On the Brink
The US Dollar parabolic rise, farmers revolting across Europe, and economies of emerging markets collapsing. An explosive combination.
You know what I've noticed? Nobody panics when things go "according to plan." Even if the plan is horrifying! […] Introduce a little anarchy. Upset the established order, and everything becomes chaos. I'm an agent of chaos. Oh, and you know the thing about chaos? It's fair!
The Joker (The Dark Knight)
In Sri Lanka, the President had to flee by plane as the population revolted following the complete collapse of the economy.
What happened to Sri Lanka? The usual combination of corruption and mismanagement, but also the more unusual bet the country made on ESG agriculture, which decimated its crops and turned this once self-sufficient country into a food importer. The article below explains what happened. The All-In episode included at the bottom of this newsletter also covers the situation in Sri Lanka.
Sri Lanka was a victim of what is called luxury beliefs. Once you start paying attention, you will realize that virtue signaling and luxury beliefs are everywhere.
Luxury Belief Definition
Ideas and opinions that confer status on the rich at very little cost, while taking a toll on the lower class. The concept was introduced by Rob Henderson, an Air Force veteran and Ph.D. candidate at the University of Cambridge.
Example: You can afford to believe in defunding the police if you live in a safe neighborhood that is unlikely to be negatively affected by diminished police presence.
After watching what is happening in Sri Lanka, the Netherlands thought it would be a good idea to do the same thing and ban fertilizers containing nitrogen, which would bankrupt many of its farmers. But just like the truckers in Canada at the beginning of the year, the farmers are fighting back.
After getting its energy policy completely wrong over the past decade, Europe seems to be doubling down, but with agriculture this time.
With a 9.1% print in June, the US CPI (that measures the change in prices of a basket of goods and services) keeps beating multi-decade records. Every month, the White House has been very creative to explain why it wasn’t responsible for high inflation numbers.
But of course, it doesn’t take a genius to figure out what caused inflation: the $4 trillion of money created out thin air by the US Federal Reserve during Covid to finance the massive deficit of the US Government.
It’s even worse when you look at the change in the Producer Price Index (PPI) that measures the average changes in prices received by domestic producers for their output.
But next to Europe, the US is looking great. The Euro has been weakening relentlessly since the beginning of the year. It broke the symbolic $1.00 threshold earlier in the week before slightly recovering on Friday at $1.01. The euro is the victim of the sanctions that Europe has imposed on Russia. While month after month Russia has been recording high trade surpluses thanks to high energy prices (resulting from European sanctions), Europe is paying the price.
Maybe, next time Europeans leaders will take the time to understand supply and demand and how markets work before acting. If Americans and Europeans wanted to punish Russia, they should have done everything in their power to increase oil production, which would have lowered oil prices, and Russia’s revenues. Instead, they did the opposite. The article below explains how bad the situation is for Europe.
To try and suppress oil prices, the Biden administration has been depleting the US Strategic Petroleum Reserve (SPR) to the tune of one million barrel per day (5% of the US daily consumption). The SPR is now at its lowest level in 36 years.
The only theory you need to understand what is happening with the US Dollar is that of the Dollar Milkshake. I had written a newsletter about it back in May that you can find here. I invite you to listen to the podcast episodes with Santiago Capital’s Brent Johnson I had shared back then. He came up with this theory years ago and it is playing out in real time now.
Why is the US Dollar ripping? Because there is so much US Dollar denominated debt outside of the US…
The consequences? Crises popping up everywhere.
Taking a step back, most of the pain the world is experiencing today can be traced back to the historic bad call the US Federal Reserve made on inflation. But the Fed still believes a recession can be avoided. It has been consistently wrong for the past two years, but perhaps this time it will be right, who knows? Even a broken clock is right twice a day!
How does this end? Read the excellent article published this week by Arthur Hayes to find out. It’s long but worth it.
In the crypto world, Celsius went bankrupt this week. It had billions of dollars of crypto deposits. The thread below summarizes what is publicly known at this stage.
An interesting twist is that Celsius had used Decentralized Finance (DeFi) platforms to borrow. To do that it had to post collateral in the form of crypto assets. While all regular creditors have to wait for the Celsius bankruptcy to follow its course to find out how much they will receive, the DeFi platforms were repaid in full by Celsius. As per the code in the smart contracts, only after a loan is repaid can the collateral be released. Code is law in the DeFi world. But will the courts agree? Was Celsius right to repay the DeFi loans first? Many precedents will most likely emerge from the ashes of Celsius.
Links to best podcast episodes of the week
On the Margin | U.S Dollar Wrecking Ball Is Causing Liquidity Stress with Lyn Alden
All-In | Emerging markets, Sri Lanka, 9.1% CPI, market sentiment, NASA’s Webb telescope & more
Call Me Back | Mohamed El-Erian on high inflation and what it means for the economy
Macro Voices | Lyn Alden: Energy, Inflation, The Dollar & More