by Chris Black
I predict we will see a total curveball in the second half of the year, most likely in the Summer. Not necessarily a war (although totally possible) but some event that will convince the world that they need to park their finances in the safety of American debt and American dollars.
The only reason I call it a curveball is because, with so much more attention on these power brokers and institutions since late 2019, we have to be prepared for the totally unexpected.
Sounds paranoid. But let’s revisit the big picture:
The BRICS alliance is currently posturing in an ill-fated attempt to reject dollars and, by extension, the US-led world order. They will soon be reminded – and some, like the Saudis punished – that they need dollars to survive.
A rude awakening.
During COVID, as one of the most epic financial panics in history unfolded, the world’s insatiable demand for dollars exposed itself as everyone ditched hopes for alt currencies and rushed to exchange their assets for dollars.
They were reminded that the American currency & Wall Street reign supreme. The empire in distress knows it must keep flexing, even on its own allies, to preserve legitimacy.
This event will probably be triggered by some serious Treasury and/or dollar funding market dysfunction – which, with MOVE (T-bond volatility) now comfortably sitting above 120 (the T-market broke in 2020 as MOVE ticked over 105), it is not a matter of if but when.
We are already seeing the early fractures.
We have plenty of pain down the pipeline — the yield curve tells that a hard landing is due for June, and we have yet to see whether this precarious feedback loop between smaller banks and CRE is packing the potential energy we estimate.
The market always tests statements of confidence, whether from companies, nations, or central banks.
At the first real test in March 2023 (last month), American policymakers mumbled at regional bank stress as BRICS marched on openly trying to threaten dollar hegemony — two statements of confidence in their own ways.
Powell opened up the daily swap lines and created a new discount window-like facility) while hiking rates another quarter – in other words, he went “half way.”
He didn’t Go Big because he couldn’t – he’s stuck.
In 2020, we went big on everything.
The times called for it.
For example, can you imagine if America had allowed the entire airline industry to be liquidated amid lockdowns?
The cost of restarting the world’s largest economy with a severely crippled airline industry would have been staggering.
Right now they’re being tested to see whether they will Go Big again.
And the longer it takes them to respond, the deeper the damage to US hegemony will be, and the more aggressively they will need to go when they decide to – the bigger the ‘big’ in Go Big.