Erik: MacroVoices Episode 85A was produced on October 20th, 2017. I’m Erik Townsend.
Our Eurodollar University series featuring Alhambra Partners CIO Jeffrey Snider has been extremely popular with listeners. We originally planned to air Parts 3 and 4 over the Holidays. But thanks to some generous donations we’ve received in the last few weeks, we’re able to accelerate the release schedule. This episode contains Eurodollar University Part 3.
Today’s feature interview with Alhambra Partners CIO Jeffrey Snider was pre-recorded back in July of 2017 as Part 3 of our Eurodollar University project. There’s a slide deck to accompany this interview, and we recommend that you download it before listening as we’ll be referring to the charts and graphs it contains throughout this program.
Registered users at macrovoices.com will find the download link in your Research Roundup email. If you’re not yet registered, just go to www.macrovoices.com and look for instructions to register and get the download, above Jeffrey Snider’s photo on our home page.
This four part series came about after listeners to the MacroVoices weekly podcast asked for more in-depth coverage of the Eurodollar system.
In Part 1 we discussed how the Eurodollar system came about, how Milton Friedman demonstrated in a series of articles that fully $30 billion in new US dollar money supply was created by the Eurodollar system in the 1960s, and how this occurred at the stroke of a bookkeeper’s pen without a single penny of actual cash issued by the Treasury or a single ounce of gold bullion to back this $30 billion of new money supply.
In Part 2 we learned about the wholesale component of the Eurodollar system. And we discussed the role that the repurchase market used by banks to secure short-term financing played in expanding the wholesale Eurodollar market.
We discussed why investment banks went on a collateral-buying binge in the early 1990s and how the Fed’s policy change to target the Fed funds rate rather than the money supply was probably influenced by the Fed’s inability to accurately measure the money supply creation that was going on in the wholesale Eurodollar market.
The next subject I discussed with Jeff Snider was the role of the Basel Banking Accords on the development of the Eurodollar system.
So, without further ado, let’s jump right back in where we left off and hear Jeff Snider talk about the Basel Accords. Here is Alhambra Partners CIO, Jeffrey Snider.
Jeff: The Fed flew by the seat of its pants throughout the 1990s. But, because things seemed to be very good and very well behaved (especially inflation), everybody assumed that the correlation was between the economy (especially inflation) and monetary policy. In other words, Greenspan must have been a maestro for doing whatever it is he did.
And, in fact, Greenspan never actually came out and said exactly what they were doing. All he did was raise and lower the federal funds rate. But nobody could really determine – nor did he specify – exactly how they did that. What caused the Fed to raise the rate 25 basis points one day and then the next meeting perhaps lower it. And, in fact, what we know today is that it was a completely discretionary policy that had absolutely nothing to do with money whatsoever.
Erik: Joining me next on the program is petroleum geologist Art Berman. Art prepared a fantastic slide deck to accompany this interview that you’re definitely going to want to download, because we’ll be referring to it throughout most of the interview. Registered users at macrovoices.com will find the download link in your Research Roundup email. If you’re not registered yet, just go to macrovoices.com. On the home page, right next to Art Berman’s picture, look for a red button that says “looking for the download” and click on it.
Art, thanks so much for joining us. Let’s go ahead and start with your slide deck. Starting on Page 2 here, after your title slide. I just love your charts, the way that you are so visual and the way that you describe things. Go ahead and tell us what this chart is about on Page 2.
Art: All right, Erik, thanks for the compliment on the charts, and it’s great to be back with you. It’s been a while. I’m always glad to talk to you.
I talk a lot about comparative inventory, and I do it because I think it’s really important. You don’t hear a lot about it. You hear people sometimes reference the five-year average etc. But to me this is the main tool that cuts through most if not all of the confusion about why oil prices are doing what they’re doing, and where they might be going.
Slide 2 is just a history of comparative inventory. Again, that’s the current stock levels minus the five-year average. And in this case I’m using crude plus a basket of refined petroleum products which I think are the most diagnostic. So it’s comparative inventory (CI) in blue, versus WTI spot price in gold.
What you can see, looking at this thing, is that there’s an awfully good negative correlation between comparative inventory and WTI spot price. And that’s the reason that it’s important.
The salient features on this chart are that back in mid-February we were not at an all-time high comparative inventory, which is actually back in March-April of 2016, but we were pretty darn high. We were second-highest: 213 million barrels by my count. And we have dropped as of yesterday to 74 million barrels.
That is huge. That’s a 139 million barrel drop over a period of 30-some-odd weeks. And there have been a couple of weeks where it went up a little or went sideways. But that is consistent, that’s a trend. We have to pay attention to it.
What’s also important and interesting is that, typically we see a pretty big price response – again, just looking at this time period since the price collapse in ‘14 – you see a pretty good price response whenever comparative inventory goes down. And it’s really striking how we’ve had the biggest drop in comparative inventory ever, and prices have just kind of hung in there between $45 and $55 a barrel. I’m showing $40 to $50.
And so an astute observer would say, your correlation doesn’t really work. And I would argue that, actually, it does, that an awful lot of those price responses were based on sentiment. And we had some price run-ups, particularly in early ‘16, that proved to be vapor and went away in a big hurry.
So those are the key points in this. And as we get on to the next slide or two, I’ll explain exactly why price is responding exactly as it should. It still is an awfully good negative correlation. It’s just the amplitude has been suppressed, as it should be.
Erik: Joining me next on the program is CPM Group founder Jeffrey Christian.
Jeff, obviously you're a precious metals guy. We're going to get to gold and silver in just a minute. But I want to start with the US dollar, because obviously everything else is priced in the dollar. We had seen what a lot of people thought was going to be a long-standing secular bull run in the dollar index. In the last several months we've seen a big sell-off and all of a sudden the bears are out. We've gone from record long speculative interest to record short speculative interest.
So is the dollar rally over? Was this just a pullback that's set to continue? What's your outlook for the US dollar?
Jeff: When we look at the dollar, because we don't get involved necessarily in shorter-term trading of the dollar, we look at it more as a macroeconomic fundamental. And we look at it on a longer-term basis. And our view was that the dollar did go through this very large upward ratcheting from 2015 through into 2016, and our view was that the dollar would basically move sideways with a slight upward bias in a relatively volatile fashion from, say, 2017 onward.
So we're not expecting to see the dollar come off. We don't expect to see the dollar continue to decline. We think it's pretty much – if you look at it on a trade-weighted basis on the broad trade-weighted basis index – we think that you're pretty much close to the bottom of it. We don't necessarily see it continuing to rise at the rapid pace that we saw in 2015-2016, but we don't necessarily look for it to go back to the lower levels that it had from, say, 2008 to 2014.
So we're looking for it to move sort of sideways in a volatile fashion with an upward bias.
Erik: A trend that we've heard a lot about lately – although I don't know how much reality versus hype it is – is de-dollarization. And I think there's certainly some truth to this, that a lot of people would like to move away from the dollar. We see China and Japan with less US Treasury holdings than they used to have.
Do you think that this trend of de-dollarization is something that we should take seriously? Do you think that the US dollar's hegemony as the world's reserve currency is in question at all?
Jeff: I think that's a long-term transition. Most central bankers and most economists would like to see the world move to a multipolar currency regime where you don't have a dominant currency. No one necessarily wants their currency to be the dominant currency, except maybe the US government, the dollar. The Chinese clearly don't want the yuan to be the dominant currency in the future. But I think a lot of people would like to see a multipolar currency regime.
They see it as a long-term transition.
And they see it as a long-term transition for a couple of reasons. One reason is that there are so many dollars out there. You have 62% of central bank assets in US dollars. And you have about probably over 70% of private assets in US dollar-denominated assets. So the dollar has such an enormous pool that it's like the old joke, if you owe a bank you own it – there's no ready, quick substitute away from the dollar to anything else. Even to a pool of all the other currencies combined, you can't do it.
Erik: MacroVoices Episode 82 Alpha was recorded on September 28th, 2017. I’m Erik Townsend.
Today’s feature interview with Alhambra Partners CIO Jeffrey Snider was pre-recorded back in July of 2017 as Part 2 of our Eurodollar University project. There’s a slide deck to accompany this interview, and we recommend that you download it before listening as we’ll be referring to the charts and graphs it contains throughout this program.
Registered users at macrovoices.com will find the download link in their Research Roundup email. If you’re not yet registered, go to www.macrovoices.com and look for instructions to register and get the download, next to Jeffrey Snider’s photo on our home page.
This four-part series came about after listeners to the MacroVoices weekly podcast asked for more in-depth coverage on the Eurodollar system. In Part 1 we discussed how the Eurodollar system came about, how Milton Friedman demonstrated in a series of articles that fully $30 billion in new US dollar money supply was created in the Eurodollar system by the end of the 1960s, and how this occurred at the stroke of a bookkeeper’s pen without a single penny of actual cash issued by the Treasury or a single ounce of gold bullion to back this $30 billion of new money supply.
So, without further ado, let’s jump right back in where we left off. Here is Alhambra Partners CIO Jeffrey Snider.
Jeff: One of the things that we have to be aware of is that the word Eurodollar, as I said before, is not a technically precise term. At least, the way I use it, it’s not a technically precise term. I use it as a catchall to describe what is, essentially, 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.
The wholesale part of it is just as important as the offshore part of it. I think we want to describe in a little more detail what we mean by wholesale finance.
Erik: Joining me now is Morgan Creek founder and CIO, Mark Yusko. Mark sent us a fantastic 146 page slide deck to accompany today’s interview. Now obviously we’re not going to have time to touch on every single slide, but I strongly encourage you to. So, please, download the slide deck and peruse the whole thing. Registered users will find the download link in your Research Roundup email.
If you’re not registered yet, just go to macrovoices.com and look for the red “Looking for the Downloads?” button above Mark Yusko’ s photo on our home page.
Mark, I can’t believe it has been almost a year since we had you on the show last October. And, at that time, all the smart guys that we had on the program were super- uber-bullish on the US dollar on a secular level. Then you came along and you proclaimed that the dollar was topping. You held a bearish view – not just as a trade, but you articulated a secular bearish view about the dollar gradually weakening over a long time horizon as its hegemony in the global financial system comes into serious question.
Now, as of the time of our last interview, holding a bearish view on the dollar was extremely unfashionable in macro circles. A year later, we’re about 10% lower on the DXY. So if there’s anything I’ve learned in this business, Mark, it’s that you don’t want to pay attention to the guy with the most eloquent explanation of what already happened. You want to pay attention to the guy who got it right when it was unpopular to be right. And that clearly is you in this case.
So, for the benefit of our newer listeners who may not remember that interview, let’s start from the beginning. Please explain your view. How did you know a year ago that the dollar was topping, and what you saw was not just a pullback or something but a secular change in direction.
What is this all about? And what can we expect from here for the US dollar?