This is the amount of the $-denominated loans and bonds sitting on the balance sheet of entities domiciled outside the US
The death of the USD has been called for times and times again (last: '20-21): it's an easy narrative, but caution is required
1/8
Our economic and monetary system is based on continuous credit creation.
The US sits at the epicenter of this system as they enjoy the benefit of issuing the global reserve currency to the world: the majority of trades, settlements, payments across the world happen in USD.
2/8
As @patrick_saner shows, the world is highly leveraged towards the USD: while the US only accounts for 15% of global GDP, 50% of global trade invoices and 75% of global securities issuance are $-denominated. Wow.
3/8
The birth of the Eurodollar system has largely contributed to this phenomenon: entities domiciled outside the US can borrow USD and foreign banks (!) can lend USD out of thin air.
The system works during risk-on periods, but it shows poor and convex behavior during crisis.
4/8
When economic activity is fine, trade flows are robust and risk-on lending/borrowing behavior is there the system holds okay.
When trade flows stop and nobody wants to lend $ offshore (e.g. 2020), foreign entities leveraged in USD have a problem.
5/8
The Fed can intervene via FX-swap lines but it can't reach every place immediately.
Banks are reluctant to extend fresh credit in $ as they start behaving in a risk-adverse way: the system shows evident cracks, and the USD rallies.
6/8
Aside from this convex behavior, a continuous leveraging pattern is inherent to our economic/monetary system.
The $ sits at the epicenter of such system, and the Eurodollar system complicates this mechanism further.
7/8
While every global reserve currency is doomed to lose its status at some point, watch out for people calling for the USD to go to 0 every month
Even a broken clock is right twice a day
The reality is that we will still see the current (unstable) system in place for a while
8/8
• • •
Missing some Tweet in this thread? You can try to
force a refresh
Commercial banks print money.
They are able to extend credit to the real economy, temporarily boosting aggregate demand and GDP.
They are not doing that, and it's key to pay attention!
Why?
1/10
The chart above shows the 2y mov.avg. of the growth in US bank lending to the real economy. It therefore excludes mortgages, but it includes commercial, industrial and consumer loans - basically credit that ends up on the account of consumers the engines of the real economy
2/10
It's now running at a very modest +1.6% on an annualized basis, peaking from the +5.0% reached in early 2020 when governments effectively guaranteed the majority of the credit risk on bank loans during the first stages of the pandemic.
Yesterday I asked people on FinTwit to ask questions about how QE works and what are its consequences on the economy and asset prices, and I promised to answer to the 10 most interesting questions.
Here we are: the questions were awesome, buckle up!
0/10
Q: ''Why does the following QE process NOT create money? An asset manager sells a gov bond to the CB & receives a bank deposit, which it can use to buy a new bond from the gov, which in turn can spend the proceeds of that new bond sale into the real economy''
A: in this example, the only creator of inflationary forms of money is the government that prints additional deficits; the Central Bank simply swapped the gov bond for a bank deposit on the asset manager balance sheet.
Let me share with you my main tools to navigate markets: The Macro Compass.
It's a cross-asset allocation tool that serves as a big picture indication of what's coming next, and it helped me generate excess risk-adjusted returns over the years.
1/10
The Macro Compass is a 4-quadrants asset allocation tool, which uses two main inputs: the global credit impulse and the relative monetary policy stance.
The global credit impulse is my prop indicator that measures the pace of growth of credit creation amongst G5 economies
2/10
Credit creation is the real ''money printing'': when credit gets extended, new money is created out of thin air and handed over to the private sector
Commercial banks (net lending) and governments (net fiscal spending) are responsible for the lion share of credit creation.
Evergrande panic? I can almost hear you asking for it...here is your Chinese thread!
From a panoramic macro perspective, chances that a widespread financial market panic unfolds are relatively low - it will mostly depend on the Chinese authorities reaction.
1/n
The chart below shows the % of Chinese households wealth in real estate - 74%, quite high.
For comparison, US households own <30% of their wealth in real estate.
This tells us:
- The Chinese economy is not very financialized
- Real estate matters for the CH household
How much?
74% of wealth concentrated in real estate is quite a lot, yes.
But 74% of what?
The chart below shows Chinese HH net assets (value of assets - liabilities).
In 2019, Chinese household net assets were RMB 500 trn = approx. 70k USD net wealth per each Chinese adult.