Russell Napier: The Rising Dollar Will Trigger The Next "Systemic Banking Crisis"

Fresh off his successful call earlier this year that the US dollar would strengthen in the coming months, macroeconomic strategist and market historian Russell Napier joined MacroVoices host Erik Townsend to discuss why he favors deflation and why he has such a bullish view on the US dollar.

Echoing David Tepper's concerns that the equity highs for the year might already be in, and that a 10-year yield above 3.25% could lead to market chaos, Napier said he sees interest rates rising sharply in the coming months as the dollar strengthens - a phenomenon that will push the US back into deflation.

Napier's thesis relies on one simple fact: With the Fed and foreign buyers pulling back, who will step into the breach and buy Treasurys?

The answer is - unfortunately for anybody who borrows in dollars - nobody. In fact, the Fed is expected to allow $228 billion in Treasury debt to roll off its balance sheet this year.


This "net sell" will inevitably lead to higher interest rates in the US, as well as a stronger dollar. And once the 10-year yield reaches the 4% area, signs of stress that could be a lead up to a global "credit crisis" could start to appear.

We know what the Federal Reserve plans to sell this calendar year, $228 billion. We know what the rise in global foreign reserves is, and about 64% of that will flow into the United States’ assets. Slightly less of that will flow into Treasuries. $228 billion, at the current rate at which foreign reserves are accumulating, we are not going to see foreign central bankers offsetting the sales from the Fed.

So that’s a net sell. We don’t know what that net sale will be, but it’s a net sale from central bankers at a time when the Congressional Budget Office forecasts a roughly $1 trillion fiscal deficit. This is the first time in my investment career that savers will have to fund the whole lot. And it’s perfectly normal that real rates of interest have to go higher to attract those savings.

$1 trillion is still a large amount of money. It can come from anywhere in the world. It can come from outside the United States. It can come from inside the United States. But it’s a liquidation of other assets or a rise in the savings rate, which is necessary to fund this. Either of these things is positive for the dollar.

And that's a huge problem - not for the US so much as the rest of the world, where higher US interest rates could lead to a global credit crisis which Napier believes could begin in China or Turkey, then emanate out from there.

One symptom of the rising dollar, Napier says, is it could force China into a corner and finally help China bears like Kyle Bass who have countenanced brutal losses over the past couple years as the greenback as weakened. While Bass has cut back some of his positions, he says he remains committed long-term to his bearish thesis. 

So the strong dollar, if it continues and if it comes to pass, really could force China into a corner. That, combined with the trade tariff policies of the president, may be leading us to a more flexible exchange rate. Or at least what will be billed as a more flexible exchange rate but, for all intents and purposes, is likely to be a weaker Chinese exchange rate. So I was just going to read you the list of those emerging market economies where the debt-to- GDP ratio has been going so strongly that actually the BIS suggests there is a risk of a systemic banking crisis. China is top of the list; you’re absolutely right to point to China.

But China isn't the only economy that could be facing a financial blowup driven by a stronger dollar...

I think there is definitely a role already being played by higher US rates. So if the dollar goes higher as well, it’s definitely playing a role in creating vulnerabilities. We’ve seen a couple of large Chinese companies unable to pay their US dollar credit. As I’ve mentioned, there’s a lot of Turkish companies that really can’t pay it. And that is already something to do with the rise in US yields. They’ve gone from incredibly low levels to low levels. But it’s enough at the margin when global debt to GDP is to shine the light on particularly vulnerable economies and particularly vulnerable companies.

A strong dollar should be negative for global equities, Napier said. But the outlook for European and EM equities would be far worse than the outlook for the dollar if US interest rates climb above 4%.

So all I would add – let’s say I’m wrong on US rates and these yields continue to rise, I think that’s particularly bearish for those outside of America who borrowed dollars, people we’ve already focused on. I think United States growth may be good. United States inflation may be rising.

I wouldn’t specifically see any particularly bad credit issues in America. I don’t see it being anything like we’ve seen in the past. But outside of America, I think there would be an awful lot of pain going on as interest rates go higher and higher and higher. Remembering that, roughly, the European banks – I should say non-US global banks – have got a loan book in dollars of about 4.5 trillion.

That’s a big loan book for people who don’t really take US dollar deposits. And the implications of higher US rates and a higher dollar mean that the pain may not be so America specific, but it could be very emerging market specific.

Listen to the rest of the interview below:


philipat El Oregonian Sat, 05/05/2018 - 21:15 Permalink

Something is going on here behind the curtain, probably to point the finger of blame after the financial collapse on to "Emerging markets" not the Central Banks where it belongs.

As recently as the second half of 2017, the DXY was at 103 and there were seemingly no problems, in fact everything was unicorns and rainbows in a coordinated Global expansion. Now, after a "correction" (being charitable) of the DXY to below 89 and another correction (dead cat bounce?) to 92, all of a sudden the Emerging markets are going to collapse. Please explain?

In reply to by El Oregonian

Stuck on Zero Escrava Isaura Sun, 05/06/2018 - 10:29 Permalink

The only solution is to convert externally held dollars into "trade dollars."  It would then be easy enough to create lots of liquidity and they wouldn't flood back into the US to create inflation. Trade dollars could not be used in the US to buy anything, they could only be used to purchase exports. That would balance the trade deficit immediately.

In reply to by Escrava Isaura

hedgesofnight philipat Sun, 05/06/2018 - 01:00 Permalink

I sense a big drop coming in the markets.  Zerohedge is finally not so bearish so that is one reason. Also I emailed Shepwave last week when they called that buy signal Thursday morning and basically they are on the verge of giving another aggressive sell signal like they did on the QQQ in mid march.  I think the signal will come out on tuesday of this next week. 

In reply to by philipat

Catullus Sat, 05/05/2018 - 20:38 Permalink

If the dollar rises, the carry traders get paid to hold their positions. So yield goes from 2 to 3%. Who cares. Those dollars are worth more on the cross. 

A falling dollar and rising yields? Now yer carry trader is fucked 

GooseShtepping Moron mendigo Sun, 05/06/2018 - 06:01 Permalink

That's what a lot of people around here say, but it isn't right. The Fed is not omnipotent; they cannot manipulate the currency forever without the deformations showing up in the real economy. The rest of the world is no longer going to accept worthless dollars in exchange for subsidizing the pensions of fat American retirees. The great bond vigilantism has begun, and there is no stopping it now.

In reply to by mendigo

MrSteve Sat, 05/05/2018 - 20:51 Permalink

The narrative doesn’t even include Italian banks or Greek bonds anymore?? Venezuela is off the hook??? Is Illinois suddenly solvent???? 

Tubs Sat, 05/05/2018 - 21:12 Permalink

Can someone confirm if rising yields and inflation  are actually good for the dollar or not? Schiff says no,  textbooks say yes,  crystal ball says WTF.

lester1 Sat, 05/05/2018 - 21:17 Permalink

Why the hell would you buy the dollar when you know darn well the Fed will have to print money again in order to finance the budget deficit and entitlements?? 🤔

TheEndIsNear Sat, 05/05/2018 - 21:42 Permalink

"This 'net sell' will inevitably lead to higher interest rates in the US, as well as a stronger dollar. And once the 10-year yield reaches the 4% area,..." -- the US Treasury will no longer be able to service its debt to the Federal Reserve banking cartel and the US Treasury will hyper-inflate our currency, ushering in a depression the likes of which we have never seen with widespread starvation.


SH_Resurrected Sat, 05/05/2018 - 23:35 Permalink

WTF will NOT trigger the next systemic banking crisis?  ...seems like every other article posted on ZH addresses a different cause of the next banking/financial crisis.



turkey george palmer Sat, 05/05/2018 - 23:47 Permalink

To hear some tell it Chicago to California are bankrupt with pensions underfunded.

These rate increases would wipe pension funds into the red as bonds and equities drop.

When a local government goes bankrupt the Muni bond market will take a big hit as well. Add in commercial real estate collapsing and local tax base shrinking causing higher taxes to support schools and higher borrowing costs ruining the housing and auto industries.

No 4% is not ok it is full on societal collapse. Seriously the debt in such a case will likely just go down daily as no one will touch it. Even now gold has almost broken out as interest rates are rising. Don't bet we won't see 1500 this fall if not sooner. There will be waiting lists to buy silver and limits. These are things that have happened every fucking time in history. You'll give s SUV for a roto tiller if one could be found

oncemore1 Sun, 05/06/2018 - 03:18 Permalink

there is one other parameter in the equation: what if USG stops overspending and starts a sober domestic policy, cutting spending on 1000 mil. bases around the globe?

Goodsport 1945 Sun, 05/06/2018 - 04:59 Permalink

I still don't understand how the dollar can ever survive a $200 trillion+ national debt (based on accrual not cash based accounting) that keeps growing and can never be repaid.  Shorter term, yes, and a very good way to play ETF inverse dollar / gold relationships and then convert gains into real physical assets. 

Fahq Yuhaad Sun, 05/06/2018 - 06:05 Permalink

"successful call earlier this year that the US dollar would strengthen in the coming months "

Making a prediction with a random success probability of up to 50%?

Fuck off, Napier




TK69 Sun, 05/06/2018 - 09:36 Permalink

If foreign nations can't pay back us dollars then it would be the large financiers who suffer since most domestic banks lend locally nor are borrowing from big banks.

dogismycopilot Sun, 05/06/2018 - 09:58 Permalink

Yes, one thing people don't understand is that the rising interest rates are going to fuck hard the emerging markets - especially those that are linked to the USD.