As the Fed begins their journey into a deflationary blizzard, they are beginning to break markets across the globe. As the World Reserve Currency, over 60% of all international trade is done in Dollars, and USDs are the largest Foreign Exchange (Forex) holdings by far for global central banks. Now all foreign currencies are crashing against the Dollar as the vicious feedback loops of Triffin’s Dilemma come home to roost. The Dollar Milkshake has begun.
The Fed, knowingly or unknowingly, has walked into this trap- and now they find themselves caught underneath the Sword of Damocles, with no way out…
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Sword Of Damocles
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“The famed “sword of Damocles” dates back to an ancient moral parable popularized by the Roman philosopher Cicero in his 45 B.C. book “Tusculan Disputations.” Cicero’s version of the tale centers on Dionysius II, a tyrannical king who once ruled over the Sicilian city of Syracuse during the fourth and fifth centuries B.C.
Though rich and powerful, Dionysius was supremely unhappy. His iron-fisted rule had made him many enemies, and he was tormented by fears of assassination—so much so that he slept in a bedchamber surrounded by a moat and only trusted his daughters to shave his beard with a razor.
As Cicero tells it, the king’s dissatisfaction came to a head one day after a court flatterer named Damocles showered him with compliments and remarked how blissful his life must be. “Since this life delights you,” an annoyed Dionysius replied, “do you wish to taste it yourself and make a trial of my good fortune?” When Damocles agreed, Dionysius seated him on a golden couch and ordered a host of servants wait on him. He was treated to succulent cuts of meat and lavished with scented perfumes and ointments.
Damocles couldn’t believe his luck, but just as he was starting to enjoy the life of a king, he noticed that Dionysius had also hung a razor-sharp sword from the ceiling. It was positioned over Damocles’ head, suspended only by a single strand of horsehair.
From then on, the courtier’s fear for his life made it impossible for him to savor the opulence of the feast or enjoy the servants. After casting several nervous glances at the blade dangling above him, he asked to be excused, saying he no longer wished to be so fortunate.”
—---------------
Damocles’ story is a cautionary tale of being careful of what you wish for- Those who strive for power often unknowingly create the very systems that lead to their own eventual downfall. The Sword is often used as a metaphor for a looming danger; a hidden trap that can obliterate those unaware of the great risk that hegemony brings.
Heavy lies the head which wears the crown.
​
There are several Swords of Damocles hanging over the world today, but the one least understood and least believed until now is Triffin’s Dilemma, which lays the bedrock for the Dollar Milkshake Theory. I’ve already written extensively about Triffin’s Dilemma around a year ago in Part 1.5 and Part 4.3 of my Dollar Endgame Series, but let’s recap again.
Here’s a great summary- read both sides of the dilemma:
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Triffin's Dilemma Summarized

(Seriously, stop here and go back and read Part 1.5 and Part 4.3 Do it!)

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Essentially, Triffin noted that there was a fundamental flaw in the system: by virtue of the fact that the United States is a World Reserve Currency holder, the global financial system has built in GLOBAL demand for Dollars. No other fiat currency has this.
How is this demand remedied? With supply of course! The United States thus is forced to run current account deficits - meaning it must send more dollars out into the world than it receives on a net basis. This has several implications, which again, I already outlined- but I will list in summary format below:

1. The United States has to be a net importer, ie it must run trade deficits, in order to supply the world with dollars. Remember, dollars and goods are opposite sides of the same equation, so a greater trade deficits means that more dollars are flowing out to the world.
2. (This will devastate US domestic manufacturing, causing political/social/economic issues at home.)
3. These dollars flow outwards into the global economy, and are picked up by institutions in a variety of ways.
4. First, foreign central banks will have to hold dollars as Foreign Exchange Reserves to defend their currency in case of attack on the Forex markets. This was demonstrated during the Asian Financial Crisis of 1997-98, when the Thai Baht, Malaysian Ringgit, and Philippine Peso (among other East Asian currencies) plunged against the Dollar. Their central banks attempted to defend the pegs but they failed.
5. Second, companies will need Dollars for trade- as the USD makes up over 60% of global trade volume, and has the deepest and most liquid forex market by far, even small firms that need to transact cross border trade will have to acquire USDs in order to operate. When South Africa and Chile trade, they don’t want to use Mexican Pesos or Korean Won- they want Dollars.
6. Foreign governments need dollars. There are several countries already who have adopted the Dollar as a replacement for their own currency- Ecuador and Zimbabwe being prime examples. There’s a full list here.
7. Third world governments that don’t fully adopt dollars as their own currencies will still use them to borrow. Argentina has 70% of it’s debt denominated in dollars and Indonesia has 30%, for example. Dollar-denominated debt will build up overseas.

The example I gave in Part 1.5 was that of Liberia, a small West African Nation looking to enter global trade. Needing to hold dollars as part of their exchange reserves, the Liberian Central Bank begins buying USDs on the open market. The process works in a similar fashion for large Liberian export companies.
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Dollar Recycling
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Essentially, they print their own currency to buy Dollars. Wanting to earn interest on this massive cash hoard when it isn’t being used, they buy Treasuries and other US debt securities to get a yield.
As their domestic economy grows, their need and dependence on the Dollar grows as well. Their Central Bank builds up larger and larger hoards of Treasuries and Dollars. The entire thesis is that during times of crisis, they can sell the Treasuries for USD, and use the USDs to buy back their own currency on the market- supporting its value and therefore defending the peg.
This buying pressure on USDs and Treasuries confers a massive benefit to the United States-
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The Exorbitant Privilege
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This buildup of excess dollars ends up circulating overseas in banks, trade brokers, central banks, governments and companies. These overseas dollars are called the Eurodollar system- a 2016 research paper estimated the size to be around $13.8 Trillion USD. This system is not under official Federal Reserve jurisdiction so it is difficult to get accurate numbers on its size.
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https://preview.redd.it/92wcmhdb0uq91.png?width=691&format=png&auto=webp&s=20dbaf63f75ff6f2e255fff06e6f48c03170b11b
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This means the Dollar is always artificially stronger than it should be- and during financial calamity, the dollar is a safe haven as there are guaranteed bidders.
All this dollar denominated debt paired with the global need for dollars in trade creates strong and persistent dollar demand. Demand that MUST be satisfied.
This creates systemic risk on a worldwide scale- an unforeseen Sword of Damocles that hangs above the global financial system. I’ve been trying to foreshadow this in my Dollar Endgame Series.
Triffin’s Dilemma is the basis for the Dollar Milkshake Theory posited by Brent Johnson.
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The Dollar Milkshake

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Milkshake of Liquidity
In 2021, Brent worked with RealVision to create a short summary of his thesis- the video can be found here. I should note that Brent has had this theory for years, dating back to 2018, when he first came on podcasts and interviews and laid out his theory (like this video, for example).
Here’s the summary below:
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“A giant milkshake of liquidity has been created by global central banks with the dollar as its key ingredient - but if the dollar moves higher this milkshake will be sucked into the US creating a vicious spiral that could quickly destabilize financial markets.
The US dollar is the bedrock of the world's financial system. It greases the wheels of global commerce and exchange- the availability of dollars, cost of dollars, and the level of the dollar itself each can have an outsized impact on economies and investment opportunities.
But more important than the absolute level or availability of dollars is the rate of change in the level of the dollar. If the level of the dollar moves too quickly and particularly if the level rises too fast then problems start popping up all over the place (foreign countries begin defaulting).
Today however many people are convinced that both the role of the Dollar is diminishing and the level of the dollar will only decline. People think that the US is printing so many dollars that the world will be awash with the greenback causing the value of the dollar to fall.
Now it's true that the US is printing a lot of dollars – but other countries are also printing their own currencies in similar amounts so in theory it should even out in terms of value.
But the hidden issue is the difference in demand. Remember the global financial system is built on the US dollar which means even if they don't want them everybody still needs them and if you need something you don't really have much choice. (See DXY Index):
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DXY Index
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Although many countries like China are trying to reduce their reliance on dollar transactions this will be a very slow transition. In the meantime the risks of a currency or sovereign debt crisis continue to rise.
But now countries like China and Japan need dollars to buy copper from Australia so the Chinese and the Japanese owe dollars and Australia is getting paid in dollars.
Europe and Asia currently doing very limited amount of non-dollar transactions for oil so they still need dollars to buy oil from saudi and again dollars get hoovered up on both sides
Asia and Europe need dollars to buy soybeans from Brazil. This pulls in yet more dollars - everybody needs dollars for trade invoices, central bank currency reserves and servicing massive cross-border dollar denominated debts of governments and corporations outside the USA.
And the dollar-denominated debt is key- if they don't service their debts or walk away from their dollar debts their funding costs rise putting great financial pressure on their domestic economies. Not only that, it can lead to a credit contraction and a rapid tightening of dollar supply.
The US is happy with the reliance on the greenback they own the settlement system which benefits the US banks who process all the dollars and act as gatekeepers to the Dollar system they police and control the access to the system which benefits the US military machine where defense spending is in excess of any other country so naturally the US benefits from the massive volumes of dollar usage.
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https://preview.redd.it/yq1f1anq0uq91.png?width=1140&format=png&auto=webp&s=27447e2acec884848a5c70ab3651820e487fc0f3
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Other countries have naturally been grumbling about being held hostage to the situation but the choices are limited. What it does mean is that dollars need to be constantly sucked out of the USA because other countries all over the world need them to do business and of course the more people there are who need and want those dollars the more is the pressure on the price of dollars to go up.
In fact, global demand is so high that the supply of dollars is just not enough to keep up, even with the US continually printing money. This is why we haven't seen consistently rising US inflation despite so many QE and stimulus programs since the global financial crisis in 2008.
But, the real risk comes when other economies start to slow down or when the US starts to grow relative to the other economies. If there is relatively less economic activity elsewhere in the world then there are fewer dollars in global circulation for others to use in their daily business and of course if there are fewer in circulation then the price goes up as people chase that dwindling source of dollars.
Which is terrible for countries that are slowing down because just when they are suffering economically they still need to pay for many goods in dollars and they still need to service their debts which of course are often in dollars too.
​
So the vortex begins or as we like to say the dollar milkshake- As the level of the dollar rises the rest of the world needs to print more and more of its own currency to then convert to dollars to pay for goods and to service its dollar debt this means the dollar just keeps on rising in response many countries will be forced to devalue their own currencies so of course the dollar rises again and this puts a huge strain on the global system.
(see the charts below:)
JPY/USD
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GBP/USD
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EUUSD
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To make matters worse in this environment the US looks like an attractive safe haven so the US ends up sucking in the capital from the rest of the world-the dollar rises again. Pretty soon you have a full-scale sovereign bond and currency crisis.
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https://preview.redd.it/72nlain01uq91.png?width=1141&format=png&auto=webp&s=cbaa411acc88acb3849949d84a36624d75d6cfc4
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We're now into that final napalm run that sees the dollar and dollar assets accelerate even higher and this completely undermines global markets. Central banks try to prevent disorderly moves, but the global markets are bigger and the momentum unstoppable once it takes hold.
And that is the risk that very few people see coming but that everyone should have a hedge against - when the US sucks up the dollar milkshake, bad things are going to happen.
Worst of all there's no alternatives- what are you going to use-- Chinese Yuan? Japanese Yen? the Euro??
Now, like it or not we're stuck with a dollar underpinning the global financial system.”
—-------------
Why is it playing out now, in real time?? It all leads back to a tweet I made in a thread on September 16th.
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Tweet Thread about the Yuan
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The Fed, rushing to avoid a financial crisis in March 2020, printed trillions. This spurred inflation, which they then swore to fight. Thus they began hiking interest rates on March 16th, and began Quantitative Tightening this summer.
QE had stopped- No new dollars were flowing out into a system which has a constant demand for them. Worse yet, they were hiking completely blind-
Although the Fed is very far behind the curve, (meaning they are hiking far too late to really combat inflation)- other countries are even farther behind!
Japan has rates currently at 0.00- 0.25%, and the Eurozone is at 1.25%. These central banks have barely begun hiking, and some even swear to keep them at the zero-bound. By hiking domestic interest rates above foreign ones, the Fed is incentivizing what are called carry trades.
Since there is a spread between the Yen and the Dollar in terms of interest rates, it thus is profitable for traders to borrow in Yen (shorting it essentially) and buy Dollars, which can earn 2.25% interest. The spread would be around 2%.
DXY rises, and the Yen falls, in a vicious feedback loop.
Thus capital flows out of Japan, and into the US. The US sucks up the Dollar Milkshake, draining global liquidity. As I’ve stated before, this has seriously dangerous implications for the global financial system.
For those of you who don’t believe this could be foreseen, check out the ending paragraphs of Dollar Endgame Part 4.3 - “Economic Warfare and the End of Bretton Woods” published February 16, 2022:
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Triffin's Dilemma is the Final Nail
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What I’ve been attempting to do in my work is restate Triffins’ Dilemma, and by extension the Dollar Milkshake, in other terms- to come at the issue from different angles.
Currently the Fed is not printing money. Which is thus causing havoc in global trade (seen in the currency markets) because not enough dollars are flowing out to satisfy demand.
The Fed must therefore restart QE unless it wants to spur a collapse on a global scale. Remember, all these foreign countries NEED to buy, borrow and trade in a currency that THEY CANNOT PRINT!
We do not have enough time here to go in depth on the Yen, Yuan, Pound or the Euro- all these currencies have different macro factors and trade factors which affect their currencies to a large degree. But the largest factor by FAR is Triffin’s Dilemma + the Dollar Milkshake, and their desperate need for dollars. That is why basically every fiat currency is collapsing versus the Dollar.
The Fed, knowingly or not, is basically in charge of the global financial system. They may shout, “We raise rates in the US to fight inflation, global consequences be damned!!” - But that’s a hell of a lot more difficult to follow when large G7 countries are in the early stages of a full blown currency crisis.
The most serious implication is that the Fed is responsible for supplying dollars to everyone. When they raise rates, they trigger a margin call on the entire world. They need to bail them out by supplying them with fresh dollars to stabilize their currencies.
In other words, the Fed has to run the loosest and most accommodative monetary policy worldwide- they must keep rates as low as possible, and print as much as possible, in order to keep the global financial system running. If they don’t do that, sovereigns begin to blow up, like Japan did last week and like England did on Wednesday.
And if the world’s financial system implodes, they must bail out not only the United States, but virtually every global central bank. This is the Sword of Damocles. The money needed for this would be well in the dozens of trillions.
The Dollar Endgame Approaches…
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Q&A

(Many of you have been messaging me with questions, rebuttals or comments. I’ll do my best to answer some of the more poignant ones here.)

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Q: I’ve been reading your work, you keep saying the dollar is going to fall in value, and be inflated away. Now you’re switching sides and joining the dollar bull faction. Seems like you don’t know what you’re talking about!
A: You’re mixing up my statements. When I discuss the dollar losing value, I am referring to it falling in ABSOLUTE value, against goods and services produced in the real economy. This is what is called inflation. I made this call in 2021, and so far, it has proven right as inflation has accelerated.
The dollar gaining strength ONLY applies to foreign currency exchange markets (Forex)- remember, DXY, JPYUSD, and other currency pairs are RELATIVE indicators of value. Therefore, both JPY and USD can be falling in real terms (inflation) but if one is falling faster, then that one will lose value relative to the other. Also, Forex markets are correlated with, but not an exact match, for inflation.
I attempted to foreshadow the entire dollar bull thesis in the conclusion of Part 1 of the Dollar Endgame, posted well over a year ago-
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Unraveling of the Currency Markets
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I did not give an estimate on when this would happen, or how long DXY would be whipsawed upwards, because I truly do not know.
I do know that eventually the Fed will likely open up swap lines, flooding the Eurodollar market with fresh greenbacks and easing the dollar short squeeze. Then selling pressure will resume on the dollar. They would only likely do this when things get truly calamitous- and we are on our way towards getting there.
The US bond market is currently in dire straits, which matches the prediction of spiking interest rates. The 2yr Treasury is at 4.1%, it was at 3.9% just a few days ago. Only a matter of time until the selloff gets worse.
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Q: Foreign Central banks can find a way out. They can just use their reserves to buy back their own currency.
Sure, they can try that. It’ll work for a while- but what happens once they run out of reserves, which basically always happens? I can’t think of a time in financial history that a country has been able to defend a currency peg against a sustained attack.
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Global Forex Reserves
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They’ll run out of bullets, like they always do, and basically the only option left will be to hike interest rates, to attract capital to flow back into their country. But how will they do that with global debt to GDP at 356%? If all these countries do that, they will cause a global depression on a scale never seen before.
Britain, for example, has a bit over $100B of reserves. That provides maybe a few months of cover in the Forex markets until they’re done.
Furthermore, you are ignoring another vicious feedback loop. When the foreign banks sell US Treasuries, this drives up yields in the US, which makes even more capital flow to the US! This weakens their currency even further.
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FX Feedback Loop
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To add insult to injury, this increases US Treasury borrowing costs, which means even if the Fed completely ignores the global economy imploding, the US will pay much more in interest. We will reach insolvency even faster than anyone believes.
The 2yr Treasury bond is above 4%- with $31T of debt, that means when we refinance we will pay $1.24 Trillion in interest alone. Who's going to buy that debt? The only entity with a balance sheet large enough to absorb that is the Fed. Restarting QE in 3...2…1…
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Q: I live in England. With the Pound collapsing, what can I do? What will happen from here? How will the governments respond?
England, and Europe in general, is in serious trouble. You guys are currently facing a severe energy crisis stemming from Russia cutting off Nord Stream 1 in early September and now with Nord Stream 2 offline due to a mysterious leak, energy supplies will be even more tight.
Not to mention, you have a pretty high debt to GDP at 95%. Britain is a net importer, and is still running government deficits of £15.8 billion (recorded in Q1 2022). Basically, you guys are the United States without your own large scale energy and defense sector, and without Empire status and a World Reserve Currency that you once had.
The Pound will almost certainly continue falling against the Dollar. The Bank of England panicked on Wednesday in reaction to a $100M margin call on British pension funds, and now has begun buying long dated (10yr) gilts, or government bonds.
They’re doing this as inflation is spiking there even worse than the US, and the nation faces a currency crisis as the Pound is nearing parity with the Dollar.
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BOE announces bond-buying scheme (9/28/22)
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I will not sugarcoat it, things will get rough. You need to hold cash, make sure your job, business, or investments are secure (ie you have cashflow) and hunker down. Eliminate any unnecessary purchases. If you can, buy USDs as they will likely continue to rise and will hold value better than your own currency.
If Parliament goes through with more tax cuts, that will only make the fiscal situation worse and result in more borrowing, and thus more money printing in the end.
—----
Q: What does this mean for Gamestop? For the domestic US economy?
Gamestop will continue to operate as I am sure they have been- investing in growth and expanding their Web3 platform.
Fiat is fundamentally broken. This much is clear- we need a new financial system not based on flawed 16th fractional banking principles or “trust me bro” financial intermediaries.
My hope is that they are at the forefront of a new financial system which does not require centralized authorities or custodians- one where you truly own your assets, and debasement is impossible.
I haven’t really written about GME extensively because it’s been covered so well by others, and I don’t feel I have that much to add.
As for the US economy, we are still in a deep recession, no matter what the politicians say- and it will get worse. But our economic troubles, at least in the short term (6 months) will not be as severe as the rest of the world due to the aforementioned Dollar Milkshake.
The debt crisis is still looming, midterms are approaching, and the government continues to deficit spend as if there’s no tomorrow.
As the global monetary system unravels, yields will spike, the deleveraging will get worse, and our dollar will get stronger. The fundamental factors continue to deteriorate.
I’ve covered the US enough so I'll leave it there.
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Q: Did you know about the Dollar Milkshake Theory before recently? What did you think of it?
Of course I knew about it, I’ve been following Brent Johnson since he appeared on RealVision and Macrovoices. He laid out the entire theory in 2018 in a long form interview here. I listened to it maybe a couple times, and at the time I thought he was right- I just didn’t know how right he was.
Brent and I have followed each other and been chatting a little on Twitter- his handle is SantiagoAuFund, I highly recommend you give him a follow.
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Twitter Chat
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I’ve never met him in person, but from what I can see, his predictions are more accurate than almost anyone else in finance. Again, all credit to him- he truly understands the global monetary system on a fundamental level.
I believed him when he said the dollar would rally- but the speed and strength of the rally has surprised me. I’ve heard him predict DXY could go to 150, mirroring the massive DXY squeeze post the 1970s stagflation. He could very easily be right- and the absolute chaos this would mean for global trade and finance are unfathomable.
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History of DXY
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Q: The Pound and Euro are falling just because of the energy crisis there. That's it!
Why is the Yen falling then? How about the Yuan? Those countries are not currently undergoing an energy crisis. Let’s review the year to date performance of most fiat currencies vs the dollar:
Japanese Yen: -20.31%
Chinese Yuan: -10.79%
South African Rand: -10.95%
English Pound: -18.18%
Euro: -14.01%
Swiss Franc: -6.89%
South Korean Won: -16.73%
Indian Rupee: -8.60%
Turkish Lira: -27.95%
There are only a handful of currencies positive against the dollar, the most notable being the Russian Ruble and the Brazilian Real- two countries which have massive commodity resources and are strong exporters. In an inflationary environment, hard assets do best, so this is no surprise.
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Q: What can the average person do to prepare? What are you doing?
Obligatory this is NOT financial advice
This is an extremely difficult question, as there are so many factors. You need to ask yourself, what is your financial situation like? How much disposable income do you have? What things could you cut back on? I can’t give you specific ideas without knowing your situation.
Personally, I am building up savings and cutting down on expenses. I’m getting ready for a severe recession/depression in the US and trying to find ways to increase my income, maybe a side hustle or switching jobs.
I am holding my GME and not selling- I still have some shares in Fidelity that I need to DRS (I know, sorry, I was procrastinating).
For the next few months, I believe there will be accelerating deflation as interest rates spike and the debt cycle begins to unwind. But like I’ve stated before, this will lead us towards a second Great Depression very rapidly, and to avoid the deflationary blizzard the Fed will restart QE on a scale never seen before.
QE Infinity. This will be the impetus for even worse inflation- 25%+ by this time next year.
It’s hard to prepare for this, and easy to feel hopeless. It’s important to know that we have been through monetary crises before, and society did not devolve into a zombie apocalypse. You are not alone, and we will get through this together.
It’s also important to note that we are holding the most lopsided investment opportunity of a generation. Any money you put in there can be grown by orders of magnitude.
We are at the end of the Central Bankers game- and although it will be painful, we will rid the world of them, I believe, and build a new financial system based on blockchains which will disintermediate the institutions. They have everything to lose.
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Q: I want to learn more, where can I do? What can I do to keep up to date with everything?
You can start by reading books, listening to podcasts, and checking the news to stay abreast of developments. I have a book list linked at the end of the Dollar Endgame posts.
I’ll be covering the central bank clown show on Twitter, you can follow me there if you like. I’ll also include links to some of my favorite macro people below:

• Peruvian Bull (my only account)
• Lyn Alden
• Luke Gromen
• Brent Johnson
• Raoul Pal
• Andreas Steno Larsen
• Jeffrey Snider

I’m still finishing up the finale for Dollar Endgame- I should have it out soon. I’m also writing an addendum to the series which is purely Q&A to answer questions and concerns. Sorry for the wait.
—-------------------
Nothing on this Post constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person.

I am getting increasingly worried about the amount of warning signals that are flashing red for hyperinflation- I believe the process has already begun, as I will lay out in this paper. The first stages of hyperinflation begin slowly, and as this is an exponential process, most people will not grasp the true extent of it until it is too late. I know I’m going to gloss over a lot of stuff going over this, sorry about this but I need to fit it all into four posts without giving everyone a 400 page treatise on macro-economics to read. Counter-DDs and opinions welcome. This is going to be a lot longer than a normal DD, but I promise the pay-off is worth it, knowing the history is key to understanding where we are today.
SERIES TL/DR (PARTS 1-4): We are at the end of a MASSIVE debt supercycle. This 80-100 year pattern always ends in one of two scenarios- default/restructuring (deflation a la Great Depression) or inflation( hyperinflation in severe cases (a la Weimar Republic). The United States has been abusing it’s privilege as the World Reserve Currency holder to enforce its political and economic hegemony onto the Third World, specifically by creating massive artificial demand for treasuries/US Dollars, allowing the US to borrow extraordinary amounts of money at extremely low rates for decades, creating a Sword of Damocles that hangs over the global financial system.
The massive debt loads have been transferred worldwide, and sovereigns are starting to call our bluff. Systemic risk within the US financial system (from derivatives) has built up to the point that collapse is all but inevitable, and the Federal Reserve has demonstrated it will do whatever it takes to defend legacy finance (banks, brokedealers, etc) and government solvency, even at the expense of everything else (The US Dollar).

I’ll break this down into four parts. ALL of this is interconnected, so please read these in order:

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Updated Complete Table of Contents:

• Part 1.0: The Global Monetary System
• Part 1.5: Triffin’s Dilemma and the New Rome
• Part 2.0: Reflexivity and the Shadows of Black Monday
• Part 2.5: Derivatives and the Alchemy of Risk
• Part 3.0: Debt Cycles and Great Depression
• Part 3.5: The Money Illusion
• Part 4.0: The Weimar Republic
• Part 4.1: Nightmare of Hyperinflation
• Part 4.2: Financial Gravity & The Fed’s Dilemma
• Part 4.3: Economic Warfare & The End of Bretton Woods

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Preface:

Some terms you need to know:

Inflation: Commonly refers to increase in prices (per Keynesian thinking). However, Inflation in the truest sense is inflation (growth) of the money supply- higher prices are just the RESULT of monetary inflation. (Think, in normal terms, prices really only rise/fall, same with temperatures. (ie Housing prices rose today). The word Inflation refers to a growth in multiple directions (quantity and velocity). Deflation means a contraction of the money supply, which results in falling prices.
Dollarization (Weaponization of the Dollar): The process by which the US government, IMF, World Bank, and other elite organizations force countries to adopt dollar systems and therefore create indirect demand for dollars, supporting its value. (Think Petrodollars).
Central Banks: Generally these are banks that control/monitor the monetary policy of the country they reside in. They are usually owned by private financial institutions (large banks/bank holding firms). They utilize open market operations%20refers,out%20to%20businesses%20and%20consumers.) to stabilize and set market rates. They are called the “Lender of Last Resort” as they are supposed to LEND (not bailout/buy assets) to other banks in a crisis and help defend their currency’s value in international forex markets. CBs are beholden to the “dual mandate” of maintaining price stability (low inflation) and a strong job market (low unemployment)
Monetary Policy: The set of tools that central bankers have to adjust how money moves through the financial system. The main tool they use is quantitative tightening/easing, which basically means selling treasuries or buying treasuries, respectively. *A quick note- bond prices and interest rates move inversely to one another, so when Central banks buy bonds (easing), they lower interest rates; and when they sell bonds (tightening), they increase interest rates.
Fiscal Policy: The actions taken by the government (mainly spending and taxing) to influence macroeconomic conditions. Fiscal policy and monetary policy are supposed to be enacted independently, so as not to allow massive mismanagement of the money supply to lead to extreme conditions (aka high inflation/hyperinflation or deflation)
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Part One: The Global Monetary System- A New Rome

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Allegory of the Prisoner's Dilemma

Prologue:

In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” (pictured in the title image of this post) the artists Diaz Hope and Roth visually depict a great tower of civilization that rests upon a bedrock of human cooperation and competition across history. The artists force us to confront the fact that after 10,000 years of human civilization we are now at a cross-roads. Today we have the highest living standards in human history that co-exists with an ability to destroy our planet ecologically and ourselves through nuclear war.
We are in the greatest period of stability with the largest probabilistic tail risk ever. The majority of Americans have lived their entire lives without ever experiencing a direct war and this is, by all accounts, rare in the history of humankind. Does this mean we are safe? Or does the risk exist in some other form, transmuted and changed by time and space, unseen by most political pundits who brazenly tout perpetual American dominance across our screens? (Pulled from Artemis Capital Research Paper)
​

The Bretton Woods Agreement

​
Money, in and of itself, might have actual value; it can be a shell, a metal coin, or a piece of paper. Its value depends on the importance that people place on it—traditionally, money functions as a medium of exchange, a unit of measurement, and a storehouse for wealth (what is called the three factor definition of money). Money allows people to trade goods and services indirectly, it helps communicate the price of goods (prices written in dollar and cents correspond to a numerical amount in your possession, i.e. in your pocket, purse, or wallet), and it provides individuals with a way to store their wealth in the long-term.
Since the inception of world trade, merchants have attempted to use a single form of money for international settlement. In the 1500s-1700s, the Spanish silver peso (where we derive the $ sign) was the standard- by the 1800s and early 1900s, the British rose to prominence and the Pound (under a gold standard) became the de facto world reserve currency, helping to boost the UK’s military and economic dominance over much of the world. After World War 1, geopolitical power started to shift to the US, and this was cemented in 1944 at Bretton Woods, where the US was designated as the WRC (World Reserve Currency) holder.
​
Bretton Woods
In the early fall of 1939, the world had watched in horror as the German blitzkrieg raced through Poland, and combined with a simultaneous Russian invasion, had conquered the entire territory in 35 days. This was no easy task, as the Polish army numbered more than 1,500,000 men, and was thought by military tacticians to be a tough adversary, even for the industrious German war machine. As WWII continued to heat up and country after country fell to the German onslaught, European countries, fretting over possible invasions of their countries and annexation of their gold, started sending massive amounts of their Gold Reserves to the US. At one point, the Federal Reserve held over 50% of all above-ground reserves in the world.
​
US Trade Balance
In a global monetary system restrained by a Gold Standard, countries HAVE to have gold reserves in their vaults in order to issue paper currency. The Western European powers all exited the Gold standard via executive acts in the during the dark days of the Great Depression (in Germany’s case, immediately after WW1) and build up to War by their respective finance ministers, but the understanding was they would return back to the Gold standard, or at least some form of it, after the chaos had subsided.
As the war wound down, and it became clear that the Allies would win, the Western Powers understood that they would need to come to a new consensus on the creation of a new global monetary and economic system.
Britain, the previous world superpower, was marred by the war, and had seen most of her industrial cities in ruin from the Blitz. France was basically in tatters, with most industrial infrastructure completely obliterated by German and American shelling during various points of the war. The leaders of the Western world looked ahead to a long road of rebuilding and recovery. The new threat of the USSR loomed heavy on the horizon, as the Iron Curtain was already taking shape within the territories re-conquered by the hordes of Red Army.
Realizing that it was unsafe to send the gold back from the US, they understood that a post-war economic system would need a new World Reserve Currency. The US was the de-facto choice as it had massive reserves and huge lending capacity due to its untouched infrastructure and incredibly productive economy.
At Bretton Woods, the consortium of nations assented to an agreement whereby the Dollar would become the WRC and the participating nations would synchronize monetary policy to avoid competitive devaluation. In summary, they could still redeem dollars for Gold at a fixed rate of $35 an oz, a hard redemption peg which the U.S would defend.
Thus they entered into a quasi- Gold standard, where citizens and private corporations could NOT redeem dollars for Gold (due to the Gold Reserve Act , c. 1934), but sovereign governments (Central banks) could still redeem dollars for gold. Since their currencies (like the Franc and Pound) were pegged to the Dollar, and the Dollar pegged to gold, all countries remained connected indirectly to a gold standard, stabilizing their currency conversion rate to each other and limiting local governments’ ability to print and spend recklessly.
​
US Gold Reserves
For a few decades, this system worked well enough. US economic growth spurred European rebuilding, and world trade continued to increase. Cracks started to appear during the Guns and Butter era of the 1960’s, when Vietnam War spending and Johnson’s Great Society programs spurred a new era of fiscal profligacy. The US started borrowing massively, and dollars in the form of Treasuries started stacking up in foreign Central Banks reserve accounts.
Then-French President Charles De Gaulle did the calculus and realized in 1965 that the US had issued far too many dollars, even considering the massive gold reserves they had, to ever redeem all dollars for gold (remember naked shorting more shares than exist? -same idea here). He laid out this argument in his infamous Criterion Speech and began aggressively redeeming dollars for gold.
The global “run on the dollar” had already begun, but the process accelerated after his seminal address, as every large sovereign turned in their dollars for bullion, and the US Treasury was forced to start massively exporting gold. Backing the sovereign government's actions were fiscal and monetary strategists getting more and more worried that the US would not have enough gold to redeem their dollars, and they would be left holding a bag of worthless paper dollars, backed by nothing but promises. The outward flow of gold quickly became a deluge, and policymakers at all levels of Treasury and the State department started to worry.
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Nixon ends Bretton Woods
Nearing a coming dollar solvency crisis, Richard Nixon announced on August 15th, 1971 that he was closing the gold window, effectively barring all countries from current and future gold redemptions. Money ceased to be based on the gold in the Treasury vaults, and instead was now completely unbacked, based solely on government decree, or fiat. Fixed wage and price controls were created, inflation skyrocketed, and unemployment spiked.
Nixon’s speech was not received as well internationally as it was in the United States. Many in the international community interpreted Nixon’s plan as a unilateral act. In response, the Group of Ten (G-10) industrialized democracies decided on new exchange rates that centered on a devalued dollar in what became known as the Smithsonian Agreement. That plan went into effect in Dec. 1971, but it proved unsuccessful. Beginning in Feb. 1973, speculative market pressure caused the USD to devalue and led to a series of exchange parities.
Amid still-heavy pressure on the dollar in March of that year, the G–10 implemented a strategy that called for six European members to tie their currencies together and jointly float them against the dollar. That decision essentially brought an end to the fixed exchange rate system established by Bretton Woods. This crisis came to be known as the “Nixon Shock” and the DXY (US dollar index) began to fall in global markets.
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DXY
This crisis came out of the blue for most members of the administration. According to Keynesian economists, stagflation was literally impossible, as it was a violation of the Philips Curve principle, where Unemployment and Inflation were inversely correlated, thus inflation should theoretically be decreasing as the recession worsened and unemployment climbed through 1973-1975.
​
Phillips Curve
MONKE-SPEK: Philips Curve Explained

• Low Unemployment>Lots of jobs/high demand for labor.
• Thus, more workers are employed, and wages rise>putting more money in more people’s pockets.
• These people go out and buy beanie babies, toasters, and bananas (what economist John Maynard Keynes called aggregate demand) and this higher demand leads to higher prices for goods and services. This shows up as inflation.
• Consider the opposite- high unemployment>fewer jobs>less money for people
• Less demand for goods and services> lower inflation

Keynesian economists treated this curve as a law of nature, rather than a general rule. We see exceptions to this rule everywhere- Argentina is a prime example, where they have persistently high unemployment AND high inflation. This phenomenon is called stagflation, and is evidence of inflationary pressures so strong that they overcome the deflationary force of high unemployment. These economists were utterly blindsided by the emergence of stagflation.
After the closing of the gold window in 1971, the crisis spread, inflation kept climbing, and other sovereigns began contemplating devaluing their currencies as their only peg, the US dollar, was now unmoored and looked to be heading to disaster.
US exports started climbing (cheaper dollar, foreigners could now import stuff to their countries), straining export economies and sparking talks of a currency war. Knowing they had to do something to stop the bleeding, the Nixon administration, at the direction of Henry Kissinger, made a secret deal with OPEC, creating what is now called the Petrodollar system. This article summarizes it best:
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PetroDollar system
Petrodollars had been around since the late 1940s, but only with a few suppliers. Petrodollars are U.S. dollars paid to an oil-exporting country for the sale of the commodity. Put simply, the petrodollar system is an exchange of oil for U.S. dollars between countries that buy oil and those that produce it.
By forcing the majority of the oil producers in the world to price contracts in dollars, it created artificial demand for dollars, helping to support US dollar value on foreign exchange markets. The petrodollar system creates surpluses for oil producers, which lead to large U.S. dollar reserves for oil exporters, which need to be recycled, meaning they can be channeled into loans or direct investment back in the United States.
It still wasn’t enough. Inflation, like many things, had inertia, and the oil shocks caused by the Yom Kippur War and other geo-political events continued to strain the economy through the 1970’s.
​
PCE Index
Running out of road, monetary policymakers finally decided to employ the nuclear option. Paul Volcker, the new Federal Reserve Chairman selected in 1979, knew that it was imperative to break the back of inflation to preserve the global economic system. That year, inflation was spiking well above 10%, with no end in sight. He decided to do something about it.
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Volcker Doctrine
By hiking interest rates aggressively, consumer credit lending slowed, mortgages became more expensive to finance, and corporate debt became more expensive to borrow. Foreign companies that had been dumping US dollar holdings as inflation had risen now had good reason to keep their funds vested in US accounts. When the Petrodollar system, which had started taking shape in ‘73 was completed in March 1979 under the US-Saudi Joint Commission, the dollar finally began to stabilize. The worst of the crisis was over.
Volcker had to keep interest rates elevated well above 8% for most of the decade, to shore up support for the dollar and assure foreign creditors that the Fed would do whatever it takes to defend the value of the dollar in the future. These absurdly high interest rates put a brake to US government borrowing, at least for a few years. Foreign creditors breathed a sigh of relief as they saw that the Fed would go to extreme lengths to preserve the value of the dollar and ensure that Treasury bonds paid back their principal + interest in real terms.
​
10yr US treasury yields
Over the next 40 years, the United States and most of the developed world saw a prolonged period of economic growth and global trade. Fiat money became the norm, and creditors accepted the new paradigm, with it’s new risk of inflation/devaluation (under the gold standard, current account deficits, and thus inflation risk, was self-stabilizing). The Global Monetary system now consisted of free-floating fiat currencies, liberated from the fetters of the gold system.

(I had to break this post up into two sections due to the character limit, here is second half of Pt 1): /

My first post on this topic about 2 weeks ago had its flair changed to speculation by the mods as there was not sufficient evidence to support my theory that tokenized "GME" shares were being used as locates for short sales in the stock market. Fair enough.
I'm labeling this one as DD and I stand by it.
https://i.redd.it/ay42izyd0t4a1.gif
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Same as last time, here's a legend for the post;

1. Prologue
2. Tokenized Equities
   1. BIS & Tokenized Equities
   2. Project Helvetia
3. Uniswap & Liquidity Pools
4. "GME" tokens
5. Wrapping it up with FTX

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1 - Prologue

I am fascinated by TOKENIZED STOCKS.
Quick reality check for all the immediate naysayers;
Member when we discovered the GameStop NFT landing page in May 2021? The one that evolved into the NFT marketplace?
member?
And member when we discovered a series of easter eggs that led to the hidden bananya cat game game and this message?
member?
Well the Ethereum contract listed on the official landing page was 0x13374200c29C757FDCc72F15Da98fb94f286d71e, which just happens to be one of the many "GME" tokens - Gamestop
And the solidity code for this contract has the same message from the website easter egg;
member?
And and it was minted on May 25, the same day Ryan Cohen Tweeted 'Don't Try This At Home';
And and and the contract for this token has multiple interactions, all of which oddly failed due to lack of gas, including 3 directly from Matt Finestone on Dec 2, Dec 4 and Dec 7, 2021;
tOkEnIzEd GaMeStOp ToKeNs ArE a NoThInG bUrGeR
Yeah, no, yeah, they're not a nothing burger. They're a something burger.

2 - Tokenized Equities

What the heck is even that? Well, officially;

Tokenized equity refers to the creation and issuance of digital tokens or coins that represent equity shares in a corporation or organization.
With the growing adoption of blockchain, businesses are finding it convenient to adapt to the digitized crypto-version of equity shares. Tokenized equity is emerging as a convenient way to raise capital in which a business issues shares in the form of digital assets such as crypto coins or tokens.

In theory, they offer flexibility in and better access to fundraising, decrease restrictions that may genuinely hinder some businesses and bring all other benefits of blockchain to equities like verified voting, dividends, mergers, acquisitions, etc., but like all things, people can be shitty when given the chance.
And this gives them a big chance.
IMO DEX tokenized shares would be a great idea, but what we got was CEX tokenized shares.
And CEX is for dummies.

2.1 - BIS & Tokenized Equities

In case you missed my post on the Bank for International Settlements (BIS), here is a great video again of the author, Adam LeBor, of the book The Tower of Basel, summarizing the history and the current structure of the BIS. Watch it.
He explains how the BIS is the central bank for central banks. What they say goes.
And what they're saying is that tokenized equities are meaningful and CBDCs are 100% coming.
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The following two documents are BIS's updated global legislation on crypto assets and tokenized securities from June 2021 and June 2022, respectively;
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Consultative Document #1 - Prudential treatment of cryptoasset exposures;
https://preview.redd.it/7vp994zuge4a1.png?width=646&format=png&auto=webp&s=05bbba2af5be07cef1c7946fff03e375bbe1f1ba
Ok firstlies, banks have limited exposure to crypto assets, yet banks face increased risks with the growth of crypto assets? Hmm.
Secondlies, it is BIS's official stance that the risks involved are;

• consumer protection
  • Protect who exactly? Protect them how? from what? They conveniently left out any elaborations. I wonder why.
• money laundering
  • Takes one to know one.
• terrorist financing
  • See above.
• carbon footprint
  • Fixed that.

What's next? Oh wait, that's all they had... Terrorists and energy consumption. Fucking L-O-L.
https://preview.redd.it/hs7q5mijhe4a1.png?width=624&format=png&auto=webp&s=65ce59cc13cd91f6ba0e7087db2e262d73ad187c
The BIS says tokenized assets must have adequate reserves. Take that, SBF.
https://preview.redd.it/p5vcblq7ur4a1.png?width=702&format=png&auto=webp&s=f746c498185d9b7008d921f891571cf4112361fb
"If you (any Central Bank) even look at anything crypto, we have legal access to your books, because fuck you, we're the BIS.."
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Consultative Document #2 - Second consultation on the prudential treatment of cryptoasset exposures'
https://preview.redd.it/cxg0zht8wr4a1.png?width=667&format=png&auto=webp&s=621a22f81f06a9819d63176c5feb57c722f05db9
"We're still worried about being out of a job but don't want you to know we're worried about being out of a job."
"Also tokenized assets are for real for real."
https://preview.redd.it/83dgn8szxr4a1.png?width=747&format=png&auto=webp&s=f9e3f83ec3a224a2a9dab242facfc45d3630b04b
Look, there's a whole whack of legalese that, to be honest, is well above my pay grade, however the point I want to emphasize is simply that the bank of banks has been working hard to define crypto and tokenized asset definitions, exposure limits, risk calculations, etc.
If someone ever tells you these assets are just fluff, show them these documents.

2.2 - Project Helvetia

SIX? More like DIX amirite?
Project Helvetia (Latin for Switzerland) is a joint experiment by the BIS Innovation Hub (BISIH) Swiss Centre, SIX Group AG (SIX) and the Swiss National Bank (SNB), exploring the integration of tokenised assets and central bank money on the SDX platform ^{see below}
Quick recap on these 3 entities;

• BISIH identifies, in a structured and systematic way, critical trends in technology affecting central banking in different locations, and develop in-depth insights into these technologies that can be shared with the central banking community.
• SIX operates the infrastructure for the Swiss financial centre. The company provides services relating to securities transactions, the processing of financial information, payment transactions and is building a digital infrastructure. The company is owned by ~130 domestic and international financial institutions (can't find specifics?), which are also the main users of its services. (Like the FED?)
  • SIX Board of Directors, Governance, 2021 Annual Report
  • SDX **(**SIX Digital Exchange), "the world’s first fully regulated Financial Market Infrastructure offering issuance, listing, trading, settlement, servicing, and custody of digital assets"
• SNB - Swiss Central Bank

Wait a second, a lof of Switzerland happening here? Isn't that where FTX had its custodian CM-Equity AG "hold" it's "stock reserves" for its tokenized stocks?...
u/tjoma90 I would love to know your thoughts. Post for reference.
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I won't go into the all of the details because that's not what I want to focus on (totally not because I don't understand it...), but the TL,DRS is that BIS, SIX and SNB have conspired cOlLaBoRaTeD to create a private, permissioned, peer-to-peer blockchain for central banks with hierarchical access to the ledger and SDX as the central authority.
https://preview.redd.it/66prae3lgd4a1.png?width=399&format=png&auto=webp&s=ad881ce76d91cc907356903e5383c8ecded13115
Yeah, this is going to be fine. PAUSE NOT!
https://preview.redd.it/opj0yah9cd4a1.png?width=469&format=png&auto=webp&s=0cffdbcbf327d4da1070f0f99269d8fa6d1e0931
https://preview.redd.it/8lfqhp36nd4a1.png?width=541&format=png&auto=webp&s=6e801c472942ee62b7769dc902cadf5b9cb985b4
There you have it folks. Don't ever let someone tell you that CBDCs aren't coming or tokenized assets are meaningless. Here you have the tippy top of the pyramid of modern global financial institutions discussing the topics, and how they already went live with part of their intervention solution to stay modern back in November 2021.
\"we need to change the laws to allow CBDCs\"
\"we need to change the laws to allow CBDCs\"
Aside from the mechanics of their proposals, let's look at the language they use in the following legal sections;
\"CBDCs won't be bad at all!\"
\"we will need a global effort to change all the laws to allow CBDCs\"
They want CBDCs, badly.
Why? IMO they saw the writing on the wall. "Join or die" is ever prevalent in this transition away from fiat currency to cryptocurrency, and CBDCs are a last-ditch effort to "compromise". Well, tough luck asshats, you're trying to offer better horse-drawn carriages when Henry Ford has already showcased his automobile - the Ford Broncass.
No thanks. I'll take the car.

3 - Uniswap Liquidity Pools

Before we hop into the matter at hand, we need to review what Uniswap is. The mechanics are not overly important but you'll see why this is relevant in section 4. If you know what Uniswap is or don't care about its mechanics, skip ahead.
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Uniswap is a decentralized cryptocurrency exchange (DEX) that facilitates automated and permissionless transactions of ERC20 tokens through the use of smart contracts.
It's like a currency exchange booth at an airport except it's decentralized and you exchange Ethereum tokens on the blockchain rather than cash, and you pay a very small fee (~0.3%). Meaning if you wanted to exchange $1,000 of XYZ token, it would cost you around $3. All automatic, trustless and guaranteed by math.
Traditional exchanges price assets based on the order book model, where all bid and ask prices are recorded and once there's a match, a trade is conducted. In this model, liquidity is determined by the amount of offers on both sides of a trade and the price of the assets is based off of the most recent trade.
Uniswap prices assets differently. Rather than having the last trade determine the price of an asset, a deterministic mathematical formula is used, called an Automated Market Maker (AMM). Assets stay in liquidity pools, which are a shared pool of assets deposited by liquidity providers (LPs). Why would you want to become an LP? Pretty simple - because you can collect fees. Anyone can create a liquidity pool or become an LP.
More specifically, Uniswap uses an AMM called Constant Product Market Maker Model, which is represented as "X*Y=K". This can get quite complicated but in a nutshell this means that any one specific liquidity pool has a constant ratio of assets, K, comprised of a pair of two tokens, X and Y. K is called the constant because the amounts of X multiplied by Y is always the same.
If X is purchased from the pool, there is a lower supply making it more valuable, so the price goes up (within that liquidity pool).
https://preview.redd.it/h7mi67891t4a1.jpg?width=1400&format=pjpg&auto=webp&s=af9d78987d34177f29b1014ba2acad03f0071d38
For example, let's say I want to make a liquidity pool with 100 apples and 10,000 oranges, so people who have either can exchange for the other, in this instance at a ratio of 1:100. Using the AMM model the constant K would be 1,000,000 (100*10k). If person A buys 10 apples, there are only 90 left in the pool. Our constant has to stay at 1,000,000, so the cost for this transaction will be 11,111.11 oranges (X/K*Y). This means person A would need to deposit 11,111.11 oranges to buy 10 apples.
Ok yes yes yes math, but why do we do this? Well, it's because the price of assets in liquidity pools are determined by how much you want to buy, not by how much someone else wants to get for it. This keeps liquidity in the system without the need for external market makers regardless of the order size or amount of liquidity. If someone uses your assets to trade 10 times a day, that's a direct peer-to-peer, permissionless and taxless 3% ROI per day, 9% per month, 108% per year, etc. Not bad.
This model makes it infinitely expensive to consume the whole amount of a certain token because algebra. If someone buys most of the apples, the contract just makes the next person pay more oranges for the amount of apples they want. This happens until someone wants to trade a bunch of oranges for apples and balance is restored.
There have been 3 different formulas that Uniswap has used;
V1 Formula (Nov 2018) - Trading of ETH to ERC20 tokens only
V2 Formula (May 2020) - Trading of ERC20 to ERC20 tokens added
V3 Formula (May 2021) - Adjustments to the math to incentivize providing liquidity

4 - "GME" tokens

From my previous post I thought there were only a handful of GameStop-related tokens. Well, I found a few more, as well as a buttload of sequential "GME" liquidity pools from Uniswap...

Token Name	Supply	Uniswap Liquidity Pool	LP Contract Creation
Gamestop	0
GameStop Token	100,500	Uniswap V2: GME	Jan 26, 2021
Wrapped GameStop	10,000,000	Uniswap V2: GME 2	Jan 26, 2021
GameStop	20,000,000	Uniswap V2: GME 3	Jan 27, 2021
		Uniswap V2: GME 4	Jan 27, 2021
GAME-STOP	61,500,000	Uniswap V2: GME 5	Jan 28, 2021
GameStonk	21,212,121	Uniswap V2: GME 6	Jan 28, 2021
		Uniswap V2: GME 7	Jan 29, 2021
GameStop.Finance	1,000,000	Uniswap V2: GME 8	Jan 29, 2021
		Uniswap V2: GME 9	Jan 31, 2021
		Uniswap V2: GME 10	May 12, 2021
Gamestop NFT	1,000,000,000,000	Uniswap V2: GME 11	May 25, 2021
		Uniswap V2: GME 12	May 25, 2021
		Uniswap V2: GME 13	May 26, 2021
Gamestop NFT	1,000,000,000,000,000	Uniswap V2: GME 14	May 26, 2021
GameStop	69,420,000	Uniswap V3: GME 2	July 3, 2021
GME Coin	12,000,000	Uniswap V3: GME 3	July 10, 2021
Gamestop Inu	1,000,000	Uniswap V2: GME 19	Sept 29, 2022
		Uniswap V2: GME 20	Sept 29, 2022
GAMESTONK	1,000,000,000,000	Uniswap V2: GME 21	Oct 2, 2022
GME Token	1,000,000,000,000,000	Uniswap V2: GME 23	Nov 6, 2022

Fun facts:

• Every one of these swaps involve Wrapped Ethereum because Eth is not an ERC20 token and Uniswap only deals with this standard.
• Gamestop, the token and contract listed on the official GameStop NFT parking page currently holds 69,420.69 GameStop (~0.1% of the supply) and 6M GME Coin (50% of the supply)
• Uniswap V2:GME 7 was ENS registered as "GameStop: Delpoyer" on Jan 27, and sent 500k of GameStop.Finance tokens to a contract called PostBootstrapRewardsDistributor
• Liquidity pool Uniswap V2: GME 23 holds 438 million % of the supply of GME Token
• The Uniswap icon and ticker is the same on all of the above tokens

5 - Wrapping it up with FTX

Ok ok ok, let me onceuponawrapitup for you.
On Jan 26, 2021, FTX minted 10M Wrapped Gamestop tokens, depositing 2.5M tokens each to 4 addresses; FTX Exchange, FTX Exchange 2, Serum Deployer... and a 4th address... whose first order of business was to DEPOSIT THESE ('add liquidity') INTO THE UNISWAP LIQUIDITY POOL FOR THIS TOKEN.
The following day, Jan 27, 2021, SBF himself released the "official" "tokenized GME" on the FTX platform, product "GME-0326".
The same product that recently (pre-bankruptcy) had a discrepency between the token price and share price.
The same product that was possibly used as locates under DTCC eligibility of hybrid securities.
The same product that can be used by JP Morgan for collateral.
The same product that was included in the W5B-1230 FTX futures contract that increased linearly from $795 to $52.6k a few weeks ago (outlined in my first post section 4, ^{the screenshots of which look to be scrubbed? oh well hehe, I still have them saved hehe} ).
^{Also, all FTX webpages now conveniently redirect to legal filings due to the bankruptcy, not surprising, but what's odd is even the multiple confirmed screenshots saved on the wayback machine for this FTX webpage won't load...}
Anyways, another point, "wrapping" a coin allows it to be used on a non-native blockchain. Wrapping a token is essentially swapping one token for another token in an equal amount via a smart contract, or code on the blockchain that can store and send funds.
Why is that relevant? Because I can't find anything regarding GameStop on Serum/Solana/Synthetix/Kwenta, where the original Wrapped Gamestop token was minted, or even in the ERC20 contract on Etherscan, suggesting there is actually nothing "wrapped" about this token, it's not an actual wrapped token, it just has the name "wrapped" to have the appearance of being legitimate, and in addition to the intentionally complicated systems, cross-blockchain transfers, multiple Uniswap liquidity pools and more, is all likely just to obfuscate the data.
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And going back to a specific section from document #1 in section 2a real quick (banking exposure to cryptoassets);
https://preview.redd.it/9hqoctdbtr4a1.png?width=710&format=png&auto=webp&s=4cd82803df81977fd84ad4859731086e2ec7241f
Wait wait wait, "redeemers" (holders) of cryptoassets (GME tokens?) backed by traditional assets (GME shares?) held in a bankruptcy vehicle (FTX?) have zero credit risk exposure due to that bankruptcy? Wow. How convenient.
tOkEnIzEd StOcKs ArE a NoThInG bUrGeR
Yeah, no, yeah, they're not a nothing burger. They're a something burger.
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I probably need one more brief post following the specific transactions to link the tokens to each other, but the teaser for that is that the most recent token has 1 quadrillion tokens in circulation, yet the uniswap liquidity pool for this token has 4.383 sextillion tokens in it.
That is 4,383,561,655,088,940,000,000 tokens.
That's a lot of fucking tokens.
Stay tuned.

Get JACKED to the tits! The "Federal Reserve Board invites public comment on an advance notice of proposed rulemaking to enhance regulators’ ability to resolve large banks in an orderly way should they fail". [Sauce: Federal Reserve Press Release (Oct. 14, 2022)]
TADR: Big Banks, Big Booms

Large banks? Fail? What's going on???

The Federal Reserve ("Fed") [Wikipedia] and Federal Deposit Insurance Corporation ("FDIC") [Wikipedia] are concerned about financial system stability and limiting contagion risk should a big bank go bust. So, they (Fed & FDIC together) are proposing Resolution-Related Resource Requirements for Large Banking Organizations (PDF). The Fed & FDIC need options on how to handle a big bank going bust and are proposing to add an "extra layer of loss-absorbing capacity".
Fed & FDIC Proposal pg 1
Let me apeify this for you. "Resolving a large banking organization" is fancy words for cleaning up the mess when a big bank fails. So this proposal summary is saying the FDIC (who provides insurance for cash deposits) needs options to clean up the mess ("resolve a firm") in a way that doesn't break the whole financial system ("in a way that minimizes the long term risk to financial stability") that keeps their options open ("preserves optionality").
Normally, messes are cleaned up by selling a failed financial institution to someone else. Selling one failed bank to a functional one turns out to be the cheapest option for the FDIC's Deposit Insurance Fund. After all, no insurance company ever wants to pay out when there is another option on the table.
Fed & FDIC Proposal pg 7
Except during the 2008 global financial crisis, there was not a lot of buyers for the biggest failures. And that hasn't really changed since 2008. There's simply no good option for cleaning up the mess when a really big bank fails which made them Too Big To Fail so the Big Banks got bailed out by taxpayers [Too Big to Fail Banks: Where Are They Now? (Investopedia)].
The 2008 bailouts meant Too Big To Fail now became a goal for banking organizations chasing short-term profits by relying on risky (less stable) uninsured deposits to keep running -- at about 40% of total deposits.
Fed & FDIC Proposal pg 7
What did we expect when excessive risk leads to taxpayers paying the bills? Private profits and public losses.
Some large banking organizations really reached for Too Big To Fail by operating across jurisdictional boarders (e.g., EU and Asia) and setting up "significant non-bank operations" to provide bank-like financial services without the banking regulations and oversight. [Investopedia] Non-bank operations include hedge funds, pension funds, and insurance companies [Investopedia; Wikipedia; BIS Glossary; World Bank Definition] -- the same type of non-bank targets the OCC got the green light to raise unlimited funds from.
Fed & FDIC Proposal pg 8
$#!+. Now what?

"We're kinda screwed. Need some options people!"
[Fed, basically]

The Fed is basically asking for options. (Asking Wall St., not apes -- we know they don't care much about the public aside from taking our money.)
The Fed is basically proposing to set up more assets and insurance as "an extra layer of loss-absorbing capacity" to give the FDIC something to work with. This is interesting because it also implies that without "an extra layer of loss-absorbing capacity", the FDIC expects there won't be much to work with.
Fed & FDIC Proposal pgs 8-9
Assets? Wut assets? All gone. Poof!
This is so important that this document reiterates what the FDIC can and can't do:
Fed & FDIC Proposal pgs 10-11
The Fed and the FDIC are looking for options for how to handle failures of the largest and most complex banking organizations (plural) because there's not much assets left for the FDIC to work with. They're almost out of options and time is running out.
So the Fed issued a cryptic cry for help with all the legalese and complex phrasing you might expect from a group trying to keep normal people from figuring out that they've got a really big problem with their biggest banks going boom.

What next?

Well, obviously, apes and the public need to comment! People should speak up because there is no way the Fed, which is basically owned by Wall St, wants to hear from the public on this which makes it a prime example of why the public needs to create a record for posterity.
Beyond the Federal Reserve website for Proposals for Comment, I'm not actually sure how to comment to the Federal Reserve on this or what to say yet. (Still reviewing...)
Please help review the Proposal (PDF) and Press Release to share your thoughts on what is worth commenting to the Federal Reserve on how to handle bank failures! NEED MORE WRINKLES!
Thanks to u/julian424242 for the heads up!

TADR: Systemic Risk occurs when you borrow so much money from people that you take everyone down with you if you go tits up.

"OK Google, define risk":

Merriam-Webster Dictionary Definition
Risk is simply the chance something bad happens. In the Wall St Casino, this means the possibility of losing money.
Most of us understand risk. If I loan money to my wife's boyfriend, he might not pay me back. I took a risk on that loan that I might not get my money back.
The same thing happens between people and banks. If I borrow money to buy a car or house, the bank is taking a risk on me that I'll make my payments.
At some point though, if you owe someone enough money then the risk profile turns around. There's even a saying for this:
https://preview.redd.it/hnpdus4p3i5a1.jpg?width=1080&format=pjpg&auto=webp&s=ec7a81b2a264c6ec3292da955ee061a70a48753b

If you owe the bank $100 that’s your problem.
If you owe the bank $100 million, that’s the bank’s problem.
— J Paul Getty

The more you owe someone, the more the other person needs you to succeed. If I borrow $100M from the bank, the bank needs me to succeed so I can pay them back.
This flips the risk profile forcing the lender to help the borrower.

Banks Lend Money

Banks make money by lending money out to borrowers. Each individual loan is a very small fraction of the overall lending pool so when you owe the bank $100, that's your problem.
In 2008, lots of individuals couldn't pay back their loans [Subprime Mortgage Crisis]. As we saw in The Big Short, there was a bubble in real estate assets. Many raindrops led to a flood; now known as the 2008 Global Financial Crisis.
Bailouts and stimulus pumped in billions of dollars into the economy to keep money flowing:

In effect, the central banks went from being the "lender of last resort" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered the "buyer of last resort".
2007-2008 Financial Crisis (Wikipedia)

The Federal Reserve bought up the crappy Mortgage Backed Securities nobody else would touch so that those toxic assets would be off the balance sheets of corporate America to be held, instead, by the Federal Reserve Bank. (FRED, Superstonk on Fed Balances, Superstonk on 30% of Fed Balance Sheet in MBS)
Money kept flowing with Too Big To Fail banks backed by the full faith and credit of the United States (and, by that, we meant US taxpayers).

Moral Hazard

With Too Big To Fail, our financial system created a Moral Hazard (Investopedia, Wikipedia) for banks who realized they can take on unlimited risk chasing profits with taxpayers paying their bills.
If someone gave me money to gamble at a casino where I keep all the profits and they eat the losses, I'd gamble all their money as fast as I could.
So, banks lent money out chasing higher yields with higher risk and zero reserve requirements. When they needed more money to lend out, they would just borrow more.
After all, lending and borrowing are just opposite sides of a transaction. And, when a bank borrows enough money from another bank, the other bank is forced to help.
So the banks figured out they should borrow enough money from each other to force lending banks into helping them. Meaning banks would loan each other ridiculous sums so that they're forced into helping each other stay afloat.
That, is systemic risk. If one bank fails, they all fail. So the banks must all work together to keep each other from failing.
We're now at a point where the Federal Reserve wants banks on the brink of failure to borrow more money, including from retirees and pensions, so that everyone will help bail the bank out. (I'm not a big fan of that idea, and you shouldn't be either. Feel free to give the Federal Reserve your opinion.)

What will happen when the music stops this time?

Margin Call (YouTube) which has started at Credit Suisse.

Disclaimer :
- This series is gonna be about some of the greatest minds in the current financial world talking about their opinion regarding Global Macroeconomics.
- This topic will be discussed in series of questions so you can easily skip the part you know the answers of. Reason : Highlighting, Re reading and paragraphing are not the best techniques of learning things in college or school education. Diagrams and question framing are.
- This post is about to be super lengthy and is probably gonna be boring too. I don't expect you to read this but I want you to know that this post is gonna be super helpful for you as a Wall Street tradeinvestor who have just started their journey into the financial world.
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FYI : No short term trade signals available down below, so without any further delay let's begin but first let's check out their works.
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Credits : Blockworks macro. Left : Joseph Wang Right : Michael J Howell
Now let's finally begin.
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Q1 What is the meaning of the word Liquidity? Explain the difference b/w Liquidity and M2 money supply?
There are two types of liquidity.
- Funding ( Accounting ) Liquidity : Company ability to pay off debt. ( short term liquidity and debt capacity are the two types )
https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/liquidity
- Market Liquidity : Spread b/w ask and bid.( More spread : Illiquid, Less spread : Liquid )
https://www.investopedia.com/terms/b/bid-askspread.asp#:~:text=The%20bid%2Dask%20spread%20is%20the%20difference%20between%20the%20highest,spread%20will%20have%20high%20demand.
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Liquidity in terms of balance sheet perspective is as follows
For Banks : Deposits at Fed checking account
Not Bank : Deposits at Banks, mmf or t-bills
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Liquidity is not a money supply. Money supply is a retail bank concept. It's effectively a deposit at a retail bank.
M2 (Less liquid than M1) = M1 (cash + demand deposits + traveler's check) + savings + time deposits + Certificates of Deposits (cd’s) + Money Market Fund (mmf)
Liquidity is just something different. It's a measure of the financing capacity of the financial sector and its ability to fund positions. Generally speaking, liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself.
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So Liquidity = Total amount of credit in system + access to savings
There are also other dimensions of Liquidity.
- Includes what the Central Bank does.
- Includes what the private sector does.
- Includes what shadow banks can create in credit terms.
- Includes cross border flow.
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Q2 Why do investors look at Liquidity ?
Too see where money was moving and hence you could predict where asset markets are likely to move. For ex : Currently money is parked in rrp.
Risk assets and Liquidity moves in lock step. Hence
Normal monetary correction : -15 to -20%
Recession as well : -30 to -40%
Banking crisis : -50 to -60%
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Q3 How does the Fed look at markets ?
The Fed oversees financial system stability & ultimately the health of the real economy. The Fed can only do QT until something breaks. And something will definitely break because the Fed is focused on fighting inflation.
Hence it's an assumption
Next 6m : Front load this interest rate.
In 12m : Reverse course and go back to QE. ( Suggested by Dr. Burry )
So keep buying for 1 or 2yrs in drips. Don’t rush all in at once.
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May reading : Mid 40's. (3yr low) Latest reading : 40 (-55% drop from 85-90)
Goldman Sachs report : Depth of S&P mini-futures is -67%
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IPO market is down
As the rates are rising it's not just that the cost of capital is rising. It's also about the capacity of capital being decreasing.
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Q4 Which is more important to fight inflation tsunami, QT or rate hike. Explain the difference between banking from the 18th century and this century?
Minor movements in rates can lead to huge movements in liquidity. The financial system is the financing system for new capital. It's a refinancing mechanism for debt.
The amount of debt outstanding is 300T worldwide.
Average 5 yr duration : Roll 60T/yr.
60T is 6x the new issue in the market in both fixed income + equity.
Global capEx is : $100T. GDP of the Usa is about : $20T
Half of capEx is raised through capital markets at about $10T.
But refinancing burden is 6x
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In refinancing positions interest rates are not a key thing.
Think of it as refinancing your mortgage or rolling your mortgage payments. What really matters is whether you're going to roll and whether a bank will take up a new mortgage and not what interest you pay. If you can't get a mortgage, then you're basically unhoused.
Bigger the debt burden the bigger the problem. That’s why you need liquidity.
All Central Banks kept interest rates low at y2k and 2008. They all wrongly read inflation dampening pressure as monetary deflation. But it was actually cost deflation caused by China entering the trade organization. They competed aggressively, which bid down prices in the goods market and on the high street worldwide. So Central Banks panicked because of this monetary deflation. So they all cut interest rates which encouraged more and more debt ( low interest rates are an incentive to debt )
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Let's go back to the British financial system. There was a credit crisis in the 19th century. In May 1866 Overend, Gurney and company (largest bill broker) collapsed owing about £11M equivalent to £1084M in 2021. It was a bankers bank kinda like today's shadow bank. Also, the Bank of England refused to lend them. So there was no lender of last resort.
This inspired Walter Bagehot, and he wrote a book called Lombard Street : A description of the money market, and published it in 1873. It was the dawn of the financial system. He came up with this idea called the Bagehot rule. A bank capable of lending freely to the system at a higher rate of interest against good collateral.
Right now, look at where we are. The Central Bank is doing the opposite. Lending at low interest rates against poor collateral.
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Q5 What does it mean when Fed lends and Fed raises rates through Fed funds. Is QE-QT like buying and selling and not lending.
Before the Fed founding in 1913 the banking system would get into panic time after time. People used to come to the bank and ask for money and eventually they used to run out of money and everyone used to panic and then the bank failed. Hence the idea of the Fed was to tackle this liquidity problem and lend to banks freely through discount window.
So what happened now was if you're a bank and there was a liquidity problem you used to call the Fed and go to the discount window and you'd have this folder of loan that you have on your balance sheet and you'd ask for loan against this collateral. This discount window used to accept a wide range of collateral.
But now the Fed has flooded the system with so much liquidity that banks don't have these problems.In the capital market it's often the refinancing mechanism. The new issue, net issuance doesn't grow that much. It's just the same company, the same people just rolling over the current debt.
The new money injected comes from the commercial bank or the government. Basically when you refinance you need someone's money to lend it to you. So like bank deposits. You can also have money come out of banks and banks can make that loan or if the money has already been created by Fed then someone else will reallocate those bank deposits through capital markets transactions like a hedge fund.
Taking your money and lending it to a corporation. That's another way liquidity can move.If you're doing QT then you're taking away the second part of the money supply. It creates tightening conditions where quantities come to play and it's not just about price.
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https://preview.redd.it/u0xg0tan26991.png?width=1447&format=png&auto=webp&s=d7d03b05a6616dbe4592c43f7997ed3543512162
They are all similar.
All marketplaces are driven by liquidity. The correlation has tightened over the last decade. Earlier 0.6 now 0.8.
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Net liquidity injection by Fed in US markets
Reported balance sheet nope think effective balance sheet ( How much liq Fed put into system ) Tracking b/w liq. and s&p 500 is closer than ever before.
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Q6 Is the Fed realistic in what it intends to do with the balance sheet?
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Fed Balance sheet
Nyc Fed came out into documents on Open market operations in 2021. In that projection you're looking at a sizable drop in something called Soma ( System open market account ) It's also called the amount of treasury Fed holds.
Sci Fi reference : Soma drug in "Brave new world". A feel good drug everyone has. So Soma = Fed monetary drug. Soma account will drop from 9T to 6T basically 3-4 yrs. The Fed intends to remove $1T/yr. If this goes through successfully you will have a huge drop in treasuries price. You've also got a reverse repo which could move up simply because rates are rising. Hence Money market fund rates might go up faster than bank deposit rates because of a lot of demand for reverse repo. So there is a risk of rising rrp to $3T by eoy.
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Reason :
- Not many investments yielding above rrp.
- People move out of their checking account because banks will give them 0% whereas the money market could give as high as 3% by eoy.
This will all suck a lot of liquidity into rrp and hence you could see M2 contract a lot in absolute terms because you're going to get disintermediation out of the banking system to mmf. So someone needs to be aware of these risks considering inflation is encouraging bank to make high demand for loans
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So at the end where is the bank gonna get funding from? This is all building upto bank reserves danger which are parked with Fed cashing accounts.
Refer S&P500 Fed liquidity chart above
If the Fed takes $2T out of the balance sheet the level s&p 500 will go is $3200. There is also a chance of another loss of $800B-$1T due to money sucked by rrp. Hence $2500 can easily come according to this logic. ( Michael burry came with $1800 S&P500 range )
This all hasn't even factored the real economy situation.
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Q7 Have you seen tightening this rapid or atleast the velocity at this level?
This QT is so rapid that $1T out of bank reserves are gone. Tga is also moving down. Soma hasn't moved yet because it's not plunging.
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https://preview.redd.it/7hb7euy406991.png?width=1443&format=png&auto=webp&s=67bf48d41d740779b9f0174522de610f491713a6
On paper this QT is 5x faster than before. But if you look at the chart it's similar to the y2k liquidity bubble. 1997-2003
So now where to take the position ? Go to the front end of the treasury curve and maybe start to dip a toe in the back end.
This judgment will all depend on where inflation settles, what underlying level of inflation is, global backdrop ex : Europe and Japan.
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Q8 Is the chances of pivot by the Fed so much lower now considering inflation is so much high.
The Fed is going with the approach whatever it takes and that includes crashing the stock market. Fed cares about mechanics of financial system so they want market to function
- orderly buying and selling.
- corporations able to refinance debt.
That's how the financial system impacts the real economy. Corporations need to borrow money on a short term or long term basis to make a payroll. As long as these functions are all fine. The drop in equity doesn't matter. It will rather help in tamping down the animal spirit of investors. People buying less will help demand inflation go down. So ans is yes its lower.
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Q9 Why is Vix still at 25-30 when you have a vicious sell off.
Right now we have vicious moves in 1-2month scale, not on a daily scale. We still haven't had a huge spike in daily realized volatility like netflix snowflake on indices. Hence as a result Vix hasn't spiked.
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Q10 Is an orderly selloff of -1% every week better than a dramatic selloff that could start panic.
Liquidity recedes correlation to Vix spike. Hence huge selloff over the course of year but Vix hasn't spiked.
Orderly demolition of risk assets is bad if you own puts. When you have these volatile moves there is a chance that something can break but you won't know where. Reaching s&p 3000 over the next few months is good compared to reaching in the next 2 days. Because then that would mean QE the next day.
Vix :
Volatility tends to begin in Fixed income or forex markets and then it gets created in equity.
You have started to see this sequencing. You have got high volatility in the Move index which is Vix for fixed income. And so now you're starting to get more volume in currency markets. Ultimately in the end it will all get triggered into the equity market when recession arrives.
So now the question is "Is recession coming" ?
Many of the investors are already convinced it's coming if not it's already here. Asia is already in a recession. Europe is just entering one and in the USA it will probably reach in 2-3 months time. Recent earnings reports out of Walmart and Target show whopping increases in inventories. (30%-40% jump)
All points to a slower economy in future.
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https://preview.redd.it/r60ungr706991.png?width=1432&format=png&auto=webp&s=db7d8fe307db97b4097993fff69e859531ad600b
There is also an important concept of spillover that we need to know about in month over month inflation numbers in Usa. The persistence levels of inflation are up if compared with 1970's rate.
Meaning for every 1% in monthly US inflation you get a spillover of about 0.8% in the next month and 0.6% in the month afterward. So that's a huge amount of persistence right there.
Last time we needed volcker to get us out of this persistence.
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Q11 Does QT moderate the amount of rate hike so that we don't need volcker?
Right now, the treasury fed fund rate that's implied by forward curve is about 3.6%. (now 2.9%) It's pretty hard to imagine if the Fed can get to these levels. Everyone views are around 3% because no one thinks the Us economy can handle much more than that.
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Q12 Fed and Ecb projection of balance sheet is showing QT and reduction in balance sheet by 2025. So will 95B/m rolloff inflation. ( $1T/yr )
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https://preview.redd.it/gnjdpqoe06991.png?width=1301&format=png&auto=webp&s=103dbb8a284f42f4f4fe017d041e7c60d73e51e3
First let's discuss Ecb. They will never be able to shrink their balance sheet. They are more worried about spread blow up ( Germany Italy 10yr bond spread )
As for Fed projection :
Nyc Fed projection 8 6 9 T by 2030. So if you're an investor the main question you should ask is, are these Central banks here for the long run. If yes then these balance sheets are only going to get increased as years pass on.
Hence start thinking about asset classes that you need to hold in an environment where CB's major aim is to continue to be the major player in the market.
So logic would say Gold and king of voldemort ( V king ) deserves a place in the long term portfolio.
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Q13 Why isn't Gold responding to CB's ballooning their balance sheet. Is the part of the reason that the market hasn't woken up to this fact or it's the case of a stronger dollar or it's just a timing issue.
If you combine assets that respond to monetary inflation. The answer is Gold+V king together. They match the gyration in liquidity 1:1. The fact that Gold did not go up when liquidity was expanding meant most of the impetus was showered in Voldemort assets.
But if you average the two out, it looks reasonable.
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Q14 Fed current power level = 3 X 2008 power level. Is it real power or not real power at all going forward.
The Fed 's main objective right now is to get the balance sheet down which in turn has strengthened the dollar.
We know that Fed and Treasury policy impact markets. Now think about what's important in the world for them. The answer is liquidity and global power. We all know what liquidity is, so let's talk about global power. It's also termed as economic power the ability to move capital around. Hence currency and credit are important.
So the dollar credit system is paramount within this world system.
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Q15 B. wood 1 vs B. wood 2 debate ? How does Boj fit here ?
This is nonsense. B. wood 1 never went away. Bretton Woods was the dominance of the dollar, basically setting it up at the heart of the world system so that trade flows and capital flows would move around the free world. It excluded China and Russia at that stage. We had the IMF and world bank to police that and you would happen to have a corollary of a fixed rate system. Now from that we got rid of the fixed exchange rate system but everything remains the same. So as the time went by the dollar remained more and more important.
There was a speech Janet Yellen made at Atlantic council. It's called friendshiring. What this meant was either you're a friend of America or you're a foe. There is no middle. Friends get access to dollar swap lines and foes don't.
Currently we have the world financial system divided into two bits. One controlled by Usa and the other nascent one by the Chinese. Ultimately what it means is there will be a challenge to the dollar system by china. Hence China is setting up equivalent swap lines to lure people into the yuan system.
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https://preview.redd.it/cvd81u5l06991.png?width=885&format=png&auto=webp&s=59952d82fa95f860b50460fce39ad7a5e9ced8aa
So Us is responding to this thread. We all know how everything in world is connected. Look at yen. It has devalued over 40 trading days by annualized rate of 83%. Markets can never do that to such a big currency only governments can do. So someone is shaking that tree by the orders of government. What you have seen in last 5-6 yrs across asian markets is something called Shanghai accord which came out in Shanghai G-20 meeting in spring 2016. It was an attempt to get strong dollar down. What happened was currencies went static across rate in asia with no volatility.
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https://preview.redd.it/3q950pqm06991.png?width=1426&format=png&auto=webp&s=c8d57bf5640861c40ae7dc26c8eda6647825f0a9
In the last 8-10 weeks that trend has broken. Someone is shaking up things in japan. Currency volatility in Asia has leapt higher. Yen is a trojan horse so China is being forced to tighten liquidity right now.
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https://preview.redd.it/adp80i3q06991.png?width=1425&format=png&auto=webp&s=bdde5c72b21e091dc01100e5cf900eefa3111c70
No one really knows what Ccb and Pboc will do next. April and May are normally the months for China to inject liquidity into the financial system. So what did they do in the last 2 months ?
They have taken 800B yuan out of the system. That is $120B dollars. That is a lot of money for them to do tightening.
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Q16 Why are Chinese tightening when their manufacturing Pmi is down and they are already in a recession. Shouldn't the Chinese govt., like the USA govt. in 2008, inject liquidity?
To try and stop devaluing your currency through Seven ( The Group of Seven i.e. G7 is an intergovernmental organization made up of the world's largest developed economies: France, Germany, Italy, Japan, the United States, the United Kingdom, and Canada.)
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Q17 Why is Fed 3x or 4x important right now ?
- Because of Basel 3 regulations. These regulations put constraints on bank's ability to lend.
- With Fed you get access to repo and standing repo facilities.
- Tax control of Eur-usd market ( About 5yrs ago under trump money was repatriated back to Usa )
- Importance of the fx-swap market.
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Q18 Does the Fed have reins. Is it a good thing or bad ?
Goodness : Everyone expects
The Fed has more power than anyone thinks of. They are the lender of last resort. This has basically expanded to everyone. It has expanded its role from lender of last resort back in Gfc to euro dial system through fx-swaps. It has also expanded its role as lender of last dealer to money market funds and also to the shadow banking system. If you look back at 2020 they have further extended lenders of last resort not only to banks but also to corporations.There is a corporate credit facility now. It has also tried to become a lender of last resort to businessmen and individuals through the ppp loan facility which basically works with the government. ( Asking banks to make loans to small business and people )
The Fed does not have the infrastructure to give money to people individually so they have to work through the banking system.
Badness : Forced by politicians
They have become more influential as well through regulatory aspects. Basel 3 expanded the regulatory power of Central Banks around the globe. Now they are moving to a role where the Fed may be able to suggest to banks that they have to do a certain type of lending. For ex : Making green loans to support green infrastructure. This model is not new. 30 yrs ago in Japan and much of South east Asia CB's operated in this manner. They would direct domestic banks to lend to certain key industries. Central banks don't stand in elections and if you work there you can never be fired. So you also don't know if they are making good decisions or not.
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In nutshell they have reigned
- Eur-usd system.
- They have complete control over reserves which they can manipulate with the wand of QE or QT.
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Q19 Discuss the importance of commercial banks?
These banks are important in driving inflation after Gfc 2008. Commercial banks lend to real people which in turn drives businesses. We cannot force banks to lend even though it does enforce an explosion of reserves which can then lead to an explosion of deposits. But these deposits aren't loans they are deposits from bank buying treasuries + Mbs from their own customer or must i say government. But if this inflationary cycle keeps on repeating then disaster is soon to happen. After the disaster , the Fed won't be able to stimulate bank lending. Hence questions we must ask is will Fed not be able to moderate bank lending and what if we have banks lend out way too much in 2022-23. Does Fed even have control over that?
So many economists are betting that the next phase would be introductions of digital currency. It would be a toolkit for the Fed to be able to do things like above.
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Last year Saule T Omarova, a professor in law from one of top bank regulator was nominated for paper on how economy would operate in CBDCs
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715735
In nutshell :
The Fed would make loans and determine who gets the money or not. We're not there just yet or we're still building technology and infrastructure for it. If you look at 20 yrs in the future you would think the Fed would certainly be in fashion for political want. Meaning politicians would have more influence over who gets money. So make sure you have friends in politics.
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https://preview.redd.it/fb5dlcjs06991.png?width=1511&format=png&auto=webp&s=3c4955924292ad0291fe4b247a2f1016925308dd
Less bank credit creation in 2022 rivals historic growth since last year. Bank deposits look set for first annual decline since early 90's which sounds deflationary but that decline from bank deposits is due to QT & reverse repo and not credit creation itself. ( Creating money using alchemy )
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Q20 The Fed doesn't have the ability right now to stop banks from lending. What happens if inflation goes to 10-12% because of this ( lending is like creating money ) ?
There are some segments in the economy which are still okay. Bank credit creation is strong. At least well enough to lend people. We're still in an inflationary environment where everything costs more. Everything costs more hence everyone needs to borrow more to buy things you used to buy.
We are definitely going to have a slower economy in the next 2-3 years with a recession somewhere. It will be then you would expect credit creation to slow down. So we don't see disasters in this manner but yes the storm clouds are approaching.
The hurricane Dimon was probably talking about is if there is a recession, still the large corporations will help accelerate loans in the near term because they will draw down predetermined loan credit lines when they need them. This is feasible. But the main issue is how banks will fund their balance sheet and that kind of lending in a recession environment where deposits must be shrinking and money markets are tightening hugely. And then there is also the bigger problem of the Fed accident during QT.
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Q21 Who to buy what in treasuries i.e. bond market and why ? And why not if so?
There are a number of moving parts when you decide to go on shopping for treasuries.
- What is the underlying inflation
- Will growth actually slow
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The most likely scenario is we are gonna have a repeat of what we saw precovid.
Let's discuss inflation part :
In Usa we have 2-3% inflation targets. That's largely demographically driven because of an aging society as all west have low inflation. The deflation of Japan shows us that. But it will take time to get there due to the persistent nature of inflation. Bond market will price near term surge and hence we will not get an unnecessary hike at the front end. Hence the Fed fund would go as high as 4% only and not above.
Now for growth part :
Back end of the treasury is driven by the term premium. Term premiums are already very negative. And they can go more negative as well. What we investors need to know is equity never rallies until there has been a subsequent or previous surge in the fixed income market. 10 yr bonds prices have to move significantly up before equity begins to turn. In other words you're gonna see a drop in long yields at some stage. And that my friends is a recession driven environment where first long bond yields go up while stocks fall and then we will see that turn or rally up in equity.
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Another way to look at it is through a S&D and B&S lens which could be contradictory to above.
Supply :
So if you account for QT the supply of treasuries is gonna be $1.5T each. That's a lot for the market to handle in this slowly decreasing liquidity. Hence we are seeing large moves with small volumes.
Demand :
For the past few years we had different sets of marginal buyers. Precovid : It was Hedge funds doing basis trade. Comparing today to that time they have taken exposure down by $1T. Past 2020 : Fed (doing QE) and commercial bank (picking QE cash to work) Now : All have gone away.
We are going to have a new buyer somewhere down the line. We just don't know who it is. Foreigners aren't gonna buy because when they do they have to Fx hedge it. When you Fx hedge it's based on front end rates and front end rates are going higher too like back end. So it's not worth it for them. So we don't know who it is gonna be hence there is going to be a phase of price discovery that is probably gonna be volatile and probably much higher in yields than the marginal buyer of past years.
The Hedge funds buy these treasuries as part of a spreadsheet. They don't care where yields are by themselves. Fed too doesn't care and neither does commercial banks which are regulatory driven. Foreign banks are partially regulatory driven and in part what they have at home is negative notes. So if you want it to move to common folks who look at it as fundamentally then you're gonna need higher yields. Hence rates will go higher than normal levels.
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Q22 Discuss aging demographics in 2022. Is it really deflationary like Japan taught us or something has changed and we are starting to see its actually inflationary? How does it affect bonds and stocks?
This idea of the aging demographic being inflationary and not deflationary is a very fascinating concept. Basically what these new papers are saying is when you have lower supply of labor and if you decrease the supply of labor in the labor market what you're gonna get is higher prices because wages will go higher due to shortage of labor.
Ex : A person is retired at 60 who no longer is producing goods and services into the economy. However he continues to consume products or buy yachts or whatever else by living a high standard of life or the same standards he used to when young.
So monetary demand for more goods and services reduces supply of labor. This means higher prices.
But these so-called old economists point to Japan as to how the aging demographic can be deflationary. People who hold these views believe that in a global world, labor is a global pool. So even though Japan was itself aging globally there was still an enormous supply of labor from China and from developing countries. But that's changed now. Going forward, China is also aging pretty quickly because of the one child policy. So you're seeing more people buying and consuming but fewer fewer people working. So structurally it seems inflationary.
So bonds will be bought and you should dca whereas you don't touch stocks until bond yields peaks.
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Q23 Discuss what other factors you must think about making your first bond purchase.
Summary : What Central Banks will be doing.
Although in the previous statement we have dismissed foreign banks like Ecb and Boj but they still do play some role in the bond market.
Reason :
a) Bonds tend to correlate much more than equities do. The fact is if Ecb loses the battle on inflation which it looks like it is right now rapidly what effect does it gonna have on Bund. The charts don't look great and could easily feed into the treasury market.
b) The other thing to look at is the devaluation of Yen. It continues to devalue itself as we speak. Add more bond buying ( they have yield controls ) by them recently. At some point reality will hit Boj and they are gonna have to tighten policy and that is going to create a ripple effect in the bond market.
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Hence we may get pressure on bond market through these two shocks. Hence we need to dip a toe in the long end of the market but it would be more comfortable to be on the front end.
Overall : A shock by Boj to let their 10yr bond go to 50bps ( current 0.22% ) could surprise a lot of people and most of them won't be prepared for that. Idea being global bond investor will then look at german 10yr bund in same way as they look at 10yr treasury yield. They just hedge risk 10yr jpy government bonds. So if bund goes from 1 to 3 ( current 1.51% ) then 10yr treasury will go from 3 to 5 ( current 3.2% )
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Q24 Till now we have established conservation on how high the Fed funds go (max 4%) or how high short end go. But if you look at financial conditions in the Goldman Financial index which is related to GLI and has a lot more factors like dollar, interest rate, Fed tightening monetary conditions. Does equity have more room to downside? Does credit spreads need to widen and can you discuss more about why 3.5% or 4% is the highest Fed fund note 5%. ( A tail risk scenario )
You don't necessarily have to look at the Goldman financial index. Just look at the treasury market and dissect it.
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https://preview.redd.it/etimorbv06991.png?width=1098&format=png&auto=webp&s=65c8c4037e283452cc23e95ebc353c71484d5bec
Front end (interest rate exp) : 1-3 yr , 1-5yr spread for what markets are pricing for Fed rate hikes.
Back end ( Term premia ) : 5-10yr is for whats a crude measure and not a bad measure for what term premia on bonds will be.
Right now the yield curve is steepening on the front end (very vicious ) and flattening ( very vicious ) on the back end.
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https://preview.redd.it/zw8wp7ly06991.png?width=1427&format=png&auto=webp&s=50865b9993f2b7355b51c885a6591ac7e864f00b
This is telling us that the rate expectations are going up and the term premia is collapsing. Collapsing term premium is all about changing risk appetite.
It's all telling us that bond investors don't want to take any risk. They want the safety of a safe asset which is a 10yr bond.
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Now let's look at what it's telling us from a corporate point of view. Corporate raise money in about 3-5yr areas. So the first point being the cost of financing has gone up because of the front end rise. Secondly the appetite for debt has collapsed because of much more negative term premia.
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https://preview.redd.it/n8ens8t716991.png?width=1443&format=png&auto=webp&s=47f69b146209ad61dc85ac4c1981f951006bb00b
So this configuration of flat yield curve with giant belly around mid duration yields is the worst outlook for any bond investors. Much worse than inverted yield curve.
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https://preview.redd.it/1p68iika16991.png?width=1472&format=png&auto=webp&s=0141dd142f78d14e19e1e7ddd1eae1b3ca5dad03
Now you need to dissect the front end and back end movement.
So now you're seeing a black line ( rate exp ) i.e. 1yr fwd 10yr out suggesting terminal fed funds around 3.5%. Now this orange line is term premia measuring risk appetite of investors in fixed income market. This has collapsed.
Now what youre seeing here is black line cross orange line called the credit market death cross. This tells us within 12m a big problem will arise in credit market. Hence youre seeing credit spread widening about 6-12m after this above pattern unfolding.
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Red : Down below is a chart that have z score of different credit spreads like high yield, junk (CCC-B, B-AAA) , quality spread (BAA-AAA) these sort of things in index
Yellow : 10-5y US treasury yield inverted and advanced by 12m.
What happening this is tracking exactly the movement what the treasury yield curve is suggesting.
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https://preview.redd.it/ziqd088c16991.png?width=1325&format=png&auto=webp&s=c92f0b6efb1083c257063a9feb2be43c4b35d80d
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Q25 Is HYG down -10% Ytd because of credit spread widening or rate hikes ? Do you think the Fed thinks about term premia? Do they want it to go up or down ?
Credit markets are imploding. But this is due to rise in risk free rate which is fed but not widening of credit spread as every noob on twitter or wsb will say.
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https://preview.redd.it/wptg4icd16991.png?width=1403&format=png&auto=webp&s=db9c176346c39e94a40427653173260a00d63a97
There is a hedged version of HYG called HYGH. ( interest rate version of HYG )
You can clearly see whether it's because of credit spreads widening or because of interest rates.
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The Fed does care about term premia and they want it to go wider. That's what QT is all about.
QE : Compress term premia. So people shift portfolios to other assets and take out loans for housing.
QT : Expand term premia and Fed let markets digest more treasury.
QT for treasury is a bit strange. See Mbs for example. Once we know it's gonna be QT then markets become aware of it and spread b/w agencies and 10yr widens significantly. For treasuries it hasn't been much. We don't know if markets are slow or something else is happening that we don't know of.
Over the coming months a lot more treasury will come into markets. Hence term premia will expand a lot more. Who knows what credit spread will do going forward but everyone's guess is it should widen a lot. If this doesn't happen then that would mean departure from history.
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Q26 What is the difference between good liquidity and bad liquidity? How does it result in a change in the FX market , currencies as well as the yield curve?
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https://preview.redd.it/lkglbx6e16991.png?width=935&format=png&auto=webp&s=2315e108013158d20017db014ee8b57e92044a12
When we think of liquidity we should think of quality and quantity. Now this is what drives the fx market, fixed income market and also where we take the yield curve as probably the best measure of the fixed income market.
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Look at the graph below
Good liquidity is created by the private sector. Corporations create a lot of cash or households manage to produce lots of savings. This cash generation is coming from a vibrant economy. A vibrant economy then causes currency strengthening.
Bad liquidity is created by Central banks. It's bad from a forex point of view and hence the currency weakens.
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So what you want to look at from a currency perspective is to subtract Fed liquidity from private sector liquidity creation. And that will tell you how the forex market will be moving. What traditional academics do is they lump all money or liquidity together and start to compare US liquidity with let's say Canada, Japan or Mexico. This way above is a more accurate way of predicting currencies. (Looking quality mix and then taking that relative)
The other dimension to look at is what drives fixed income market.(sum of liquidity which is pure quantity and not quality)
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So the private sector creates liquidity. It's creating a lot of cash. The Fed is the one that creates that cash. Domestic investors are not bothered where it came from and if there's a lot of equity they can just go and use that liquidity and go down risk of bonds, stocks, voldemort asset class, commodities or lets say credit.
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In layman terms :
When corporations do liquidity they go to banks for borrowing which in turns creates goods and services. Meaning a good debt will be invested.
But when Central banks do liquidity it's providing money to the government to spend. They will then give it to friends or people with special interest. This in turn creates bad debt.
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Q27 Why is PBOC ( People's Bank of China ) not stimulating given they are in a recession ? Why is their strategic priority stability if China has many trillions of dollars as reserves ? Are they really afraid of yen-like depreciation that they don't want to stimulate right now and suffer the same fate as them ?
To answer these questions we need to look at the evolution of capitalism. As capital in this regime becomes mature you want to export itself and go international. For this you need purchasing power and hence a strong currency gives you that.
The Chinese want yuan to be used as a vehicle and savings currency. So basically a strong yuan will enhance that situation. So they want stable currency because they look for stability.
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In capital wars we learn that the goal of Chinese authority is to challenge the dollar. They want to get rid of it particularly in Asia (India recently purchased oil from Russia in yuan ~ Market Insider) and the route to do it is basically by three paths.
- Re-denomination Chinese trade in yuan.
- Open Bond market to foreign
- Creating a digital currency
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Q28 Why is China setting up so many swap lines around the Asia region ?
The purpose of swap lines is for yuan denominated trade. So basically they are preparing for Euro-Renminbi.
To stop that someone is shaking up the tree in Japan vigorously to put pressure on yuan. Yen is your Trojan horse from Troy which is trying to break that stability that the Chinese government is so proud of by putting pressure on China given the integration of the Japanese economy with china.
Look at Korea, India. Their currency has been devalued too recently. The Chinese are trying to stop this storm. This long term geopolitics macro politics objective is to take this as no1 priority over the strength of the Chinese economy i.e. health of real estate, steadying credit market, stock market etc.
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Q29 Discuss the Chinese balance sheet ?
Pretty much everyone is saying China will do a monetary ease. They did a big one after gfc. They haven't really done anything since 2016. They do a very tiny stimulus ( did this yr in april ) hence their balance sheet is flat line.
They love growth and stability over injecting Soma drugs into the system.
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Thank you guys
Sorry for ruining your Saturday day or night w/o any jokes. I really have no clue when to post this kind of sh9t. I’m still figuring it out.
“Keep enjoying life. Stay in cash and park with mmf in rrp if you really wanna be in safest asset or just take out your money from bank coz if we are going into depression there’s gonna be bank run”
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With lots of love
Regards
Uchiha