The Dollar"s Reign As The Global Reserve Currency Is Running Out - Fast

The dollar’s hegemony over the global financial system can’t last forever. Like all things, it will eventually come to an end.

The only question left, as MacroVoices" Erik Townsend puts it, is whether we’re in the second inning and there’s going to be another hundred years of the dollar serving as the world’s global reserve currency? Or whether we’re in the bottom of the ninth and it’s all about to fall apart? Or maybe somewhere in between.

In an interview with Jeffrey Snider, CIO at Alhambra Partners, Luke Gromen, founder of Forest for the Trees, and Mark Yusko, founder and fund manager for Morgan Creek, Townsend explores the issue in greater detail. For many, the decline of the dollar as the world’s reserve currency is difficult to imagine. But the first blow to the petrodollar system has already been delivered: By refusing to accept oil payments in dollars, Venezuela has demonstrated to the world that an alternative system to the petrodollar is indeed possible. Furthermore, Latin America’s socialist paradise has begun publishing an oil-price index denominated in yuan. We"ve also highlighted reports that Russia, Venezuela and Iran - three countries that have trouble accumulating dollars because of Treasury Department sanctions - are considering launching a cryptocurrency backed by oil.

Townsend begins his interview with Gromen, who points out that, counterintuitively, the dollar’s rapid appreciation beginning in Q3 2014 has coincided with a drop in the share of global trade settled in dollars. Gromen predicts that this trend will continue to benefit the dollar – until it doesn’t.

I would probably say in the later innings. Certainly the last third of the game. Maybe the eighth inning.

 

The reason I say that is that, given the Eurodollar system as it’s structured, early on, if any nations or major parties wanted to move away from using the dollar for any number of reasons, ironically, what that moving away from the dollar would do would drive significant dollar strength. So, ironically, accelerating moves to dump the dollar in global trade usage, which in the long run is the most bearish development for the dollar, in the near term is the most bullish development for the dollar.

 

And so when we look back, we think, beginning in 3Q14 was when you started to see a marked acceleration in the dollar’s share loss in global trade. And, in particular, in energy trade centered between China and Russia. And so we think things began to accelerate in 3Q14 and, like we’ve said, the process of moving away from the dollar, or the dollar losing share in trade, is a big positive for the dollar – until it’s not.

However, Gorman believes an important shift happened in Q3 2016 when the dollar’s share loss in global trade started to accelerate. At that point, the dollar’s climb from 2014 and 2015 had already been unwound to a degree. Furthermore, Gorman posits that the dollar will weaken because it’s in the national security interest of the US for the dollar to weaken.

And then the “until it’s not” part of this movie began over a year ago now, in 3Q16. The reason we say that is because from 3Q14 until 3Q16 you saw a rising dollar, rising Libor, and a pretty traditional dollar strengthening cycle up to that point.

 

Where it started to become non-traditional relative to what pretty much any market participant trading in markets today – or even alive today – was when in 3Q16 rising dollar, rising Libor, drove a year-over- year decline in US tax receipts and therefore an increase in the US deficit as a percent of GDP. And it did this before you had a major emerging crisis.

 

This was the first time the US’s tax receipts declined before a major emerging market crisis, in a dollar-tightening cycle, in the post-Bretton Woods period.

 

And so, then, when you combine that with what has become effectively a system that requires as infinitum asset price appreciation in order to drive tax receipts for the US government, it sets up – beginning in 3Q16, where we started to get into late innings of this game. Where, not only are foreign creditors looking to move away from the dollar in trade usage for a number of reasons, but it also started to become a matter of national security for the

 

US government for the dollar to weaken.

Moving on, Townsend turns next to Jeff Snider, CIO at Alhambra investments. Snider explains how the Eurodollar system harms emerging-market economies and ultimately weakens the global financial system with each cycle of tightening.

The last tightening cycle, which lasted from 2014 through 2016, was particularly destabilizing, Snider explained, particularly for emerging markets like Brazil, Russia, and China. Many EM countries and corporations based in those countries issue dollar-denominated debt, which becomes more expensive to pay down when the greenback climbs.

But, for now at least, Snider expects the system to endure – if for no other reason than there’s nothing to take its place.

My position is that the dollar system, the supply of dollars in the global network of trade, continues to be a problem. But it isn’t a problem in a straight line. It’s not like it’s a straight-line decay from where you can draw a singular line from 2007 to 2013. Instead, it’s more of an intermittent type of thing where we have these alternating periods where things tighten up. Then they loosen up relatively.

 

But, as we go through each of these periods, the system is worse off for having gone through each one. And so the last tightening episode, starting in 2014 and lasting through 2016, was severe. Especially in emerging markets like Brazil, Russia, and China, the BRICs, because that’s where that part of the dysfunction was focused. More in FX and more into the Asian part of the system, as it has evolved since 2007 in that direction.

 

So, from my perspective, nothing has really changed except the system continues to get weaker. And I think right now where we are is we’re waiting for the next tightening event to start taking place. That there’s plenty of evidence that the system continues to decay, particularly with China and some of the other emerging markets.

 

So it doesn’t add up to a bullish position, necessarily. And I think that’s one of the things I want to define, is what exactly is a rising dollar? And it’s not bullish. And I’m certainly not of the position that most dollar bulls take, which is that the dollar goes up because the US is going to strengthen either economically, financially, or otherwise. I think that’s just not the case. So if we couch these in terms of the Eurodollar system and its continued decay, it’s not a bullish thing. But I think the dollar continues to go up, at least for the next little while. Because, frankly, there is nothing there to take its place.

 

So we’re kind of stuck with it.

Moving on, while Yusko didn’t feel comfortable attaching an expected expiration date for global dollar hegemony, he did draw some interesting parallels between the dollar and the British pound, the global reserve currency that immediately preceded the dollar.

You know, the interesting thing about world reserve currency is there have been lots of them over time. And I always joked that Americans are like Notre Dame football fans – they remember a past that never was. Notre Dame football fans think that we win all the time, which, clearly, we don’t. I was down in Miami. That was horrible.

 

And, you know, Americans think that we’ve always been the world reserve currency, for some reason. And we clearly haven’t. It’s only been since 1944. What’s interesting about that is the transition can last a long time. The sun never set on the British Empire for 70 years. They had the world reserve currency. They had the strongest navy.

 

And then in 1913 they invaded Mesopotamia, incurred a bunch of debt, the pound sterling collapsed, the dollar ascended. We, 31 years later, became the world reserve currency. And then in 2013, we (coincidentally) invaded Mesopotamia, incurred a bunch of debt, the dollar collapsed, and the Renminbi ascended.

 

Well, that hasn’t all happened yet. But I think it’s on its way to happening. And when I look around the world, I think it’s supremely clear that China has a plan. And for the last 50 years, their stated goal was a harmonious rise.

 

Doesn’t that sound poetic? It’s beautiful. It’s non-confrontational.

Ultimately, Yusko believes the Chinese yuan will replace the dollar as the world’s reserve currency sometime before 2050, the time by which Yusko expects China will become the dominant global power.

This contrasts with the consensus view, that, after the dollar, there won’t be one dominant currency, but several in separate spheres of influence.

The conversation is part one of a five-part series from MacroVoices exploring the dollar’s future as the world’s dominant currency.

Readers can listen to the whole conversation below:

An Interview with GoldCore Founder, Mark O’Byrne

An Interview with GoldCore Founder, Mark O’Byrne

“Uber-bull predictions of gold at over $5,000 per ounce are not beyond the realms of possibility…”

So says GoldCore founder and self-confessed gold bug, Mark O’Byrne.

Indeed, I recently caught up with Mark to get his thoughts on gold and what’s going on with it right now…

But before we got to the nitty-gritty, I started by asking him a little about his background:

GLENN: How long have you been in the gold business, Mark?

MARK: Well, I founded GoldCore more than 14 years ago and it’s been my passion and a huge part of my life ever since.

I strongly believe that due to the significant macroeconomic and geopolitical risks of today, saving and investing a portion of one’s wealth in gold bullion is prudent.

Indeed, I believe it will reward patient investors again in the coming years.

GLENN: Interesting… and I want to dig into your views on where you see gold going in a moment. First, though, for those who don’t know about GoldCore, can you tell us a little about what you do?

MARK: Sure. Basically, my passion is helping people to protect and grow their wealth with the provision of the safest forms of precious metals ownership – allocated and segregated physical gold, silver, platinum and palladium bullion coins and bars.

GLENN: And that ownership is key, right, as far as you’re concerned?

MARK: Definitely. We believe actual outright legal ownership of physical coins and bars is vital, rather than owning digital and paper gold.

We now have over 15,000 clients in over 140 countries with over $130 million in bullion assets under management & storage.

We completed the sale of our wealth management division in 2015 to focus on our core business. A major milestone of sales of over $1 billion was reached in September and it’s our next corporate goal to help our clients own $1 billion worth of coins and bars stored through us in the safest vaults in the world.

GLENN: Those are some big numbers – well done.
MARK: Thanks. It’s great to be moving in the right direction and you know I have long endeavoured to educate our clients and the wider public about our modern monetary and financial system and how a precious metals diversification remains an important way to grow wealth in today’s uncertain world.

Today, I am concerned that we have not learnt our lessons, we are repeating the same mistakes as before and there will be similar negative consequences for the unprepared.

So, the more we can help people protect themselves with physical gold, the better as far as I’m concerned.

GLENN: Makes sense. And obviously, you’re a major gold bull… but let me ask you, as I’m sure many other would ask the same: why do you think gold makes a good investment?

MARK: Well, that’s the question isn’t it?

Put it this way…

We live in a world beset by risks – Brexit, Trump, North Korea and major central banks, including the Bank of England, are all engaged in a gigantic monetary experiment.

Fact is, the UK – and most other country’s economic recoveries remain very fragile.

But gold is a proven safe haven asset and acts as a hedge against a fall in stocks and property and against currency devaluation. This was seen during the global financial crisis.

And it was the same for those with sterling exposure after Brexit, when gold rose 30% in sterling terms last year.
GLENN: In other words, over the long term gold has performed well?

MARK: Exactly. Since GoldCore was established in 2003, gold has seen average gains of over 12% per annum in British pound terms. I think that makes it pretty good investment.

GLENN: Indeed, here’s the thing, though… for a while now gold seems to have been underperforming. Many commentators suggest the gold price should be much higher right now? Do you agree?

MARK: Yes I do.

We believe gold will reach a new inflation adjusted high over $2,500 per ounce in the coming years.

Indeed, uber-bull predictions of gold at over $5,000 per ounce are not beyond the realms of possibility given the scale of the coming global debt crisis and the magnitude of the geo-political risks facing us.

GLENN: Hmm. That is very interesting. What do you think could be the next catalyst for a significant rise in the gold price?

MARK: For me it has to be geopolitics and the supply demand fundamentals…

We are on the cusp of peak gold production.

Gold production is South Africa has already fallen over 75% and it is the canary in the gold mine so to speak.

All the data is suggesting this and leading people in gold mining industry itself to say we are on the verge of peak gold.

GLENN: That’s interesting you mention mining there… I’m currently working on a project with our in-house gold mining expert all about an area in British Columbia called ’The Golden Triangle’… are you familiar with it?

MARK: Yeah, a little. I’m aware that there sizeable gold deposits in the area and that they are seeing a lot of exploration and increased mining.

Canada is interesting from a gold supply perspective as it is the 5th largest gold producer, after China, Australia, Russia and the U.S.

Arguably given its size and the inaccessibility of many of the mines, Canada likely has to best potential for an increase in gold production.
This supply will be needed to meet global demand as global gold production faces the challenge of peak gold production.

[Editor’s note: This backs up exactly what Simon Popple has been writing about in a new report he’s preparing right now. I’ll be in touch with more details on this as soon as it’s ready.]

GLENN: Great. I’m glad an expert like yourself is hearing the same things we are and I must thank you for all you’ve shared today. I think our readers will find it really interesting to get your view.

Before I let you go, though… before we started talking properly, I mentioned I saw a piece recently suggesting cryptocurrencies are now ‘the new gold’ when it comes to a safe haven asset and you, shall we say, smirked somewhat. What are your thoughts on that and cryptocurrencies generally?

MARK: Look, Bitcoin and cryptos generally, are very interesting and we were actually one of the first bullion dealers and wealth managers to write about them. We were even on CNBC back in 2015 discussing them.

And to be frank, the fledgling digital currency and the technology behind Bitcoin itself is exciting and has potential.

However, it has become massively speculative and has the hallmarks of a bubble after its meteoric 6-fold increase in the last year.

Coinbase, a leading bitcoin exchange saw 100,000 accounts opened in just 24 hours on November 1st, as reported by Bloomberg. In my opinion, Bitcoin is significantly overvalued in the short term.

Conversely, gold appears undervalued as it is flat to mildly higher this year and appears to be consolidating on last year’s gains.

It is important to think of gold in local currency terms. Gold is trading at just below £1,000 per ounce and is still 16% below its record nominal high of £1,160 per ounce in August 2011 and the height of the global financial crisis.

So, gold looks good value versus stocks, bonds and many property markets (especially London) – many of which are at all-time record highs and look overvalued. We are advising clients to rebalance portfolios.

GLENN: Great. Thanks again for taking the time to share your thoughts with our readers, Mark. It’s much appreciated.

Indeed, if people would like to find out more about Mark and what he and the team are GoldCore are up to, you can visit www.goldcore.com.

Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.

Brandon Smith Warns: The Saudi Coup Signals War And The New World Order Reset

Authored by Brandon Smith via Alt-Market.com,

For years now, I have been warning about the relationship of interdependency between the U.S. and Saudi Arabia and how this relationship, if ended, would mean disaster for the petrodollar system and by extension the dollar"s world reserve status.

In my recent articles "Lies And Distractions Surrounding The Diminishing Petrodollar" and "The Economic End Game Continues," I point out that the death of the dollar as the premier petrocurrency is actually a primary goal for establishment globalists.

Why?

Because in an effort to achieve what they sometimes call the "global economic reset," or the "new world order," a more publicly accepted centralized global economy and monetary framework is paramount. And, this means the eventual implementation of a single world currency and a single global economic and political authority above and beyond the dollar system.

But, it is not enough to simply initiate such socially and fiscally painful changes in a vacuum. The banking powers are not interested in taking any blame for the suffering that would be dealt to the masses during the inevitable upheaval (or blame for the suffering that has already been caused). Therefore, a believable narrative must be crafted. A narrative in which political intrigue and geopolitical crisis make the "new world order" a NECESSITY; one that the general public would accept or even demand as a solution to existing instability and disaster.

That is to say, the globalists must fashion a propaganda story to be used in the future, in which "selfish" nation-states abused their sovereignty and created conditions for calamity, and the only solution was to end that sovereignty and place all power into the hands of a select few "wise and benevolent men" for the greater good of the world.

I believe the next phase of the global economic reset will begin in part with the breaking of petrodollar dominance. An important element of my analysis on the strategic shift away from the petrodollar has been the symbiosis between the U.S. and Saudi Arabia. Saudi Arabia has been the single most important key to the dollar remaining as the petrocurrency from the very beginning.

The very first oil exploration and extraction deal in Saudi Arabia was sought by the vast international oil cartels of Royal Dutch Shell, Near East Development Company, Anglo-Persian, etc., but eventually fell into the hands of none other than the Rockefeller’s Standard Oil Company. The dark history of Standard Oil aside, this meant that Saudi business would be handled primarily by American interests. And the Western thirst for oil, especially after World War I, would etch our relationship with the reigning monarchy in stone.

A founding member of OPEC, Saudi Arabia was one of the few primary oil-producing nations that maintained an oil pipeline that expedited processing and bypassed the Suez Canal. (The pipeline was shut down, however, in 1983). This allowed Standard Oil and the United States to tiptoe around the internal instability of Egypt, which had experienced ongoing conflict which finally culminated in the civil war of 1952.

Considered puppets of the British Empire at the time, the ruling elites of Egypt were toppled by the Muslim Brotherhood, leading to the eventual demise of the British pound sterling as the top petro-currency and the world reserve. The British economy faltered and has never since returned to its former glory.

Perhaps we are seeing some parallels here?

Civil war may not be in the cards for Saudi Arabia; so far a quiet coup has been rather effective in completely changing the power base of the nation over the past few years. The primary beneficiary of that change in power has been crown prince Mohammed Bin Salman, who only answers to King Salman, an 81-year-old ruler barely involved in leadership.

To understand how drastic this coup has been, consider this - for decades Saudi Kings maintained political balance by doling out vital power positions to separate, carefully chosen successors. Positions such as Defense Minister, the Interior Ministry and the head of the National Guard. Today, Mohammed Bin Salman controls all three positions. Foreign policy, defense matters, oil and economic decisions and social changes are now all in the hands of one man.

But the real question is, who is behind that man?

Well, the recent political purge of various "neo-conservative" tied Saudis might lead some to believe that Prince Mohammed is seeking an end to globalist control of Saudi oil and politics.

These people would be wrong for a number of reasons.

Prince Mohammed"s revolutionary "Vision for 2030" developed as he entered power was touted as a means to end Saudi reliance on oil revenues to support economic stability. However, I believe this plan is NOT about ending reliance on oil, but ending reliance on the U.S. dollar. In fact, the plan indicates a move away from the dollar as the world"s petrocurrency and a de-pegging of the Riyal from the dollar.

Prince Mohammed has also established much deeper ties to Russia and China, creating bilateral agreements which may end up removing the dollar as the mechanism for oil trade between the nations.

You would think that this kind of strategy would be highly damaging to the West and to American interests in particular and that the corporate establishment would be doing everything in their power to stop it. However, this is not at all the case. In reality, the globalist establishment is fully behind Mohammed Bin Sulman"s "Vision for 2030."

Corporate behemoths such as the Carlyle Group (Bush family, etc), Goldman Sachs, Blackstone and Blackrock have ALL been backing the Vision for 2030 and Prince Mohammed through his Public Investment Fund (PIF), of which he is the chairman.

Trillions in capital are flowing through PIF, most of it from the coffers of globalist establishment companies. Once again I point out that the so-called "East versus West division" and the Eastern "opposition" to the globalists is complete nonsense; banking elites and globalists are the true influence behind the move away from the dollar, as the Saudi example and the Vision for 2030 shows. The end of the dollar as world reserve works in their favor — it is planned.

This does not end with the death of the dollar"s petro-status, though. These kinds of upsets in the power dynamic invariably lead to war. War acts as a kind of cleansing of the historical record; it tends to distract the public, for generations, from those that truly benefit from geopolitical and economic strife.

Prince Mohammed has already triggered conflicts with Yemen and Qatar, but this seems to have only been a precursor to greater kinetic displays of force. The next target appears to be Lebanon, and eventually Iran and Syria.

The first signal came with the resignation of Lebanon"s Prime Minister Saad Hariri on November 4, a resignation Hezbollah claims was forced by the Saudi government. Interestingly, Saad Hariri recorded the televised announcement in Saudi Arabia.

This shocking disruption to Lebanon"s political apparatus has been followed by an escalation in saber rattling by Saudi Arabia against Hezbollah (which is considered by many to be merely a puppet organization of the Iranian government). If official polls are to be believed, the Lebanese population is in extreme disagreement over Iran and Hezbollah, which could add to internal divisions and civil war if tensions continue to grow. Add to this the suspected (but officially denied) "secret visit" by Prince Mohammed to Israel in September, and the newfound "friendship" between the two nations in the months since, and we have quite a bit of momentum for a war in Lebanon.

The question is, will a war between Saudi Arabia and perhaps Israel against Hezbollah in Lebanon remain a proxy war, or will it gestate into a wider conflict drawing in Iran, Syria and perhaps even the U.S.?

First, keep in mind that Prince Mohammed has already frozen and/or confiscated approximately $800 billion in assets from his imprisoned political enemies. More than enough to fund a war campaign for several years, maybe even an expanded war against Iran.

Trump"s rhetoric against Iran and his re-institution of sanctions seems to coincide nicely with the increasing tension between the Saudis and Hezbollah. Israel attempted an invasion of Lebanon in 2006 and was soundly and embarrassingly defeated. But, the Israeli government does still showcase a willingness to enter into a ground war in the region, and with the combined forces of the Saudis and the Israelis, we might see a different outcome. Iran would be forced to intervene.

Syria under the Assad regime would also most likely be drawn in through its mutual defense pact with Iran.

I believe that major powers like the U.S. and Russia will probably not become involved in a wider sense, but continue to insert covert forces into the region and support opposing nations through funding and armaments. As with North Korea, I would not expect "world war" on the scale of a nuclear conflagration to develop in the Middle East.

What I do expect is something far more devastating - namely an accelerated disintegration of our already collapsing economic structure as war plays out abroad and the loss of the dollar"s world reserve and petro-status hits us hard at home. So far, in my view it appears that the insanity in Saudi Arabia, (along with the continued war drums against North Korea), is a perfect trigger point that provides a catalyst for mass distraction.

World economic war is the real name of the game here, as the globalists play puppeteers to East and West. It is a geopolitical crisis they will have created to engineer public support for a solution they predetermined.

Steve Keen: How I Sold Out To The Putin-Soros-Murdoch Conspiracy To Destroy Western Civilization

Authored by Steve Keen via RT.com,

I was delighted to find myself in the Top Ten (alright; top 15) of the European Values list of 2,326 “Useful Idiots” appearing regularly on RT shows, and thus legitimizing Vladimir Putin’s attempt to destroy Western civilization as we know it.

Why delighted? Because it completes the set of conspiracies to which I can now be accused of belonging. They include:

• 
  

  The Putin Conspiracy, since I am regularly interviewed on Russia Today (and even worse, I now get paid to write for RT!);

  
  


• 
  

  The Soros Conspiracy, since my research, has been funded by the Institute for New Economic Thinking (INET) which he established;

  
  


• 
  

  The Murdoch Conspiracy, since I appear every week on Sky News Australia with Carson Scott, and I used to get paid by News Ltd to write a weekly column; and

  
  


• 
  

  The Alt-Right Conspiracy, since I’ve signed a book contract with Vox Day’s publishing firm Castalia House.

  
  

So not only am I a “useful idiot,” I’m a useful idiot for four contradictory conspiracies. Does that make me a double-double agent?

No, it makes me someone who’s quadruple pissed off with people who attempt to understand the world from the perspective of conspiracy theories in the first place. I don’t deny the existence of conspiracies: in fact, far from it, because they’re everywhere. What I do deny is the implicit assumption that the conspirators understand the system they’re attempting to manipulate.

For example, I’ve heard plenty of conspiracy theorists assert that the 2008 financial crisis was caused by the Federal Reserve/George Soros (Hi George!)/Hedge Funds/Academic-Economists-Who-Peddle-The-Efficient-Markets-Hypothesis, and “they” profited from it.

This implies “they” knew what “they” were doing. Pardon me, but I’ve met many of these protagonists - and in the case of academic economists, I’ve worked with them for 30 years. “They” don’t have a clue (except George). Even those that were actively conspiring—like many hedge funds during the subprime bubble were doing so on the basis of utterly deluded theories about how the system they were trying to game actually worked. Where apparent conspiracies did work, like Soros’s punt against the British Pound decades ago, they did so because a CSP (Clever Sinister Person) bet against the conventional wisdom of others who thought they understood the system (and did not), rather than because the CSP set up the whole thing in the first place.

Higher standards

As for the argument that I’m unwittingly playing into Vladimir Putin’s malevolent plans for Western democracy by being interviewed on RT, I have three rebuttals.

The first and most important is that RT simply has better programs and better journalists than, for example, the BBC.

I would gladly discuss issues such as what caused the 2008 economic crisis on the BBC, were I asked. But the BBC (and most other Western outlets that European Values and other conspiracy theorists think are superior to RT) just isn’t interested in the issues. With precisely two honorable exceptions, BBC programs and its journalists have only been interested in a story involving me when there was a personality angle to it.

I have been interviewed by the BBC 11 times since I arrived in the UK in mid-2014. Only two interviews were motivated by the journalist’s or program’s genuine interest in my non-orthodox approach to economics: a HARDtalk interview in August 2016, and an interview by Alice Baxter in January 2016.

Fully six were about my friend Yanis Varoufakis when he was Greece’s finance minister.

Two others were on November 3rd, 2016, about some news story that I’ve since forgotten.

And my most recent interview on the BBC, on September 14th this year to mark the 10th anniversary of the collapse of Northern Rock, was the clincher for me. That failure was the most significant financial event in the UK in almost eighty years: it was the first bank run since the Great Depression. I was pleased to be asked to discuss it on air, and I expected a serious treatment of it.

Instead, the item consisted of a two-minute introduction by one presenter, and a three-minute exchange with another which rates as one of the most vacuous interviews I’ve experienced in forty-five years of being interviewed by journalists (my first was as a 19-year-old politically active student at the University of Sydney in 1972). I did my best to answer inane questions seriously, but as one member of my Patreon community commented, you could see my answers parting the journalist’s hair. That was a cruel remark, but frankly a fair one.

BBC vacuum

Which raises the second riposte: why aren’t there shows that are interested in the in-depth analysis of economic issues on the BBC? Shows like the RT staples on which I was and continue to be interviewed regularly: Capital Account, the Boom Bust, the Keiser Report, Renegade Inc, the 7pm News with Bill Dod, and Going Underground.

It’s not because the programs were devised by dastardly Russian stooges: most of them were developed by independent broadcasters and pitched to a number of outlets. I know for a fact that at least one of these shows was pitched to the BBC before it was offered to RT. They weren’t interested, but RT was.

This isn’t because the BBC - and most Western media outlets - were too highbrow for these programs: the opposite is more the case. The BBC and its commercial rivals seem more interested in infotainment than analysis, more concerned with filling time with fancy graphics and pretty (male and female) talking torsos, than in actually getting to grips with the serious economic issues in a seriously challenging world.

The third rebuttal, which I’ll develop in more depth in a later column, is that if I can help strengthen Russia as a rival axis of power to the USA, then I think that’s a good thing. I’d rather have a bipolar (or tripolar) battle for global dominance between two (or more) Superpowers, than have a unipolar world with a single Superpower, led by a leader with a bipolar personality.

Ex-HSBC Trader Involved In Front-Running Scandal To Be Extradited To U.S.

It"s not shaping up to be a great week for a group of former HSBC FX traders who decided to front-run a massive $3.5 billion currency trade placed by one of their clients and net their bank some $8 million in illicit profits in the process.  Earlier this week, Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying "I think we got away with it," was convicted by a jury in New York of fraud. 

Now we learn that Johnson"s partner in crime (allegedly, of course), Stuart Scott, has lost his court battle in the U.K. and will be extradited to the U.S. to face charges.

Not surprisingly, Scott expressed some "disappointment" with the ruling shortly after being dismissed from court.

*SCOTT SAYS HE IS DISAPPOINTED BY EXTRADITION RULING

*SCOTT SAYS U.S. CASE IS FLAWED, INACCURATE

As we"ve noted previously, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. but Stuart Scott has remained free at his home in the London suburbs...until now.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

A few weeks ago, details of court filings began to leak from Scott"s British extradition case which allowed us to learn exactly how much each HSBC trader made for his trading book in the illicit scheme that netted a total of $8 million in profits...Scott took second place with a total profit of $585,105.  Per Bloomberg:

"The defendant personally obtained over $500,000 profit," the U.S. Justice Department, represented by British lawyer Mark Summers, said in written arguments prepared for the hearing. "The offenses of which he is accused are highly serious. They involve a systematic and organized conspiracy to defraud, committed in breach of trust."

 

Scott was charged, along with his ex-boss Mark Johnson, by the Justice Department in July 2016 with using insider knowledge to front-run a $3.5 billion currency deal by Cairn Energy Plc that made the bank $8 million. Johnson is on trial in New York and a jury there could begin deliberations this week.

Here"s how everyone else made out per the DOJ:

For those who haven"t followed the story closely, according to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

Of course, we"re sure this is all just an effort to "criminalize behavior that is normal"...at least on Wall Street. 

NYU"s "Dean Of Valuation": Bitcoin"s Not A Fraud, It"s A Currency

Aswath Damodaran, a professor of finance at the NYU"s Stern School of Business, disagrees with JPMorgan Chase CEO Jamie Dimon that bitcoin is a "fraud," and explains that, in his view, the cryptocurrency is a currency rather than an asset in a new blog post.

Often referred to as Wall Street"s "Dean of Valuation," Damodaran concludes:

"I don"t believe cryptocurrencies are now or ever will be an asset class," or that they will change the "fundamental truths of risk, investing and management."

Via Musings on Markets blog,

As I have noted with my earlier posts on crypto currencies, in general, and bitcoin, in particular, I find myself disagreeing with both its most virulent critics and its strongest proponents.  Unlike Jamie Dimon, I don"t believe that bitcoin is a fraud and that people who are "stupid enough to buy it" will pay a price for that stupidity. Unlike its biggest cheerleaders, I don"t believe that crypto currencies are now or ever will be an asset class or that these currencies can change fundamental truths about risk, investing and management. The reason for the divide, though, is that the two sides seem to disagree fundamentally on what bitcoin is, and at  the risk of raising hackles all the way around, I will argue that bitcoin is not an asset, but a currency, and as such, you cannot value it or invest in it. You can only price it and trade it.

Assets, Commodities, Currencies and Collectibles

Not everything can be valued, but almost everything can be priced. To understand the distinction between value and price, let me start by positing that every investment that I will look at has to fall into one of the following four groupings:

1. Cash Generating Asset: An asset generates or is expected to generate cash flows in the future. A business that you own is definitely an asset, as is a claim on the cash flows on that business. Those claims can be either contractually set (bonds or debt), residual (equity or stock) or even contingent (options). What assets share in common is that these cash flows can be valued, and assets with high cash flows and less risk should be valued more than assets with lower cash flows and more risk. At the same time, assets can also be priced, relative to each other, by scaling the price that you pay to a common metric. With stocks, this takes the form of comparing pricing multiples (PE ratio, EV/EBITDA, Price to Book or Value/Sales) across similar companies to form pricing judgments of which stocks are cheap and which ones are expensive.

 

2. Commodity: A commodity derives its value from its use as raw material to meet a fundamental need, whether it be energy, food or shelter. While that value can be estimated by looking at the demand for and supply of the commodity, there are long lag and lead times in both that make that valuation process much more difficult than for an asset. Consequently, commodities tend to be priced, often relative to their own history, with normalized oil, coal wheat or iron ore prices being computed by averaging prices across long cycles.

 

3. Currency: A currency is a medium of exchange that you use to denominate cash flows and is a store of purchasing power, if you choose to not invest. Standing alone, currencies have no cash flows and  cannot be valued, but they can be priced against other currencies. In the long term, currencies that are accepted more widely as a medium of exchange and that hold their purchasing power better over time should see their prices rise, relative to currencies that don"t have those characteristics. In the short term, though, other forces including governments trying to manipulate exchange rates can dominate. Using a more conventional currency example, you can see this in a graph of the US $ against seven fiat currencies, where over the long term (1995-2017), you can see the Swiss Franc and the Chinese Yuan increasing in price, relative to the $, and the Mexican Peso, Brazilian Real, Indian Rupee and British Pound, dropping in price, again relative to the $.

 

 

4. Collectible: A collectible has no cash flows and is not a medium of exchange but it can sometimes have aesthetic value (as is the case with a master painting or a sculpture) or an emotional attachment (a baseball card or team jersey). A collectible cannot be valued since it too generates no cash flows but it can be priced, based upon how other people perceive its desirability and the scarcity of the collectible. 

Viewed through this prism, Gold is clearly not a cash flow generating asset, but is it a commodity? Since gold"s value has little to do with its utilitarian functions and more to do with its longstanding function as a store of value, especially during crises or when you lose faith in paper currencies, it is more currency than commodity. Real estate is an asset, even if it takes the form of a personal home, because you would have had to pay rental expenses (a cash flow), in its absence. Private equity and hedge funds are forms of investing in assets, currencies, commodities or collectibles, and are not separate asset classes. 

Investing versus Trading

The key is that cash generating assets can be both valued and priced, commodities can be priced much more easily than valued, and currencies and collectibles can only be priced. So what? I have written before about the divide between investing and trading and it is worth revisiting that contrast. To invest in something, you need to assess its value, compare to the price, and then act on that comparison, buying if the price is less than value and selling if it is greater. Trading is a much simpler exercise, where you price something, make a judgment on whether that price will go up or down in the next time period and then make a pricing bet. While you can be successful at either, the skill sets and tool kits that you use are different for investing and trading, and what makes for a good investor is different from the ingredients needed for good trading. The table below captures the difference between trading (the pricing game) and investing (the value game).

As I see it, you can play either the value or pricing game well, but being delusional about the game you are playing, and using the wrong tools or bringing the wrong skill set to that game, is a recipe for disaster.

What is Bitcoin?

The first step towards a serious debate on bitcoin then has to be deciding whether it is an asset, a currency, a commodity or collectible. Bitcoin is not an asset, since it does not generate cash flows standing alone for those who hold it (until you sell it).  It is not a commodity, because it is not raw material that can be used in the production of something useful. The only exception that I can think off is that if it becomes a necessary component of smart contracts, it could take on the role of a commodity; that may be ethereum"s saving grace, since it has been marketed less as a currency and more as a smart contracting lubricant.  The choice then becomes whether it is a currency or a collectible, with its supporters tilting towards the former and its detractors the latter. I argued in my last post that Bitcoin is a currency, but it is not a good one yet, insofar as it has only limited acceptance as a medium of exchange and it is too volatile to be a store of value. Looking forward, there are three possible paths that I see for Bitcoin as a currency, from best case to worst case.

1. The Global Digital Currency: In the best case scenario, Bitcoin gains wide acceptance in transactions across the world, becoming a widely used global digital currency. For this to happen, it has to become more stable (relative to other currencies), central banks and governments around the world have to accept its use (or at least not actively try to impede it) and the aura of mystery around it has to fade. If that happens, it could compete with fiat currencies and given the algorithm set limits on its creation, its high price could be justified.

 

2. Gold for Millennials: In this scenario, Bitcoin becomes a haven for those who do not trust central banks, governments and fiat currencies. In short, it takes on the role that gold has, historically, for those who have lost trust in or fear centralized authority. It is interesting that the language of Bitcoin is filled with mining terminology, since it suggests that intentionally or otherwise, the creators of Bitcoin shared this vision. In fact, the hard cap on Bitcoin of 21 million is more compatible with this scenario than the first one. If this scenario unfolds, and Bitcoin shows the same staying power as gold, it will behave like gold does, rising during crises and dropping in more sanguine time periods. 

 

3. The 21st Century Tulip Bulb: In this, the worst case scenario, Bitcoin is like a shooting star, attracting more money as it soars, from those who see it as a source of easy profits, but just as quickly flares out as these traders move on to something new and different (which could be a different and better designed digital currency), leaving Bitcoin holders with memories of what might have been. If this happens, Bitcoin could very well become the equivalent of Tulip Bulbs, a speculative asset that saw its prices soar in the sixteen hundreds in Holland, before collapsing in the aftermath.

I would be lying if I said that I knew which of these scenarios will unfold, but they are all still plausible scenarios. If you are trading in Bitcoin, you may very well not care, since your time horizon may be in minutes and hours, not weeks, months or years. If you have a longer term interest in Bitcoin, though, your focus should be less on the noise of day-to-day price movements and more on advancements on its use as a currency. Note also that you could be a pessimist on Bitcoin and other crypto currencies but be an optimist about the underlying technology, especially block chain, and its potential for disruption.

Reality Checks

Combining the section where I classified investments into assets, commodities, currencies and collectibles with the one where I argued that Bitcoin is a "young" currency allows me to draw the following conclusions:

1. Bitcoin is not an asset class: To those who are carving out a portion of their portfolios for Bitcoin, be clear about why you are doing it. It is not because you want to a diversified portfolio and hold all asset classes, it is because you want to use your trading skills on Bitcoin to supercharge your portfolio returns. Lest you view this as a swipe at cryptocurrencies, I would hasten to add that fiat currencies (like the US dollar, Euro or Yen) are not asset classes either.

 

2. You cannot value Bitcoin, you can only price it: This follows from the acceptance that Bitcoin is a currency, not an asset or a commodity. Any one who claims to value Bitcoin either has a very different definition of value than I do or is just making up stuff as he or she goes along.

 

3. It will be judged as a currency: In the long term, the price that you attach to Bitcoin will depend on how well it will performs as a currency. If it is accepted widely as a medium of exchange and is stable enough to be a store of value, it should command a high price. If it becomes gold-like, a fringe currency that investors flee to during crises, its price will be lower. Worse, if it is a transient currency that loses all purchasing power, as it is replaced by something new and different, it will crash and burn.

 

4. You don"t invest in Bitcoin, you trade it: Since you cannot value Bitcoin, you don"t have a critical ingredient that you need to be an investor. You can trade Bitcoin and become wealthy doing so, but it is because you are a good trader.

 

5. Good trader ingredients: To be a successful trader in Bitcoin, you need to recognize that moves in its price will have little do with fundamentals, everything to do with mood and momentum and big price shifts can happen on incremental information.

Would I buy Bitcoin at $6,100? No, but not for the reasons that you think. It is not because I believe that it is over valued, since I cannot make that judgment without valuing it and as I noted before, it cannot be valued. It is because I am not and never have been a good trader and, as a consequence, my pricing judgments are suspect.

If you have good trading instincts, you should play the pricing game, as long as you recognize that it is a game, where you can win millions or lose millions, based upon your calls on momentum. If you win millions, I wish you the best! If you lose millions, please don"t let paranoia lead you to blame the establishment, banks and governments for why you lost. Come easy, go easy!

*  *  *

As a reminder, CoinDesk reports that back in July, Damodaran also argued that cryptocurrencies were quickly becoming a preferred alternative to gold for people who don"t trust traditional fiat currencies.

Ex-HSBC Currency Trader Convicted Of Fraud In Massive Front-Running Scandal

Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying "I think we got away with it," has just been convicted by a jury in New York of fraud for front-running a $3.5 billion transaction that netted his firm some $8 million in illicit profits.  Per Bloomberg:

Former HSBC Holdings Plc currency trader Mark Johnson was found guilty of fraud for front-running a $3.5 billion client order, a victory for U.S. prosecutors as they seek to root out misconduct in global financial markets.

 

He was convicted on Monday after a month-long trial in Brooklyn, New York.

 

Johnson was the first person to be tried since the global currency-rigging scandal that resulted in global banks paying more the $10 billion in penalties. The charges stemmed from HSBC’s execution of a trading order from Cairn Energy Plc in 2011 to convert the proceeds of a unit sale from dollars into pounds.

 

"This sends a signal to traders and banks that this type of behavior is absolutely inappropriate and will be pursued by the government," Michael Weinstein, a former Justice Department trial attorney, said. "That’s a big hammer over the banks -- it may force them to monitor and self-regulate their people."

For those who haven"t followed this particular story, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. following a nearly 3-year investigation into efforts on the part of several large investment banks to rig FX markets but Stuart Scott has remained free at his home in the London suburbs pending the outcome of the extradition proceedings.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

According to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

As we"ve noted over the past couple of weeks, tidbits of the prosecution"s case has made it"s way into the media recently, including reports last week that Johnson used the code phrase "my watch is off" to trigger trading by HSBC traders all around the globe.  Meanwhile, as Law360 recently pointed out, jurors also had the opportunity to hear some rather damning recordings of Johnson"s phone conversations with traders, including the one below in which he says "I think we got away with it."

Prosecutors played a recording of a call between Johnson and Stuart after the 3 p.m. fix as they debrief, with Johnson telling Stuart, “I think we got away with it,” but Stuart replies that HSBC executive Dipak Khot — who acted as the go between with Cairn and HSBC — thinks otherwise and suspects that Cairn will protest.

 

Johnson in turn argued that Cairn is still in a better position than it would have been if it had taken any other offers to execute the deal in alternate methods as opposed to the fix. “They don’t really have a lot of room to complain,” he said on the call.

 

But as Cahill was trading ahead of the 3 p.m. fix on the day of the transaction, Johnson sounded more concerned about “ramping it up” too much. Jurors heard another recording of a call between Johnson and Scott, with Scott talking to Cahill in the background as he trades, in which Johnson cautions against spiking the price of sterling too high out of concern that Cairn will "squeal."

 

“Frank, Frank if it rates above 30 at the fix, I think they’ll start to ah ... if you need to buy them, obviously, but ideally don’t ramp it above 30,” Scott tells Cahill. “Do what you need to do, but ... sorry I know I’m probably not helping much...I’ll leave you alone.”

 

“Is he getting a bit tetchy?” Johnson asks.

 

“No, he’s not,” Scott replies.

 

“He can’t, fucking moaning bastard,” Johnson said. “I do all the work and he gets all the glory.”

 

Jurors heard that days later in a call with HSBC forex trader Ed Carmichael in Hong Kong, Johnson told him that HSBC’s London forex trading desk, “just had a bonanza” on the Cairn deal, and described his response when Cairn sought an explanation on the less than stellar result for the oil and gas developer.

Of course, when HSBC"s client complained about their less than stellar execution price, Johnson admits that he blamed all the usual suspects: "Russians, other central banks, all that sort of stuff."

“And they said, well you know it jumped up a bit, who else was buying? And we said the usual Russian names, other central banks, all that sort of stuff,” Johnson said on the call.

As we noted last week, nearly a dozen HSBC traders around the globe netted over $8 million in profits by allegedly front-running their own client.

Of course, while the DOJ will undoubtedly celebrate their conviction in the media, there is little doubt that Mark Johnson"s "pre-hedging" scandal is hardly unique for an industry that has been built on front-running clients.

"I Think We Got Away With It": HSBC Trader"s Fate Left To Jurors After Damning Phone Recordings Revealed

After weeks of testimony, the fate of former HSBC trader Mark Johnson, who stands accused of orchestrating a massive international front-running scheme that netted his firm over $8 million in illicit profits, has been left in the hands jurors.

Over the past couple of weeks, tidbits of the prosecution"s case has made it"s way into the media, including reports last week that Johnson used the code phrase "my watch is off" to trigger trading by HSBC traders all around the globe.  Meanwhile, as Law360 recently pointed out, jurors also had the opportunity to hear some rather damning recordings of Johnson"s phone conversations with traders, including the one below in which he says "I think we got away with it."

Prosecutors played a recording of a call between Johnson and Stuart after the 3 p.m. fix as they debrief, with Johnson telling Stuart, “I think we got away with it,” but Stuart replies that HSBC executive Dipak Khot — who acted as the go between with Cairn and HSBC — thinks otherwise and suspects that Cairn will protest.

 

Johnson in turn argued that Cairn is still in a better position than it would have been if it had taken any other offers to execute the deal in alternate methods as opposed to the fix. “They don’t really have a lot of room to complain,” he said on the call.

 

But as Cahill was trading ahead of the 3 p.m. fix on the day of the transaction, Johnson sounded more concerned about “ramping it up” too much. Jurors heard another recording of a call between Johnson and Scott, with Scott talking to Cahill in the background as he trades, in which Johnson cautions against spiking the price of sterling too high out of concern that Cairn will "squeal."

 

“Frank, Frank if it rates above 30 at the fix, I think they’ll start to ah ... if you need to buy them, obviously, but ideally don’t ramp it above 30,” Scott tells Cahill. “Do what you need to do, but ... sorry I know I’m probably not helping much...I’ll leave you alone.”

 

“Is he getting a bit tetchy?” Johnson asks.

 

“No, he’s not,” Scott replies.

 

“He can’t, fucking moaning bastard,” Johnson said. “I do all the work and he gets all the glory.”

 

Jurors heard that days later in a call with HSBC forex trader Ed Carmichael in Hong Kong, Johnson told him that HSBC’s London forex trading desk, “just had a bonanza” on the Cairn deal, and described his response when Cairn sought an explanation on the less than stellar result for the oil and gas developer.

Of course, when HSBC"s client complained about their less than stellar execution price, Johnson admits that he blamed all the usual suspects: "Russians, other central banks, all that sort of stuff."

“And they said, well you know it jumped up a bit, who else was buying? And we said the usual Russian names, other central banks, all that sort of stuff,” Johnson said on the call.

For those who haven"t followed this particular story, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. following a nearly 3-year investigation into efforts on the part of several large investment banks to rig FX markets but Stuart Scott has remained free at his home in the London suburbs pending the outcome of the extradition proceedings.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

According to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

As we noted last week, nearly a dozen HSBC traders around the globe netted over $8 million in profits by allegedly front-running their own client.

Of course, Johnson would like for you to know that this entire case is just "much ado about nothing" as he never intended to "front-run" his client but rather was just engaging in some innocent "pre-hedging"...which is a new term for us...must be a technical term only used by European FX traders.

Ray Dalio Is Shorting The Entire EU

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.

Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks

Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. [..] When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe . Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…

If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.” [..] “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.”

Sounds like Carney knows a thing or two that Juncker et al haven’t sufficiently thought through. The EU plans to move all – or most- derivatives clearing to the continent, but such a thing is anything but easy. That’s another very tangled web, and an expensive one to boot. Brussels probably wants to use the issue to put pressure on London in some way, but a hard Brexit might make that unlikely if not worse. Bloomberg from June this year:

EU Targets Derivative-Clearing Giants With Relocation Threat

“Today, a significant amount of financial instruments denominated in the currencies of the member states are cleared by recognized third-country CCPs,” according to the proposal. “For example, the notional amount outstanding at Chicago Mercantile Exchange in the U.S. is €1.8 trillion for euro-denominated interest-rate derivatives,” the commission said. “This also raises a series of concerns.”

The financial industry has lobbied hard against a location policy. The International Swaps and Derivatives Association said requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin requirements by as much as 20% . The FIA, a trade organization for the futures, options and centrally cleared derivatives markets, has said forced relocation “could nearly double margin requirements from $83 billion to $160 billion.”

According to that Bloomberg piece, the notional amount outstanding of euro-denominated OTC interest-rate derivatives is some $90 trillion, 97% of which goes through the London Clearing House (LCH) based in .. well, you guessed it. Wikipedia:

LCH is a European-based independent clearing house that serves major international exchanges, as well as a range of OTC markets. Based on 2012 figures LCH cleared approximately 50% of the global interest rate swap market, and is the second largest clearer of bonds and repos in the world , providing services across 13 government debt markets.

In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos. LCH’s members comprise a large number of the major financial groups including almost all of the major investment banks, broker dealers and international commodity houses.

More details from Reuters, also in June:

Derivatives Body Warns EU Against Moving Euro Clearing From London

Shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies, a global derivatives industry body says. [..]The London Stock Exchange’s subsidiary LCH currently clears the bulk of euro-denominated swaps, a derivative contract that helps companies guard against unexpected moves in interest rates or currencies.

Britain, however, is due to leave the bloc in 2019, putting it out of the EU’s regulatory reach. The International Swaps and Derivatives Association (ISDA), one of the world’s top derivatives industry bodies, said on Monday that a “relocation” in euro clearing to continental Europe would split liquidity in markets and reduce the ability of banks to save on margin by offsetting positions in the same liquidity pool.

Deutsche Bank has the world’s largest derivatives portfolio. Not all of it will be euro-denominated, but still. And I know it’s just notional amounts, but derivatives are not things one plays fast and loose with, lest the clearing becomes opaque and trouble starts.

Juncker better solve this thing. Oh, and this one too (yes, it’s quite fun to report on this):

Money Will Divide Europe After Brexit

As part of the transition period of around two years that she called for in her emollient Florence speech last month, Britain would continue to pay in to the EU budget to ensure that none of the member states was out of pocket owing to the decision to leave. These net payments of around €10 billion a year would fix the immediate problem facing the EU, the hole that would otherwise open up in its finances during the final two years of its current budgetary framework, which runs from 2014 to 2020.

[..] through its accounting procedures, the EU can and does commit it to spending that will be paid for by future receipts from the member states. What this means is that even after 2020 there will still be payments due on commitments made under the current seven-year spending plan. That pile of unpaid bills, eloquently called the “reste à liquider” (the amount yet to be settled), is forecast to be €254 billion at the end of 2020.

Estimates of what Britain might owe towards this vary, but taking into account what might have been spent on British projects it could be around €20 billion. On top of that – and the second main reason why the EU is holding out for more – the EU has liabilities, notably arising from the unfunded retirement benefits of European staff estimated at €67 billion at the end of 2016, which it is expecting Britain to share. Even taking into account some potential offsets from its share of assets, Britain may face a bill of between €30 billion and €40 billion on top of the €20 billion paid during the transition period.

The EU finances itself on the fly. It’ll have a €254 pile of unpaid bills in 3 years time. That is scary. Not for Brussels, but for its member countries. A hard Brexit, in which Britain may refuse to pay, is perhaps even scarier.

Anyway, once Juncker’s done with all that, he’ll have to move on to the next problem.

Derivatives is a big cloud hanging over Europe, but this one is potentially shattering.

Ray Dalio, manager of the world’s biggest hedge fund, is shorting, placing large bets against, anything Italian, and given Italy’s size and hence importance to the EU, his bets are effectively bets against Brussels.

Dalio’s Fund Opens $300 Million Bet Against Italian Energy Firm

Bridgewater Associates is adding to its billion-dollar short against the Italian economy. The world’s largest hedge fund disclosed a $300 million bet against Eni SpA, Italy’s oil and gas giant, data compiled by Bloomberg show. Bloomberg previously reported that Ray Dalio’s firm had wagered more than $1.1 billion against shares of six Italian financial institutions and two other companies.

This latest bet is the hedge fund’s second-largest against an Italian company, trailing only the $310 million against Enel SpA, the country’s largest utility. Eni’s majority holder is the Italian government via state lender Cassa Depositi e Prestiti SpA and the Ministry of Economy. The public involvement also is reflected in the government’s role in appointing the chief executive officer. Current CEO Claudio Descalzi has been at the helm since 2014 and was reconfirmed this year.

$1.1 billion against the banking system, $310 million against the main utility, $140 million vs pan-European insurer Generali and now $300 million vs the national oil and gas company, That adds up to quite a bit more than the Bloomberg graph says, but I’ll include it anyway.

Dalio doesn’t call the bluff of Italy, and this is not just like George Soros’ shorting the British pound in 1992, he’s calling out the entire EU and its financial system.

He’s saying I don’t believe you can keep up the charade.

He’s making a mockery of Mario Draghi’s “whatever it takes”.

So what are Rome, Brussels and Frankfurt going to do? They can’t ignore the no. 1 hedge fund forever. They will have to pump money into Italy, in large amounts. Merkel won’t like that, neither will her new coalition partner FDP, and the Bundesbank may start legal action.

Dalio’s located the Union’s achilles heel, which is not just that Italy’s insolvent (it’s not alone in that), but that there’s a gigantic theater production being performed to give everyone the impression that things are going just swimmingly, thank you. So Dalio’s said: how much for a ticket to the show?, and paid it. And now he’s inside.

Bridgewater didn’t enter that theater for nothing. $1.85 billion is not chump change for them. Intesa Sanpaolo CEO Carlo Messina may have said that Dalio will lose his bets, but according to the IMF Italy’s non-performing loans levels were €356 billion at the end of June 2016, which is 18% of total loans for Italian banks, 20% of Italy’s GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo holds a nice chunk of that.

‘Whatever it takes’ may well be too much to take for the EU, and Draghi looks outsmarted, as do Juncker and Merkel. How many billions will it take for Dalio to go away? And then, who’s next, which hedge fund, which politician, which ECB chief? Coming soon to a theater near you.