There are just not enough dollars today to meet the fantastic array of nuanced and complex dollar demand in both U.S. and global markets.
This means big, big trouble ahead – and hence money printing at full speed.
How do we know? Well, we’ve seen this movie before-in fact, we’re part of the system that wrote the script.
Here’s what we mean…
The First Tremors
Last week, we sifted through all the confusing minutia and noise behind the recent panic in the otherwise open-fraud scheme that is the U.S. repo market (i.e. private banks levering GSE deposits for guaranteed payouts from Uncle Sam which you fund as the taxpayer).
Despite all this noise, and despite being completely ignored by the headlines of an otherwise teenage-level savvy mainstream financial media, the entire repo story simply boiled down to this: There weren’t enough dollars to keep it going.
As a result, the Fed printed more dollars and dumped a $1 trillion rollover facility into the repo markets.
After all, there’s nothing a money printer can’t temporarily solve.
Unfortunately, however, this little hiccup we recently observed in the repo markets was not an isolated event, but rather a symptom of a much larger and systemic problem that was equally responsible for the crisis of 2008. In fact, it will be the key factor in the next financial crisis – namely a shortage of U.S. dollars – also known as a dollar liquidity crisis.
The Fed and the U.S. Treasury, of course, are the official and perceived overseers of U.S. dollar supply. Most investors thus assume that these institutions know what they are doing and are “in control.”
If only this were true…
Unfortunately, and as we’ll reveal below, the Fed does not know what it’s doing when it comes to U.S. dollar liquidity. More importantly, the Fed is not in control of the supply of U.S. dollars.
Again, you won’t learn of this in the typical media headlines, nor even at the offices of the finest banks or fancy diploma advisors. Almost no one gets this. Almost no one sees it.
Now, however, YOU will.
The Insider Truth
My colleague and I founded Critical Signals Report because, as former bank, intel, finance, military, legal, and hedge fund insiders, we see and know more about market facts (rather than market spin) than most talking heads – and certainly more than most financial journalists.
We have access to bigger picture facts as well as knowledge of micro-level signals, which we share. That, and we talk to lots of beltway and Wall Street folks – from the wise to the clueless.
Our primary mission here is to sift through this info and make sure that otherwise hidden facts are shared with Main Street Americans and not smugly hidden from site by small circles of self-appointed “elites.”
And what we hear and see between D.C. and London et al deserves to be shared plainly with you, so that more and more real people can see and understand the obvious but otherwise hidden forces impacting their financial future.
So, what is the ticking time bomb that no one (from Fox to CNBC, Bloomberg Radio to NPR) is publicly touching upon?
What is the silent poison lurking beneath our national and global market system that no one at the Eccles Building, the White House, or the Treasury Department is discussing, let alone fully understanding?
Well, it all comes down to these two misunderstood words: Eurodollars.
How the Eurodollar System is Quietly Killing U.S. and Global Markets
So, what are Eurodollars and just why in the heck are they so critical to the future of the U.S. and global economy over the next few years?
In basic terms, a Eurodollar is just a U.S. dollar held on deposit anywhere (not just in the Eurozone) outside of the U.S.
One can therefore think of foreign banks like SocGen or Deutsche Bank making simple, clean, and direct loans to foreign companies denominated in these “Euro” dollars – i.e. U.S. dollars held overseas.
But nothing the big banks do ever stays simple, clean, or direct for very long. These banksters just can’t help themselves.
Sure, the Eurodollars have been floating around the world in greater force since the mid-1950s, but banks (and bankers) can’t help but come up with clever ways to make simple transactions complex, as they can easily hide all kinds of greed-satisfying and wealth-generating schemes behind such complexity.
Thus, rather than foreign banks using U.S. dollars overseas to make simple, direct loans to corporate borrowers that can be easily tracked and regulated on the asset and liability columns of offshore bank balance sheets, these same bankers have spent the last few decades getting more and more creative – which is to say, more and more toxic and out of control.
Rather than using Eurodollars for direct loans from Bank “X” to Borrower “Y,” offshore financial groups have been busy using these dollars for complex interbank borrowing, swap schemes, futures contracts, and levered derivative transactions.
These mind-numbingly complex transactions have acted as extreme dollar multipliers entirely outside the purview or control of regulatory bodies like the Fed and now exist at what is essentially infinite leverage multiples.
That is, when U.S. banks like Bear Sterns or Lehman Brothers were leveraging U.S. dollars in subprime derivative landmines at leverage multiples of 60:1, it was a problem.
Well, what we are seeing overseas in the unregulated Eurodollar market is a leverage ratio of U.S. dollars that is much, much, much higher – and makes the Bear Sterns of 2008 seem like child’s play by comparison today.
What this basically means is that the actual amount of U.S. dollars in overseas shadow banking transactions is massively beyond the pale of what the Fed thinks it is, and, more importantly, is massively beyond the pale of anything the Fed can control.
Thus, as Powell tinkers with adjusting interest rates or printing more money here in the U.S. to ostensibly “control” the amount and price of U.S. dollars, he is effectively chasing windmills, or playing chess as Rome burns.
There are now trillions in uncontrollable/unregulated U.S.-dollar liabilities floating around (and clogging up) an uber-complex international banking and derivatives system that is so interconnected and beyond the measures of complexity theory that trying to untie these financial knots and counter-party complexities would be akin to untying the knots of 1,000,000,000 fly-fishermen all at once.
In other words, impossible.
With all these U.S. dollars (trading as “Eurodollars”) tied up in countless and unregulated banking schemes and derivatives instruments, the actual amount of available U.S. dollars is inextricably tied up in all these many “knots.”
In other words, there are simply less dollars available for use (including emergency use) in these over-levered/risk-high markets – which is what the fancy lads call a “liquidity squeeze.”
In fact, despite all the well-deserved attention subprime mortgages received for being the cause of the 2008 Great Financial Crisis, here’s a little secret from inside Wall Street: Sure, subprime instruments were the “patient zero” of the recent disaster, but the real killer in 2008 was a lack of dollar liquidity, much of which was tied up in these Gordian Eurodollar knots of which almost no one understands, discusses or knows how to control.
That is a ticking time bomb.
Defusing the Eurodollar Liquidity Squeeze?
So how can we diffuse this ignored and misunderstood danger?
Well, John Maynard Keynes warned about this in 1944; the head of the People’s Bank of China warned about this in 2011; and just this summer, Mark Carney, the Governor of the Bank of England, warned about this at the Fed’s little banker retreat in Jackson Hole.
What was the suggested option from the head of England’s central bank? Simple – we need to replace the U.S. dollar as the world’s reserve currency with a neutral, electronic currency to settle international payments with a new, floating system that replaces the dollar.
That’s a big deal. And yet it never made the headlines. Big shocker, eh?
The sad and hidden but otherwise undeniable truth of the matter is that the U.S. dollar is no longer under the control of an increasingly clueless Federal Reserve. When the supply of dollars tightens/shortens, crisis always follows.
We saw another taste of this dollar shortage in action last week during the repo scare.
But, again, that was mere child’s play compared to what prior dollar liquidity shortages can and have done to markets, as we saw as recently as 2008, when our markets suffered over $2 trillion (!) in U.S. dollar liquidity squeeze (aka “funding gap”).
How was this “gap” filled? You guessed it: money printing gone wild.
Going forward, and with the recent (and completely downplayed) tremors of the cash-poor repo market still in our rearview mirror, the insiders in D.C. and Wall Street are bracing themselves for further dollar liquidity shocks – i.e. major market disasters driven by “funding gaps” – aka a lack of enough dollars.
The Fed knows this as well – just barely. They certainly are in no position today to simply release the U.S. Dollar from its global reserve status.
This means that the only tool available to the Fed when the next dollar-liquidity crisis sends our markets and economy over yet another cliff will be more desperate and last-minute money printing.
Yep. That’s the only tool we have left. And I’m talking money printing like you can’t imagine. Full-on monetization of our debts.
Investing in the New Abnormal
Of course, such measures have nothing at all to do with capitalism or free markets. You can kiss all that goodbye now, if you haven’t already.
Today, we now live, invest, and trade in a centralized market in which central banks have and are losing control over the supply of the U.S. dollar in offshore shadow banking schemes whose embedded and complex risks, dangers, and extremes are understood by only a handful of insiders and would frankly require hundreds of more pages here to fully unpack.
What YOU need to take away from all of this complexity is quite simple: Normal business cycles are now extinct, replaced instead by central bank liquidity cycles.
More and more dollars will be printed down the road, not because I “think so,” but simply because there is literally no other way to keep this now totally rigged to fail system afloat.
As for market volatility and the safety and growth of your money in such a toxic and complex backdrop, we admit that it is becoming increasingly hard to rely upon old predictive measures of market risk or even recession timing to fully make sense of the Twilight Zone in which we now find our capital markets.
We truly are in uncharted and completely distorted waters, where risk outweighs reward at nearly every turn.
In such a distorted “new abnormal,” informed investors have to rely more on what the market is telling them than upon what their opinions or past beliefs might otherwise be whispering in their ears.
This is new terrain for all of us, even for market veterans like my colleague and I.
Rather than pontificate on predictions or timing recessions with perfection (no one can do this), we humbly stick to tracking those critical signals that we know offer the best guidance for you and ourselves.
Equally important to such signals is genuine market information, such as what has been discussed above with regard to the otherwise esoteric Eurodollar market, a topic that not one in 10,000 investors or “experts” even understands.
But now YOU understand.
You are increasingly becoming an informed investor – which is an essential precondition to making the right decisions for your own money and financial futures.
Very soon, we will be sharing more investment strategies and tips for navigating in such a “new abnormal.” In the interim, stay careful, stay patient, and stay informed.
13 responses to “The Ticking Time Bomb that Almost No One Sees Coming”
October 02 2019