Dollar Shortage Goes Mainstream: When Will The Fed Confess?

Tyler Durden's picture

Last week we posted the report by ADM ISI's Paul Mylchreest “Dollar Liquidity Threat is Getting Critical and the Fed is M.I.A” which summarized some of the key points in the ongoing, second phase of global dollar shortage, profiled here first in the start of 2015 and validated recently by the BIS. We discussed the bitter (and all too predictable) irony that the Federal Reserve doesn’t “get it”, having recently declared that that liquidity in financial markets was “adequate.”

It isn't.

More than 68,000 hits later, we suspect that many ZH readers are tracking the dollar liquidity crisis (and Fed ignorance) via the negativity in Cross Currency Basis Swaps (CCBS). The 3-month Yen/Dollar CCBS has made a new low of 81.75 bp (swapping Yen into dollars for 3 months costs 81.75bp annualised above covered interest parity) implying that the structural dollar shortage is deteriorating.

While we’ve been writing about dollar shortages since the GFC, Mylchreest traced the timeline of the current shortage back to the first RMB devaluation in February 2014. He noted that it’s the one thing that even the central banks struggle to control… think Swiss Franc peg (SNB), impact on carry trade and the Yen (BoJ) and the severe weakness that we’re seeing in the RMB (PBoC). Indeed, a “glaring omission” is the failure of the Fed to set-up a dollar swap arrangement with the PBoC.

Mainstream economists and media are playing catch-up. For example, Carmen Reinhart referenced the “dollar shortage” last month, as did Bloomberg, citing a new report by former Fed economist Zoltan Pozsar which summarizes everything we have said for years.

In his latest “Global Money Notes” report, “From Exorbitant Privilege to Existential Dilemma”, Credit Suisse’s Zoltan Pozsar argues that “an FOMC determined to normalise interest rates has no choice but to become a Dealer of Last Resort in the FX swap market and provide qunatitative Eurodollar easing (“QEE”) for the rest of the world through its dollar swap lines.”

According to Pozsar, Basel III and the money market reforms are tightening dollar funding markets causing an “existential trilemma” for the Fed in which “it is impossible to have constraints on bank balance sheets (restraining capital mobility in global money markets), a par exchange rate between onshore dollars and Eurodollars, and a domestically oriented monetary policy mandate. Something will have to give. It’s either the cross-currency basis, the foreign exchange value of the dollar or the hiking cycle. It’s either the Fed’s regulatory and monetary objectives, or control over the Fed’s balance sheet size. It’s either quantities or prices…”

In terms of CCBS, Pozsar expects “Cross-currency bases will have to go more negative before the Fed steps in, and -150bp on the three-month dollar-yen basis is not an unlikely target”, which would probably lead to a severe bout of Yen weakness from here. The three month dollar-euro basis swap has declined to -43.9bp, closing in on its recent low of -58.8bp during the Deutsche Bank panic nearly two months ago. As an aside, it’s telling that fears about European banks still cause a scramble for dollar liquidity in a deja vu all over again. 

Pozsar, like Mylchreest, highlights how a dollar funding crisis tightens monetary policy for the rest of the world and could shred the RMB as it means “tighter financial conditions for the rest of the world. In turn, tighter financial conditions point to slow, not faster global growth as foreign banks pass on higher costs to their customers or worse: de-lever their books…If the Fed leaves the intermediation of all of the rest of the world’s marginal dollar needs to American bank’s constrained balance sheets, offshore financial conditions may tighten and the dollar may strengthen to the point where they are no longer consistent with the path envisioned for the funds rate: rounds of RMB devaluation would follow which also won’t help interest rate normalization.”

So, the rest of the world is left to hang around, waiting to see if the Federal Reserve wakes up to what’s happening to dollar liquidity, and the threat it poses to the global economy and to its own (glacially slow) tightening cycle.

And now that they may be finally catching on, we would like to see some economists or journalists sit Janet Yellen down and interrogate her about dollar funding markets. Although we doubt that they could extract a confession, it might be entertaining to watch.

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jmack's picture

I am just glad the article thumbnail graphic is not an animated gif... that could damage my psyche.

Cognitive Dissonance's picture

Tic Toc, Tic Toc

That is the sound of inevitability.

Manthong's picture

The system is run by the all-knowing particle physicists at the Fed, BOJ, BOE and ECB…

What could possibly go wrong?

..outside of maybe a teensy imbalance, disequilibrium, inflection point, phase transition,  and chain reaction in a non-linear, complex system.


Anonymous_Beneficiary's picture

Fuckers always plead ignorance, though.

We gotta stop giving them that free pass because too many people are now realizing it's a feature, not a bug.

SafelyGraze's picture

the thumbnail picture on the front page, linking to this article, is truly creepy

mryellens in the tight dress. being interrogated. smoking a cigarette. 


best regards,
sharon stone


Manthong's picture

Built for comfort, not for speed.

Nothing wrong there that a fifth of Jack, a paper bag and a dark room would not fix.

 If there isn’t anything around that meets your standards… lower your standards.

 Practical advice…not that I want to be sexist, misogynist, politically incorrect, just plain disgusting or anything…….

It’s a military thing.

.....just having fun with the straight-necks.    :-)


zhandax's picture

MT, that is a double bagger, if I ever saw one. It would take a black hole to get the room dark enough, although I don't doubt she has one.

dogfish's picture

You forgot the nose clip.

gaoptimize's picture

I hope she realizes that the excessive weight is very likely to lead to hormone imbalances and pre-diabetic changes to her physiology that promotes the growth of very bad flora (hence the accompanying odor) that will eventually crowd out the good flora necessary for a healthy immune system.  Once that condition is reached, rapid decline in heath with debilitating consequences almost innevitably follow.  With some good information and self discipline she can halt this dynamic.  We are NEVER going to get the ~17% of GDP spent on health care down until millions of people know this and act.

Dr. Spin's picture

Does her head look small to you?


Manthong's picture

Oh, I forgot to add the 55 gallon drums of Clorox and Agent Orange and whole the body prophylactic.

FatTony7915726's picture

Is that Janet Yellen doing a "Sharon Stone"?  If Yellen squats her legs a la Sharon, you will see the ugliest & smelliest vagina ever.  I'd rather look at the Medusa and turn to stone!  I know Michael Douglas would rather die of throat cancer than look at that vag!


With that ugly Yellen, I know Michael Douglas would not have gotten throat cancer cause he would refrain from any 

Oh regional Indian's picture

Sitting here in India, outside the echo chamber that is USSA, I can tell you that these fast inflating dollars are sucking up emerging markets like there is no tomorrow. Their spends on everything here from buyig companies, investing in start-ups....offices, to people to marketing efforts and gimmicks cost a pittance anyways at ridiculous exchange rates that exist and are getting cheaper every day.

USSA is up shit creek....if you have a way to diversify out in some reclaimable way, or can put some moneis out of country and wait it out for a bit till you see where the chips fall...better....

But, bad times are here and worse is a'comin, and humans cannot get off their knees....



Theosebes Goodfellow's picture

Diversify is the operative word, OHRI. India's woes are compounded with the BoI trying to crush cash-hoarding but eliminating the 500 and 1000 rupee notes. That certainly hasn't helped anyone. We here are selling most excess chattel such as extra vehicles and converting the cash into "barbarous relics". Currencies are... interesting, but I still prefer money.

Be well.

Justin Case's picture

They are missing "the scientist". When ever you plug in a scientist to a percieved issue, a scientist is a confirmation, that "there is sumtin true there". They just cost moar than the average opinion of a nobody.

DeadFred's picture

It was bad enough as it is. Please, please Tyler have mercy on my seared eyeballs.

TheAnswerIs42's picture

Not animated, but here ya go...

WARNING: Psyche Alert!


FatTony7915726's picture

Smells like dead fish all of a sudden!

BigJim's picture

I'll bet you're famed far and wide for your beauty; your login name clued me in.

ali-ali-al-qomfri's picture

uh oh,

BigJim just called out FatTony....

fight club!!!!

Bunga Bunga's picture

Wall St gets a boner even without a gif.

Mother Fletcher's picture

Bitch has got some big ole tits.

Ms No's picture

That's one HUUUUUGE bitch!  Bloated like everything else...

Ms No's picture

Oops.  Sorry, I've been drunk twice today.

Yancey Ward's picture

If it were a gif, ala Total Recall, you would see the mutant head of Ben Bernanke pop out of that hole.

buckstopshere's picture

The next collapse might be in the banknote itself.

Shortly before a tsunami, the water recedes from the beach.

And then the gigantic wave destroys everything.

The dollar rising is the water receding from the beach.

WestVillageIdiot's picture

Okay, but does this mean the Yen is going to 150 to the dollar or down to 80 to the dollar?  The dollar is rallying huge.  Is there going to be some sort of Sunday night announcement from the Fed that causes a massive rally in the Yen?

buckstopshere's picture

US corporate earnings for Q4 will tell the story.

Weak foreign currencies exchanged for dollars will mean lower profits and earnings. Trump's tax cuts will not go into effect until much later in 2017. By then it may be too late to ward off a bear market in general equities.

WestVillageIdiot's picture

So, what is really going on right now?  This situation makes 2008 look normal.

-  The dollar is skyrocketing
-  Bond yields are skyrocketing
-  The stock market is going up
-  The mortgage industry must be a disaster right now
-  Gold and silver are getting beaten like a couple of ugly stepchildren
-  The VIX has been spayed, neutered, declawed, and had its teeth pulled

And for the most part the system in the US is as calm as a herd of cattle in Mumbai.

Something has to give.  What will that be?  This does not feel right. 

DeadFred's picture

The Donald is prez-elect so the switch has been flipped.

Creative_Destruct's picture

Yes, please tell us how that switch is wired and to what it is wired. My vote is that it's wired to a Chameleon Circuit like that in Dr. Who's TARDIS that locks it in one state of appearance and for the moment it's stuck. When it unsticks, look out. Who knows what weird shape events will suddenly assume.

GooseShtepping Moron's picture

Well, I wouldn't expect to see dollar weakening anytime soon. My guess would be a rate hike. The globalists are going to want to pop the equitey bubble as a nice little "welcoming party" for President Trump anyway.

A82EBA's picture

We've seen all that, several times since 2011, nothing has been predicted, all the swings and big events take experts by surprise, the rhetoric is for entertainment and or learning. The prescription remains the as much gold/silver as you can

topshelfstuff's picture

this is all in order to leave Record Numbers for the End of the current Administration that can and will be pointed to in the future

CJgipper's picture

An equity bear market is a rising dollar.  too late?  better late than never.

Anonymous_Beneficiary's picture

When global counterparty confidence goes bearish you know that there's about to be a big premium on cash.

We need moar pallets of cash, STAT!

s2man's picture

The dollar bubble will collapse,  followed by the UST bubble.  Then,  put a fork in the US. 

i just wonder what the next reserve currency will be...

halcyon's picture

USD -> SDR , but slowly not with a bang

Kina's picture

Is that Sharon Stones mother?

BC6's picture

Please don't spread your legs Mr. Yellen!!

King Tut's picture
King Tut (not verified) BC6 Nov 24, 2016 11:15 PM

Don't lie- you know you would licky-licky

DeathMerchant's picture

Even with feet 48 inches apart, thigh surge would still cover the stanky.

Seasmoke's picture

who is the gorgeous girl ????