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Central Bankers' Fears As They Watch The Plummeting Dollar
Barclays, whose primary goal these days seems to be to enjoin the Fed in ruining the dollar (talk to a gummy bear salesman from Barclays and you will get a "short the dollar" pitch), presumably in order to make even more money on their alleged huge short dollar prop exposure, is out with a new note from currency strategist Steven Englander. His latest perspective is that all of today's conventional wisdom interpretations of IMF data demonstrating a diversification away from the dollar in global reserves is in fact not what it seems. If it were, the dollar would be at most worth zero, and at worst, the Fed would be paying you to take every new batch of brand new Obama-faced $1 trillion bills from its basement.
To wit:
IMF data show a drop in the USD’s share of reserves from a peak of 73% to just below 63% in Q2 09. Most of this is due to valuation effects, rather than any transactions by central banks. Its share has declined because the USD is not worth as much, not because central banks have been able to substitute other currencies for USD. Insofar as there is evidence of a change in central bank behavior, it is very recent (see Central banks walk the ‘not buying USD’ walk, 5 October 2009). If it were not for the changes in the USD’s value, its current share in reserve portfolios would be less than 1pp below the 10-year average and about 2.5pp below the peak.
The IMF COFER line shows a steady decline in the USD’s share in reserve portfolios based on its published headline numbers. These are the numbers most often discussed by journalists and investors (Figure 1). We also calculate what the USD’s share would have been if exchange rates had been stable during 1999-09. This would provide an estimate of how much USD has been actually bought or sold relative to other currencies, and eliminates valuation effects because exchange rates are held fixed. The values of the currency used are arbitrary and change only the level of the share, not its trend. We recalculate the USD’s share using exchange rates at: 1) Q2 01, when the USD’s share in the headline IMF data was at its peak; and 2) Q2 09, when its share hit its trough. Our calculations exclude the small “other currencies” category because there is no way to fix an exchange rate for this category. This omission has almost no effect on the outcomes.
And here is the punchline: basically the only reason reserve portfolios have seen a decline in the dollar is due to the ceaseless pounding the dollar receives only because it is cursed with being the currency of choice of the current batch of madmen in the Federal Lunatic Asylum Reserve.
If the value of the USD had not changed, its share in reserve portfolios would be virtually trendless. It does not matter whether exchange rates are from a strong or weak dollar period. As noted above, whatever FX rate is used, the Q2 level would be less than 1pp below the 10-year average.
In valuation-adjusted terms, the USD’s share hit a local peak at the end of 2004, illustrating that in the past, central banks have been content to buy and largely hold the USD when it was depreciating. When it really came under downward pressure in 2004, its incremental share in reserves rose to almost 80% (Figure 2; the incremental share is the USD’s share in valuation-adjusted reserves accumulation over the prior eight quarters). A similar surge in the USD’s share occurred as it weakened into 2008. By contrast, the 2005 strength led to a much lower USD share in incremental reserves.
Yet Barclays, even as it pounds the drum on the dollar's death, attempts to retain some objectivity when highlighting the flow chart of optionality for those who run central banks yet are not blessed with Mr. Bernanke's cunning dollaricidal pathology.
While we find some evidence that central banks have a strong desire to avoid increasing the USD share, the inability of central banks to diversify out of it suggests that it is very difficult to significantly reduce the share, as well. Of course, if the USD were to drop further, its share in reserve portfolios would fall further as well, but that is hardly what is meant by reserve diversification. With about USD7,400bn in global reserves, a 1% reallocation would mean USD74bn of USD sales. That is a small number compared with gross global FX transactions, but it is more than two months of the US trade deficit. It is difficult to see how even that modest reallocation could be done without driving the USD significantly lower.
The three fears of reserve managers are: 1) losing competitiveness, which means they will keep intervening to contain their currencies’ appreciation; 2) increasing the incremental USD share in their portfolios, which means they are aggressively opportunistic in selling the USD when the private sector is buying, and more aggressive in diversification at the margin; and 3) precipitating a USD collapse, which means they are unable to push diversification to anywhere near the degree they desire.
The dilemma likely will worsen over time. As reserve portfolios grow, the potential losses from dollar weakness will mount. Moreover, diversification efforts may become riskier because the volume of USD selling required to achieve the desired reweighting of reserve portfolios is growing. From a reserve manager’s perspective, it is hard to see any benefit from a USD collapse – and, potentially, quite a bit of damage. A steep fall in the USD would simply lower the value of reserve portfolios, while any backing up of US risk premia would probably be reflected in global, as well as US, rates. This seems to argue more for caution, rather than any sudden USD move, contrary to what many FX investors fear. So while we expect USD weakness in coming months, we see more risk of a relatively low volatility grind than of a precipitous collapse.
And as you are establishing even more short dollar positions, feel free to use Barclays highly efficient, yet so very anti purchasing power, trading desk. After all, without your gambling on the demise of America's middle class, said desk would end up being disbanded for lack of a product to sell to addicted gamblers.
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It's like that love-hate relationship I have with the Whopper. Damn.
nice
Has anybody thought about starting a Zero Hedge Web Site for Dummies. That is you read all the content and then break it down for the rest of us in Laymans.
It is tough for us common folk. I have been here for about 5 months and 65% of the content is still way over my head. I recommend making a friend or two here and blog them for clarification. Some will help, others will not.
If you just keep reading here, eventually you will catch on. The main thing to remember is, people in the investment world have a language that makes absolutely no sense. They call gold the yellow metal. Only registered indirects can buy directly from the fed- directs cannot. They use the word basket in replacement of the word combination. Their favorite phrase is-that being said-, but it makes no correlation to what the point was. You will just have to look up VWAP, Iy, YG, UG, MYG, etc.
Do like I do. When I get frustrated with the site I act like a real idiot.
Remember, you are here to be seen, not heard.
And I would like to take this moment to thank God for making Kyle Busch run out of gas yesterday.
Nice contribution
I'd befriend a humble chap with a curious mind over some pompous academic every time.
Go #5!
Yes. Suggestions or recommendations beyond waterdog's glossary?
Yes, very much so.
I do listen waterdog.. not just read
http://www.youtube.com/watch?v=6fZwMcoDVJM
kinda feel like this?
ZH for dummies? = Oxymoron
Sink or swim. If I have to study hard to learn it and catch up why should these smart people start dumbing down and educating us on a curve?
These men (and women) are taking valuable time out of their day because they care enough to share whatever info they have/can.
You can go to MoneyandMarkets.com (Weiss) for excellent reports if you need to cut back the gradient level.
I love this site...always something new to learn. I just google any lingo or concept I don't get. Sometimes I understand right away, other times I need to dig deeper.
I have been doing this since I started investing fifteen years ago and figure I will be doing it until I die. There is always a new scheme, always a new fundamental predictor, always new methodologies to make things better and make things worse. Just google, keep reading and learning, and gather multiple view points when in doubt. And when you aren't sure which way to invest....don't.
The two olympic swimming pools full of gold that represents the quanity of all the gold ever mined provide one short path to dollar diversification vs the around the earth size warehouse required to hold the fiat currencies and massive concurrent drive arrays of fiduciary and shadow currency media that sit in the vaults of big broker/banks rather than physical gold.
I wonder how much of that gold is spray-painted tungsten?
That is easy for you to say. I am down on my bullion because I bought with my CAD dollars because of the COMEX default rumors in late 08. They chickened out on the COMEX default, pussies...
EA misses but stock up on 1500 job cuts. Should be good for another 20 on the spx
You know it. More unemployed = more QE + Stimulus = lower dollar = SPX gunned.
Plus a bigger market to buy & play video games with those extended unemployment checks.
Sprint up over 20 percent today. Among other factors, announced 2000-2500 job cuts.
More good news for housing and consumer spending.
« ... central banks ... With about USD7,400bn in global reserves ... »
"Just 7.4 Trillion?" says Bernanke. "Hell, that's just a few months o' printin' ta bail out our buddies."
Fed just adds the zeros just like this to the money supply 0000000000000000000000 as less then 10% OF THE USD$ our actually printed as paper. ITS ALL DIGITAL BABY!
who knows ? maybe tungsten will soon be a precious metal at the rate that the dollah is plummetingah!!
are those reserve numbers normalized for the attempted japanese bond dump - lmao
I bet ewi publishes their trading update late today. 4th time they called for the start of p3 only to have it shoved up their alimentary canal. What idiots EW fools are----they will fight the fed and the tape for their religion.
Their job is to take your money. Lots of it.
Hold it just a minute. Bernanke said that he printed and gave a trillion dollars to central banks throughout the world. When asked which ones and how much, he said he did not know. Now, it appears with this post, that there is no way in hell any central bank would have accepted US dollars then or now, but now, Russia cannot seem to get its hands on enough.
To whom did Bernanke really give the trillion dollars and, why does Russia and China want all they can get?
You know I have been wondering this myself. Is it possible that at some point all of these people that are bailing us out know the dollar is going higher? Is there like a guaranteed return on their investment. Is that possible? How could it happen to come out that way. Or do they wait until the interest rates go higher?
Is this all a pay back for the CDOS? and MBS?
Just curious what others think.
IIRC the US Dollars that Berwanker sent abroad were to fill up gaping balance sheet holes that were left by US denominated assets taking a nosedive. If the proportion USD in central bank reserves is dropping only because the dollar is losing value you've got inflation.
As to the propping up of the dollar, my money is on Russia trying to protect their export market for oil. If the market for oil dries up suddenly some of the outlays for Russian oil companies may not look so hot. If Americans can't consume oil that leaves a loooooot of slack for the Chinese to pick up.
China could give them 2T USD for it.
Perhaps the fed gave USD to central banks to buy our tbills and such, they pocket the interest payments and we get to have successfull auctions.
I think it's even more simple than that, Josey.
I'm pretty sure the Fed has been buying up MBS and Agency debt from the foreign central banks in exchange for their commitment to buy U.S. Tresuries at auction. You know, the "2 birds with 1 stone" theory.
As the Russians have recently indicated, they have taken this junk off of their books and now and expect to remain out of MBS for quite a while.
As the worldwide MBS buying spree comes to an end, one must wonder how much more in Treasuries will foreign central banks take???
Bingo!
I think you nailed it.
Apparently we have to "fix" the balance sheets of those global municipalities that "trusted nice man in Armani suits" in tandem with our own banks, also at the expense of the American taxpayer.
Between energy costs, inflation, taxes, criminality, equity/201k deterioration, health care costs (not an issue for me as I am always healthy), the erosion of constitutional liberties and family values why is America still worth propping up and fighting for?
"You forgot 'stoopid', 'inconsiderate', 'lazy'.....
"But dad, what about you?"
"Don't talk to me that way!"
"No, but dad, what about you?"
I'm recommending central bankers over an open pit and memphis style barbecue sauce, kansas city style will do in a pinch... their babies are even tastier.
With mesquite since they are a rich meat.
Hey Stimulus...... we got your back.
http://img175.imageshack.us/img175/2555/greatwhiteshark.jpg
What was the deal with REITs melting up today?
ONE of those swimming pools would be filled to your ANKLES with PLATINUM.
G-20 has committed to ongoing stimulus FOREVER. Thus incoming bad news on employment/credit losses will be good news for the boyz. And it all carries the stamp of approval from the Internationalists of Monetary Destruction.
Was it Billy Joel ?? Ah, yes.......we'll all go down together.
I have an idea! How about Zimbabwe stimulates its economy. Yes, I'm quite certain they should do that. Keynesianism establishes this to be effective. Oh wait...
Two huge problems faced by the Feds, both require very different strategies to solve.
1) Financial system insolvency: the only way out from under piles of bad and worsening debt (short of actually coming clean and working it out in bankruptcy court) is to reinflate the asset side of the ledger while deflating the debt side. This requires massive liquidity, no restrictions on where it goes, low rates, a change in accounting rules, and a willingness to pummel the currency..
2) Dead and dying real economy: the only way to get our economy back on its feet is to bring capital back home as investment. This has naturally stimulative effects but it requires higher rates (getting paid for taking risk), a stronger dollar (who wants to go long a bear market?), sound fiscal policies (who wants to pay ever higher taxes?), transparent accounting (who wants to invest in Enron?), and a public policy environment friendly to capital repatriation.
The focus is and has been problem 1. But every step toward success with problem 1 results in the worsening of problem 2. The two problems can be solved, but the solution to one exacerbates the other. So the thing that concerns me is that the Feds have decided problem 1 is most important. But once problem 1 is solved, how much is left of the real economy? This is the real question, and now that they have started down this road, it's very difficult to change course.
Dead on, dude. So buy the fi, as in financials. Gold, equities, rock on. The G-20 presses are running and there ain't no stopping 'em. There is only up, when you've removed the possibility of down.
....2) Dead and dying real economy: the only way to get our economy back on its feet is to bring capital back home as investment."....
And this is in out as a solution also. If you "Get the Economy Back on it's feet" you de facto increase petroleum consumption(Energy Consumption). And we cannot increase the energy consumption. We Peaked in Oil output a couple of years ago, Any increase in demand(ie Economy back on it's feet), and you will increase price dramatically.
There is (and will be from now onwards) LESS petroleum physically for sale every month from now on.
Look at Mexico, Look at North Sea. UK is now really hurting, They are at the end of the gas line. Their economic growth is controlled by a value not on their soil.
Any way. Don't look for a return to the slope of "Growth" in any sense of how we have traditionally thought of it.
....2) Dead and dying real economy: the only way to get our economy back on its feet is to bring capital back home as investment."....
And this is in out as a solution also. If you "Get the Economy Back on it's feet" you de facto increase petroleum consumption(Energy Consumption). And we cannot increase the energy consumption. We Peaked in Oil output a couple of years ago, Any increase in demand(ie Economy back on it's feet), and you will increase price dramatically.
There is (and will be from now onwards) LESS petroleum physically for sale every month from now on.
Look at Mexico, Look at North Sea. UK is now really hurting, They are at the end of the gas line. Their economic growth is controlled by a value not on their soil.
Any way. Don't look for a return to the slope of "Growth" in any sense of how we have traditionally thought of it.
Let's enjoy yet another day of cognitive dissonance. Drink it all in. Sure seems like being "right" on this market involved going all in at 666 when Obama called the low and Ben announced QE for a couple trillion. Seems like being "right" in terms of recoiling in horror at the madness starting with Paulson's $700B heist, which was just the beginning, and yelling and stamping my feet while identifying all the bad shit that is going down made for interesting drama, and maybe a dose of self-righteousness now and then, but utterly failed to pay the bills. 200 points today and time to throw in the ZH monogrammed, tear soaked towel. From now on, its CNBC, Jim Cramer and happy thoughts, right after I get my dose of soma and tune into some sex and violence on the propaganda machine. 1200 S&P, here we come. Whoo hoo.
goldman sachs blankfein says he is doing God's work...
what???? ha ha ha
http://blogs.wsj.com/marketbeat/2009/11/09/goldman-sachs-blankfein-on-ba...
Since his God is Satan then yes, he is.
The merchants of the earth will weep and mourn for her,
because there will be no more markets for their cargo.
In one hour this great wealth has been ruined.
I confess to being very confused about this and other posts.
Do stocks (and everything) go up simply because everyone is fleeing $? I know the volume of trading was low, but some big players could be "diversifying."
On the other hand China and Russia want $ to depreciate their own currency?
If you need to put me in the corner and make me read something, I am okay with that.
Investors the world over are gathering up all the dollars they can get, begging, borrowing, and stealing, and converting them to risk assets, basically selling dollars to buy stocks, corporate bonds, municipals, commodities, etc. The incredibly low rates in the US courtesy of the Fed makes it cheap to borrow an arbitrarily large amount of dollars to convert them to risk assets. Everyone is 'short' the dollar in that in order to close out the trade, you have to return dollars to the lender. This means, everyone could very well rush to buy dollars at once (i.e., sell stocks, bonds, etc) and cause a massive short squeeze in the world's reserve currency.
That's the short answer, basically.
Do they want dollars because some big shit is getting ready to unwind?
The central banks want dollars because international trade is transacted in dollars and because the US has the guns. But people do want to be in dollars when big shit unwinds given its safe haven status. Just look at how UST yields went to basically zero last fall. So many people wanted US treasuries for the relative safety they bid the prices up like mad. The reserve currency always strengthens in times of financial panic.
@fisherblack
what you just wrote is what 99% of people assume is going to happen. That does not sound like a contrarian play to me.
During a market crash it is contrarian to be BEARISH on the USD, not BULLISH
mass panic inevitably causes a run from risk to the reserve curancy. A large number of paniced humans in motion can only lead to this result.
mass panic inevitably causes a run from risk to the reserve curancy. A large number of paniced humans in motion can only lead to this result.
reminds me of the "mass panick" to tech stocks in 2000 and realestate in 07.
A run to the most flawed currency in hostory.... BTW obama care passed the house
Why is being contrarian the important thing? Look, carry trades go on and on, until something causes them to unwind, and then they unwind. The unwinding of carry trades causes liquidity events like last fall.
If you can come up with a plausible scenario that includes a market crash at the same time the dollar gets pummeled, I'd be interested to hear it. During a liquidity event the world seeks dollars because of the reserve status. 'Easy to convert to dollars' is basically another way of saying 'liquidity' in the global financial system. Markets crash when everyone seeks liquidity at the same time. This is dollar bullish, wouldn't you agree?
This won't happen but you asked for it.
They catch Goldmans Sachs, red handed, manipulating the stock market with the other TBTF. Their tentacles reach into so many things through companies and sub companies that soon, no one trusts the any of the Dow companies.
Simultaneously, the Fed is audited. They figure out that Ben has been printing way more than is on the record. It's beyond that tame buying of trash assets and holding them on the books at full value. He just puts numbers anywhere he feels like it for any reason he feels like it.
Sachs caught = Massive market exit.
Ben caught = Massive dollar exit.
For fun, Bernanke is gay and has been having an affair with Blankenfien for years. They share young boys, Geitner, Paulson, all of them. They are an absolute nest of theives and perverts.
That could do it?
BTW, thanks for your reply to my questions.
LMAO
They're all members of the Super Adventure Club!
http://www.southparkstudios.com/clips/60694
Just thinking out loud, but what about a scenario where, in a few months gold, or some other commodity related currency becomes a seriously viable alternative currency to the USD, and when the market actually does trend down, they flock to that currency instead of the USD?
Your answer is better.
Yours is funnier :)
In a normally functioning market, you can have stock market crashes for almost any reason. Anything that causes widespread fear and risk aversion is enough to set it off. In such a case, gold could very well be the safe haven asset of choice. So no argument there.
But IMO, this is far from a normally functioning market. What's happening is a growing asset bubble funded by widespread short positions on the dollar. The only way to cover these short positions is to buy dollars. To do this you sell assets, stocks, bonds,commodities, precious metals, etc. A stock market crash is simply an effect of this scramble to cover these dollar short positions. If we're accurately understanding the root causes of this bubble, then the unwinding will send the dollar much higher.
This may only be a temporary move higher until all the shorts cover, but the more crowded the trade, the more disorderly the exit and the higher the dollar can go.
You can hedge by holding some cash and short term govies. But carry trades can go on for a long time. It's hard to watch assets bubbling like mad while your cash loses purchasing power tick by tick.
Ok Prechter, put your money where your mouth is.
Go 100% fed notes, not 90%,100%
Wheee, this investing stuff is easy !
Do you know where the Mogambo Guru has gone? MIA since September.
Count up the number of people you know in the US who work for a concern which primarily manufactures or produces for export. Cheaper dollar will benefit.
I know, I don't even need one had to count everyone I know.
Zero.
So a dollar and equity market simultaneous downmove would mean that everyone is fleeing US based investments?
What if this was a financial war, and the UK/US and other Western central bankers wanted the rest of the world to do what would seem on the surface smart:
So, countries and corporations in other countries take the bait and borrow massive amounts in US Dollars, creating unmatched balance sheet exposures. Once this takes place, the US owns those corporations and countries with the threat of a strengthening US Dollar - like Iceland with borrowings in Euros when their currencies weakened.
"What if this was a financial war,"
I have wondered about this myself. I hear about all kinds of cyber attacks as well. Is it too outrageous that our leaders could be meeting and doing all these agreements in public, shaking hands, claps on the back, meeting the wives, and in private an incomprehensible war is being raged? That would make our economies, our well being, their giant chess board.
GS would not merely be the trading arm of the US-- they'd be soldiers. I don't want to take the conversation too far tin hat, but if "dark ops" were being funded by government investments in the stock market, and the government had different rules for certain players so that capital could fund all these CIAish activities, then really, what is the difference between government, finance, and war? It's all aggression.
In fact, I'll venture to say it is downright naive of us to think this isn't how it really is. And if we accept that, then what does that mean about everything we are seeing on the surface, in the charts, the numbers, the reports?
Think of the movie, Wag the Dog - it's actually real and works for "wars" and "markets"
Trading is clearly real, however those trillions in derivatives would be like getting on a teeter totter with a sperm whale on the other end (leverage literally). Perhaps millions of people reading into tea leaves, entrails, I-ching, astrology charts, golden ratio cycle waves, and fundamental analysis to try and explain movements in pixels were all just searching for meaning where there is none but the will of a select group.
Confirmation bias drives observers to believe they understand the historic moves and perhaps even believe that they know the direction of future movements. Looking for meaning in the market is like looking for a repeating pattern in pi. Perhaps this is all a great distraction diverting your attention and we should instead look for meaning in what really matters - usually not things but people and experiences - Who or what do you love, and who loves you?
Wealth in gold is great because it frees up your time (infinite opportunity cost and the most valuable thing you have) and clearly appreciates over the long term relative to fiat currencies that become worth less. All of the moves back and forth in different asset classes, the frustration and waste of mental effort applied to this activity that doesn't benefit society and doesn't generate happiness while bankers sit on top and take transaction fees on all the movements makes me yearn for a different investment vehicle.
My experienced advice is to generally avoid options and leverage since it is impossible to consistently time markets (although the TBTF's writing can force their bets to pay off with their leverage). Bet on the sure thing like all the old money, which would be inflation over the long term - option premiums are typically too expensive and primarily benefit the writers. In periods of great uncertainty, do not be lured in by the newsletters promising get rich schemes - it's very difficult to build wealth back up from a signifcant loss, so it's all about protection on the downside - park it in precious metals until there is a clear direction in the market.
Gold cuts the Gordion knot. I may need to take this advice and rest a bit. It is doomy and gloomy, but trying to figure it all out is emotionally exhausting.
Gold really long, can't be too bad. A 40 something year old woman saving for hard times, unemployment, or retirement could do worse.
"That would make our economies, our well being, their giant chess board." Yup...exactly...*sigh*...thats why I'm going steelhead fishing tomorrow instead of doing anything taxable, like growing a business...
financial.. moral.. spiritual..
have some islamic ron paul.
http://www.youtube.com/watch?v=epGZHnJexSA&feature=related
I like this old saying:
"The market is in the business of making the most people wrong"
If thats the case and most are going long now ...
I like this old saying:
"The market is in the business of making the most people wrong"
If thats the case and most are going long now ...
Thats right, everyone is bullish on the dollar because everyone is bearish on the dollar.
If gold even splits the run to the dollar and takes half the safety trade, the people that ran to the dollar would turn around and run to gold because it would have the momentum. Then the dollar is fuct and Prechter can kiss my ass.
And it most definitely has much better fundamentals than the dollar.
as with gold, it's important to work with constant values to understand an entity's status and configuration over time....both are settled in dollars so there will be an inverse relationship with another entity where demand is constant....
Strategy (sic) proposed yesterday at my bank's website: Short on gold!? At least the guy was safe enough with a trigger well under $1000.
Clear enough, now I know what the banks want us not to buy, this week.
and so gold rises in lock step with the USD decline. what else is new? you double the money supply without means to tax any of it back, and gold will double again. stocks rise with inflation and earnings, too. what to buy is more the question, not when to buy. for all of history, "money" in paper form has always failed to hold value. its why people invest at all. the fundamental reality that paper is just paper until it's converted to assets. shawn mesaros, pamria, llc