Capital Flows

"Foreign central banks' holdings of US Treasuries at the Fed custody facility are dropping fast (almost $40bn in just one week)."

Every week we crunch thousands of capital flow and alt data time series @ExanteData

This one stood out to me this week. Foreign central banks's holdings of US Treasuries at the Fed custody facility are dropping fast (almost $40bn in just one week). pic.twitter.com/qIB37mhvin

— Jens Nordvig 🇩🇰🇺🇸🇺🇦 (@jnordvig) October 2, 2022

Why the Dumping?

It's not really dumping in the classic sense. Foreign central banks seek to shore up their currencies. 

A bit more color here...https://t.co/N8YXnkJ99E

— Jens Nordvig 🇩🇰🇺🇸🇺🇦 (@jnordvig) October 2, 2022

China's SOEs in On the Act

And here is the price action so far

In USDCNH (offshore currency market) pic.twitter.com/nlmJNAxzz7

— Jens Nordvig 🇩🇰🇺🇸🇺🇦 (@jnordvig) September 29, 2022

Japan and China are both in on the act, the latter perhaps more than anyone knows.

China's SOE reserves are not in official estimates of China's US treasury holdings. What many considered "dumping" of official assets was really hidden in SOEs.

Huge Structural Shift Creates Feedback Loops

• The Fed now wants a stronger dollar to stop inflation.
• Previously the Fed wanted a weak dollar to stimulate inflation. 
• And previously, foreign central banks wanted weak currencies to support exports to the US consumers, the buyers of last resort.
• Now foreign central banks are screaming "uncle".

Nations that import food and energy are getting hurt even more than the US on the inflation front. 

Even though the dollar is getting stronger, the Fed is attacking export mercantilism of Japan, China, and Germany by recession-inducing rate hikes to kill consumer demand. 

Fed Portfolio Losses

Meanwhile, the Fed is now underwater on it's huge pile of QE holdings. John Hussman sums up the situation nicely.

No question the Fed can operate with negative equity. Also no question the losses mean the Fed has issued unbacked government liabilities, which is a form of unlegislated fiscal expenditure, which in this country isn't actually Constitutional. But then, nobody cares, so

— John P. Hussman, Ph.D. (@hussmanjp) October 3, 2022

Mark to Market Accounting

"With $8.8 trillion in bonds averaging ~8-year maturity, year-to-date market losses of ~15%, and just $48 billion in capital, the Federal Reserve would definitely be insolvent if it needed to mark to market."

Questions of Legality

I said implicit IOU, as in an shared understanding. This is similar to the federal backstop of Freddie and Fannie. There was never a written, legally enforceable act on this matter. Just a shared understanding.

A bill of credit is a legal debenture and totally different.

— David Cervantes (@pinebrookcap) October 3, 2022

Dollar Scarcity?

Richard Russell discussed dollar scarcity in 1964.

Curiously, a literal explosion in dollars results in a "scarcity". But countries that borrowed dollars are having a terrible time paying back those loans.

Sounds about right. 😳https://t.co/Wh4TuPEGoL

— New Low Observer (@NewLowObserver) September 29, 2022

Free Money Via QE

Let's also discuss free money via QE. The Fed forced money down banks throats and it now pays interest on those reserves parked at the Fed.

The Fed reports this data monthly, last updated September 27. 

Reserve Balances

Reserve Balance Rate

Free Money Calculation

The Fed gives taxpayer money to banks at an annualized rate of 3.15%. 

3.15% of $3.3 trillion is $103,950,000,000. The Fed is shrinking its balance sheet but with every rate hike bumps up the interest it pays on reserves. 

Reverse Repos

Simultaneously, the Fed is doing $2.425 trillion daily in overnight reverse repos. These are allegedly "temporary" but the amount keeps growing over time. 

I think we need a new definition of temporary. 

Until the Fed Breaks Something 

Which is more likely. Bretton Wood 3 or USD strengthens until ROW eco breaks? How long we got till ROW breaks?

— playflcollector 🦇🔊 (@playflcollector) September 29, 2022

Many people, including me, have stated the Fed will keep hiking until it breaks something. 

Actually, it should be clear the current central bank governance system is broken beyond repair. 

It's Our Dollar But Your Problem, 2022 Style

To understand what's going on with the dollar, interest rates, and credit gone wild, we need to review history.

This monetary madness all stems from Nixon ending convertibility of gold.

Please consider It's Our Dollar But Your Problem, 2022 Style

At this point it is unclear what will replace the current broken setup, but please don't suggest Bitcoin because the odds of that are roughly zero.

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