Saudi banking system under pressure.
By Christine Hughes, Chief Investment Strategist at OtterWood Capital:
The US dollar remains in its year-plus-long range. It looked like it was breaking down a couple weeks ago, however, out came Fed chatter to steer it higher. The chart below shows the trading range the USD has been stuck in and the moments where Fed chatter began earlier this month.
With the USD strengthening again, weakness is coming back to emerging markets and commodities, especially gold. Crude has held up due to falling production and rig counts.
One place where recent USD strength is exerting real stress is the Saudi Arabia currency peg. Money continues to flow out of the country, putting pressure on the peg. Mounting stress in the banking system can be seen in the three-month interbank offered rates which has soared to the highest since the Financial Crisis:
There is a strong case to be made for a one-off devaluation or complete break of the Saudi peg. Neither outcome would be too surprising: the Swiss broke their peg in 2015, and China shocked the world with their devaluation last summer.
The problem with a Saudi devaluation is the link to oil. Francisco Blanch from Bank of America says a break of the Saudi peg would cause oil prices to collapse to $25 a barrel!! This is something to keep a close eye on.
I don’t believe the Fed can or will hike rates in June as interest rate differentials would be even more extreme than a year ago when the USD was surging higher. The ECB and BoJ have been much more aggressive with their policies the past year. The BoJ went into negative rates this year and is expected to do more, while the ECB will now begin purchasing corporate bonds. A Fed rate hike would send the USD through the roof.
However, it is not a simple thing. Given all the chatter out of the Fed the past two weeks about how they are going to hike next month, not following through (again) would hurt the Fed’s credibility.
The following quote about the Fed from David Kelly, chief global strategist at JPMorgan Asset Management, says it best:
“Having now worked hard in recent weeks to explain why June is on the table, provided the data remain relatively healthy, not following through with a rate hike in three weeks would only further undermine whatever credibility the Fed has left,” he said.
No one has any clue as to what the Fed will do, and it’s clear that industry experts like this have little faith in monetary authorities. I don’t blame them. By Christine Hughes, OtterWood Capital
The negative interest rate absurdities that central banks imposed on their bailiwicks elsewhere are now hitting US Treasury yields. Read… The NIRP Refugees Are Coming to America
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If you refuse to understand GOLD and paper notes, you will never understand.
People can refuse to understand Gold and paper notes longer than you can remain solvent.
I hold gold (physical and not paper), but I still think Gold can fall to below 800 before going to infinity and beyond.
Gold is a shiny metal with little real utilitarian value. Prime farmland on the other hand….
If the Fed raises rates, it will CRUSH the bond market. They will not.
We, all of us, are caught in a trap (reminds me of an Elvis song)l, and there is no way out………………………………………Prepare. We (YOU) have 6 months.
If the FED raises rates, the Treasury can pay off the old notes with cheaper money since the value of the notes will drop. What 19.5 trillion debt can continue to grow without disaster at any given moment. There is no way this economy, or any US economy looking into the next 30 years, can pay down this debt unless the note value drops.
Still them best looking corpse
Interesting times indeed.
Bill Gross came out saying that the end game might involve smth like the CB owing all the government debt and simply writing it off. Look at the CB of Japan, they are buying now equities, possibly they will be the first to simply write off the government debt.
We heard that hyperinflation will arrive when rates hit zero bound, then QE1 to QEn , now we have rates in deep negative territory and not much seems to change. Maybe writing off the government debt is not a bad idea, that money has already been spent and it is not going to have any impact in the money supply. After all, if we owe that money to ourselves, we might just write it off and balance the books. Reset the system.
Burning the government debt is called the nuclear option – the name says it all. The point is, when it comes to pass, you will have to worry about more mundane things than what happens to it. The banksters at the central bank will at least have some paper to burn – to keep them worm.
It is printed paper.
What do you expect?
There is no such thing today as “money”. Since the Dutch merchants combined with the Royal House of Holland to create a central bank (owned by the Royal House of Holland…”Bilderbergers”…and the original Merchant Families), it is all PAPER. Printed Paper. Don’t you get it? Are you that STUPID?
Don’t you all get it? PAPER. They print what “they” want. They “credit” to an account, by typing on the same keyboard you are using.
Please, don’t be so stupid,.
” it is all PAPER. Printed Paper. Don’t you get it? Are you that STUPID?”
So the universe has deemed cellulose rectangles to be less valuable than agglomerations of metal?
The point you’re straining to make has nothing to do with gold vs fiat. The reality is that the economy is a construct of the human mind.
It is no more real than my nightly fantasies of hot-tubbing with Maria Sharapova.
There never was such a thing as “money”. It was always debt which kept people working, economy growing, the world turning, the dream alive. Until it couldn’t anymore.
These guys kept tab of the promises on stone tablets:
https://en.wikipedia.org/wiki/Sumer#Money_and_credit
Now the tabs are kept on bits in computers, mostly. All that goes up will come down. All that grows will decay. Nothing lasts forever. Pretty basic stuff…and there’s also the equation of lending with interest (the act of making promises of more) to back this up and prove the promised stuff must not exist in order for the promise to have any value. Strange thing, the human mind :)
“There never was such a thing as “money”. It was always debt which kept people working, economy growing, the world turning, the dream alive.”
Debt is a product of the market economy. Before the market there were only human ‘needs’.
When a man is thirsty he ‘needs’ water. Is he in debt to water?
We no longer live in a need (demand) based economy because we live in a market based economy which asserts that the individual’s needs are limitless. The Modern Monetary theorists who currently control the world economy wield such dribble like a great firey sword.
Suggest you read -“Critique of Economic Reason” by Andre Gorz.
Suggest you read -“Critique of Economic Reason” by Andre Gorz.
Thank you for the suggestion, but it took me quite a long time to forget all the ideological and dogmatic -fundamentally contradictory- stuff I’ve already read and believed, and get back to common sense while trying to get rid of my own cognitive dissonance.
I do not think the narrative of Mr. Gorz (I’ve read most of the “solutions”) is able to resonate anymore, with me, at least. Once you truly understand the math of compounding interest on debt (and its mirror side, the compounding profit) it is becoming clear what the driver is. But yes, people like to believe in stories (I dare say we absolutely need them), it’s what keeps us going. Every civilization has had its own stories, and every collapse created new narratives (what we mock as religions), which appeared just as true to them as the current narrative seems the absolute truth to us. A cacophony of narratives will emerge as the current one collapses, and they won’t be pretty, none of them. However, one of them will become dominant, at some point, hopefully not the ugliest.
Re: it’s just paper- and gold is just an almost useless metal. If all Au disappeared over night- there would be no observable change in the natural physical world. Furthermore, there would be no industrial process or machine that could not be built. Gold plated contacts are desirable but not essential.
So why is it money? Because of human agreements that it shall be. The ‘just paper’ of say the pound sterling has been also accepted for over 200 years now. It’ll probably be ok for the rest of your life.
And of course, it you’d gone into those pieces of paper two years ago, you’d be up at least 25% against gold.
Money has been many things over the centuries. It’s what people agree it is. Like everything, it fluctuates in “value” depending on what it’s being traded against. It is a medium of exchange with a foundation of a confidence game. Erode the confidence and it devalues.
This is my thinking as well about gold. We are living in a utilitarian world, we are down sizing, and reevaluating our needs. Gold just doesn’t fit in anymore. If you look at the bitcoin movement, even though I think it is a scam, the adoption of alternative forms of value are taking place because they create convenience. The value of bitcoin is in the facility it provides not in any intrinsic value. This is why I would rather hold paper currencies from around the world than gold.
Petunia, I think you are on to a very important point here.
There are lots more “currencies” now than we realize. Not just USD, Euro, Pound, Yen, Yuan, AUD, and the hundreds of other formal currencies, but also Bitcoin and NUMEROUS other informal stores of value.
For instance, I just attended a Wyndham time-share presentation whereby they asked/pressured me to trade my hard-earned USD for Wyndham “points” that I can then use to “purchase” hotel and time-share days and weeks over the rest of my life and then transfer the “point deeds” to my heirs.
I did this while on vacation with airfare that was paid from my “airline mileage account” accumulated by buying stuff for my business with my personal credit card.
Not to mention the barter economy whereby I traded 2 hours of my wife’s and my time for free jungle zip-lining and a discount on a snorkeling tour.
While I understand and agree with many of the worries posted here on WS, I feel that too much time is spent fatalistically complaining about the problems and not enough on how the human spirit will overcome these issues.
To me, the whole gold-vs-silver-vs-guns-vs-etc discussion is nothing but LAZY THINKING. Cooter’s ideas about enriching your knowledge seem to me to be so much more practical… but of course they require optimism and discipline and are a lot more difficult to attain.
Well, I have done it my whole life. What motivates me is an old fashioned thing that was once highly honored but is now largely forgotten. It is called “Love of Learning” and I have striven to increase my knowledge and understanding my whole life. To me, nothing is more precious than knowledge. It is the hidden wealth that makes all other forms possible. it is what enabled Germany and Japan to lift themselves up from near total devastation after WWII and become the mighty economic powers today. Of the various vocations I have pursued I am most proud of being a teacher. If anything i have done makes a difference in the lives of others it will be because of what i have taught them.
I think there is a factor that is not getting enough MSM attention re: Fed tightening.
The most closely watched inflation factor is wage inflation. It is a leading indicator because you have to get before you spend. It is also the most difficult to react downwards- except by actual layoff.
The sudden move by the US working poor- the staff of Walmart, McDonald’s most recently etc. to demand substantially higher wages is a new US development, that seems to have come out of the blue.
The surprising strength of the Sanders campaign against an apparently crowned nominee ties in with this.
A pot begins to boil from the bottom.
To quantify or further comment on this is, as they say in the US military, over my pay scale.
If the real cost of living were to be HONESTLY stacked against the ‘average minimum wage’ since WWII, the current minimum wage would be $22.50. That translates to about $45,000 per year, an income that most will live a decent life even in high prices cities, maybe even buy a home in some town, maybe have the wife stay home that raise the kids instead of working too. The failure of wages to keep a decent standard of living in the USA is the ROOT of many problems that we can’t solve now.
And as long as I am ranting, this word…Entitlement. IT Is always associated with the workers as if something is being given that was not earned. Shame on all those who want to take from those who have given 20% of their incomes to benefit of their later years. I hear no calls to end ‘entitlements’ to CEO’s who wreck their companies, or Congressmen who serve one term and have a lifetime of benefits or a $50,000 a year HAIR allowance from tax payers. It is time to end this war on people who have worked all their lives to have a tiny piece of safety. The HAVES have harped on this to long so they can have more and the rest have less.
By the way…the government just re-adjusted all the data back to WWII to make all the horrible data numbers look so much better….as if the past has no place in fantasy land.
The median income in the US is $53K and that is barely enough to live on these days.
The word “entitlements” as it relates to employee benefits is inappropriate. Nothing a worker gets is an entitlement. All the benefits a worker receives are paid for with their labor. Everything workers receive is compensation for their labor, even the Christmas turkey.
>>>$53K = median income: yes … for households, not individuals. The median income per worker is a lot lower.
Bud and Petunia,
Great comments. ‘They’ use the word ‘Entitlements’ to demonize pensions, medical systems, whatever. The stupid/gullible of the lower classes sometimes buy in to this as they see themselves above everyone else and maybe rising beyond their class. I have a friend like this, who actually believes he is a conservative, yet he is the most profligate spender I know, but….but he does not want to be part of his working class roots and believes he is above it all.
It’s an entitlement when other people expect a return, its just deserts when they get it.
regards
To me it seems obvious that workers are being shafted, as the extreme polarization in the economy could not exist if workers were getting a fair share of the product of their labour. The polarization is a glaring sign of mass exploitation. It’s not returns to capital. It’s the exploiting class that has the entitlement mentality.
Yes, using “entitlement” allows it to be attacked. I’m thinking that these entitlements will be “needs tested” in the not too distant future in order to stay afloat.
Wages are determined by the market. U.S. wages have been high against the rest of the world for a very long time. That is changing due to our “trust-fund” mentality…in other words we are no longer lean, mean, and producing at a competitive level, so our wages will drop against the world. Simple stuff.
The key to the next crisis is when the USD soars, its just a matter of timing.
You must realise that there are NO markets anymore, with so much CB activity buying bonds and equities there is no true price discovery and there is no proper risk management being done. Right now “investors” are not investing but gambling.
The Fed has painted themselves into a corner but I think Yellen will have to raise rates to stop the pension funds from going under. Most pension funds based their models on having an interest rate around 6-8%, some are already blowing up and it will become an avalanche as baby boomers begin to retire at 10,000 a day.
Emerging markets have borrowed about 9 trillion in USD when commodities were at all time highs and have made investments in infrastructure which is now no longer needed. When the fed started printing money not only did it flood their local market but being the default currency USD flowed out to the rest of the world and has turned up into housing markets world wide. I got an email from my brother in Singapore telling me how great it was that he could buy a house in USD at about 3,5% or so. I got out of paper back in 2012 and moved out of London to an area where I am close to water and I can see cows.
Like in the last crisis unless you have your assets in your physical procession they are not yours. Even having a segregated account will not protect you. Here in Europe things are a lot worse than the USA and most European nations are broke. Most have debt to GDP ratios of about 100% or more. Historically when a country in in debt of about 100% they will default. Remember that the whole of Europe defaulted back in 1932 except for technically because they went into a moratorium. Its only a matter of time before many of these nations will default. The Euro is over. I like to call European CB the plate spinners because that is all they are doing. Dragi is lost now and has no idea what to do except fire fight.
We are heading into a time of economic extremes and historically this means there will always be the possibility of war.
Good luck everyone, hope to see you on the other side of this global melt up… its just time now.
Good analysis and advice. I agree heartily, people need to take more personal responsibility not rely on the government for everything, a liberal mindset.
Look at where all these Central Bankers grew up, were teethed at the tit of the squid, made partners, and sent out to do the bidding. This is not a coincidence. Every Western Banker came from one house and now they are in China, and Asia generally, doing the same destruction.
It’s about time the FED ended this negative interest rate absurdity by raising rates closer to where they should be historically. This will force the ECB and BOJ to raise rates as well or risk destabilizing the entire world monetary system. Good for the FED and hope they don’t wimp out and succumb to all the pressure just to save a few international investment bankers from their own stupidity and greed.
Mike be assured they WİLL (wimp out that is) count on it
I still want to know what Obama was told at those emergency meetings with Yellen and Biden in the White House. Maybe something like “On your upcoming trip do not make them assurances about forex matters.”????
Well downunder in Oz the RBA will be hoping that the Fed increases rates.
The RBA finally had to cut here as the Fed failed to increase rates last time. They had put too much into the never ending jawboning that they had been involved in months and months.
The A$ is in trouble no matter what the Fed does.
An increase in rates will cause the A$ to fall even more and people are talking about the 50 cent level. That would be less than half of value it hit during the mining boom.
If the Fed doesn’t cut then the RBA will be forced to cut rates here again and the A$ will initially head higher and then fall when the cut comes through.
A cheaper A$ is going to makes Australian real estate even cheaper for foreigners even though the banks and State of Victoria are trying to do their best to scalp foreign buyers.
THE A$ has been one of the weaker currencies around. It is down about 10% against the yen YTD and over 17% over the past year.
The Fed is putting on a good show of indicating a rate hike is around the corner. First they stir up markets to create a buying frenzy (which is working exactly to expectations) – then end it all in a relief rally (by not raising). I suspect the September meeting with be preceded with the same dog and pony show. And by then the whole plan will have done it’s job, to keep markets from tanking before the election. This is the last gasp before a long great recession or more likely depression; the only remaining task is to ensure it falls on someone else’s watch.
I know a lot of you own or are thinking about holding physical gold & silver, and that’s a very good idea (IMO silver maple leafs/eagles will appreciate more than gold & provide instant cred at local shops). But also I feel that today’s tendency towards polarizing views has manifested in the public consciousness as a mass ‘doomsday pepper’ style mentality. For example many feel the end game is that the stock market ‘ultimately’ crashes. It’ll certainly goes way down at first but the ‘end-game’ is that markets soar as stocks rise against local currency devaluation. Look at Venezuela’s stock market…it’s sky rocketing not because the economy’s ok but because equities are a natural hedge against the falling Bolivar.
Ensure you have some gold/silver and cash saved up for a mid-term crisis but be realistic in that (UNLESS you own hundreds of thousands in precious metals & have stored up a decade of food and TP), your not really well prepared beyond the short-term reality of a depressed economy. What happens if there’s a depression, you get laid off and lose your home but society ‘doesn’t’ fall apart and gold doesn’t go to $50,000/oz? What happens if banks start to fail, get bailed out, markets plummet; but grocery stores still stock plenty of food and silver only gets to $75/oz? These are far more realistic outcomes than a movie style disaster scenario.
Look objectively at markets for what they are…hedges against inflation and a place where banks and governments are highly incentivized to ‘protect’ and prop up rather than outright steal from. Look at safe havens like gold mining stocks, stable foreign currencies and any other place that people flock to when fear sets in. Fight the instinct to duck and cover when stocks are at their worst. Utilities and communication stocks are essential service providers that offer excellent inflation hedges, pay great dividends, and go on-sale (usually for months at a time) as markets bottom out. Building up capital thru investing in safe havens on the way down, and then picking up dividend generating stocks at the bottom, are a way you can create lifetime sources of income that increase as currency devalues or even resets.
Remember that shares of a company are not dollars, euros or yen; they’re only ‘priced’ in the local currency and tend to rise against it with inflation. Large companies wield legions of lawyers and will not tolerate theft from the government (i.e. they have your back). Banks on the other hand see you (the depositor) as a last-resort source of income with only the FDIC as a small roadblock to gaining permission for a bail-in. Negative rates in-fact are just a bail-in performed on a recurring basis. Do you think the FDIC could prevent the Fed from implementing -0.5%, -1% or even -10% rates if they decided it was necessary to rescue and preserve banks for perpetuity?
The Fed….credibility? Ha. Raising rates would foul the bond market and cause what little “growth” in the economy that exists and kill it. The USD would shoot higher and really halt things as well….. All because they’re worried about pension funds blowing up?
All great points, pension funds need higher rates, and so do insurance companies and regular local banks, so they have money to loan, and make money. But rates going up trigger bond collapse and those nasty derivatives in the trillions. Gold, who really knows?? I am biased to PM ETFs for now, but as where else do I go? Regular stocks? bonds? CB buying equities and bonds, it’s all an artificial market, and where it goes, nobody really knows for sure. It’s going to be one roller coaster ride. A ride none of us have ever been on, taking the ride in the dark maybe would be a good analogy.
TDK
Another .25 hike wouldn’t be the end of the world. Bring it on Yellen.
i just want to add to this great conversation. if the cost of living was more realistic to the rest of the world. we wouldn’t be having most of these conversations and problems. if I could afford to live the life making half what I earned then I would be happy to do so. the costs to run a house have increased too much. prices of things are too high and just to make ends meet takes your entire paycheque. there is nothing left to spend. that is the whole problem. greed,has brought us to our knees. sorry to say. capitalism died in 2008. the great recession is not over, we are still in it. that’s why we still talk about recovery and lift off. if the governments really wanted to solve these problems they would. there are no problems, cause if there were they would have to make serious decisions on how to fix things, and we r just sitting on our hands. no one will roll up their sleeves and get dirty.
also to add to gold vs cash vs anything. things are only worth what people are willing to spend for them. houses included.
once again I suggest a song by bob Dylan, union sundown. listen to the lyrics look what year it was written. also listen to working mans blues #2. enjoy!!!
“if I could afford to live the life making half what I earned then I would be happy to do so. the costs to run a house have increased too much.”
During the early stages of the industrial revolution it was hard to get people to work regularly in factories because they wanted to work just enough to cover their needs.
Clever capitalists had a solution to this- they’d make the rent so damn high you would always need to work. Four years ago you could get a 1 bdrm in Seattle for $800. That same unit is now $1500. The Fed’s mandate to print is part of a broader conspiracy.
The increase in the cost of living is not only due to greed.
In large part, prices rise due to constant devaluation brought about by a policy of perpetual deficits.
Running perpetual deficits regardless of whether the underlying economy is contracting or not, eventually erodes wealth by concentrating profit and title in the hands of the owner of the currency.
Hence the concomitant and, albeit gradual, constant rise in prices.
My dad grew up on a ranch in W. Colorado during the Depression. My grandmother raised turkeys, and my grandfather raised cattle and also wheat and hay. They farmed with horses. When they went into town for supplies, they took a wagon full of cured turkeys and beef. They were able to trade this for anything they needed.
Money is whatever someone will trade you something else for. The doomsday crowd (gold and silver bugs) are in for a rude awakening when they try to trade their metals for food and supplies. My grandparents would not trade for anything except things that had utilitarian value. They weathered the Depression quite well from this strategy.
Maybe so if you live on a farm and have things you can produce which people need. But living in a city, not feasible. If the government tries to print money, I will be happy to hold gold and silver – people will trade with it and it will hold value.
Gold has been considered a currency for 4,920 years before your grandfather raised his first calf.
Gold has never been, manipulated to such high levels as it is now relative to other metals which is why buying at this price is insane.
There is a possibility it has been manipulated to that level to discourage ordinary people,from physically holding it under their own control.
Whatever the reason gold is currently priced into irrelevancy.
I have thought of buying 20 tons of salt and keeping it in a barn on my dad’s farm. In the event of a real economic disaster, it is something that can become precious rather quickly and is easily traded for other essentials. It was used as money in the past and still is in some remote areas of the world. People can live without a lot of things but they can’t live without salt.
So… raise the interest rate, Crush those Bonds! They’re dead anyway, right?
Did YOU expect to hold them to maturity? They pay, what… 2% maybe on a 10 year. Big Whup if it rises to three or 4 you lose a bit. We are still growing DEBT here not much else.
Wanna buy a house??
How about a car? or, maybe stocks? …got some stocks, right here…
“I don’t believe the Fed can or will hike rates in June as interest rate differentials would be even more extreme than a year ago when the USD was surging higher. The ECB and BoJ have been much more aggressive with their policies the past year. The BoJ went into negative rates this year and is expected to do more, while the ECB will now begin purchasing corporate bonds. A Fed rate hike would send the USD through the roof.”
The FED has acheived what it set out to Its back in teh middle of teh range.
The fed will hike, maybe not in June but it will happen this year, Still possibly more than once.
The fed cant be to predictable takes all the fun out of Trading the $.
How does this article explain how the Saudi banking system is under stress as the title implies?
Letting go of the currency peg (causing a sudden and massive devaluation). And look at the jump in the Riyal Interbank Offered Rate (the chart)… banks begin to lose trust in each other… That’s what we saw during the early stages of the Financial Crisis.
I believe the easiest way to understand silver is with the following example. In 1964 three silver dimes and one cent would purchase the average gallon of gasoline in the United States. Today if you bring those same three silver dimes into my coin store I will purchase them from you for $3.30 US dollar. You can then go and purchase the average gallon of gasoline. If you have dimes minted from 1965 to 2016 you will need 33 of them to be equal to the three dimes you sold me. Those three silver dimes have not gone up in value, they have only preserved your purchasing power.
When a friend and I were doing a blog about Macroeconomics he had a standing offer to sell his used books (The Night Heron in Laramie) for a silver dime. :)
There is the fundamental concept of “property” that is conspicuously missed by all the commenters here.
Anything can be money. What matters however, is not what it is made of. Rather, what matters is that whatever you accept in exchange for your ideas, your time and your skills, becomes your possession.
Our modern monetary system, fails on this first requirement.
The other fundamental requirement of “money” is that it should guarantee an exchange that is not only equivalent in value but that it should also maintains said value in time.
In our modern monetary system, this requirement too is not fulfilled.
The above is the fundamental reason why profit and, therefore, title, migrates towards the owner of the currency
This is an arithmetical identity.
gold cannot be made up. Only extracted at great skill and cost.
Then came paper money originally as a guarantee that you had physical gold, or a gold certificate. Since 1971no longer the case.
So we are two generations and a bit into a great experiment which will fail.
It normally takes abot three generations for things to be re-learned.
I guess paper gold will be shafted, and not a moment too soon.
This system has been totally corrupted to the point the majority see no difference, but that does not make it right, just the common view. It will surely fail, when confidence is lost.