Month: April 2020

For the US administration it appears now is as good a time as any to start a major proxy war with Iran inside Iraq.

Or perhaps the distraction of yet another Middle East war is just what the doctor neocons ordered at a moment the United States and the world for that matter faces its biggest crisis since World War II in the form of the expanding deadly pandemic.

Wednesday afternoon the president tweeted out this stunner: “Upon information and belief, Iran or its proxies are planning a sneak attack on U.S. troops and/or assets in Iraq. If this happens, Iran will pay a very heavy price, indeed!“

Upon information and belief, Iran or its proxies are planning a sneak attack on U.S. troops and/or assets in Iraq. If this happens, Iran will pay a very heavy price, indeed!

— Donald J. Trump (@realDonaldTrump) April 1, 2020

For most, the events of January which almost took the US to war with Iran after the assassination of IRGC Quds Forces General Qassim Soleimani, likely feels light-years away into the distant past. 

But here we are again, with Trump suddenly threatening “Iran will pay a very heavy price” — clearly a threat of military strike. This after Pompeo and his gang of neocons and the State Department and Treasury have already ratcheted up sanctions further on the corona virus-ravaged Islamic Republic.

This also comes after last Friday the Pentagon was been ordered by Secretary of State Pompeo to begin planning to wipe out certain Iraqi militias which they believe are Iranian proxies, especially the large Kataib Hezbollah Shia militia.

However, the administration reportedly remains divided, given it would require an influx of thousands more American troops in Iraq, at a moment the Department of Defense is barely able to get a handle on containing the coronavirus outbreak in its ranks, which it should be noted has lately taken out a whole nuclear aircraft carrier. 

The dollar extended gains to session highs immediately following the provocative tweet, with the Bloomberg dollar index climbing up as much as 0.9% on the day, reports Bloomberg.

Authored by Jeffrey Snider via Alhambra Investments,

Yesterday was another day ending in “y”, therefore there must be some new liquidity scheme being announced by the Federal Reserve. For a crisis that many seem confident has been put in the past, the optimists still are going to have to factor that even US central bankers feel they have to keep pulling repo rabbits out of their…somewhere.

Yesterday it is FIMA. Not just FIMA but the FIMA Repo Facility! The abbreviation stands for Foreign and International Monetary Authorities which once more uncomfortably points the world’s attention to US dollar conditions outside the United States. Offshore, you might even say.

Offshore and repo, imagine that.

Foreign officials. US Treasuries. Smooth functioning of financial markets. Temporary exchange in lieu of sale. International currency. What the hell is going on here?

I sincerely doubt Jay Powell reads this blog – I know he doesn’t and never will – but it’s exactly what I wrote yesterday. The Fed has certainly been in touch with the IMF, so they are all aware that the global dollar shortage, the real one, hasn’t actually shown up yet.

So, the idiots that a year ago screwed up the largest single bailout in the IMF’s history, Argentina, now want the world to be reassured as we all face up to the prospects for eighty Argentina’s.

Hey NYSE, real GLOBAL DOLLAR SHORTAGE isn’t even here yet.https://t.co/sbnN1x6lUy pic.twitter.com/HBY3Dc6QYO

— Jeffrey P. Snider (@JeffSnider_AIP) March 30, 2020

Thus, you can take FIMA one of two ways:

• the Fed cultists will be relieved at this proactive stance Jay Powell seems to be taking;

• or you can whisper HOLY SH%$ under your breath as you understand what it means when the IMF as well as Jay Powell acknowledge just what’s before us.

When even the normally self-blinded can see the thing, is that good or is it an indication of just how starkly abnormal this potential future reality might be?

After all, the Fed was being proactive in its September repo rumble aftermath – for all the good that it did.

There is a fundamental mismatch here that’s even more basic than bank reserves versus collateral. This gets to the very center of the whole issue; starting with the question, what is the Federal Reserve?

Asking members of the public, I would wager 99 out of 100 persons would get the answer wrong; and the one who got it right did so by accident. The Federal Reserve is not a central bank, not by any reasonable definition of one. It is instead a bank authority, more importantly a domestic one. This is no trivial distinction, I assure you.

This by no means is a judgment on the public’s judgment, instead it demonstrates just how distorted Economics has twisted reality. You’ve all been taught from the beginning, as I was, how Alan Greenspan’s Fed is the most powerful force in the universe; and how Ben Bernanke in November 2002 gave that force a nickname called “printing press.” It all sounds so very central bank-y that you are forgiven for believing (it took me a long time to make the leap, too; as Milton Friedman said just before he passed, central banks are good at one thing and one thing only: PR).

Being converted into a Fed true-believer right from the start you never ask any questions about the details. That’s the thing about faith. How does this purported central bank actually accomplish its central bank chores? Moving the fed funds rate around a quarter point here or there doesn’t quite add up.

And so, we are also taught about Open Market Operations, or OMO’s. The Fed doesn’t just move fed funds around, the textbooks all say it controls the short-term rate via OMO’s. The central bank can, if it chooses, add reserves or take them away by buying or selling securities from or to dealers. Voila! There’s your money printing.

Except, no. That may be the standard theory preached in Economics class, but it didn’t actually happen that way in practice. Throughout the eighties, nineties, and middle 2000’s, there were practically no OMO’s – the level of bank reserves, the accounting remainder the Fed does “print”, never really more than $10 billion or so total.

That $10 billion balance was supposed to have been the Fed’s control element (aside: this is the steep part of the curve they were talking about in recent repo papers) in a multi-tens of trillion system spanning the entire world? And that’s the other thing; where did this LIBOR thing come from?

LIBOR is the London InterBank Offered Rate. Developed in the late sixties for Iran, yes, sixties and Iran, as the name tells you these are dollars offered between banks in London. Everyone knows that the US dollar is the world’s reserve currency, but a big part of Fed faith is never asking what that means, either.

So, we have some vague notions about OMO’s and US dollars doing some things overseas. With Alan Greenspan’s “maestro” performance, there was never any apparent reason to get into specifics. Just go along with it; let the professionals sweat the small stuff.

On August 9, 2007, however, suddenly LIBOR and fed funds were dancing to someone else’s tune rather than Ben Bernanke’s.

That point was forever driven home on August 10 when LIBOR went further up while fed funds suddenly plunged.

What followed was first a plea to use the Discount Window followed by rate cuts, OMO’s, TAF’s, TALF’s, PDCF’s, MMFCF’s, etc. In other words, the FOMC attempted to put in practice what had been only theory. Balance sheet expansion, billions and then trillions of bank reserves. Still fed funds down, LIBOR up. Overseas dollar swaps and a healthy dose of foreign names on the TAF lists. Still fed funds down, LIBOR up. GFC1.

This was the whole crisis in one picture. But what did it actually mean?

The dollar’s presumed role as global reserve currency had been carried out for decades by a global banking network that only seemed to be responding to the “maestro.” In truth, so long as that monetary system was growing it felt stable with the appearance of the Fed in control (or random good luck). But that growth also meant what Alan Greenspan in June 2000 admitted had been a “proliferation of products” that had long ago expanded and superseded every conceivable monetary boundary – including geography.

Because the world needed and still needs dollars to function, this offshore US dollar bank system sprang up over the course of more than half a century to meet those needs. While it did, the Federal Reserve was never anything more than a domestic bank authority.

This point was driven home right at the outset of GFC1. As I wrote about back in 2017 on the 10th anniversary of the launch of our first lost decade, in September 2007 the FOMC discussed LIBOR and fed funds, specifically how the former was stubbornly persistent at high positive spreads despite their “best” efforts.

You would think the focus of such solemn discussion would be about what the Fed should be doing to bring them down. Instead, officials kept wondering whose problem this was. Seriously.

MS. JOHNSON. So the spreads of overnight pound LIBOR, relative to target, opened up widely, and they were not addressed. They were allowed to just sort of sit there. The term pound market had a problem, too. Of course, many of the dollar issues that we have spoken of— and that Bill talked about—are really being captured as a London phenomenon. But you might say that, from the point of view of the Bank of England or the U.K. economy, these dollar issues are somewhat separate from the domestic economy. [emphasis added]

Is the central bank responsible for money, in this case dollars – all of them everywhere? Or, is the Federal Reserve merely a domestic bank authority whose authority and attention applies only to banks operating within the US border? We are all taught to believe it is the former when in truth it has always been the latter, as Kathleen Johnson so dutifully pointed out in September 2007.

Let’s boil this down into specifics; if RBS, for example, a bank who had been heavily involved in the global, offshore US dollar system for decades finds itself in trouble for lack of US$ funding offshore, whose problem is that? The Federal Reserve says it is the Bank of England since the specific issue is an English bank, while the Bank of England understands this is a US dollar run.

The domestic bank authority, the Fed, is therefore totally ill-suited to handle the realities of a global monetary system. The inevitable result was the “somehow” Global Financial Crisis; those that might’ve wanted to strike at the crisis directly were unable, while those that, theoretically, could have wanted no part of it; or as little as possible.

To stay true to its mandate, our domestic bank authority came up with overseas dollar swaps in order to literally pass the buck. Bernanke’s Fed acknowledged the “London” dollar problem but in keeping true to its domestic mission simply offered dollar resources, bank reserves, to these other foreign central banks so that the foreign central banks might be able to take care of their own. In US$s.

They weren’t really suited to do that, either. That’s how the repo market ended up being the lender of last resort, until collateral was squeezed right out of it.

To this massive and growing global dollar shortage, Bernanke’s Fed said: not my problem, take some bureaucratically determined dollars and you sort it out!. What got our domestic bank authority moving was only how and where the raging GFC1 impacted their domestic banks (leading to the ridiculously fallacious doctrine of “abundant” reserves), which was guaranteed to happen because it was a world-spanning crisis. The whole house was a raging inferno but Bernanke’s firefighting crew only sprayed down the garage because that’s the instructions they had from the city.

Of course the garage (and house) burnt almost completely to the ground anyway.

The consequences of this mismatch are, and have been, disastrous. GFC1 was only the beginning. Not only are we looking at GFC2, in between them was a full decade without economic growth. I’m not sure how it could have been much worse.

It has only been recently that the official world has begun to understand the implications. Starting with the rising dollar. Not all that long ago considered a good thing, Janet Yellen’s King Dollar embarrassment, the easiest correlation in the monetary world to make was finally made by these Economists in the last few years.

But why does the dollar rise? How do we get it to stop?

If you think those are the questions Jay Powell is right now asking himself you’d be wrong. FIMA is yet more proof. The Fed is still behaving as if this is someone else’s problem.

What I wrote yesterday is that the world is facing an even larger dollar shortage ahead of us than what we’ve already experienced in March 2020. The IMF rarely gets more a single emergency request for funding. It’s gotten around eighty recently with more expected.

Why?

There are, by and large, two ways a foreign location can come up with the dollars it needs (the short) to participate in the global economy; and most places don’t have the luxury of being self-sufficient, so trade isn’t a choice and therefore dollar availability is a must.

The first is the old-fashioned way – mercantilism. You sell goods to other places around the world and they give you dollars in return. When people refer to the so-called petrodollar, that’s what it means where oil rich nations have been concerned (and it isn’t anything more than that despite years of people trying to imbue other purposes).

Global trade, however, is about to be curtailed to an extent that will probably exceed GFC1, in terms of depth and likely duration (for many places the Great “Recession” was sharp but ultimately short). Therefore, countries previously dependent upon mercantile trade to source a great deal of their dollar short requirements are about to be almost totally shut out. For the oil producers, it’s already in the price of oil.

That’s the double in the dollar double whammy; the financial system has already largely shut down. Once those trade dollars dry up, too, where does anyone go to get them?

But that’s not Jay Powell’s problem, he says. The Fed’s answer is banks in whichever country should apply for aid from whomever’s local central bank. Not the Fed.

What the Fed will do is supply limited dollar swaps with some other central banks. Since there are only a dozen or so of them, and the IMF has already reported massive interest from almost all other countries (one of my main points yesterday), in the case of countries whose central bank or monetary authority isn’t a counterparty to the Fed’s dollar swaps there’s now FIMA.

The extra wrinkle is FIMA’s repo piece. Normally, as I’ve been documenting for a very long time, when confronted with a dollar shortage (as have happened two other times in between GFC1 and GFC2) the foreign central bank would “sell US Treasuries” in the attempt to make up the difference. “Sell UST’s” is in practice a euphemism for foreign officials “supplying dollars” that the eurodollar market won’t.

But “selling UST’s” means mobilizing foreign reserves, driving down the visible stock for everyone to see; which advertises to the world just who has the biggest dollar problem (the nightmare scenario). It’s exactly like the Discount Window’s stigma problem only in this case for the dollar short of entire national systems.

The FIMA Repo Facility gives these overseas monetary authorities the option to bypass the “selling” of their UST’s by letting them instead exchange them (repo) with the Fed for cash (bank reserves). For six months (or longer, if extended), foreign monetary officials – and only foreign monetary officials – will be connected to the Fed for bank reserves in a way that hides who is doing what.

Whatever happens to those dollars from there is up to the foreign monetary officials.

If this sounds familiar, it should. The TAF auctions during GFC1 were nothing more than a re-invented Discount Window with anonymity, therefore no stigma. We now have entire countries who wish to hide their dollar shortages instead of just banks seeking to obscure individual funding problems.

As I wrote last October in my FTM series, it really is setting up to be a shadow shadow run (just once I’d really, really like it if I could be right about something good, fun, and happy).

In a shadow panic, like 2008, banks sought to remove liability exposure to other banks – to reduce interbank unsecured lending (that private liquidity I spoke about above). Because it was a bank panic of only banks panicking, it was called shadow (also offshore). As we’ve just been shown, banks are still protecting themselves from this risk – fighting that last war so to speak – by refusing to step in and provide liquidity even in the secured lending market (repo).

A shadow shadow panic might be where some other type of player beyond the visible depositories is hit hardest by liquidity problems. It’ll still be another big funding squeeze, but it’ll be the corporate market or maybe whole countries at the brink.

The FIMA Repo Facility is the Fed confirming that my shadow shadow run scenario is a very real, maybe even a likely possibility. Foreign governments are about to be overwhelmed by dollar problems as the full double whammy of GFC2 is still on the horizon.

Cheery, I know.

And here’s the worst part. With the Fed still refusing total dollar responsibility, no matter how big the eurodollar shortage facing the world, it’s as I wrote yesterday: ¯\_(ツ)_/¯. Hell of a way to face a global crisis. 

FIMA doesn’t change anything. Instead of selling UST’s like foreign central banks would be doing they’ll now repo them to the Fed – ending up in the same way as other countries had been using dollar swaps. Did the swaps work? No, of course they didn’t.

None of these things solve the basic underlying dollar problem. This isn’t currency elasticity, it’s the appearance of elasticity without anyone officially acknowledging the real currency. At best, and this is tenuous, they attempt some cover for others to look like they are applying a solution.

Furthermore, instead of the funding markets being able to discern which countries are worst off by simply identifying where reserve balances are shrinking the most, eurodollar banks will now stop funding for everyone because, with reserve balances preserved by the FIMA repo, they can’t identify the weakest cases so, like in every crisis, they’ll just assume everyone is. Since nobody will know just who is the riskiest or how to separate merely a bad situation from an inescapably bad one, it becomes TAF revisited.

Fundamentally, we have a global (euro)dollar system in which the public still believes there is a central bank backstop (thank you, subprime mortgages!) Instead of a dollar central bank, we have a US bank authority whose primary interest is in making the public believe it is a dollar central bank – so long as no one asks questions or thinks too deeply about practical details.

All with a series of elaborate puppet shows, theater which now includes FIMA. Everything our banking authority does is designed to further hide even the biggest problems, not tackle any of them.

That means screw the mandates and regulatory restrictions; this is a crisis. Get them changed immediately. The US boundary doesn’t matter for the monetary system and hasn’t for decades, therefore the central bank (because that’s all we have available at this moment) isn’t a US central bank but a dollar central bank. There’s an enormous difference.

HOLY SH$% is right.

Gallup has been polling Americans on the COVID-19 crisis daily since March 13. Here are new results from Gallup’s interviewing through March 29, as well as highlights from the past two weeks.

Social Distancing Still on the Increase

Gallup last reported Americans’ adherence to the nation’s new social distancing norms on Friday, based on data collected via web using the Gallup Panel from March 20-22. Since then:

• The percentage avoiding small gatherings, such as with friends and family, has surged 15 percentage points to 83%.

• The percentage reporting they are avoiding public places, like stores and restaurants, has increased six points to 78%.

• The percentage avoiding mass transportation, including air travel, has leveled off near 90%.

• Gallup ceased asking Americans whether they are avoiding crowds after this reached 92% in March 20-22 interviewing.

Since Gallup’s original measurement of social distancing, based on March 13-15 interviewing, all societal groups have adopted stricter social distancing practices, including avoiding public places – but certain differences have held constant. As shown in the table below, women, young adults, Democrats and residents of the most densely populated areas tend to be following this recommendation most strictly.

Nation Increasingly Willing to Stay Home

In another indication that Americans are taking social distancing more seriously, an expanding percentage of Americans, now 64% up from 58% last weekend, say they are very likely to comply with a potential public health directive to remain in their homes for 30 days.

Americans Overwhelmingly Endorse the Recovery Package

According to Gallup polling over the weekend, 77% of U.S. adults approve of the recently passed $2 trillion economic relief package designed to help Americans and businesses weather economic dislocation caused by the public health crisis.

Learn more in this write-up by Gallup’s Jeffrey M. Jones: Bipartisan Support for COVID-19 Rescue Legislation (March 30)

Gauging the Effect on U.S. Workers

Gallup is monitoring changes in employment, worker productivity and worker engagement during the COVID-19 crisis. Megan Brenan’s March 27 article, U.S. Employees Increasingly Seeing COVID-19 Effects at Work, summarizes the latest important findings from this research.

These articles from the prior week show how much has changed in workers’ expectations for — and experience of — the crisis in a very short period of time.

Most U.S. Workers Not Yet Drastically Impacted by COVID-19 (March 19)

Half of U.S. Workers Expect COVID-19 to Harm Workplace (March 16)

Americans Wary of Economic Impact

The following articles document that Americans are well aware of the impact that the health crisis and measures being taken to end it are likely to have on the U.S. economy.

Americans Increasingly Expect Economic Recession (March 26)

U.S. Economic Confidence Slides Amid Coronavirus Situation (March 18)

Most U.S. Adults Expect Long-Term COVID-19 Disruption (March 25)

Rating the Nation’s Leading Actors in COVID-19 Crisis

Americans’ initial reaction to the job that various public health and elected officials are doing leading the country through the crisis is relatively positive. As detailed in Justin McCarthy’s March 25 article, Coronavirus Response: Hospitals Rated Best, News Media Worst, approval ranges from a high of 88% for U.S. hospitals to a low of 59% for Congress. It also finds 82% of workers approving of their employer’s handling of the situation, but only 44% approving of the news media.

Personal Risk and Worry About Contracting COVID-19

Americans’ worry about themselves or a family member being exposed to the coronavirus rose sharply between February and March. As the number of Americans afflicted with COVID-19 surges, that shift may also reflect Americans’ growing understanding that the highly contagious virus is especially dangerous for those with certain common pre-existing health conditions, such as diabetes, asthma and heart disease.

A special analysis by Gallup’s Dan Witters and Sangeeta Agrawal estimates that as many as 11 million Americans are at risk for experiencing severe complications from the virus should they contract it, a worst-case figure that assumes all Americans are exposed.

Read Frank Newport’s recent summary of the latest polling by Gallup and others on the coronavirus in his March 27 piece, Six Emerging Conclusions: Public Opinion and COVID-19.

Authored by Michael Snyder via The End of The American Dream blog,

Why has the western United States suddenly been shaking so violently over the past several weeks? 

On Tuesday, the constant barrage of headlines about the coronavirus pandemic was interrupted by an enormous earthquake that hit central Idaho.  Of course Idaho is not exactly known for earthquakes, and so this was quite a surprise.  In fact, the largest quake in Idaho history was the magnitude 6.9 Borah Peak earthquake in 1983.  So when a magnitude 6.5 earthquake stuck not too far from Boise on Tuesday, it really stunned a whole lot of people.  And according to the Spokesman-Review, this quake could be felt as far away as Calgary…

An earthquake hit southern Idaho on Tuesday afternoon, with shakes felt as far as Calgary, Canada, Boise and Spokane.

The United States Geological Survey measured a 6.5-magnitude earthquake at a depth of 10 miles just before 5 p.m. The center of the quake took place about 45 miles west of Challis, Idaho.

This is an event that those living up in the Northwest will remember for a long time to come.  There was a tremendous amount of shaking all over the region, and according to at least one report some people actually “ran outside yelling”…

An entry in Volcano Discovery said: “Sustained moderate shaking for several minutes, Rumbling sound heard, people ran outside yelling. Knickknacks fell off shelf.

“Items suspended from ceiling/beams still slightly swaying 10 minutes later.”

All the way over in Helena, Montana someone described the shaking like being “on a small ship at sea during a storm”, and a restaurant owner in Stanley, Idaho reported that “the water next to me is still vibrating”…

Brett Woolley, a restaurant owner in Stanley, said he heard earthquake coming before he felt it.

“I heard the roar, and at first it sounded like the wind but then the roar was tremendous,” Woolley said about 10 minutes after the earthquake. “The whole house was rattling, and I started to panic. I’m sitting here perfectly still and the water next to me is still vibrating.”

The epicenter of this earthquake was approximately 78 miles from Boise and approximately 330 miles from Yellowstone.

Needless to say, any major seismic event anywhere near Yellowstone is a cause for concern.

And of course this quake comes less than two weeks after a magnitude 5.7 earthquake hit near Salt Lake City on March 18th…

An earthquake struck near Salt Lake City Wednesday morning, shutting down a major air traffic hub, damaging a spire atop a temple and frightening millions of people already on edge from the coronavirus pandemic.

Though there were no reports of injuries and no damage was immediately reported in areas along the Utah-Idaho border, there was damage scattered in the Salt Lake City area — with the earthquake showering bricks onto sidewalks and releasing a chemical plume outside the city.

In fact, that quake caused so much shaking that it actually knocked the trumpet out of the grasp of the statue of the angel Moroni…

The 5.7-magnitude earthquake that shook Utah Wednesday morning also dislodged a symbolic part of Salt Lake City’s iconic Mormon temple: the trumpet of an angel statue atop its highest spire.

The temple is the spiritual focal point for the 16 million members of The Church of Jesus Christ of Latter-day Saints.

Following that dramatic seismic event, there have been hundreds of aftershocks.

And remember, this is not a part of the country that is known for lots of quakes.

According to the University of Utah Seismograph Stations, there had already been 658 aftershocks from that event as of Monday morning…

More than 600 earthquakes have hit across Utah and surrounding areas after a 5.7-magnitude quake struck near Salt Lake City about two weeks ago, according to University of Utah Seismograph Stations.

As of Monday morning, the University of Utah Seismograph Stations, or UUSS, recorded 658 earthquakes as part of a series of aftershocks.

Of course there will be plenty of aftershocks following the quake that just hit Idaho as well.

As I write this article, there have already been five aftershocks greater than magnitude 3.0 that have hit the region.  By the time you read this article, that number may be substantially higher.

With all of this shaking going on in Idaho and Utah, many on the west coast may be wondering if they are next.

According to CalTech, there have been more than 1,100 earthquakes in California and Nevada over the last 7 days.  A couple of magnitude 5 quakes struck off the coast of northern California during March, and that certainly rattled some nerves, but everyone understands that something far, far larger is eventually coming.

For years, scientists have been telling us that “the Big One” is way overdue and that we are not prepared for it.

And for years I have been warning people about what will eventually happen if they remain on the California coastline.

We live at a time when everything that can be shaken will be shaken.  The crust of our planet is becoming increasingly unstable, and this latest earthquake in Idaho is yet another example.

In Luke 21:11, Jesus told us the following about what things would be like in the last days…

And great earthquakes shall be in divers places, and famines, and pestilences; and fearful sights and great signs shall there be from heaven.

You may have noticed that a “pestilence” is rapidly spreading across the face of the globe right now.

And at the same time, enormous earthquakes keep popping off like firecrackers with frightening regularity.

Unfortunately, most Americans don’t understand the bigger picture, and what we have experienced so far is just the beginning…