Eurodollars & Global Deflation Risk

Published on
September 19th, 2018
Topic
Financial System, Monetary policy, Macro
Duration
29 minutes
Asset class
Bonds/Rates/Credit

Eurodollars & Global Deflation Risk

The Expert View ·
Featuring Jeff Snider

Published on: September 19th, 2018 • Duration: 29 minutes • Asset Class: Bonds/Rates/Credit • Topic: Financial System, Monetary policy, Macro

Is the global economy poised to enter another deflationary cycle? Jeff Snider, head of global research and chief investment strategist at Alhambra Partners, believes that we have never enjoyed a true recovery from the global financial crisis - but instead, have merely bounced between cycles of deflation and reflation. In this piece, Snider unpacks the importance of Eurodollars as a key to understanding where the global economy is headed next. Filmed on September 11, 2018 in Tonawanda, New York.

Comments

  • RK
    Roger K.
    5 November 2018 @ 21:39
    The only play in trading, is it the speculation of the the eurodollar system?
  • HM
    Holland M.
    4 November 2018 @ 21:37
    Brilliant.
  • MS
    Mark S.
    1 November 2018 @ 01:26
    Jeff Snider for Fed Chair.
  • YO
    Yousef O.
    26 September 2018 @ 04:55
    This is a great video - any suggestions on how to learn more about the repo market or the Fed transactions Jeff mentions?
    • BG
      Bart G.
      26 September 2018 @ 10:19
      If you want the basics check out Perry G Mehrling lectures: http://www.perrymehrling.com/
    • SP
      Steve P.
      28 September 2018 @ 01:22
      One of the best sources of Eurodollar learning has to be a series of 8 lectures Jeff did with Macrovoices Chase up the 8 lessons using this 1st lesson link https://www.macrovoices.com/mobile-home/300-jeffrey-snider-eurodollar-university-part-1
  • T~
    Tshort63 ~.
    26 September 2018 @ 03:09
    Jeff always sets up a fine time of viewing or reading. I usually have to trace back a paragraph or two to follow his deep understanding and logic. A @twitter must follow for sure.
  • DS
    David S.
    25 September 2018 @ 22:21
    IMHO, interest rates in the US and Europe have been and are artificially low because massive additional money flooding the system held by investors who are looking for safe havens. How else can you explain negative interest rates and very high P/Es even with profits boosted by the US corporate tax cuts. Mr. Snider is correct to say that something, sometime, somewhere must give. The problem is that the systems are so complicated and intertwined that how they will unwind is unknowable, therefore not predictable. Mr. Snider has given us some critical stresses and places to look for as this starts to fall apart. Hopefully we can make some money during each . This is the new world we live in, and it will not get easier. DLS
    • DS
      David S.
      25 September 2018 @ 22:23
      Should be during each event. DLS
  • F
    Floyd .
    24 September 2018 @ 22:08
    Going to start paying closer attention to Repo/fed funds rate. Wished Jeff would have referenced current economic statistics.Given the cycles he is talking about would seem to involve economy falling off a cliff. Dovetails with others that believe central banks won't have the bullets to fight the next economic slow down or financial accident
  • AD
    Anthony D.
    24 September 2018 @ 12:58
    Chains of credit driven Liabilities? Jeff I am trying to understand this definition of Eurodollars. If I may, A large chain fast food restaurant in China wants to get in on a new rabbit food craze. They find a German company that can can provide fresh frozen hasenpfeffer to their liking. They approach DB or UBS for 50M USD letter of credit and get it. Now DB doesn't have these dollars in the vault or on a server. The rabbit stew is a smash success and in six months they used 25M of that credit to pay the German supplier. There is a new liability on DB' s balance sheet. Doesn't the Chinese company have to buy dollars from someone to pay the European bank to pay the German firm. Aren't these dollars limited in that they are out of the US banking system and the fed can't just create them? Sorry if this is naive, its just out of my area of formal training. Love your work.
  • MJ
    Matt J.
    23 September 2018 @ 11:07
    Great piece. Could one of the unexplained points - the shape of EuroDollar curve 2020/21 be linked to the Libor reforms that are due to come into force around then? It strikes me (a financial markets worker but not money market expert) that these reforms will result in lower liquidity as capital requirements rise. Europe has mooted using an unsecured Euribor that I believe works with the French set up (Livret-A?) while the rest of the world seems to prefer moving to an Overnight Interest rate Swap (OIS) and this lack of coordination would impact cross currency basis swaps and everything that hangs of them. Does anyone have any views and/or suggested reading on the Libor reforms and their impact?
  • EB
    Eirik B.
    22 September 2018 @ 19:08
    Jeff Snider shares how he perceive and interpret market information from a point of view I don’t find many other places given his unique knowledge and insight with the eurodollar system. I find that invaluable because it challenge my thinking process. I feel privileged to hear him speak, and every time I do, I learn something new. Thank you!
  • MG
    Matteo G.
    21 September 2018 @ 06:44
    I love his deep knowledge of the eurodollar market but I am not able to transform it in actionable investment strategies nor he is doing that, which would make his contribution much more valuable
    • MW
      Mike W.
      23 September 2018 @ 04:02
      You nailed it.
    • SP
      Steve P.
      28 September 2018 @ 01:27
      He's educating us on a macro level - MUCH more valuable to an astute investor then a once off 'tip' on a particular stock, sector etc.
  • DR
    David R.
    20 September 2018 @ 20:32
    Sorry, but I just don't see this theory ever working, at least not for any reasonable time horizon (like how the QE-Inflation risk theory never worked for a decade). Instead, the dollar just keeps on crashing. Since Dec 2016 the dollar has remained technically bearish overall. Consistently making lower lows, and lower recovery highs. USD is being absolutely *crushed* yet again today. USD has lately suffered 2-3 failures of key support, with follow-through drops. Another key breakdown from a wedge today (bearish). DXY failed to break above 97 in its lone, rather small & brief bear-market rally that ENDED Aug 15 (bearish), and also that run ended well shy of the 618 fib required to possibly raise the dollar from a BEAR to a possible Neutral (the dollar really needed to reach *above* 99-100 to have any chance of becoming bullish). DXY suffered major H&S breakdown below the neckline recently earlier this month, subsequently followed by a steep plunge lately as would be expected, reinforcing dollar bearishness. Historically massive long-USD speculation that's caught on the wrong side (being long) and bleeding red, who *must* yet sell and thereby accelerate USD selling pressure. Breakdown below various moving averages, TL's, etc etc... There's just nothing but bearish behavior for USD, as has been the case for 5+ weeks and will generally continue to be so for many weeks and/or possibly months to come. My funds flow analysis shows money fleeing US for Europe or elsewhere as this dollar crash gathers pace. Last but not least, it's significant to note that USD appears likely to end the quarter next week with a bearish key reversal which would bode ill for the dollar long-term. Barring a miraculous bounce of more than 400 pips from current levels very quickly (which ain't gonna happen), the dollar is a bad news BEAR. Thank you.
  • KC
    Kenneth C.
    20 September 2018 @ 17:40
    I read him every day. Thanks Jeff.
  • ag
    anthony g.
    20 September 2018 @ 13:12
    Fascinating. Many thanks.
  • CF
    Cause F.
    20 September 2018 @ 05:51
    Questions 1. Does the Federal Reserve actions - interest rates and QE / QT have no impact on the Eurodollar market? That seems counter -intuitive? Has there been a study on whether there is a correlation? 2. What drives the supply of these collateral securities in the Eurodollar markets? Is there a way for regulators / CBs to make this easier? (Though I understand that currently they do not seem concerned). 3. Has Jeff carried out a joint study with say, ECRI or any other institution or of macro variable to see if vulnerabilities of Eurodollar events increase with those other indicators?
    • MW
      Mike W.
      23 September 2018 @ 04:04
      Erik Townsend has on macro voices euro dollar university.
  • DS
    David S.
    20 September 2018 @ 05:50
    Most interesting. Net, net I know I am not smart enough to place bets, but great background to use when the time comes. DLS
  • JC
    James C.
    20 September 2018 @ 00:39
    I'm convinced Jeff is correct, although i can only understand about half of what he's talking about.
    • EK
      Emil K.
      20 September 2018 @ 15:01
      Like college, there are different levels of Jeffrey P. Snider coursework. This video assumes your familiarity with the subject matter so it's no surprise if anyone is confused, including or perhaps especially central bankers. Jeff 101: (https://www.realclearmarkets.com/authors/jeffrey_snider/). Jeff 201 and 301: (https://www.macrovoices.com/edu/321-eurodollar-university-featuring-alhambra-partners-cio-jeffrey-snider) Jeff 401: (http://www.alhambrapartners.com/author/jsnider/)
  • KS
    Kathleen S.
    19 September 2018 @ 23:26
    I love this guy --- so smart. I have watched all his videos.
    • MW
      Mike W.
      23 September 2018 @ 04:05
      Thanks for sharing.
  • JH
    John H.
    19 September 2018 @ 19:38
    Google search "Zoltan Poszar Global Money Notes". Read them all. Jeff does nothing but confuse me .. that's me. Maybe I'm dense. Sure, dollars are getting more expensive because the Fed is hiking, but shortage? The direction of LIBOR-OIS and the cost of swapping euros or yen for dollars tells me dollar conditions offshore are getting easier, easier, easier. There have been hiccups as plumbing has had to adjust to changing regulations, etc.., but basically dollars are available.
    • DR
      David R.
      20 September 2018 @ 20:51
      In my experience/opinion, dollar shortage is as much a myth as the so called "strong dollar" which is just BS propaganda to mask the fact that the dollar is chronically weak and headed lower - even to a fraction of its current level especially when the US *inevitably* loses reserve currency status and fails (probably sooner than we expect). Mathematical certitude. The dollar is in a BIG long-term bear market. There is NO dollar shortage. Anyone worried of a dollar shortage, please come to me and you can have as many dollars as you want in exchange for one Euro or Pound or CHF apiece (your choice)... any takers, please? Nope, I didn't think so.
    • RI
      R I.
      21 September 2018 @ 01:12
      I tend to agree with you, David, but since your horse blunders are on and you’ve made such a generous offer, I’ll take you up on it: I’ll trade you one single EUR for USD 1MM. I’ll accept PayPal. Much appreciated.
  • MT
    Morgan T.
    19 September 2018 @ 18:24
    I feel like this interview could have been 28 hours long, Jeff always delivering! If you don't know what eurodollars is, Jeff has multi hour content called eurodollar university on marcovoices.
  • RA
    Robert A.
    19 September 2018 @ 17:31
    I’ve enjoyed every one of Jeff’s RV presentations with this perhaps being the most important one yet. Seems like Jeff and Raoul are channeling each other in this regard, eg. Raoul’s close eye on a potential TLT trade (especially with so many heavily positioned the other way). Vintage RV stuff here—different relevant point of view that we never get from ANY other venue!
  • RD
    Ravi D.
    19 September 2018 @ 16:41
    Nick G is right here.
  • NG
    Nick G.
    19 September 2018 @ 13:27
    Not really... LIBOR: London Inter Bank Offered Rate. The key part is "Inter Bank". "Inter bank" means between two banks. There is NO collateral whatsoever employed in the lending or borrowing of deposits between banks. You use "lines of credit", normally called "Limits" which are determined by credit committees at each bank and are pretty fixed or revised in times of great stress. But there is NO COLLATERAL WHATSOEVER. Collateral is used in repos. Repos, by definition, are not between two banks but there has to be at least one non-bank actor. Limits between a bank and a non-bank (a bank customer) are THOUSANDS of times smaller than between banks. Now, if you are lending, as a bank, in the interbank market, at 2% in 3 months, it does not really matter if repos are at 1000% bid, because you have no limit (or have filled it up) towards that bidder. There is no arbitrage possibility for the majority of banks. That is why these spikes occur and why it takes time for them to be arbitraged out. This has been going on since God was a boy, I have seen it and traded trough it dozens of times. It normally produces nothing but very short term stress in Eurodollars, just as it did this time. The Fed could (and regularly does) neutralize these effects, without any change to the underlying monetary policy they are running. As the Fed pointed out in its minutes, there was a huge spike in demand for "safe" assets as a result of the market derating Italian bonds and their implied safety and individual dealer's acceptance of them in repo operations. Who, in their right mind is going to accept BTPs as collateral (without a huge haircut) when the Finance Minister of Italy is talking about leaving the Euro and repaying the BTPs in Liras? This caused a huge spike in demand for USTs and Bunds, as a replacement for BTPs. That's it. Nothing more to see here. Purely technical.
    • VP
      Vincent P.
      19 September 2018 @ 19:30
      So,are you suggesting Banks holding BTP's as collateral drew cash to purchase UST's?/Bunds to protect against non-bank loans? Who's to say those next time non-bank loans do in fact default and snowball should other Banks have weak collateral in other assets at the same time? US rate differentials continue to expand since no other CB's have any kind of rate increase glide path established to mitigate such stress. Is this truly or merely technical and nothing to be concerned about? Wami missing? I'm no expert, maybe you are but it is possible that we could see more persistent degradation in market sentiment from deviations in asset pricing from rate differentials, I wouldn't be surprised this subject triggers another credit event. Equities (namely tech seem to have the most difficulty here at 3.08% US 10yr. Man that's rough, 3.08%. What if it's 4%,,,5%. Tell you what,,, unless we see back to back GDP's of 4+% with manageable inflation, this thing ain't goin' nowhere from here. Or, maybe it will just keep going in perpetuity and we all remain complacent. Admittedly, it has been the most beneficial approach.
    • AM
      Andrew M.
      19 September 2018 @ 20:01
      Why weren't they using BTPs as colleral? European banks bidding USTs and bunds because they're worried about using BTPs as collateral (at least Italian banks, no?). That might seem nonsensical, but they are ECB / Germany back-stopped. Also, EZ banks have a silly amount of exposure to Turkey / EM (over 20% equity for some). Isn't this all the same as any bank run, really? In 2008 agency backed MBS were rejected. It's a race to the bottom as confidence collapses. BTPs, MBS, ABS, and it goes on.
    • LR
      Lucie R.
      20 September 2018 @ 15:21
      I think you gravely misunderstand the function of collateral in the financial system we have at present. Our whole global financial system is based on the collateral. And post 2007 the system is malfunctioning. If you want to test you conviction that I am wrong please read an excellent book my Manmohan Singh (IMF, ex UBS) "Collateral and Financial Plumbing" to learn just how essential the collateral is, and why we need to pay more attention to the repo rates, Eurodollar system trends, etc).
    • NG
      Nick G.
      20 September 2018 @ 19:39
      Hi Lucie, thanks for the advice. I would read that book, if I just had the time. You see, I am too busy doing in real life with real money what the kid opines about.
  • TJ
    Terry J.
    19 September 2018 @ 11:51
    Brilliant analysis from the undisputed eurodollar system king! Just this one interview with Jeff makes my RVTV subscription value for money. If only policy making global central bankers had the humility to listen and learn from Jeff about the all-important eurodollar system, the global economy would be in much better shape. I love Jeff's wit when he suggests that the central banks might be right in their interpretation of what occurred in May, before quickly adding "It would be the first time!" So true! Thank you RVTV for this priceless video.
    • LR
      Lucie R.
      20 September 2018 @ 15:22
      Totally agree with you. I would say it in exactly the same words!
  • CD
    Chris D.
    19 September 2018 @ 11:34
    Soo... what do we do then? Long USD? Short EUR? Long gold? Long TLT? Long silver? Short S&P 500? Nothing actionable here, just confusion...
    • CM
      Christopher M.
      19 September 2018 @ 13:12
      It’s not EUR/USD. This isn't in the ”trade ideas” section my friend, don't ask something of a video it is not advertising to be.
    • MK
      Michael K.
      19 September 2018 @ 13:12
      I don’t like being a downer or being one of the ignorant “what’s the trade NOW???” Types, but I’ve been trying to understand Jeff for the last two years through the macrovoices and zero hedge articles, and I just don’t get his point.
    • MB
      Matthias B.
      19 September 2018 @ 13:20
      he may not have stated the investment direction but it becomes obvious from his arguments. If Jeff's point of another deflationary phase proves accurate, then S&P puts, TLT, long gold should do fine as you rightly observe.
    • BM
      Beat M.
      19 September 2018 @ 13:49
      Brace Position?
    • RA
      Robert A.
      19 September 2018 @ 17:37
      It’s hard to get a trade idea out of a fairly evenly chanced Binary outcome, except for possibly positioning for both outcomes, IMO.
  • DC
    Dale C.
    19 September 2018 @ 11:08
    Take this and add in the ECRI position that the Global Economy is actually declining and you can see the dark clouds of recession coming our way
  • PD
    Peter D.
    19 September 2018 @ 11:06
    The implications of Jeff Snider's thesis - that the eurodollar market is so large and opaque that the Federal Reserve no longer has effective vision and control of the money supply - are profound. For one, America - without knowing it - just might be in a depression with no clear path out. But RV needs to help Jeff put this stuff into English. That requires an interviewer who can ask Jeff questions in a way that the viewers would ask them. It's time for Grant Williams to get on a plane.
    • V!
      Volatimothy !.
      19 September 2018 @ 13:00
      I’ve been asking for an interviewer as well. I’m sure sure they will listen if we keep nagging. Expert view is a great series, but the lack of an interviewer diminishes some of that quality.
    • RA
      Robert A.
      19 September 2018 @ 17:41
      Yup, excellent observation. I enjoy listening to Jeff always, but I think you nailed it with the interviewer (and RV has some EXCELLENT ones) as it would help us have Jeff target certain specific areas of concern and potential actions to take.
    • LP
      Lynn P.
      19 September 2018 @ 19:56
      Actually Erik Townsend at Macroadvisors does an excellent job translating Jeff-talk into language anyone can understand.
    • EK
      Emil K.
      20 September 2018 @ 14:52
      If you want to read Jeff's work 'in English' then I recommend his weekly RealClear Markets essay: https://www.realclearmarkets.com/authors/jeffrey_snider/ If you want to read him 'in Eurodollar-speak' but with the benefit of charts, data and links I recommend his daily Alhambra Investment Partners blog posts: http://www.alhambrapartners.com/author/jsnider/ My strong recommendation is to commit to reading every single one his posts for one month straight. You won't get it, at first. But then, it will, and "How far your eyes may pierce I cannot tell."
  • RA
    Richard A.
    19 September 2018 @ 11:01
    Jeff is awesome. He barely scratched the surface here on how the Eurodollar system functions. You can listen to 6 hours of his Eurodollar University for free on macrovoices.com, timeless section, and 5 hours of a dollar discussion with Jeff, Mark Yusko, Luke Gromen and Erik Townsend as well. Love my Real Vision and my Macrovoices!
  • KW
    Kieran W.
    19 September 2018 @ 10:23
    Legend!
  • JH
    Joe H.
    19 September 2018 @ 09:36
    Excellent. Check out his Macrovoices series for much more detail.
  • MT
    Mike T.
    19 September 2018 @ 09:31
    at long last, someone of real substance willing and able to explain, within the limitation of available time, how he arrived at his conclusions. I await with interest to see the response from other RV subscribers to his non-mainstream, but extremely well articulated thesis.

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