- The world’s global dollar shortage (Sounds crazy, right?)
- Team Biden: Need oil, please help
- “Few investors seem positioned for this”
- Bye, Janet?: SEC chief spruces up his resume
- Twitter is tweaking out.
“The world is suffering a global dollar shortage,” declares Paradigm Press Group’s macroeconomics authority Jim Rickards.
Sounds crazy, right? What about all the stimmy checks issued during the pandemic? What about the Federal Reserve’s incessant money printing?
But Jim’s been warning readers of The 5 about a dollar shortage since early 2016. His thesis was simple, if counterintuitive: Back then, for every dollar printed by the Fed since the 2008 financial crisis, about 20 dollars of new debt was created.
As Jim summed it up, “The world created new dollar-denominated debt faster than the Fed created money.”
Now in 2022… more than six years and trillions in additional debt later… the global dollar shortage is reaching critical mass.
Not that most Americans have noticed. The shortage “has had relatively little impact on U.S. banks so far,” Jim explains, “because they have the Fed dollar printing press at their disposal and trillions of dollars on deposit at the Fed in the form of excess reserves.”
In contrast, “central banks and commercial enterprises around the world are not so lucky. Their central banks do not print dollars. In fact, central banks including those in China, India, Japan and the U.K. have recently had to sell U.S. Treasury notes in order to raise dollars to keep their economies afloat.
“The scramble for dollars has to do with demands by commercial banks and hedge funds for dollars needed to buy U.S. Treasury bills,” Jim goes on.
“The bills are needed as collateral for over $1 quadrillion in notional value of derivatives contracts.”
We’ll pause for a moment. “Derivatives” is a shorthand term for sophisticated financial instruments like futures, forwards, options and swaps. You know, the kind that nearly took down the global financial system in 2008.
And a quadrillion? That’s a trillion with three more zeroes at the end.
Sounds kinda threatening, huh? You’re absolutely right.
“Without dollars, the counterparties cannot buy bills and cannot meet collateral requirements,” Jim says.
“The result is a liquidation of positions and contraction of balance sheets. This leads eventually to a break in the system in the form of a major entity failure and resulting rush for the exits in all asset classes at once.
“This happened in 2008 and 1998. Both times the results were near catastrophic before the Fed intervened. Still, investor losses were in the trillions of dollars.”
Now?
We’re already looking at trillions in losses before the great dollar shortage reaches a crisis point. “Since the start of the meltdown in early 2022, more than $3 trillion in retirement savings has been wiped out as stocks, crypto, bonds and more have all begun to implode,” says Jim. “But I fear that’s just the beginning.”
Gee, and a new financial crisis isn’t even our “big” topic today…
“Ever been in a Walmart when some shopping cart full of kids just melts down? Well, that’s the White House Situation Room just now,” quips Paradigm’s energy expert Byron King.
As you’ve likely heard, the OPEC+ nations — led by Saudi Arabia and Russia — decided yesterday to cut oil production by roughly 2 million barrels a day. That is, about 2% of global daily demand.
In reality, the cut is likely closer to 1 million barrels a day, seeing as many OPEC+ nations already struggle to meet their production targets. Still, that’s 1 million barrels a day to match the 1 million barrels a day the White House is draining from the U.S. Strategic Petroleum Reserve. Nice symmetry there…
Anyway, the reaction from Team Biden is indeed a tantrum: “It’s clear that OPEC+ is aligning with Russia with today’s announcement,” said White House press secretary Karine Jean-Pierre.
On the one hand, there’s a short-term calculus at work.
“Saudi Arabia sees a recession coming next year and they don’t want to be stuck with millions of barrels of cheap oil. They see now as the time to get the best price,” says a “former senior U.S. official” to the Middle East Eye website.
But it’s much more than that: After 77 years as America’s client state, the House of Saud sees which way the geopolitical winds are blowing.
We illustrate with some clever Photoshoppery depicting the July meeting between Joe Biden and “MbS” — Saudi Arabia’s Crown Prince Mohammed bin Salman…
At the time, Team Biden’s defenders said there was no choice but for Biden to go to MbS, hat in hand. As the neoconservative pundit Max Boot wrote in The Washington Post, “If the United States won’t support the Saudis, Russia and China will.”
Yeah, how’s that working out?
There was a telling passage buried in this morning’s Wall Street Journal’s coverage of the OPEC+ decision: “The OPEC+ production cut will limit Russia’s loss of market share, said delegates, who acknowledged it represented an unprecedented effort by the world’s biggest oil producers to collectively help Russia with the political and economic problems caused by the war in Ukraine.
“OPEC states, like many countries of the ‘Global South,’ have remained neutral or silent on Russia’s war, as they weigh competing interests that include Russia’s stature as a global grain exporter and a top armaments supplier.”
Call it the end of an era that began on Feb. 14, 1945. As the conclusion of World War II was in sight, a dying President Franklin D. Roosevelt cemented the U.S. relationship with Saudi Arabia aboard the USS Quincy — during a meeting with MbS’ grandfather, King Ibn Saud.
Or as Byron King quips, “MbS is thinking, My granddaddy knew FDR, and you are no FDR.
“What are Saudi and other Middle East leaders supposed to think when the USA essentially tells them, ‘We hate fossil fuel, especially oil and gas. We hate what keeps you alive, supports your economy and on which you are building your future’?
“Hmmm — I guess they team up with Russia (for this, among many other reasons) because the enemy of my enemy is my friend.”
Which brings us to the ludicrous spectacle of Washington looking for a helping hand from… Venezuela.
“The Biden administration is preparing to scale down sanctions on Venezuela’s authoritarian regime to allow Chevron Corp. to resume pumping oil there, paving the way for a potential reopening of U.S. and European markets to oil exports from Venezuela,” says The Wall Street Journal — citing “people familiar with the proposal.”
The Trump administration started laying on sanctions against Nicolas Maduro’s government in Venezuela in 2017 and tried to engineer a coup in 2019. The Biden administration carries on with the policy, still recognizing an unelected clown named Juan Guaido as the “interim president.”
But now, Team Biden appears willing to let bygones be bygones. The actual governing government in Venezuela would get sanctions relief in exchange for Maduro resuming talks with the opposition. A deal could get done sometime this month.
Not that it would accomplish anything, Byron King says. “As if Venezuela can just turn a few valves? Hey, what valves? They’re either rusted shut or stolen and sold for scrap. Venezuela’s oil industry has been decapitalizing for 15 years. It will take hundreds of billions of dollars to get it back up to speed, and likely a decade if it all begins today. (Which it won’t.)”
Anyway, with OPEC cuts offsetting releases from the Strategic Petroleum Reserve, “I could see oil prices in a steady uptrend for a few months,” says Paradigm senior analyst Dan Amoss.
“Few investors seem to be positioned for this,” he hastens to add.
That’s because many investors remain wedded to the notion that the Federal Reserve is on the verge of a “pivot” away from its current hawkish policy.
“Oil prices are important to the Fed pivot narrative,” says Dan. “If we see a $20–30 per barrel jump in crude over the winter, the month-over-month inflation rate will reaccelerate.” Inevitable result: The Fed would have to jack up short-term interest rates for longer than Mr. Market expects.
Just one hitch in this forecast, which brings us back to a forecast Dan made here a month ago — that the Biden administration might resume the ban on exports of American crude or refined products.
“If the administration keeps panicking and goes all the way to an oil export ban,” Dan says this morning, “there will be mayhem in the delicate refining and distribution system — probably short-term crashes in oil and gasoline, but with a payback of higher long-term prices.”
Two routes to the same final destination — higher prices. An oil-and-gas ETF looks like a mighty good buy-and-hold idea right now.
As it happens, the biggest oil-and-gas ETF — ticker XLE — is up 4% since the OPEC+ announcement yesterday.
We said weeks ago the OPEC+ nations probably want a floor of $90 a barrel under Brent crude, the global benchmark. It trades this morning for $93.79. West Texas Intermediate, the U.S. benchmark, goes for $88.26, the highest since mid-September.
As for the broad stock market, it’s adding to yesterday’s losses. All the major indexes are down between a quarter and a half percent. That said, the Dow is still holding the line on 30,000. And at 3,765, the S&P 500 is still 5.3% higher than last Friday’s year-to-date lows.
Bond yields are back on the rise — the 10-year Treasury over 3.8% again.
Precious metals are losing a little ground, gold at $1,712 and silver at $20.54. Ditto for the major cryptos, Bitcoin at $20,808 and Ethereum at $1,364.
So the whole Kardashian crypto settlement is about SEC chief Gary Gensler spiffing up his resume to be the next Treasury secretary?
As we mentioned on Monday, famous-for-being-famous person Kim Kardashian will fork over $1.26 million to settle an SEC complaint. Last year she touted a crypto called EMAX on her Instagram page without disclosing that she was being compensated to do so.
Now Fox Business reporter Charlie Gasparino reports that SEC enforcement staffers are taking issue with Gensler’s handling of the whole thing — like, going on CNBC within minutes of the settlement being announced.
“They are calling it a ‘publicity stunt’ designed to burnish his rep[utation] to be named Treasury Secty,” Gasparino tweets.
Yeah, so our speculation in June that Treasury Secretary Janet Yellen is on her way out?
Here in October, that’s common knowledge around the Beltway. Now, follow the breadcrumbs as laid out on Twitter by Bianco Research chief Jim Bianco…
Yep. Suddenly Gensler’s weird approach to crypto makes a lot more sense.
As Bloomberg columnist Matt Levine summed it up last month, “Gensler wants the SEC to have jurisdiction over basically all of crypto, because basically every crypto token is a security, but that he does not seem to have any interest in writing new rules to accommodate the crypto market. Gensler’s approach would put the SEC in charge of crypto, and then more or less ban crypto, and I am not sure that is a winning position for him to take.”
Unless you’re angling for a promotion to Treasury secretary and looking to curry favor with the Senate Finance Committee, right?
Cynical, we know…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Aw gee, we used up all of our 5 Mins. and still didn’t get to Elon Musk and Twitter.
Well, we think you’ll understand how other matters took priority today — not least because it’s still not really a done deal. One of Musk’s main backers, Apollo Global Management, is backing out.
But the freakout has resumed anew: “Virtually every Twitter employee I’ve spoken to in the last six months has told me that he or she plans to leave if Mr. Musk takes over,” writes The New York Times’ Kevin Roose — one of the Establishment media’s most reliable enforcers against online “wrongthink.”
Just a guess, but maybe Roose needs to expand the circle of Twitter employees he speaks to?
