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.


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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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