Thanks for the nuanced attitude. This is what I was hoping for when I signed up for the long-term investor 2023 plan. I'm tired of reading the sensationalist financial stuff that says everything is sliding downhill and it's all doom. I was hoping that Alf would give a professional take on the current financial situation and it looks like that's what we're getting. Kudos for not going down the easy route of sensationalist news. 👍
Thanks for your deep insights as per usual. Learning tons from this, even if just at a more high level, but slowly things are beginning to make more sense (I hope at least lol). Really appreciate it!
You often see general media paint negative light re the credit centric world we live in (well, only when the times begin to worsen), but also for being too "USD-centric" but the commentary is always very surface-level.
But really my basic observation is just a very complex and sophisticated system that has helped realize real economic growth faster that has had to react and evolve over time, making it fragile. Basically, learning on the go, and where things blow up, patch it up and try to move on. Very much like everything else in life.
Obviously, this is a worrying reality given so much there's riding on it, but what can you expect? Impossible to for anyone or anything be all-knowing.
And always good to have your commentary, not just explaining things and providing insight but also adding context as to why things are the way they are... and even though so many things are nuanced, it's likely not going to be the "end of the world!"
Great piece - as always - and looking forward for the macro paid service in 2023!
However, I don’t get one thing. Why do you and everyone call it ’debt’? To enter the FX swap, you need to have the cash (let’s stick to JPY example) so you exchange JPY for USD - I don’t fully get why it is called debt. Only risk is related to FX rate changes - and it may lead to incurring losses. But notional itself is mostly covered by cash in JPY that is required before you enter swap.
Nice write up but I think you will find that only a very small percentage of FX forwards, (the far leg of a swap), is centrally cleared. NDFs and FX Options are increasingly centrally cleared but not FX forwards.
Another great article, Alfonso! Highly educational for people like me, who want to figure out how the financial system works, in order to understand WTF is happening in the world we live in.
As a person, who isn't an investor yet, it is not worth paying for any of the subscriptions, but it would be great if could still provide these articles for free to people like me or at least for an affordable price.
Really fantastic piece Alf! So, just to understand, these pieces won't be available to subscribers of the plan "THE LONG-TERM INVESTOR", correct? Only to those belonging to "THE ALL-ROUND INVESTOR"?
Thank you for the wonderful content. I have signed up for the your paid subscription, I’m guessing your articles will no longer be listed on Substack and on your platform? Will we still get a voice over the article? I find this very useful.
SO WHY did the $ drop since october ? Did the US injected more $ into the global system to increase liquidity ? Is that not what we saw in march 2020? ... this can continue for several months ?
Your quote is arguing a $ spot bid up
"But when these USD cash flows dry up as the economy is weakening, all of a sudden servicing $ debt becomes hard.
In a snowball mechanism, all foreign entities leveraged in US Dollars try to de-leverage…which means they bid up the spot USD itself, which in turn hits other foreign USD borrowers in a self-fulfilling prophecy.
It seems like the world is borrowing short term for long term projects and if the balance sheets are leveraged it is a Matter of time that they get “squeezed “
And the FED can’t put more dollars out there and finance the world
Am I nuts. ?? We have seen this outcome before I think.
Why would a Brazilian company accumulating USD want to hedge anything? Typically, a strong USD position for developing nations is the desired position to hedge against dollar denominated debt payments. I could see them entering into FX swap agreements to make productive use of their strong USD cash flow.
If only the average person understood how absolutely cartoonish the amount of leverage in our system is
Thanks Alf
I fill like getting a milkshake now ;)
Thanks for the nuanced attitude. This is what I was hoping for when I signed up for the long-term investor 2023 plan. I'm tired of reading the sensationalist financial stuff that says everything is sliding downhill and it's all doom. I was hoping that Alf would give a professional take on the current financial situation and it looks like that's what we're getting. Kudos for not going down the easy route of sensationalist news. 👍
Thanks for your deep insights as per usual. Learning tons from this, even if just at a more high level, but slowly things are beginning to make more sense (I hope at least lol). Really appreciate it!
You often see general media paint negative light re the credit centric world we live in (well, only when the times begin to worsen), but also for being too "USD-centric" but the commentary is always very surface-level.
But really my basic observation is just a very complex and sophisticated system that has helped realize real economic growth faster that has had to react and evolve over time, making it fragile. Basically, learning on the go, and where things blow up, patch it up and try to move on. Very much like everything else in life.
Obviously, this is a worrying reality given so much there's riding on it, but what can you expect? Impossible to for anyone or anything be all-knowing.
And always good to have your commentary, not just explaining things and providing insight but also adding context as to why things are the way they are... and even though so many things are nuanced, it's likely not going to be the "end of the world!"
Great piece - as always - and looking forward for the macro paid service in 2023!
However, I don’t get one thing. Why do you and everyone call it ’debt’? To enter the FX swap, you need to have the cash (let’s stick to JPY example) so you exchange JPY for USD - I don’t fully get why it is called debt. Only risk is related to FX rate changes - and it may lead to incurring losses. But notional itself is mostly covered by cash in JPY that is required before you enter swap.
What am I missing here??
Thanks a lot
Mike
✔️✔️
Nice write up but I think you will find that only a very small percentage of FX forwards, (the far leg of a swap), is centrally cleared. NDFs and FX Options are increasingly centrally cleared but not FX forwards.
Another great article, Alfonso! Highly educational for people like me, who want to figure out how the financial system works, in order to understand WTF is happening in the world we live in.
As a person, who isn't an investor yet, it is not worth paying for any of the subscriptions, but it would be great if could still provide these articles for free to people like me or at least for an affordable price.
Really fantastic piece Alf! So, just to understand, these pieces won't be available to subscribers of the plan "THE LONG-TERM INVESTOR", correct? Only to those belonging to "THE ALL-ROUND INVESTOR"?
Fantastic piece, thank you, Alf
I think I now understand the mechanics of "dollar milkshake" for the first time!
Thank you for the wonderful content. I have signed up for the your paid subscription, I’m guessing your articles will no longer be listed on Substack and on your platform? Will we still get a voice over the article? I find this very useful.
SO WHY did the $ drop since october ? Did the US injected more $ into the global system to increase liquidity ? Is that not what we saw in march 2020? ... this can continue for several months ?
Your quote is arguing a $ spot bid up
"But when these USD cash flows dry up as the economy is weakening, all of a sudden servicing $ debt becomes hard.
In a snowball mechanism, all foreign entities leveraged in US Dollars try to de-leverage…which means they bid up the spot USD itself, which in turn hits other foreign USD borrowers in a self-fulfilling prophecy.
It looks like USD leads Korean exports in the chart, not the other way around
It seems like the world is borrowing short term for long term projects and if the balance sheets are leveraged it is a Matter of time that they get “squeezed “
And the FED can’t put more dollars out there and finance the world
Am I nuts. ?? We have seen this outcome before I think.
Why would a Brazilian company accumulating USD want to hedge anything? Typically, a strong USD position for developing nations is the desired position to hedge against dollar denominated debt payments. I could see them entering into FX swap agreements to make productive use of their strong USD cash flow.
The minding numbing part is dollar has potential to go much higher