that it happened in real time and proved not to be a transitory event. Much is being written about the anniversary and the implications for the global economy.T he Nixon strategy was summed up in his supposed statement of “We ARE ALL KEYNESIAN’S NOW.”

The end of gold exchange allowed the U.S. to pursue its overseas and domestic strategies unfettered from budgetary concerns. The DOLLAR would still remain king of global reserves as the coming years allowed the markets to begin to readjust the dollar’s value.

The basis of the Bretton Woods policy was not just financial stability but supporting an overvalued DOLLAR that was providing a critical support to the economies rising from the ashes of World War II. In the battle for the dominance of capitalism versus Soviet communism it was important to avoid the mistakes of Paris 1919. Instead of punishing the losers of war it was better to resurrect the obliterated in an effort to rebuild world markets under the umbrella of a U.S.-dominated rules-based orders.

But when the cost of maintaining that order became too great it was time to change it and allow the hegemony of the non-Soviet world to get out from under the burden of depleting its gold reserves. Japan, Germany and many others were able to compete for markets with undervalued currencies all at the expense of the U.S. economy. Thus, pull the PEG and the competitive game was on, though it would take the U.S. time to adjust.

One thing that aided the U.S. was that corporations were well aware of the overvalued DOLLAR in the late 1960s and 70s and used the currency to buy up foreign-domiciled corporations in an effort to expand their foreign markets (the golden age of U.S. multinational development). The foreign competitors were cheap because of the overvaluation of the U.S. dollar. Nixon’s Keynesian strategy of untethered deficits with an accommodative FED provided a landslide victory over McGovern. (Of course opening China, ending Vietnam and even talking to the Soviets provided a powerful backdrop.) The lesson learned was that it is expensive to maintain your role as a hegemon and allowing for depletion of the country’s gold was not an option.

Today is an appropriate day to note the fall of Kabul, which can be seen as either comedy or farce but of course not for the bereaved Afghani people, especially the women who will be back under the jackboot of the Taliban and its misogynist ways. Again, so much blood and treasure spent for what? In 50 years we have learned NOTHING, for arrogance blinds policymakers. This was a bi-partisan act of arrogance in the approach to solving the issue of the failed state activities of harboring nihilists and now we are right back into that quagmire. It’s interesting to see what lessons China and Russia have learned but it will be difficult to criticize the Chinese for Xinjiang and Uyghurs as terrorist activity is certain to increase dramatically in the EURASIAN landmass.

As we head into Jackson Hole it is important to keep the focus on the G-30/FOMC messaging on the need for a Standing Repo Facility, especially with the release of the FOMC minutes from the July meeting on deck. Last week, New York Fed’s executive vice president Lorie Logan delivered a speech titled, “Liquidity Shocks: Lessons Learned From the Global Financial Crisis and the Pandemic.” Logan is probably the most important figure in measuring the impact of the SRF as she is the frontline actor.

The establishment of the SRF is important as it is a backstop for the funding markets to prevent spikes in the repo market from spilling over the effective fed funds rate, pulling the Fed’s benchmark outside of its target range (think back to the repo turmoil of September 2019). Logan also noted the CRITICAL importance of the addition of Foreign and International Monetary Authorities (FIMA REPO FACILITY), first introduced during the early days of the pandemic in 2020.

“The FIMA Repo Facility establishes a standing facility to address global dollar funding pressures that may affect the U.S. financial conditions.The facility provides foreign official accounts with a temporary source of liquidity against their holdings of U.S. Treasury held in custody at the NY Fed, presenting an alternative to outright sales of those securities. THE FACILITY COMPLEMENTS THE EXISTING U.S. DOLLAR LIQUIDITY SWAP LINES BY EXTENDING ACCESS TO DOLLAR FUNDING TO A BROADER RANGE OF CENTRAL BANKS AND FOREIGN OFFICIAL INSTITUTIONS.”

There will be massive amounts of DOLLARS available at all times. SHOULDN’T THIS MINIMIZE THE HAVEN STATUS BECAUSE NO FEAR OF MISSING OUT FROM DOLLAR LIQUIDITY? More importantly, shouldn’t the U.S. yield curve flatten as it lessens the need to be fearful of a massive sell-off of longer duration Treasuries? On Friday, the U.S. yield curve flattened after a “weak” U.S. 30-year auction the prior day. Did traders realize that the effective real yield on the bond offer far more upside then the ridiculously priced five-year note? The 30-year has a real yield of -29 basis points while the five-year has a real yield of -150 basis points.

Before Logan’s speech, Credit Suisse analyst Zoltan Pozsar noted in a Bloomberg article that the SRF “IS A STROKE OF GENIUS.It generates demand for Treasuries and MBS.” Pozsar noted that the “SRF created $500 billion to $750 billion of demand for collateral ‘at the stroke of a pen.’ Reforms to the supplementary leverage ratio and the removal of Wells Fargo’s asset growth ban will improve the picture.” DOLLAR, DOLLAR, DOLLAR liquidity available everywhere. We are all BERNANKEANS NOW.

***Hoping you have a great week but wish to remind traders that after last Sunday night’s meltdown in the GOLD and SILVER, the GOLD CLOSED HIGHER ON THE WEEK, even as the FED‘s language grew more hawkish in terms of beginning QE tapering. The U.S. DOLLAR also failed to rally after the initial GOLD bashing, the dollar index closing lower on week. The hawkish rhetoric failed to provide lift to traditional vehicles of positive dollar asset classes.

This is just something to watch even as global sovereign BOND markets remained in nominal real territory: German Bunds -0.46%; French Oats -0.13%; Netherlands -0.34%; Greek 0.55%; and Italy 0.54%.

Of course the BOJ, RNBZ, RBA and BOE all have interest rates on overnight money near zero. This is the predicament for the FED in being the the first to remove liquidity. Interest rates are low everywhere and the BOJ and ECB have openly stated their reticence to begin pulling back asset purchases. This is the global financial system with which we go back to beach. Will the SRF allow the FED to reduce QE without leading to a DOLLAR RALLY? Only time will tell.

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13 Responses to “Notes From Underground: Before I Break”

  1. Arthur Says:

    Geopolitics = 2+2 = 5


    President Ashraf Ghani three months ago:

    Q: How long can your government last without US support?

    A: Forever.

    Source: Der Spiegel


    Aug 16 President Biden: Afghans must fight for themselves

    Aug 7 Refugees from Syria and Afghanistan account for 5% of the Turkish population

    Jul 12 Afghan government could collapse six months after US withdrawal

    Jun 10 Afghanistan: 60% of the countryside is either contested or under Taliban control

    Apr 14 Will the Taliban return to power in Afghanistan?

    Geopolitical Calendar | The best of geopolitics

    • Yra Says:

      Arthur–that is a beautiful time line—this is a dangerous time for the world for if doubts grow about US commitments well you do the math—-Taiwan,Hong Kong,Nordstream 2 ,Damascus,Beirut ,Ethiopia ,Cairo –many will question the idea of U.S. support.I am glad to see U.S. pull back from Kabul—just not in the way it was done but I didn’t support the way it was first entered.The massive buildup of troops rather then the ability to put special forces in and out at the time of your choosing always seemed a better way –especially as the transport ability has been so greatly elevated—but as I always maintain when it comes to defense for me less is always more but I don’t own defense stocks.The Chinese went into Vietnam in early 1979—stayed three weeks and got out—message sent—when you are a poor country you find ways to influence outcomes at a much lower cost–but the message was poignant

  2. Financial Repression Authority Says:

    […] Link Here to the Blog Post […]

  3. Chicken Says:

    Nixon did prove the US to be an ally of Israel.

  4. Pierre Says:

    I enjoyed watching this, thought I would share it. Old reel to reel films of Nixon’s visit to China.

    • David Richards Says:

      Ahh, simipler and better times. I’ve seen reports that Janet Yellen will be the next to go to China, after the disastrous “summit” at the rundown motel in Alaska this year with no food (the foreign guests had microwaveable ramen noodles in their rooms) and the Wendy Sherman catastrophe last month in Tianjin.

      Tho I’m no fan of Yellen, I think her trip could hold more promise because there are many opportunities for mutually beneficial economic agreements that could facilitate some meeting of the minds. I sure hope so because the world needs that now, plus as it’s gone so far this year with the rhetoric and momentum, we’re on the runway to a hot war between US and Russia + China, if not WW3.

      • The Bigman Says:

        Hi Over time I have followed the written rule of not bringing politics to this table. But I am compelled to do so now with respect to China. China is a country actively engaged in a genocide based on religion. Other than the
        religion persecuted, I fail to see how doing business now with China differs with US companies like IBM doing business with Nazi Germany prior to World War II. While the US can not and has not intervened in all instances of genocide, we certainly do not need to do business with these regimes. In addition to the genocide, China unleashed a biologic attack on the world when it allowed visitors from the Wuhan festival to return to their home countries. At the same time it barred domestic travel from Wuhan to other parts of China. The source of the virus is irrelevant to these facts. China pursued a deliberate policy of contagion spread. This act became personal for me last week when my 93 year old mother died from Covid despite being fully immunized. I do not believe that we as individuals or a nation should do any thing beneficial for China. As far as war will Xi really go to war with a country that owes him $1.1 trillion dollars? After this week will the US really defend Taiwan?

        FWIW The Bigman

      • Yra Says:

        Bigman—I am so very sorry for your loss.When world events show up on our doorsteps seems become cloded while at the same time more clear.You have much to say here and as you know I will not enter the political discussion as it leads us astray from our intentions of seeking financial gain .We have discussed the policy implications of Taiwan in this blog for several years and while others were pointing at Hong Kong I stressed that was a sideshow for the real flashpoint was,is and will be Taiwan.Will XI go to war?I would be doubtful for in my opinion he is unwinding the Deng strategy of hide and bide believing that China can now press some of its new found wealth and power—-this is why i lean to the Graham Allison idea of not falling into the Thucydides Trap.Whether the U.S. owes China 5 trillion to me is of little consequence because the U.S. according to Jerome Powell has a printing press and Weimar its way out of the burden of fiduciary responsibility.There are many moving parts to this and the recent events if Kabul make the realm of international affairs much more fragile in the very near term.One thing for certain is that the arrogance of U.S. policy makers is not being met with static decisions–there is a movement to begin reassessing long held alliances.Many are bemoaning the impact on NATO but as readers of NOTES are aware,I have believed NATO is an archaic institution that has out lived its usefulness.The collective action clause [Article5] is a very dangerous source for generating a global war—-I pose yet again—if Russia and Turkey went to war OUGHT the U.S. enter war against Russia to defend the Turks ?If not then NATO by definition is DEFUNCT.The Europeans have been freeriders for years and now they are questioning what exactly they are riding.Afghanistan has been a protracted burden in which the U.S. will held sway—-very complicated indeed.Also,for the Chinese did the FED and G30 just pave the way for the PBOC to dump massive amounts of US debt on the standing repo facility without having a negative impact on market prices?Many moving parts indeed—most importantly though I again pray that your mother’s memory be for a blessing to you and your family—-deepest condolences –Yra Harris

    • Pierre Says:

      Heartfelt condolences to you and your family Bigman.
      I agree and have no idea why more people aren’t mad as hell of the suffering unleashed in this world.

      Maybe, pulling out of Afghanistan, was to put more resources on defending Taiwan.

      As David said and Bloomberg reports:

      “Janet Yellen is weighing a trip to China in the coming months”

      So, pull out of Afghanistan now, increase presence in the South China Sea and Yellen pays a visit from a position of strength.

      Except, Screwed up withdrawal from Afghanistan thwarts all.

  5. The Bigman Says:

    Yra and Pierre Thank you for your kind thoughts which are very meaningful in this time of sorrow

  6. TraderB Says:

    The disruptions to the global supply chain, subsequent inflation, political and social unrest, unprecedented monetary and fiscal stimulus, and now Delta variant…. Let’s assume that a disorderly loss of faith in fiat currency and in government as a whole is inevitable at this point. Obviously a bold, but realistic assumption.

    In this ‘every man for himself’ scenario, what would the “Powers that Be” prefer? A disorderly scramble to gold and precious metals OR a shift to Bitcoin (crypto).

    Once they realize they are going to completely lose control, I would think different countries would have a certain bias towards one of those two scenarios playing out over the other. I would love to hear the thoughts of those on this blog in terms of how that would be most likely to play itself out.

  7. Bosko Says:

    TraderB, if you don’t mind my two cents… in a “every man for himself” scenario, the “powers that be” will surely distract the general public to invest in crypto, while they keep all the gold and land for themselves (eg. Bill Gates is the largest farmland owner in USA). Case in point… todays news of the Coinbase fiasco, they claim NO liability for a hackers antics and losses to clients. I have stated on this blog in the past, there is no legal jurisdiction in cyberspace, no courts, no CEO of Bitcoin, no one is accountable in a video game fantasy. It reminds me of the internet craze of the nineties. On the other hand, gold is a physical asset that complies with private ownership laws in a particular jurisdiction. Gold is recognized as a private asset around the world. I just visited Bal Harbour in Miami a couple days ago, and the Rolex store is completely OUT of stock in men’s watches and 3+ months to order new ones. The display shelves were half empty, demand for Rolexes are huge. Cryptos are great and efficient until something goes wrong, and it always does. There can be no liability for an asset that does not exist in the physical world. Bitcoin has no back-up or delivery process like a gold futures contract. Sure there are Bitcoin futures, but what do you take delivery of? Cryptos will work great if issued by central banks, but in the end you still own a government issued “note” backed by the central bank, therefore backed by an actual entity. Bitcoin does not have this type of backing.


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