In April, the 30-year yield was 2.45%. But like the Eurodollar Futures Curve, it's not one thing or another. If they ever stop QE and normalize rates, there will soon follow a government default. Save my name, email, and website in this browser for the next time I comment. Can you take any market signals from the bond market given that the FED controls what, 50% of it? Even during the Great Recession I did not see tons of new currency, mostly added digits. But Jeff, wouldn't these slides also explain the scenario where the market is just discounting that there has to be a recession and that the Fed is going to be forced out of its tightening cycle because of the recession? Erik: Hang on a second Jeff, let me interrupt you here because I want to just push back on the whole thesis of what you're saying, which is Eurodollar inversion is telling us something changed. Beyond the cursory, theres very little depth to the publics knowledge base. This activity, of course, presupposes that the theoretical and empirical problem of whether an expansion of the money supply leads to inflation has already been solved, in the sense of establishing a positive correlation . But the fact of the matter is, we have fewer jobs, we have a bigger problem, a much larger participation problem this time than last time. As the U.S. administration tried to control the outflow of dollars, multinational corporations, eager to find profitable usage of their surplus dollar balances, and banks, equally eager to accommodate demand, found way to get around the controls. I think that's a mistake that mainstream economics is really badly needs to to correct. Section of Real Property, Probate and Trust Law. And then that happened again, just recently, the last data we have from Federal Reserve Bank of New York primary dealer statistics for the week of June 22, almost half a trillion in repo fails during that week, which would have put it as again the second worst week in March of 2020. It was about how subprime mortgage bonds had become priced and use the same as good quality collateral when that was never really the case. If you have to pay a lot for oil prices, absent money printing, absent credit growth, and what's going to happen is that's going to rob from other sectors of the economy. Slide 13, very bad news for Mr. Powell because FRBNY, The New York branch's own DSGE model has said, we kind of get in this recession feeling too. This resulted in an agreement for countries to fix their exchange rates to the U.S. dollar and the U.S. to peg the dollar to gold. And it's not just in the United States. So if oil prices go up for structural factors, I would say that's even more deflationary because it's going to harm the global economy down the road. I may or may not be dead 100 years before it happens though. Is the Eurodollar market an engine of inflation? Certainly never nobody ever at the Fed. It's about long run potential, the yield curve for example. I feel very lucky. And that's something that has happened repeatedly throughout history including just a couple of years ago in 2018 and 2019 when the Eurodollar Futures Curve had inverted in June of 2018, beginning in June of 2018, signaling the same thing. But either way, this time is different. From global trade to gross financial investment across geographic and national boundaries, the modern, integrated economy doesnt happen without an efficient, well-functioning dynamic global reserve system. For the time being the yield curve is flat for 3 months and still positive out to 20 years. SOURCES: Bank for International Settlements annual reports, FRED and authors calculations. The information presented in MACRO VOICES should NOT be construed as investment advice. 4 Min Read NEW YORK/LONDON, Nov 11 (Reuters) - The eurodollar futures market, which tracks short-term U.S. interest rate expectations over the next few years, is betting on a U.S. rate hike by. Most dollars are added digits in a ledger. And economists and policy makers made all sorts of excuses about why that was just as we're hearing over the last couple of years how well the economy must be red hot because of consumer prices, yet, we still have fewer jobs. On the other hand, the FHFA just raised the yoy conforming loan threshold by 18%. We can see that from 1964 to 1969, the estimated market size of eurodollar market grew over 252% from $75 billion of 2020 dollars to $264 billion. It's going to represent the reversion to the same mean that we were in throughout the decade of the 2010s. And if so, have we ever seen anything like that in our lifetimes? And that's really what these markets are saying. The Eurodollar money market was invented by the British banks and the Bank of England, the Eurodollar bond market also by the British government. It is intended for those working or studying in the fields of business and economics. And they aren't going to be fixed in any kind of reasonable, foreseeable future. Also, it is useful for financing foreign trade by enabling traders to import and export through cheaper methods. That's exactly what a recession is, that there would still be an overlying or underlying trend towards secular inflation, and that would get us into stagflation. We get questions about the labor market. Of course, if I could go back Id have bought into it 5 years ago. pic.twitter.com/XPgL4BDQHi, Michael Lebowitz, CFA (@michaellebowitz) December 1, 2021. The government can barely stay afloat with the FED buying $60b in T-bills every month and interest rates near zero. Erik: Jeff as we're speaking on Tuesday afternoon. People are suddenly going to find their cars thousands (if not tens of thousands) of dollars underwater and impossible to trade in. So you have the Fed, secular inflation rate hikes are coming for a very long period of time, they're going to be ultra aggressive. And as I was saying, in slide 16 and of course slide 17 too. Essentially, its a radical monetary evolution, away from the traditional format that was based on deposits of dollars, toward the more indescribable and ill-defined interbank market of these bookkeepers pen ledger balances moving back and forth.. If so, please Subscribe to MishTalk Email Alerts. Now, if I go back to the other thesis that our inflationists have shared with us. Proudly powered by WordPress. The feds are caught in a trap ,cant look back > que the music, I remain unconvinced the Fed will get in any rate hikes at all.. You're with a new shop, Atlas Financial Advisors. Understanding the Eurodollar market goes a long way to understanding why despite the greatest monetary intervention we've ever seen by central banks we've remained in a contractionary environment. This brought out some amusing observations from economist David Rosenberg and others. Read the ones you like and you can unsubscribe at any time. And the household survey, which indicates because it's two months, the household surveys is very noisy month to month, because it lasted for two months, that indicates a very high likelihood that maybe there's something going on in the labor market already, which then gets back to what the curves are all pricing. Consumer prices have accelerated wildly as everybody knows, particularly in the energy markets over the last year. you like and you can unsubscribe at any time. It is one of the fundamental reasons why monetary policy has historically been ineffective and illustrates the limitations of Central Banks in their ability to quantify US Dollar supply and demand. I may try to articulate Jeff's view, but hoping this shitpost can generate . Click the red button that says, looking for the downloads just above Jeff's picture. Eurodollar futures are interest-rate-based financial futures on deposits in commercial banks outside of the United States. And now the markets are all uniformly describing now in July of 2022 the downside of the supply shock rather than continuing secular inflation. The risks are in fact rising. I can assure that is not the case, because rates move independent of the Fed, but let's leave that for another time. Eurodollar market.'6 Inflation results when the expansion process in-creases the supply of money,"7 without a corresponding increase in the production of goods and services." In the United States, a portion of every dollar deposited with a bank is removed from circulation because of federally imposed reserve And some of the sell offs that we've seen. Erik: Patrick Ceresna and I will be back as MacroVoices continues right after this. You don't ever get into that feedback loop because it's not inflationary. It's hey! And then again, they even called it globally synchronized growth in 2017. How it operates and who or what regulates it. At least, I don't expect people to believe everything I'm saying or disagree. My bias is heavily against it and I want it to blow up for no other reason than I told you so!. I don't see what you're saying here as really countering that. The Powell Fed has blown it. UKX. But for me, it was always a question of and we had this discussion last time it was on last year, I think, where was it actual monetary inflation? We've seen flattening and now inversion, especially today, and the Treasury curve, all of these markets coincidentally, and corroborating fashion saying the probability that the probability that we're going to have sustained inflation from 2022 and beyond was diminishing over time. 6. A. The US Dollar is a global bellwether about global financial and monetary conditions, which, again, going back to my first point, if the monetary system is there's no excess currency, there's no money printing going on. The long into the yield curve is is all about growth and inflation potential, not just today, but over the long run period, or at least as much as we can identify in the forecast. The first is the Eurodollars found in traditional. (1983), for an in-depth analysis of unsecured, commercial lending arrangements. It's a deflationary recession that hits at the worst possible time, which is why these curves are signaling are changing so quickly. Its going to be a blood bath. Stop me if youve heard this before: dollar up for reasons no one can explain; yield curve flattening dramatically resisting the BOND ROUT!!! And that's nothing good to be sure. And there's something historically go to Slide seven, that certainly Fed officials have talked about the Eurodollar Futures Curve and have said, we can't take this thing literally again, Harley's point we don't take it literally. If you don't have a research roundup email, just go to our homepage macrovoices.com. That just means that there's when we do go into a downturn, or we do get into these deflationary pressures. It has of course been flattening as youve pointed out. Say theyre going to stop QE and start raising rates and never actually do it. But that doesn't necessarily mean it's inflationary. Because we haven't had something like a pandemic to coordinate all the time clocks around the world for every economy to set this up before? You know, Elon Musk has already said, despite Jay Powell's assurances that the labor market is strong. For more information, see the BIS annual report (PDF) for 1969. So since the middle or early part of October, we've seen flattening and then inversion and Eurodollar futures. Nonetheless, inflationistas told me I was crazy. Jeff: Sure. And that's just a frightening long run scenario to me. An individual can hide in cash, but not major corporations. I think the recession is coming. Some of the stuff that I talk about some of the risks I see in the marketplace was kind of falling on deaf ears. The Eurodollar Futures Curve is increasingly certain, it's never 100% certain, but is increasingly positive that none of that stuff matters. You see it in the rising US dollar too, which is, today it's spiking again, which is nothing good. Videos showing how the St. Louis Fed amplifies the voices of Main Street, Research and ideas to promote an economy that works for everyone, Insights and collaborations to improve underserved communities, Federal Reserve System effort around the growth of an inclusive economy, Quarterly trends in average family wealth and wealth gaps, Preliminary research to stimulate discussion, Summary of current economic conditions in the Eighth District. The monetary system itself is telling us what the risks are and the risks are not inflation. It's just going to create even bigger problems for them, which means they're going to hire fewer workers, which is means they're going to pay less for their workers because they can't afford to. Because of this, weve spent the last few months working out the full picture (within whats possible to know) of the Eurodollar Market (an extension of the global supply/demand of dollars equation) to help us gain a broader understanding of the totality of the US Dollar market. Does this board have any arguments against his? And so there's a very direct and easy to see relationship between something like repo fails, therefore collateral shortage and the absolutely ridiculous tumble in the Japanese yen and look at where it's really starts again in October! To put it simply, these futures will trade at what the market expects U.S. 3-month interest rate levels will be in the future. Is a cumulative credit collapse likely? Erik: Okay, Jeff, so you're calling for deflationary recession, a lot of other people are calling for recession. One, people say, well, Eurodollar futures are nothing more than hedging, to which the reply should immediately be well, yeah, of course, that's what they are. Slide 25, we have the Federal Reserve custody of US Treasuries owned by basically foreign central banks. You're starting to see it of course, we have an inventory problem in the United States as well as other parts around the world, partially related to those container prices and the difficulties that they represented in shipping goods around the world. If the US goes into recession, and China goes into a hard landing at the same time. Euro-dollar market, by the process of intermediation, can increase the flow of international credit and can thus affect total world demand in a meaningful sense. And I don't think that's really changed. There's some places where they're still in denial. . Maybe we get one. Because in the public's mind in particular, that individual economies are treated as individual economies when they really aren't. Which is why we have supply chain issues-so producers can create a fake supply squeeze and keep prices high). That's every bit familiar for anybody who's been paying attention over the last couple of years, except that in 2022, some of these collateral shortage indications have gotten to their own extremes, which represents serious deflationary danger. So the markets are going in a different direction than Jay Powell and the mainstream inflation case has been. I think the first to blow up will be the massively inflated car prices (both new and used) that have gone on over the past year. The real deflationary dangers of money happened to be collateral. Much lower than 1.7(odd) percent would be negative.. Tantrums are now a way of life for the 30%. Let's assume that they fall further, they settle at some eventual low because of the recession, lack of demand over the short run and then they start rising back up, because the supply, the supply factors have never been fixed. The Eurodollar Market, also called the Offshore Dollar Market, is something of a mystery in modern finance. My thought has been, though that this recession although obviously there has to be some contraction of economic activity. 2. Created: 07 July 2022 Erik: Joining me now is Jeff Snider, Chief Investment Strategist for Atlas Financial and author of the Eurodollar University. A minimal loss in interest more than offset by currency gain. - _ 7. It's about probabilities, and that these inversion periods as Dudley was saying in 2007, this hedging could push implied yields on Eurodollar futures contracts lower than what would be consistent with an unbiased forecast. I expect the 10-year will invert with the 7-year next. Eurodollars have nothing to do with currencies. Your email address will not be published. Central bankers aren't going to stop it, governments aren't going to stop it for various reasons, including, as you said Erik, the fact that they're all convinced this is inflation. In particular 2022, we have the same problem largely as in 2018-19. The jobs search . In this globally synchronized economy, especially as it's linked together by the monetary system, the Eurodollar system, that central banks by the global monetary system, that increases the potential for real havoc, disorder, financial disorder. So you get to a major natural event which should have been a real negative on the economy, but central banks around the world stimulated like there was no tomorrow. Jeff prepared a terrific slide deck to accompany this week's interview listeners, you'll find the download link in your research roundup email. And you can see it again, going forward to slide 24, collateral fails against something like JPY, the Japanese yen, because Japanese banks are a key redistribution point in the Eurodollar system. Huge Interest Rate Dislocations: Did the Fed Cut Too Much? So I see what you're saying with all of the slides, and I see where they're going. concerned about employment and inflation within the United States, and monetary policy is an attempt to influence those conditions. In fact, the labor market is a contributing source to what they believe is inflation pressures, and that rate hikes need to happen and they need to happen aggressively in order to get this stuff in check. Inflation will stop when the Fed reduces access to credit. Is that a concern? I think you are correct. Read the ones Slide 22, for example, we see in treasury bill yields just absolutely incredible premiums being paid in primary and secondary markets for especially the four week instrument, where, the four week treasury bill yield, that's so much less than the RRP or IOER represents a huge liquidity premium that the market is paying or the system actually the monetary system is paying just to acquire the best quality collateral, and at times, it infects the eighth week, as well as the three month bills too, especially early in the morning when illiquid trading, Asian trading, where the previous day's repo and interest rate derivatives and other derivatives are being unwound. Shanghai and some of the ports along the east coast are just now coming online and all the freight companies were expecting a bounce in container prices as well as a surge in activity as China's reopening and it didn't happen. Erik: Joining me now is Jeff Snider, Chief Investment Strategist for Atlas Financial and author of the Eurodollar University. Erik: Well Jeff, I can't thank you enough for another terrific interview. In short, eurodollars represent a bet on when and how much the Fed will hike rates. Few can describe the current monetary systems basic factors let alone the finer details of how this reserve regime carries out these critical monetary roles. David Rosenberg (@EconguyRosie) November 30, 2021, Largest intraday swing in over a year. 37. I'll say that again. They think the tide will turn bullish again. So does that have the potential to set up a feedback loop that eventually does bring us to inflation or stagflation? How can they possibly stay afloat without FED purchases and having to pay 4% interest? Its too late to taper and then hike. Well, nothing that I havent been saying all along 10 yr yield will flirt with going negative and $US will surge. He also stated it was appropriate to consider wrapping up tapering a few months sooner. What happens if oil gets to $200. Very soon folks will be worried about return OF capital rather than return ON capital. As World War II raged on, delegates from 44 Allied nations gathered at a hotel in Bretton Woods, N. H., to lay out foundations for the reconstruction of the international financial system. But the last thing they're going to do is try to stimulate an economy when they've said we can't stimulate the economy. Now, as you make your arguments in this slide deck, it seems to me like okay, you've made a very compelling argument for why inflation perhaps is ending, we're not going to see more inflation, where the inflation is going to come out of the system. And that's not going to have any real impact on the economy, at least not according to the SCP models that are projecting unemployment to go up a little bit from its very low position where it is now, GDP, according to these models, isn't supposed to be all that bad, either this year or next year, not real, no real changes there. Jeff Snider makes a compelling argument for deflation surrounding Eurodollar futures curve. And it's, again, it's not just one market or another, it's all the markets together that are talking, that are pricing and hedging against not just this year but future years. So again, the downside potential builds not just in markets but in actual fact across the real economy. Because that's exactly what we're seeing right now. And that's really what's one of the reasons why markets are pricing the way they are. Maybe extreme valuations are finally catching up with reality. And there has been no money printing. This Is A Big One (no, its not clickbait). MACRO VOICES is presented for informational and entertainment purposes only. It has been the bane of our existence since August of 2007-2008 crisis, as you and I talked about many times Erik was never really about subprime mortgages. Last Hurrah for Year-Over-Year Inflation, Rate has Peaked or Soon Will, On November 9, I wrote Last Hurrah for Year-Over-Year Inflation, Rate has Peaked or Soon Will. Retiring the Phrase Inflation is Transitory. Jeff prepared a terrific slide deck to accompany this week's interview listeners, you'll find the download link in your research roundup email. So if these massive players throughout the global economy feel the need to hedge in such a way that it upsets the Eurodollar curve meaning that they're preparing for lower interest rates in the immediate future, rather than where interest rates are supposed to be, according to the mainstream narrative, you need to pay attention to that. The biggest risk in my opinion, which is always the biggest risk when it comes to money. The company's production manager, Tor Einar Hanssen, said it had sold about 110 in the past year and a half, making a small profit on the cars, most of which had been used for a few years by U.S . One of the reasons we go to slide 14, the labor market contrary to what Jay Powell says, is really not in all that great shape to begin with. And that allowed the immediate timeframe around the actual pandemic, not to be recessionary. So once we do happen, once we do get into the downturns. Sometimes. We can see that from 1964 to 1969, the estimated market size of eurodollar market grew over 252% from $75 billion of 2020 dollars to $264 billion. FED is desperately worried about 1930s price crashes in commodities,agriculture and of course asset values(which will create a wave of defaults across the board.) The flattening and inverted yield curve isn't just about recession in 2022. Based on past behavior, the Fed will continue its asinine polices to contrive growth. I cant say that.because I want it to happenand I try not to let my biases drive my thinking. We already had a contraction in the first quarter. That's really what the Eurodollar Futures Curve is saying. And sure enough, going back to last year, US Treasuries disappear from custody at FRBNY because foreign central banks are using them for some reason. There's something a little bit bigger going on here. It's not an unbiased forecast. But yet, in macro timescales, time and again, we've seen throughout history that transitory can last a lot longer than maybe you think it is. haha (But Ive have sold it long ago). But that's not likely to persist through the second half of the year. For discussion of the Feds useless economic models please see How Bad are Inflation Models, Expectations, and Forecasts vs Reality? 1. I mean, you have to love it. So? And what happens when companies especially retailers and wholesalers start liquidating inventories, prices are going to fall sharply, and they're already starting to be discounted in a lot of different places. A year ago, we debated whether inflation would be transitory or not. Our methodology uses data on three-month Eurodollar futures, options on three-month Eurodollar futures from the Chicago Mercantile Exchange (CME), three-month LIBOR/fed funds basis swap spreads expiring in 12 months, and the Treasury yield curve. And again, I go back to what markets are pricing currently these curves, that's kind of what they're saying is that in this globally synchronized world. Eurodollars are the largest trading futures contract by far, but the name is more than a bit confusing. It's a global economy phenomenon. Much higher is a bigger problem, because of the corresponding drop in price. Inversion of the Yield Curve Eurodollar futures are derivative contracts that allow buyers and sellers to hedge against interest rate risk in the future. You go to slide 15, I think a lot of people are aware of consumer confidence the University of Michigan survey at a record low lower than 2020 lower than 2008 to 2009. What is a Eurodollar deposit? Well, we've been saying that on macro voices for months now. It's not just the US labor market. Lots of other similar worthless assets like sports cards/collectibles, NFTs, art etc. . The stock market's big run has critics warning that it is not a certainty the economy will avoid a recession, that inflation will continue to coast lower and that corporate profits will recover. So FRBNY's models are picking up serious degradation in economic circumstances and potential going forward. Just like the Eurodollar Futures Curve began to flatten then invert, just like the US Treasury curve began to flatten and now inverts, the Japanese yen and repo fails. I mean, we're seeing it today as we speak. So what we're really saying here is the Eurodollar futures market is betting against the Fed. What kind of a recession breaks the back of consumer prices that have been the highest they've been in 40 years? Turkeys currency is moribund. So the higher oil prices go for structural reasons, the more likely in my mind again, going back to these curves going back to the US dollar exchange value. It may be that the market is thinking exactly like you are Erik and saying, what happens if oil goes up to $150 in the recovery period. The other question is what is affecting portions of the yield curve. Following its emergence, the eurodollar market played a big role in the Bretton Woods system and also its breakdown and eventual demise in the early 1970s. Market size Since the Eurodollar market is not run by any government agency its growth is hard to estimate. Theyll shriek and riot about something else if covid goes away. 29th Aug 2022 Online Futures Trading 0 Comments This article on Eurodollar Futures is the opinion of Optimus Futures. And yet, the market is increasingly certain that something is going to go wrong in the Feds very own backyard. I mean, that's what 2008-2009 was. So it is every bit monetary like as cash is. So Steve and I are going to work more closely together on developing strategies and maintaining, monitoring, monitoring the strategies he has allowing me to have more input in over the portfolio process and things like that. Again, that's what markets are proposing that the global economy is about to undergo changes that are going to look more like recession than not, I mean, the GDP now's the projections for GDP in the second quarter of this year. Number one, that commodities in particular has been very favorable. On the other hand, if I look at JP Morgan's estimate of how high the oil prices could go if Putin decides to intentionally game the west by withholding access to Russian oil and gas at the worst possible times, then they think it could go to $380. Historically, when things go bad, the most worthless assets get liquidated first. The dollar, especially when it goes up, and it has a very high accelerated pace is a very dependable sign of deflationary money working its way through the global monetary system. That's why for example, the 2001 recession or the 1991 recession, those were relatively mild, because it was only the US or basically the US experiencing mild, moderate recessions that were not stitched together by the Eurodollar system malfunctioning. What is the impact of the Eurodollar market on the foreign exchange value of the dollar? The questions discussed are the following: 1. But they're not just hedging instruments that you or I Erik are using. Subscribers get an email alert of each post as they happen. Interesting . Sure, that is probably the market discounting the oncoming recession. And you're starting to already see if you go to slide 18, some of the deflationary trends develop in macro economic sense as well. The Eurodollar Market is one of the most influential and least understood drivers of financial markets. Inflation not being transitory expecting it to be persistent. But Eurodollar futures are a set of probabilities. The flattening of the ED implied forward libor curve suggests that is the time the Fed will be done with hikes and could go the other way. Deflation of the U.S. dollar wont happen because of something called a printing press. What's the nature of that relationship and particularly tell us more about what's going on with Eurodollar University, the ongoing podcast that you and our friend Emil Kalinowski have developed. If you go to slide 23, repo fails another indication of collateral shortfall. I remain unconvinced the Fed will get in any rate hikes at all. So it's not just demand and recession risk in the US it's demand and recession risk across the entire world, including China as it reopens.
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