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The Eurodollar’s Nose

Summary:
What an intriguingly odd month September 2017 turned out to be. To start with, Reflation #3 only seemed to be gaining strength. The full throat behind Inflation Hysteria #1 was still ahead, as was its related personage the BOND ROUT!!!! And yet, early in that late summer month a sudden eruption; actually several. On September 5, T-bills. A day later a big one, CNY. Gold. Repo fails. And on and on. While Reflation #3 would continue forward, and after October 2017 it seemed like the situation in these others (all of them, of course, deeply connected to eurodollar “stuff”), was calming down, by the end of that year a return of the more ominous tones and bass notes. All the while the bond market, from UST’s to JGB’s to Germany’s bunds were signaling the other – the reflation. There had

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What an intriguingly odd month September 2017 turned out to be. To start with, Reflation #3 only seemed to be gaining strength. The full throat behind Inflation Hysteria #1 was still ahead, as was its related personage the BOND ROUT!!!! And yet, early in that late summer month a sudden eruption; actually several.

On September 5, T-bills. A day later a big one, CNY. Gold. Repo fails. And on and on.

The Eurodollar’s NoseThe Eurodollar’s NoseThe Eurodollar’s Nose The Eurodollar’s NoseThe Eurodollar’s Nose

While Reflation #3 would continue forward, and after October 2017 it seemed like the situation in these others (all of them, of course, deeply connected to eurodollar “stuff”), was calming down, by the end of that year a return of the more ominous tones and bass notes.

All the while the bond market, from UST’s to JGB’s to Germany’s bunds were signaling the other – the reflation. There had been the Tax Cut and Jobs Act (TCJA) later in December 2017 to refill those expectations along with more forcefully hawkish sounds from the likes of Yellen. And don’t forget the chorus of kings, the Bond Kings like Bill Gross.

While optimism seemed to be gaining at least in rising nominal yields following September 2017, we couldn’t seem to escape the escalating warnings underneath that whole time. I wrote during that particular month:

It started with repo, and that part is confirmed. The real question is what this all means, up to and including whether it marks like fails in June 2014 the start of whatever the next phase of eurodollar decay might be. We obviously won’t know anything like that for some time (and we have to be very careful about bias, meaning that since I suspect it, it’s easy to believe and see what I think is already there), but the biggest clue will be in escalating warnings like this.

Five months is what it would take before those warnings underneath broke out into the open. Early February 2018, the dollar stopped “crashing” and then things really got serious (including in the real economy, as places like Germany and Japan quickly fell apart).

The Eurodollar’s Nose

There weren’t nearly the same obvious issues in January 2021 like there had been four Septembers ago. On the contrary, after early January it seemed as if for the first time in forever all the good things had been lined up just perfectly for the world to finally right itself. Vaccines, stimulus, you remember all the unchallenged positives.

Funny thing, though, just like September 2017 the dollar curiously stopped “crashing.” Defying all the certitude with which this latest dollar downtrend had been called its demise, seemingly out of nowhere it stopped right in its tracks.

T-bills began acting funny, too. And then, of course, Fedwire late in February. Warnings. Escalating.

Even more interesting, the dollar’s exchange value then performed the same five-month up and down – only to turn right around as if on cue, guided by some hidden, shadowy force unlike and wholly unrelated to all the “money printing” and whatnot:

The Eurodollar’s Nose

This isn’t magic nor do I think it random coincidence; fractals is more like it and likely. Either way, also escalating warnings which in 2021’s case include falling yields globally (while bunds reversed coincident timing back then, at least UST’s continued upward before ultimately peaking later on in 2018).

How’s the economy this far in 2021? As questionable if not more so than it had been early in 2018 – if you’re being honest. Same mainstream inflation expectations regardless (no surprise).

Someone once said history repeats because no one was listening the first time. No kidding. To this day, all anyone really remembers of that last time was something about a boom. Maybe trade wars. Constant drumbeat of LABOR SHORTAGE!!!! Definitely Jay Powell’s hawkishness.

What might people remember about what’s going on now? Serious economic boom. Supply constraints. Continuous outpouring of LABOR SHORTAGE!!!! Jay Powell and his hawkish taper.

Dollar? Eurodollar? Nothing. Not even if it all continues to repeat almost exactly. There didn’t end up being any of those things because it really is the same thing over and over again. So far this year, a little too on the nose – if you know what that really means.

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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