the strong usd

[Chomsky]

Re: the strong usd

That is one of my favorite Snider pieces. It really helps to understand one reason WHY banks may hoard treasuries, which they are.

[Mega]

Re: the strong usd

"Not investments, insurance!"

Hmmmmmmmmmm................like they expecting "something"

[kbird]

Re: the strong usd

That is one of my favorite Snider pieces. It really helps to understand one reason WHY banks may hoard treasuries, which they are.

The high interest rate in the United States compared to other countries combined with inverted yield curves in Europe/Japan are causing foreign CBs to use up U.S. dealer reserves by putting their capital into foreign RRP (repo) facilities at U.S. dealers like JPM.

This allows foreign CBs to keep their currency exchange rate low while also taking advantage of attractive overnight interest rates in the United States.

Below is a link to a hard to understand note but this guy seems to understand what’s going on. I've read it 3 or 4 times.

https://research-doc.credit-suisse.c...34061071196160

If he’s correct, the fix seems simple. The Federal Reserve needs to drop rates further to scare off the foreign CBs.

[thriftyandboringinohio]

Re: the strong usd

The high interest rate in the United States compared to other countries combined with inverted yield curves in Europe/Japan are causing foreign CBs to use up U.S. dealer reserves by putting their capital into foreign RRP (repo) facilities at U.S. dealers like JPM.

This allows foreign CBs to keep their currency exchange rate low while also taking advantage of attractive overnight interest rates in the United States.

Below is a link to a hard to understand note but this guy seems to understand what’s going on. I've read it 3 or 4 times.

https://research-doc.credit-suisse.c...34061071196160

If he’s correct, the fix seems simple. The Federal Reserve needs to drop rates further to scare off the foreign CBs.

Thanks kbird, that's a great article. My favorite bit is this (emphasis mine):

...…as it used to be that when foreign central banks intervened to weaken their currency, they bought dollars which were invested in Treasuries. However, it appears that the recent EM currency weakness sparked by the PBoC’s move to nudge the renminbi lower– following President Trump’s recent tariff tweet – was orchestrated through interventions where dollars were not invested in solely in Treasuries but also the foreign RRP facility...

As you point out, the article says that the overnight borrowers are no longer just the banks adjusting their balance sheets in the traditional way. Now the borrowers also include foreign central banks making an arbitrage play because RRP rates are above treasury rates.

It also offers us a really great turn of phrase - " the collateral tsunami”.
And the last conclusion is pretty interesting:

...In English, that means that the Treasury is funding the federal deficits o/n on the margin...

Since the US debt and deficit are going to hell and picking up speed the last couple years, it's not clear what choice the treasury has. Especially since foreign CBs would rather lend to the RRP than buy treasuries directly.

The suggestion to drop rates further would seem to result in a classic "beggar thy neighbor" scenario where nations enter a tit-for-tat cycle of interest rate reductions. Since interest rates no longer have a zero bound, we might see increasingly negative rates becoming absurd. I remember the early 1980s when a 30 year fixed rate mortgage was 16% and the fed funds rate was 20%. Maybe we should brace ourselves for similar numbers with a negative sign.
.
.
.
.

[touchring]

Re: the strong usd

The suggestion to drop rates further would seem to result in a classic "beggar thy neighbor" scenario where nations enter a tit-for-tat cycle of interest rate reductions. Since interest rates no longer have a zero bound, we might see increasingly negative rates becoming absurd. I remember the early 1980s when a 30 year fixed rate mortgage was 16% and the fed funds rate was 20%. Maybe we should brace ourselves for similar numbers with a negative sign.

Thanks. Why would anyone want to put money in an account where they can get back only 80% of what they put in after 1 year?

[jk]

Re: the strong usd

Thanks. Why would anyone want to put money in an account where they can get back only 80% of what they put in after 1 year?

pension plans and insurance companies may be forced to by regulations. individuals and investment pools would do it in the hope that yields would drop still further, producing capital gains greater than the negative yield loss.

[thriftyandboringinohio]

Re: the strong usd

I think individual people will behave differently than big corps or financial institutions. You and I can keep fifty grand in cash in a small safe to avoid negative interest. CALPERS or JPM Chase can’t keep 20 billion in paper currency. So maybe negative interest will leave the little people alone but hit the big actors.

[GRG55]

Re: the strong usd

I really don't think there's much chance now the global reserve currency will go into negative rates.
Negative interest rates have the most effect when applied to societies with a high propensity to save instead of consume.
I don't anybody can accuse the USA of fitting that description.

The uncorking of fiscal spending worldwide is likely to create the inflation that monetary policy by itself was unable to create. Europe, which has been following an absolutely disastrous fiscal austerity policy led by the Germans, may be coming to its senses now that the German economy is at risk of contraction. Incoming ECB head, Lagarde, is a fiscal dove advocate.

The UK, post-Brexit will have to implement quite a bit of government support policy to ease the transition.

In the USA the Dems best policy wonk, current nomination frontrunner (and the Dems best hope to capture the White House), is advocating opening the fiscal taps. If Trump is re-elected there's little indication of any austerity movement from the Republicans.

In Canada, where we are in the midst of a Federal election campaign, the incumbent government party, which has been running all time record fiscal deficits for the last four years (currently $19 Billion deficit) is in a race with opponents to see which can promise more giveaways than the other. Its positively breathtaking. I have no difficulty imagining $80 Billion to $100 Billion deficits in Canada, with commensurate major tax increases on pension savings, residential capital gains, and other assets.

China? Well what's to say. It's a real mess; totally predictable. Growth will continue to slow and the Chinese will continue to try to "fool all of the people all of the time" into believing otherwise. I used to think Europe would be "the next Japan", but now I am not so sure.

We may see global interest rates, led by the USA, slowly start a secular rise starting some time in 2020.

[touchring]

Re: the strong usd

We may see global interest rates, led by the USA, slowly start a secular rise starting some time in 2020.

Ok, so interest rates will drop to nearly zero but won't go negative, then it will rise again in 2020. Isn't this too short a period of time for all this to happen? By the way, rising rates will be bad for gold if it happens.

[GRG55]

Re: the strong usd

Ok, so interest rates will drop to nearly zero but won't go negative, then it will rise again in 2020. Isn't this too short a period of time for all this to happen? By the way, rising rates will be bad for gold if it happens.

yes, a rising US$ is usually bad for gold.

Gold works best when real interest rates are negative. If, as I expect inflation starts to rise with dramatically accelerating fiscal expenditures worldwide, interest rates will increase but likely lag the rate of inflation. That should be gold positive over time. But I don't see a compelling case to hold gold or other PMs, or commodities at this time.

[Chris Coles]

Re: the strong usd

Thanks. Why would anyone want to put money in an account where they can get back only 80% of what they put in after 1 year?

It is my understanding, taken from reading recent posts by Daniel Amerman that the purchase of bonds at negative interest rates means that the purchaser pays the full interest burden up front and thus the seller realises a massive single year income. This was the starting point for his debate: http://danielamerman.com/va/ccc/B2ZeroArb1.html

[touchring]

Re: the strong usd

yes, a rising US$ is usually bad for gold.

Gold works best when real interest rates are negative. If, as I expect inflation starts to rise with dramatically accelerating fiscal expenditures worldwide, interest rates will increase but likely lag the rate of inflation. That should be gold positive over time. But I don't see a compelling case to hold gold or other PMs, or commodities at this time.

I won't hold industrial commodity or oil at the moment. But won't gold be attractive if cash carries a negative yield? Other than real estate of course.

[jk]

Re: the strong usd

The uncorking of fiscal spending worldwide is likely to create the inflation that monetary policy by itself was unable to create. Europe, which has been following an absolutely disastrous fiscal austerity policy led by the Germans, may be coming to its senses now that the German economy is at risk of contraction. Incoming ECB head, Lagarde, is a fiscal dove advocate.

as usual, eu economic policy will be whatever is best for germany.

. I have no difficulty imagining $80 Billion to $100 Billion deficits in Canada, with commensurate major tax increases on pension savings, residential capital gains, and other assets.

tax increases would nullify the whole program. gov'ts all around the world have to pump a lot of "money" into the system to create the inflation that will lower the real value of all the debt that's been accumulated. that's the sub rosa jubilee.

We may see global interest rates, led by the USA, slowly start a secular rise starting some time in 2020.

low nominal rates for years, then rising nominal rates. negative real rates for many years.

[Chomsky]

Re: the strong usd

Dollar going down in 2020? This is Luke Gromen's thesis.

The Most Crowded Trade

https://seekingalpha.com/article/4294621-crowded-trade

[GRG55]

Re: the strong usd

The world needs a lower US$.
I'm not nearly as certain the world is going to get a lower US$.