Max Notes
Venezuela, the Cayman Islands and cockroaches. I’m unpacking them each in separate episodes over the next week but these are major stories that are all related. Our monetary chickens and mindless mismanagement are about to come home to roost in a significant way. In fact, they might already be here.
Everything comes back to the dollar.
On the most recent JPMorgan Chase investor call, Jamie Dimon alluded to the recent bankruptcies in the private credit sector as cockroaches; meaning where there’s one, there are usually many. He said this in response to a question of whether the unraveling of Tricolor and First Brands Group were isolated events or indicative of a greater liquidity issue in the shadow banking industry. We’re beginning to learn that it might be more than a family of cockroaches, we might have an infestation.
So how does this relate to Venezuela and the Cayman Islands? And how does it all come back to the dollar?
I’ll save Venezuela for last because the Cayman Islands issue is more recent. And it’s a fucking blockbuster. For months I have been warning of weird signals in the Treasury International Capital (TIC) releases from the U.S. Treasury. This is where we measure total inflows versus outflows of capital. Aside from the Liberation Day fiasco in April that spooked the bond market and sent investors fleeing from U.S. Treasury bonds, there is always an appreciable flow of money into the United States. It manifests in the stock market, the corporate bond market, government agency and municipal bond markets and through purchases of U.S. treasury notes and bonds.
The weird signal that we’ve been calling out is the uptick in inflows from “unofficial” sources, meaning private sources rather than foreign central banks. Since Trump’s election, foreign central banks have been moving away from U.S. treasuries and into hard assets such as gold and silver, as well as foreign exchanges and currencies as well as Bitcoin. The movement is a hedge against the U.S. dollar and a sign that central banks are losing confidence in the United States.
But the administration and the financial pundit class has been vocal about the strength of inflows into the United States. After every treasury auction, financial analysts, business news hosts and treasury officials would sign from the same hymnal that everything is healthy and people are gobbling up treasuries as they always have. All is well! Move along. Nothing to see here.
Sensing there was more than meets the eye, a couple of months ago I started putting notifications in my calendar to remind me of these TIC releases. Something just didn’t seem right. And, of course, the government shutdown has delayed most information from the U.S. Treasury so this one is late and there’s no telling when it will come out. (So is the budget that updates every month for that matter.) Very frustrating.
But there’s one agency that is running at 100% because it’s self funded and therefore unaffected by the shutdown: The Federal Reserve. And they just released what can only be considered a fucking bombshell report on the 15th of October.
Here’s the last line of the report:
“The puzzling disconnect between the TIC and Form PF data on Cayman Islands’ holdings of U.S. Treasuries is under active investigation.”
Again, more to come this week but here’s the upshot. It was previously thought that investors and institutions registered to the Cayman Islands held around $400 billion in U.S Treasuries. The actual figure according to the Federal Reserve?
$1.8 trillion.
I’ll explain more about this in the days to come but suffice it to say, we have a huge problem on our hands. Under normal circumstances this is entirely manageable, though the concentration risk in an opaque market isn’t great no matter how you slice it. The bigger problem is that a significant (albeit unknown) portion of these holdings is on leverage. In some cases up to 100 times. So when we enter an abnormal circumstance like COVID or…RIGHT NOW…there is actually risk inherent in these markets.
That’s because these shadowy companies aren’t buying U.S. treasuries because they’re patriotic; they’re buying them because there’s profit to be made on holding them and selling them down the line. Basic arbitrage. And like every trade involving arbitrage, there’s risk in the timing. So if the value of the holdings suddenly decreases, the market can go upside down pretty quickly and all those payments come due—it’s a bad scene. Especially if you owe 50 to 100 times more than the loss due to leverage.
Okay, and Venezuela?
So, it’s way more complicated than this and I promise to break it down further, but this article from Naked Capitalism is a good base. Essentially, when the world buys oil (most of it at least) they do it in dollars. (Dollars used to purchase oil are called petrodollars.) Therefore, yet another one of our superpowers is the fact that no matter where the transaction occurs, the oil itself is purchased in dollars. So if Japan buys oil from Saudi Arabia, it’s paid for in U.S. dollars. Pretty neat, huh? Thus, one of the reasons the global market purchases dollars is so countries can buy oil.
But countries like Venezuela and Iran, and more recently Russia, have been sanctioned by the United States. Part of this means a prohibition on using U.S. dollars to buy oil from these countries. In order to find ways around this, sanctioned nations will sell in other currencies or, more recently, in crypto currencies.
Now here’s the crazy part. Our foreign policy is so upside down and backwards that we will sanction these countries and then bomb them even though they pose no imminent threat to us. Basically, our goal is to take control of their oil production by forcing regime change, then “negotiating” with the new leadership to work with our oil companies and re-enter the global trade market with U.S. dollars.
If you’re wondering why we wouldn’t just lift the sanctions and let them trade on the open market since it’s a hell of a lot easier and more beneficial for everyone then you’re smarter than everyone who has ever worked in the U.S. State Department.
Again, more to come on all but suffice to say it’s going to be a wild few months ahead. |
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