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What? Default? Where? Dollar?

What? Default? Where? Dollar?

It won’t come as a surprise to anyone that the first half of 2020 has brought, among many other things, renewed calls for the demise of the US dollar. It’s been pretty much a non-stop call for over a decade now, and longer. But this time, like all previous ones, I’m thinking: I don’t see it. I guess my first question is always: please explain why the dollar would collapse before the euro does.

For one thing, the dollar would have to collapse/default against one or more “entities”. The dollar is not like one of those highrises that collapse upon themselves. It will have to default or collapse against something(s) else. Since it is the world reserve currency, that means there would have to be a replacement reserve currency. Yes, that could also be for example gold or SDR’s, or even a basket of currencies, and something like that may happen eventually, but it doesn’t appear in the cards in the short run.

There are really only two candidates for the role, and neither looks at all fit to play it. The euro may have some ambitions in that direction, but it has far too many problems still. The yuan/renminbi certainly has such ambitions, but the Communist party refuses to let it get on stage to show what it’s got. As I recently wrote:

The main sticking point for Beijing is a conundrum it cannot solve. The CCP wants to have BOTH a global currency AND total control over that currency. It will have to choose between the two, and cannot make up its mind. So it pretends it doesn’t have to choose.

…click on the above link to read the rest of the article…

Presenting SocGen’s 5 Black Swans For 2016

Presenting SocGen’s 5 Black Swans For 2016

If you’re the type who likes black swans this has been the month for you.

On the political front, Portugal’s Socialists, led by Antonio Costa, formed an alliance with the Left Bloc and the Communists on the way to overthrowing the Passos Coelho government and presaging a repudiation of Berlin’s brand of fiscal rectitude. This throws the country’s austerity program into doubt and sets up not only a confrontation with the troika, but also the potential loss of access to ECB QE should a deteriorating fiscal situation prompt a DBRS downgrade.

In Spain, Catalonia is in the midst of a secession bid which, depending on Catalan political infighting and how far Rajoy wants to push things ahead of national elections set for next month, could see a fifth of Spain’s GDP separate, causing Spanish debt-to-GDP to jump by some 25%. 

As far as geopolitics goes, ISIS Sinai downed a Russian passenger plane killing all 224 people on board and then, not even two weeks later, ISIS proper waged war in the streets of Paris killing 130 people. As if those two bombshells weren’t enough, Turkey decided to shoot down a Russian fighter jet this morning.

Finally, 12 month forwards for the Saudi riyal seem to indicate that the market believes the three decade-old dollar peg is about to fall under pressure from slumping crude and falling FX reserves. BofAML calls the possibility of a Saudi depeg the “number one black swan event for the global oil market in 2016.”

And those are just the black swans that have landed in the last 30 days. 


In its latest quarterly Global Economic Outlook, SocGen takes a look at five political and economic black swans that could touch down in 2016 and also warns that “high levels of public sector debt, already overburdened monetary policy, still high debt stocks and on-going balance sheet clean ups in a number of economies leave the global economy will a low level of ammunition to deal with new shocks.”

…click on the above link to read the rest of the article…

Saudi Oil Minister Puts On Brave Face Amid Severe Headwinds: “Eventually, Economic Producers Will Prevail”

Saudi Oil Minister Puts On Brave Face Amid Severe Headwinds: “Eventually, Economic Producers Will Prevail”

As the EM world looks on helplessly while Saudi Arabia’s war with the US shale complex (and, by extension, with the Fed) serves to keep crude prices depressed putting enormous pressure on commodity currencies and accelerating emerging market outflows, the question is whether Riyadh’s SAMA piggy bank can outlast the various capital market lifelines available to America’s largely uneconomic shale drillers.

It’s tempting to simply say “yes.” That is, with the next round of revolver raids due in days and with HY spreads blowing out amid jittery US markets, it seems unlikely that maligned US producers will be able to survive for much longer, and despite the fact that data out yesterday shows Riyadh’s FX reserves falling to a 32-month low, the Saudi war chest still amounts to nearly $700 billion,  giving the kingdom plenty of ammo. However, between maintaining subsidies, defending the riyal peg, and fighting two proxy wars, Saudi Arabia’s fiscal situation has deteriorated rapidly, forcing Riyadh to tap the bond market in an effort to help plug a hole that amounts to some 20% of GDP.

Given the above, some have dared to suggest that in fact, the Saudis could lose this “war” just as they may be set to lose their status as regional power broker to Tehran thanks to Iran’s partnership with Moscow in the ongoing effort to shore up Assad in Syria and wrest control of Baghdad from the US.

But don’t tell that to Saudi Arabia’s Oil Minister Ali al-Naimi who says that despite all the uncertainty, the economics of oil exploration and production will prevail at the end of the day. Here’s Reuters, citing Economic Times:

Saudi Arabia’s Oil Minister Ali al-Naimi believes economic producers will prevail over higher-cost suppliers and OPEC’s share of the market will rise, India’s Economic Times newspaper reported on its website on Monday.

…click on the above link to read the rest of the article…

A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage

A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage

As we’ve documented extensively of late, a host of idiosyncratic political factors have served to exacerbate what was already a very, very bad situation for emerging markets.

This dynamic is most readily apparent in Brazil and Turkey, and although Ankara probably has a leg up in the race for “most at risk from domestic turmoil”, Brazil isn’t far behind as President Dilma Rousseff battles abysmal approval ratings and a recalcitrant Congress in an effort to shore up the country’s finances by convincing lawmakers to sign off on much needed austerity measures.

Meanwhile, a confluence of exogenous shocks that include slumping commodity prices, depressed Chinese demand, the PBoC yuan devaluation, and the threat of an imminent Fed hike have conspired with country-specific political turmoil to send the BRL plunging and that, in turn, has put Copom in what former Treasury secretary Carlos Kawall calls “crisis mode.”

Of course crises are often costly to combat, especially when you’re an emerging market in the current environment and when it comes to Brazil, the use of alternative measures (like effectively selling dollars in the futures market) to avoid FX reserve liquidation is now weighing heavily on the fiscal outlook. As Goldman noted earlier this week on the heels of the latest monthly budget data, “the overall fiscal deficit is tracking at a disquieting 9.2% of GDP, driven in part by the surging net interest bill, which was exacerbated by the large losses on the central bank stock of Dollar-swaps.” Here’s what Capital Economics had to say after an emergency swaps auction was called by Copom in a desperate attempt to shore up the BRL last week:

…click on the above link to read the rest of the article…

In Latest Sign Of EM Chaos, Turkey’s FX Reserves Fall Below Key Threshold Ahead Of Pivotal Elections

In Latest Sign Of EM Chaos, Turkey’s FX Reserves Fall Below Key Threshold Ahead Of Pivotal Elections

One of the key things to understand about the veritable meltdown that’s unfolded across emerging markets is that there’s more to the story than the headline risk factors.

That is, while the list of proximate causes that includes a decelerating China, collapsing commodity prices, and uncertainty over when or even if the Fed will hike goes a long way towards explaining the carnage that’s unfolded across EM, each country has its own set of unique circumstances to grapple with. Indeed, the idiosyncratic political risks playing out across emerging economies have taken center stage as Brazil attempts to navigate congressional gridlock, Malaysia struggles with the 1MDB scandal, and Turkey faces new elections in November.

While there’s no question that the political situation in Brazil is particularly troubling, it would be difficult to imagine a more precarious scenario than that which exists in Turkey, where President Recep Tayyip Erdogan has managed to subvert the democratic process by starting a civil war, and thanks to the strategic significance of Incirlik, the effort is co-sponsored by the US and NATO.

Of course extreme political uncertainty, a bloody civil war, and an unfolding proxy war just across the border do not inspire much confidence, which helps to explain the fact that Turkey’s FX reserves have now fallen below $100 billion for the first time since 2012:

And here’s an updated look at the lira which is in the midst of a rather epic decline (which threatens to destabilize inflation) thanks to everything noted above combined with a central bank that either i) doesn’t understand the gravity of the situation, or ii) is loathe to hike rates going into the election:

…click on the above link to read the rest of the article…

Shale Oil’s “Dirty Little Secret” Has Been Exposed

Shale Oil’s “Dirty Little Secret” Has Been Exposed

On Friday, on the way to diving into Goldman’s $20 crude call, we recapped our characterization of low crude prices as a battle between the Fed and the Saudis, a battle which is now manifesting itself in budget troubles in Riyadh and a concurrent FX reserve burn. Here’s what we said:

When Saudi Arabia killed the petrodollar late last year in a bid to bankrupt the US shale space and secure a bit of leverage over the Russians, the kingdom may or may not have fully understood the power of ZIRP and the implications that power had for struggling US producers. Thanks to the fact that ultra accommodative Fed policy has left capital markets wide open, the US shale space has managed to stay in business far longer than would otherwise have been possible in the face of slumping crude. That’s bad news for the Saudis who, after burning through tens of billions in FX reserves to help plug a yawning budget gap, have now resorted to tapping the very same accommodative debt markets that are keeping their competition in business as a fiscal deficit on the order of 20% of GDP looms large.

Still, as we went on to point out, it looks like the Saudis have dug in for the long haul here and the strain on non-OPEC production is starting to show as the IEA now says “the latest tumble in the price of oil is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades, as lower output in the United States, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d.”

“US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year,” the agency adds.

…click on the above link to read the rest of the article…

 

 

 

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.

“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reportedat the time.

The reason this is so ironic is that at various times, we’ve characterized persistently low crude prices as essentially a battle between the Fed and the Saudis. Many struggling US producers would likely have been out of business months ago were it not for the fact that ZIRP has kept capital markets wide open, allowing otherwise insolvent drillers to stay afloat. Obviously, that works at cross purposes with Riyadh’s efforts to “preserve market share”, and so ultimately, the Saudis are betting their FX reserves can outlast ZIRP.

There are other factors at play here that weigh on Saudi Arabia’s financial situation including two proxy wars and the defense of the riyal peg which is why turning to the bond market is an attractive option especially considering that capital markets are so favorable thanks to – and here’s the irony – the very same Fed policies that are keeping US shale producers in business. 

But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg:

 

…click on the above link to read the rest of the article…

The “Great Accumulation” Is Over: The Biggest Risk Facing The World’s Central Banks Has Arrived

The “Great Accumulation” Is Over: The Biggest Risk Facing The World’s Central Banks Has Arrived

To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century.

When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets. 

Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.

On Tuesday, Deutsche Bank is out extending their “quantitative tightening” (QT) analysis with a look at what’s ahead now that the so-called “Great Accumulation” is over.

…click on the above link to read the rest of the article…

 

 

 

Why The Great Petrodollar Unwind Could Be $2.5 Trillion Larger Than Anyone Thinks

Why The Great Petrodollar Unwind Could Be $2.5 Trillion Larger Than Anyone Thinks

Last weekend, we explained why it really all comes down to the death of the petrodollar.

China’s transition to a new currency regime was supposed to represent a move towards a greater role for the market in determining the exchange rate for the yuan. That’s not exactly what happened. As BNP’s Mole Hau hilariously described it last week, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Of course a reduced role for the market means a greater role for the PBoC and that, in turn, means FX reserve liquidation or, more simply, the sale ofUS Treasurys on a massive scale.

The liquidation of hundreds of billions in US paper made national headlines this week, as the world suddenly became aware of what it actually means when countries begin to draw down their FX reserves. But in order to truly comprehend what’s going on here, one needs to look at China’s UST liquidation in the context of the epochal shift that began to unfold 10 months ago. When it became clear late last year that Saudi Arabia was determined to use crude prices to bankrupt US shale producers and secure other “ancillary diplomatic benefits” (think leverage over Russia), it ushered in a new era for producing nations. Suddenly, the flow of petrodollars began to dry up as prices plummeted. These were dollars that for years had been recycled into USD assets in a virtuous loop for everyone involved. The demise of that system meant that the flow of exported petrodollar capital (i.e. USD recycling) suddenly turned negative for the first time in decades, as countries like Saudi Arabia looked to their stash of FX reserves to shore up their finances in the face of plunging crude. 

…click on the above link to read the rest of the article…

 

 

Saudi Arabia Faces Another “Very Scary Moment” As Economy, FX Regime Face Crude Reality

Saudi Arabia Faces Another “Very Scary Moment” As Economy, FX Regime Face Crude Reality

“They are working for their market share, not for the price,” Kazakh Prime Minister Karim Massimov told Bloomberg on Saturday, during the same interview in which he predicted that sooner or later, dollar pegs in Saudi Arabia and the UAE would have to be abandoned.

The Saudis are essentially betting that their FX reserves all large enough to allow the Kingdom to ride out the self inflicted pain from persistently low crude prices on the way to bankrupting the US shale space. But the battle for market share comes at a cost, especially when ultra easy monetary policy in the US has served to kept capital markets open to heavily indebted drillers, allowing otherwise insolvent producers to remain in business longer than they otherwise would. It is, as we’ve noted before, afight between the Saudis and the Fed.

In the midst of it all, the petrodollar has died a rather swift if quiet death and as we documented on Saturday, the demise of the system that has served to underwrite decades of dollar dominance has left emerging markets in no position to defend themselves in the face of China’s move to devalue the yuan. With Kazakhstan’s decision to float the tenge, we are beginning to see the post-petrodollar world (or, the “new era” as Karim Massimov calls it) take shape.

Over the weeks, months, and years ahead we’ll begin to understand more about the fallout and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that’s fueling speculation about the viability of the dollar peg. Here’s Bloomberg on why the current situation mirrors a “very scary moment” in Saudi Arabia’s history.

…click on the above link to read the rest of the article…

 

 

 

Meet the bureaucrat who had the courage to tell the truth (and probably won’t have a job tomorrow)

Meet the bureaucrat who had the courage to tell the truth (and probably won’t have a job tomorrow)

It’s not very often that you hear a senior government official refer to their economic situation using the word ‘crisis’.

Yet with uncharacteristic bluntness of any government official anywhere, at least one senior Chinese government official is sounding the alarm bells.

And he would know.

Guan Tao oversees the foreign exchange of China’s $4 trillion stockpile of reserves, so he has an incredibly unique view of capital flows and currency movements in and out of the country.

Currency movements and capital flows are extremely interesting indicators.

They don’t necessarily tell you that there’s a problem. They tell you that people have figured out there’s a problem.

Look at Greece, for example.

The government is bankrupt, another default is looming, and the country is literally about to run out of money. It’s pretty obvious that there’s been a problem for a very long time.

But the central bank data in Greece now shows that roughly 8% of all customer deposits have vanished from the Greek banking system so far this year.

That’s an astonishing figure.

 

…click on the above link to read the rest of the article…

Will There Be Forced Official Sellers of Gold? |

Will There Be Forced Official Sellers of Gold? |.

Possible Side-Effects of Plunging Commodity Prices – A Look at Russia

One of our readers wrote to us with a question on a topic that will surely be of interest to a wider audience. Here is what he asked:

“As FX reserves dwindle, surely there is some potential that Russia may be forced seller of Gold? I understand your views re gold market, but would be most interested to hear your thoughts on the possible impact? Are there other options? Talk of gold backed RUB, default on USD debts, etc.

It is clear that a number of major oil producers are in severe trouble. However, Russia’s central bank has actually increased its gold reserves in recent months. It is now the world’s 5th largest official holder of gold, after increasing its stock pile to 1,150 tons in September (the most recent data available).

To this it must be kept in mind that Russia itself is a major producer of gold, the third largest in the world in fact, mining about 250 tons per year. The central bank is involved in the marketing of this gold, acting as an intermediary for producers. Still, in spite of increasing its gold reserves quite a bit, they still only represent about 10% of Russia’s total reserves. Here is by the way a chart of gold in ruble terms:

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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