The World and The Ratings Agencies Now Question the Reserve Status of the Clown World Fun Bucks

It was described as "the exorbitant privilege" by the French when describing the Dollar being recognized as the world's reserve currency.

The fat lady is now singing.

The path toward the Dollar's dethroning started when Obama was in office.  One ratings agency, S&P, dared to downgrade US debt in 2011.  Obama was not pleased and S&P retracted its criticisms.

Was S&P wrong then?  I don't think so.  I think they were early.  And, importantly, S&P's voice was alone.  S&P's concerns were valid in 2011 but they folded under intense political pressure.

The king had no clothing back then and it still parades around naked but it has been able to browbeat people into silence.  Until now.

If you take off the rose colored glasses and take a hard look at what this country, its leadership and the electorate in total looks like (think "Great American Voters"), do you see a nation that should have its currency serve as the world's reserve currency?  Don't get me wrong.  I see a lot of very good people who work hard, have their shit together, keep up their lawns and mind their own business.  Unfortunately, I also see a whole lot of complete idiots, ass-hats, bullshit artists, deadbeats, etc. that are "a waste of skin" to use one of my neighbor's phrases.

The Wheels Are Starting to Come Off

When an economy is 70% consumer spending and a large part of that consumer "spending" is driven by the use of credit, you get a very fragile situation.

Rising rates will slow some spending.  Higher standards and tighter underwriting when generating new loans will slow a lot of spending.  That is where we are today.  Nothing sobers the mind of greedy bankers more than losses and failure.  Poorly supervised banks are feeling the sting.

It's hard to "spend" what you don't have and for many "Great Americans", they can "spend" only that which they are able to borrow.

I'm enjoying the compounding interest.  Tomorrow, I will renew a certificate into a new certificate that has a higher rate than what I received last year.  It's a good time to have some money that can "climb the ladder" of increasing interest rates.

Every Day I'm Hustlin'

Roughly one year ago on CNBC:

The U.S. has been “extremely trigger-happy” with stinging economic measures, and central banks may decide to diversify their portfolio of foreign reserves instead of relying heavily on the U.S. dollar, according to the co-director of the Institute for the Analysis of Global Security.

“Central banks are beginning to ask questions,” said Gal Luft of the Washington-based think tank, adding that they are wondering if reliance on the dollar and “putting all their eggs in one basket” is a smart idea.

“The United States has extended itself, has been extremely trigger-happy when it comes to the use of sanctions and other economic punishments,” he said.

The White House did not respond to a CNBC request for comment.

And what happens if the world continues to move away from the dollar and the currency weakens in foreign countries?  It is hard to say since the dollar has been the world's reserve currency since the end of WWII but a few have predicted that:

1) Imports to the U.S. will become much more expensive.

2) The U.S. government will lose its ability to borrow at its current levels and it will be forced to raise taxes or print money to cover its shortfalls.

3) or, the U.S. government will lose its ability to borrow at super cheap levels and it will be forced to pay higher yields to buyers of its debt and it will be forced to cut services while simultaneously raising taxes to cover its shortfalls (the equivalent of a much needed and long overdue "national financial enema" if you will).  This is my own personal favorite and what I hope for as I tend to run my life on the lean side and I enjoy collecting compounding interest when lending money to others.

4) Inflation will be at higher levels than we have ever seen in the past as the cost of all imported goods climbs higher and higher.

5) Lastly, the key question is "cui bono" or "who benefits"?  I'm not sure but my guesses are:

a) manufacturers of durable items made in the U.S. that are sold overseas.

b) short term financiers

c) agricultural giants that export food items

d) large scale farming operations

e) weapons manufacturers

f) probably evil genius George Soros who probably has some sort of hustle going to crash the dollar just like he did with the Bank of England way back in the day.  Every day, that fucker looks more and more like Darth Sidious.

How Do You Afford Your Rock-n-Roll Lifestyle?

70% Of Americans Are Financially Stressed, 58% Live Paycheck-To-Paycheck

Singer kind of reminds me of Lou Reed

Don't Look Now But Here Comes the Iron Sheik!

 

So, just as oil markets are settling down, the Arabs cut production and explore the settlement of accounts in a currency other than the dollar.

And, just as the strategic reserve in the U.S. is at a low point - what a coinky-dink.  Everyone who shorted Big Oil is sucking wind this morning.  The fun never stops in Clown World.

Everything Everywhere All At Once Bubble

 

I find myself going through real estate advertisements, used automobile advertisements, used motorcycle advertisements, new home offerings, etc. from time to time and I thank my lucky stars that I am no longer in banking.  Making the decision to lend or not to lend in this environment would suck.  Valuations on collateral are nearly worthless.  Credit scoring models are skewed and somewhat unreliable.  Sorting out credit worthy candidates from posers and wannabes is murky.  

Collecting is going to be tough, especially if the long overdue Bankruptcy Code overhaul gains any traction in the House and Senate.  Liz Warren (Senator Pocahontas) is pushing a revision to the Code that would allow underwater and overindebted "Great Americans" to include student loan balances in their new "Chapter 10" Bankruptcy petitions.  This is overdue.  I am in agreement with the allowance of student loans as unsecured debt - it never should have been excluded in the first place but thanks to the likes of then Senator Joe Biden of Delaware (banking hub), student loans were expressly excluded from being capable of discharge in Bankruptcy.

Anyway, this bubble was brewing prior to all of the Covid 19 nonsense from the Federal Reserve.  But, once people in power at the Fed got their way and shoved TRILLIONS of newly printed dollars into an already warm economy, the Everything Everywhere All At Once Bubble was off to the races.  A lot of banks, credit unions and other lenders are going to find themselves holding a lot of shitty paper and hoping to God Almighty that their debtor finds a way to keep squeezing out the monthly payments.  Many of them will not.  The Siren Song of Bankruptcy is too hard to resist.  A lot of them will throw in the towel and go visit with Moustache Pete (our 1990's office name for then famous St. Louis Bankruptcy attorney T. J. Mullen).

Moustache Pete

The Fed's "Shit or Get Off the Pot" Moment

"Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time."

Rising present day yields on bonds and treasury paper means that the value of a bond purchased one, two or three years ago is diminished.  It is underwater and would need to be redeemed at a loss should the holder need to cash in that bond in today's market.

Through Q.T. and raising the overnight rate, the Fed is "turning the screw".  Q.E. was the heroin - Q.T. is the withdrawal. 

If you are ever having trouble sleeping, go over to Treasury's website and look at the historical yields on government paper (Uncle Sam's I.O.U.'s).

Here's a link.

On April 21, 2020, if you had decided to buy a 30 year Treasury, you would have a yield of 1.17% - pretty fucking shabby, right?

If you had to sell that security in today's market to raise necessary cash, you would be fucked. You are a "hold until maturity" guy.  Anything that pops up and that necessitates the need for immediate cash (*cough* bank run *cough*) will cook your goose.  I remember seeing those yields and thinking, "Who in their right mind would lend this government/country money on a 30 year security and agree to that kind of yield?"

Shorter durations were the order of the day and I think that a mix of short to medium term durations are the way to go.  Short so that you can take advantage of the current rates available on money needed "TODAY" and medium term so that you can lock in some decent returns in the near term (7 year or less) future.

The job market is turning over.  There are still plenty of jobs available but not all jobs are created equal.  Translation: "Goodbye Meta job with six figure income, plenty of perks, nice bonuses and private parking space - Hello Marriott Hotel job with an income half of that paid by Meta and few if any benefits".

Oil prices are back to a level more in line with long term trends (and declining).  The "Everything Bubble" (which few people believed existed as recently as two or three years ago) is now acknowledged and bursting.  These are all deflationary pressures in the very long term.  If a war does break out, all bets are off.

Fed takes the safe route and jacks the overnight 0.25%.  That's probably the most prudent route.  Now they should focus upon standards - start auditing and making insured depositories get their shit together.  Still got "a long row to hoe".