I Like What Trump and Sanders Tell Us About Voters

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On Thursday, August 20, amidst the growing noise of a "dollar" run seemingly unstoppable by any foreign force, the TED spread quietly and purposefully rose above 30 bps. Though it was close on December 28, 2012, the TED spread hasn't been above 30 bps since August 2012 and pre-QE3. It was another in a series of "money dealing" indications that foretold what was about to come; even stocks in the US fell sharply that Friday and then crashed at the open (and stayed down) the following Monday.

Obviously that trend includes eurodollar lending since 3-month LIBOR forms the first part of the spread. Also almost wholly unnoticed, LIBOR rates have been rising rather steadily going back to December 1, 2014. That period is closely defined by what occurred on October 15 last year despite the official exoneration from the US Treasury and Federal Reserve that found no faults except some computers (before admitting in their report they didn't really consider factors like causes and potential systemic effects). It is amazing this change in attitudes whereas only a few years ago there would have been (and was) a general call to alarm.

To put it in perspective, at about 33 bps, where the TED spread is now was where it was on May 24, 2010, when it was also rising. That was more than two weeks after the "flash crash" and the ECB's first general experimentation with "not" monetizing some sovereign debt. It was at that level also on September 12, 2011, which was six days after the Swiss National Bank was "forced" to peg the franc to the euro and three days before the Fed and four other central banks (including, relevantly, the SNB) announced three separate dollar auctions of three-month swaps to alleviate not euro pressure but "dollar" pressure. The Fed had reinstituted its swaps mechanism in, of course, May 2010.

As if that weren't odd enough to produce at least curiosity, the repo market had just weeks prior to the current LIBOR breakout already undergone an almost exact replication. If you plot DTCC's published GC MBS repo rate surrounding the quarter end of Q1 on top of the quarter end for Q2 they match to a very uncomfortable degree. That similarity was a sign of human elements rather than the "randomness" that should accompany any deep and robust market. The tie to the quarter end is also an echo of still more troubling repetition, as it represents a very real bottleneck where financial firms introduce "artificial" stress via window dressing. As we are just days from the start of the next quarter end process, it bears minding how the bottleneck is amplified in periods such as now (why September 15, 2008, as September 15, 2011).

In 2015, it seems as if the same kinds of strains and stresses that were widely reviewed not long ago are now just ignored because Janet Yellen says they aren't real. If we are to judge the health of the global "markets" based on her view of the world, then I fear much worse lay ahead; just as it already has closely behind. The increase in LIBOR starting in early July (beyond the more gentle, steady rise dating back to last December) coincides with more than a few ferocious reminders that Yellen's view is intentionally colored, if not ideologically obscured. For all the fuss and fury about China's "devaluation" it is increasingly clear, as it should have been ahead of time, that it was, like Europe in 2010 and 2011, a grand "dollar" issue.

Thus the sudden and sharper change in upward trajectory in TED via LIBOR was a sign that crisis had emerged to the point that it would take down even the vaunted PBOC; and not long thereafter force stock investors to, for a little while anyway, rethink this misplaced and wholly unearned complacency.

Perhaps at least some of the lack of appreciative distinction about eurodollar condition in 2015 is due to ZIRP itself (though, again, it curiously wasn't just a few years ago). When the TED spread exploded in 2008, it did so to a level ten times that which we see now. The morning the "dollar" woke up to Lehman's bankruptcy saw TED move above 300 bps for the first time, beating the Crash of 1987 finally for the highest on eurodollar record. At its worst, on October 10, 2008, TED was an enormous 459 bps - recognizing all sorts of negativity that would follow, including renewed and devastating turmoil in stocks as dark leverage imploded here and everywhere. As noted last week, that included interest rate swaps as the 30-year swap spread would just two weeks later become "impossibly" negative for the first time.

That seems to be the most evident effect of engineering through ZIRP and all the QE's; not that they performed, mind you, but that they have had the effect of reproducing the same patterns in miniature. I don't think that would fully account for the lack of notice about funding more recently except that it helps obscure ill-health as far as it isn't as sensational. It takes much more work to realize that a 3 bps rise in 3-month LIBOR at ZIRP is quite serious now that the Fed essentially owns this systemic working point.

Such remarkable passivity suggests, as it usually does, that even hearty and severe liquidations will not be enough to square prices to funding conditions. That is perhaps a given with the reality especially in the corporate bond bubble. The immensity of corporate debt just in the past three years dwarfs by all accounts subprime (and I am only including junk corporate such as high yield bonds but most especially leveraged loans with very few, if any, prudent covenants). In short, the asymmetry itself begs more consideration given that it is currently supported by an unstable and danger-prone liquidity system (and that relates also to pricing, as leveraged loans are priced systemically via only a small window of "liquid" names just as subprime mortgage products were mostly priced via a similarly small window in ABX indices).

You might, from that, start toward the impression it may get a lot worse before it gets any better. After all, even with the huge global liquidation on August 24 and 25, "dollar" money rates continue both elevated and unsatisfied. Currencies remain crashing all over the world, even with an emerging nation or Asian flavor this time, and the angry "dollar" is behind it all.

That potential is particularly unwelcome in a state such as now. It is, obviously, unwelcome at any point but more so when the system never reset or recovered. That observation includes not just the eurodollar system and standard but also the global economy, US very much included still at its center. Typically, any business cycle is a full one, where the economy picks itself up, grows for some steady time and is thus re-fortified to withstand the next cycle. That hasn't occurred this time, as in many ways, increasingly, the US and global economy is revealed both significantly smaller and weaker now than at the start of the Great Recession. The correlation there is no accident, as the economy was financialized these past few decades so that a weak "dollar" system (not the exchange rate of the dollar) would produce little financialized recovery.

To have the political sideshows, then, become the center ring is actually welcome. Bernie Sanders is no more mysterious in his rise than Donald Trump. You might ascribe Sanders as a function of Hillary Clinton's penchant for being unable to shake loose from criminal implications, but it is much more than that. Earlier this week, Senator Sanders tweeted that, "it is unacceptable that the typical male worker made $783 less last year than he did 42 years ago." His huge crowds enthusiastically embrace that populism, which is a direct contradiction to the dominant, complacent rhetoric about the economy parroted out from the FOMC and that which is being similarly claimed by the current administration of his own party.

Sanders' recent appeal seems enhanced by attacking Obama's economy rather than serving tribute to it as is generally expected of these things. Even the New York Times has suddenly noticed the shift, going so far as to have the paper's own public editor write Wednesday in response to an overwhelming near-revolt of Times readers on behalf of what they see as "unfair" and overly "colored" publicity within its pages - of a Democrat no less. Margaret Sullivan wrote of her paper's coverage that, "Do these decisions merely recognize political reality or are they part of a self-perpetuating cycle in which someone like Bernie Sanders can never stand a chance."

It is that last part that is being changed, and, again, I don't think it is as much Clinton as Establishment. The current mood on "both" sides is a mirror image - Trump as Sanders, perceived, which is all that really counts, against the entrenched interests of DC. But I don't believe that is the real root of it either, or at least fails as a comprehensive explanation as Sanders continued "income inequality" theme reveals (just as Trump on immigration). In this respect, Jeb Bush, for example, actually belongs in the same classification as Hillary Clinton, which sets up not so much D's vs. R's, but factions within each against the overall technocracy to which "establishment" is increasingly shorthand.

That is the true face of the Establishment in either party, where lines are being drawn as per current alignment but against a common view. In other words, Sanders' own supporters seem to be quite against the results of the technocracy if currently unable to fully appreciate the genesis of their palpable angst. That leads to a seeming contradiction where they don't much like its products but are now appealing to a hyper-technocrat as a solution.

Again, there isn't much disbelief even in that regard as the "populists" of the left have been reading the economic condition as if it were unfettered capitalism. And so where these two currents align is on Wall Street; a shared target of Elizabeth Warren followers as well as Tea Party adherents. That fusion is a product of the economic technocracy even if it isn't appreciated in just that manner, as Wall Street as it exists now is the primary tool for it. To the left, Wall Street is free market, big corporate business while to the right it is crony capitalism and too big to fail. To both, it is a symbol of decay not just of the "dollar" system but how that continued and now-amplified failure has provided a basis for at least tangible and personal stagnation if not something far worse - a rightful target as the year 2015 continues to prove.

Wall Street itself isn't really the problem so much as it is in its expression of the technocratic takeover on the economic side. Companies raising money via floating shares or as governments directing funding of primary markets still happens, but the guts of banking have changed considerably. The axis upon which all of this turns is where money was not just banished but that its primary functions were not unleashed in at least parallel fashion but completely entangled within finance itself. There is, again, some political unity in that diagnosis as it is an element of this populism that decries Gramm-Beach-Bliley with some good reason (not specifically the elements of the law, but rather how it fostered and furthered this process of entangling banking with finance).

The purpose of it has been construed usually from the perspective of "greedy bankers" but in reality that, too, was just a symptom. In other words, Wall Street bankers had realized decades before GBB that the true "easy money" was in hooking up with DC (Volcker's "dilemma" in May 1982 more than amply demonstrates that point). The alignment of banking as the primary tool for central planning via central banking was carried out as the removal of most limitation and restriction while, most importantly, overriding the means of financial self-correction and replacing it with a ridiculous theory that central bankers themselves would (or even could) perform all those functions.

The real point about money in finance as both self-correction and limiting scale is that it is self-extinguishing. I give you a quantity of gold and our transaction is at an end. Replacing that with a credit-based monetary system leaves a huge hole in that regard; there are now chains of liabilities without actual security. If you hadn't noticed, almost every financial loan or credit product is collateralized in some fashion; the same has been true of credit-based reserve currencies. Where Wall Street under this central bank, central planning approach truly "shined" was in manufacturing collateral as if it were replicating the security function of hard money - repo.

In many ways, that was the real "genius" of the housing bubble, namely that subprime and vast mortgage expansion wasn't just a means to great volume but really that it was its own "money printing" operation in parallel function. Banks were not just investing in formerly illiquid securities, they were inventing an entirely new form of currency and manufacturing it at will. The technocracy simply approved because it followed the course the technocrats set out for: some kind of rising GDP. Alan Greenspan thought he was controlling GDP via the federal funds rate when instead an enormous and almost unrelated currency system was doing it for him and almost completely without him.

That is, perhaps, the most poignant if basic aspect of the technocratic approach, which shares a similar and very related element with the statistical use that accompanies it. The basic flaw in both is that the world can be modeled and assumed within a definable "normal" distribution. In fact, that is exactly what the Fed was saying in the 1980's when it transitioned away from "reserve targeting" to "interest rate targeting"; that it would be able to keep the financial system within the bounds of its supposedly updated statistical correlation views. The trends of the 1990's had already defined that very failure, as even Greenspan at least hinted in his infamous 1996 "irrational exuberance speech" (as I have pointed out several times recently, so I won't do so again here, that speech was not really about the stock bubble so much as it was orthodox confusion about its own monetary control; which tells you a lot about the two decades since).

The manufacture of mortgage collateral and the development of wholesale money channels, globally, along those lines was what statistics would categorize as a "tail event"; but one that was not really and truly appreciated until September 2008 when all that collateral as money came to a crashing and devastating halt. That means that the crash was not really the tail event but instead the rise and expansion of the eurodollar standard.

On October 28-29, at the scheduled FOMC meeting, long after the "impossible" panic had been unleashed, the committee members had a lengthy discussion about the foreign "dollar short." They were ostensibly led to especially emerging market holdings of UST as "reserves" in the midst of contemplating the enormous draw upon their belated dollar swaps. The whole discussion is quite illuminating in the perspective of flawed technocracy as I have laid out here, but Vice Chairman Tim Geithner's response sums it up far better than I could ever describe:

Another way to think about this is that the privilege of being the reserve currency of the world comes with some burdens. Not that we have an obligation in this sense, but we have an interest in helping these guys mitigate the problems they face in dealing with currency mismatches in their financial systems. We have an interest in helping them meet that in some sense. It's not our obligation. We have the same basic interest that led us to be responsive to the European need in some cases. These guys are different in that they actually have managed the countries' balance sheets better because they at least have a huge amount of their assets in dollars. That should make us in some ways as comfortable as-maybe more comfortable than-doing it with the Europeans because they ran a banking system that was allowed to get very, very big relative to GDP with huge currency mismatches and with no plans to meet the liquidity needs of their banks in dollars in the event that we face a storm like this.

I can't help but almost laugh at that statement, because it is a modern incarnation of the 1960's Triffin's Paradox or Dilemma. The conditions are clearly different and obviously so is the form of "reserves", collateral in this case, but the very fact that the Fed in 2008 was in the same spot of its earlier incarnation debating the same ideas of currency responsibility in an entirely different form is, for me, dispositive. For all the supposed progress into the age of technocratic statistics, the financial system simply replicated the same fault lines just out of sight of the "best and brightest." For all the assumed ability of the central bank to keep the financial world, and thus the economic one, inside the meat of the Bell Curve, the very tool to accomplish that restriction had instead itself moved the entire curve ten standard deviations to the right (or left, depending on your political view) without the Fed ever noticing.

And that shift was multi-dimensional where not only had the form of currency been transmuted, from, you know, currency to collateral it was also a geographic dispersion in quantities and places the Fed even in October 2008 had disastrously little appreciation for. In other words, the experts claiming economic control were so narrow in their normal distribution that they didn't even realize how little their abilities actually applied to the real world or even "obligation" as Geithner termed it (Bernanke, even in light of all that has happened, still, somehow, refers to the absurd idea of a "global savings glut").

The common outbreak of such technocracy is always the same, as you can easily observe in places like Venezuela - the more the technocrats claim of power and ability the less the intentions of that power and ability are actually produced. In the US and the "dollar" world, that reality has been proven over and over (and over and over) in QE's just the way in which central bankers talk about it. Their descriptions depend solely upon the tense they use; in the future tense QE "will be" powerful and effective, a quantified and thus technocratic expression of precision and force of singular good and economic righteousness; in the past tense, it "was" short of expectations, as there "were" greater factors to consider including an immense sea of financial noise set against a cacophony "headwinds" purportedly unrelated to monetary factors. When delivering promises, it is unquestionable; when accounting for what was, "it's not our fault." In Venezuela, they talk a lot about the government's abilities that "will" deliver toilet paper and even food, while never apologizing for or explaining how little actually "was."

It is in that vein that I am supremely encouraged by both Trump and Sanders, especially the intensity, not as actual candidates but that Americans may no longer simply take idle with the technocratic failings. The danger, the long-term worry, has always been that American apathy would harden to Japanese. As I documented earlier this week, the Bank of Japan is currently on at least its tenth QE, which actually might fairly be called its 22nd if you number in the same manner as what is accepted here. The first of those QE's, in March 2001, was preceded by more than a decade still of Bank of Japan "free market" technocracy. The fact that they are still going at it is not just sad and tragic but revealing of both the real power of the technocrat while also the character of the system that accepts so little. That America might finally wake up after nearly its own "lost decade" or two now, even if not yet fully apprised of its true nature, is truly hopeful. Getting the election "right" this time isn't so important so long as finally the attempt of not settling for the con. As the "dollar", it may have to get worse before it gets better, but that is an improvement in long-term prospects for the first time in a long time.


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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