Reserve Currency

The era of infrastructure investment and multilateral banks and financial institutions controlled, in large part, by Washington - often as an aggressive strategic policy tool - has come to an end. 

In the case of the U.S., which thanks to its pool of capital, political and military power, enjoys the exorbitant privilege of having the world's reserve currency, an expansive Fed will not even necessarily "throw seniors under the bus", as one of Bernanke's critics once mentioned, suggesting that monetary expansion erodes life savings of senior citizens. A lot of the monetary expansion results in investment bubbles all over the planet. Some even have "credited" Bernanke with triggering the Arab "Spring", as food prices in the Middle East rose from mid-2010 to an unsustainable level after quantitative easing was re-started. It looks like Bernanke, or at least the institution he presided, is more powerful than he seems to think.

De-dollarization accelerates...

Make no mistake, the international central banking cartel of our times are on a mission to dismantle the sovereignty of all people.  

At first glance, the title to this commentary seems facile, especially to those readers in higher income brackets. The reality, however, is that “investing in food” is a risk-free means of generating an annual return on one’s investment that would likely exceed the return one could earn on almost any other investment – despite the fact that nearly all other asset classes carry significant risks.

Janet Yellen noted that everything was awesome and that stocks were now slightly "on the high side" of their historical range. It appears no one showed her the Russell 2000 which has a valuation multiple of just about 90x LTM earnings (as reported by the 2000 companies which comprise the index, and which were certified as accurate by 4,000 CEOs and CFOs on penalty of jail time). The mystery of how the Fed remains so stubbornly bubble blind - just like it did during the dotcom and housing bubbles - is thus revealed. The self-evident reason is that the purported geniuses who comprise our monetary politburo drink the Wall Street Cool-Aid about forward ex-items EPS. The Fed is driving a two-ton bubble machine, but has no clue that it has become a financial death trap.

Where things get really scary is not only when looking at global trade volume, which is sliding, but the actual value of trade calculated in USD. It is here that the real devastation for a world whose global reserve currency is still the USD, does the recent collapse in global trade, as a result of the soaring value of the US dollar (for all the wrong reasons) become truly apparent.

With allies migrating en masse to China's new infrastructure bank (and even the US having to admit it will 'cooperate'), it appears America has fallen back on what has worked for it in the past to ensure the world's largest creditor remains the world's reserve currency ad inifinitum - rattle its nuclear missile sabre... As the following clip shows, The US Air Force just test-fired a Minuteman III intercontinental ballistic missile from California, providing a "visual to the world."

In response to questions posed by Santelli, former Dallas Fed president Richard Fisher made two points which were both salient if not downright prophetic. The first: “Well, what worries me is how totally lazy investors have gotten, totally dependent on the Federal Reserve and I find this to be a precarious situation.” The second: “Are we vulnerable in my opinion to a significant equity market correction? I believe we are. Not only has the Fed painted themselves into an even tighter corner – they’ve left no clear path as to now kick the empty can.

Sometime after the initially soft Q1 GDP “print” expect a “trial balloon” of more debt monetization [QE4] issued by some FOMC constituent. Naturally this will weaken the dollar and immediately suspend/reverse the Fed’s dollar based concerns articulated earlier in this post. However, this will also serve to “piss” off both Kuroda [BoJ] and Draghi [ECB]…as their heavily depreciated and shorted currencies will, at least initially, sharply reverse course…and the continual game as to which global economic zone can depreciate their currency the fastest is “on”…again.

On Wednesday afternoon, just after the close of the market, the US Dollar, the world's reserve currency flash crashed. “I haven’t seen anything like it since the financial crisis,” said Paul Lambert, head of currency at Insight Investment, which manages $480 billion of assets. For a few minutes on Wednesday, the lack of dollar buyers caused a short-term freeze in electronic trading platforms, according to a New York-based trader at a major currency-dealing bank. “There was a lot of shouting on the desk, a lot of nervousness,” the trader said.

The latest red light: Global equity 12-month forward EPS has turned to the tune of 7% negative on a YoY basis.In fact, as the chart below shows, global forward EPS is now plunging at the fastest rate since Lehman, and is down to levels last seen in 2011.

Many analysts regard this as further evidence that the Fed is caught in a bind. What is yet to be appreciated by most analysts is that it is unlikely that the massively over-leveraged and debt-saturated financial system can weather increases in interest rates.

Russia must get aggressive in the economic war. You can win this economic contest in 24 months, if certain special zones in Russia simply are allowed to copy Swiss banking rules and regulations, as wealth will always flow to secure locations where taxes are low. You know what banking privacy and security did for Switzerland, it made a poor country with few natural resources the wealthiest nation in the world.

The United States government just went from “Please, baby, don’t leave me,” to frustrated threats and whining. After the UK announced it will join new China-led Asian Infrastructure Investment Bank (AIIB) as a founding member late last week, Germany, France and Italy decided yesterday to follow Britain’s lead and join as well. Welcome to the beginning of the end of the US dollar’s domination. It’s happening.