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The Changing Monetary System, Yield Curves and Bitcoin



Listen to this episode: In this episode of Bitcoin Magazine’s “Fed Watch” podcast, Christian Keroles and I sat down with Jeff Snider, the head of global investment research at Alhambra Investments and a leading eurodollar expert, to discuss the current and changing state of the global financial system.We cover the London Inter-Bank Offered Rate (LIBOR) and Secured Overnight Financing Rate (SOFR), the aggressive hub of the Federal Reserve, what we can learn from yield curves and of course bitcoin.Why LIBOR And SOFR Matter Deep at the heart of the eurodollar system was LIBOR, the rate banks charged each other to lend money.As it acted as a sort of Fed fund rate for the international eurodollar system, it was the interest rate that charged all other rates. for years the Federal Reserve and other central banks tried to get rid of LIBOR and it seems they had maybe it did this time. According to a Congressional Research Service (CRS) document published Dec. 15, 2021, “financial companies using LIBOR faced legal, operational, credit, regulatory and reputational risks,” according to a Congressional Research Service document. (CRS) published on December 15, 2021. Snider’s comments were insightful into why it had taken so long to move away from LIBOR and that the transition will last until at least June 2023, when the last futures contracts using LIBOR expire. The replacement offered by the Federal Reserve is SOFR, while private companies such as Bloomberg also offer alternatives. There is currently no clear winner, and there may be no winner for an extended period of time. LIBOR was an emerging market phenomenon that caused Eurodollar contracts to gobble up the financial world. In the above document, LIBOR was referenced in 2020 contracts worth $223 trillion per CRS. That’s a lot of relaxation, and Snider said that by stopping the market from using LIBOR, regulators have opened up a lot more systemic risk and uncertainty. For my part, I think this is a fantastic opportunity to see how the system adapts to a fundamental change. One day it will have to happen when they adopt bitcoin, so this experiment is one where we can get some data. Exploring Reasons for the Hawkish Fed Pivot I couldn’t get Snider on the show and ask him what his thoughts were on Jerome Powell’s recent flip-flop. His response focused on the Fed’s concerns that confusion and discontent about the “temporary” world would trickle down to longer-term consumer and corporate inflation expectations. That’s what the Fed has wanted since the Great Financial Crisis (GFC), but now it fears inflation expectations will get too high. ). The five-year term is falling below 2% and the IMF has released its updated January 2022 GDP estimates, three months after its previous estimate, which saw US growth cut by 1.2% to 4% and global growth to 4.4%.Source: Federal Reserve Bank of St. Louis Next, we tried to get inside the central banker’s mind and discuss other reasons why Powell might have made this aggressive move, such as to make room for future rate cuts and the restart of quantitative easing (QE). What would the Fed do in the coming downturn if it was still at full throttle, interest rates at zero and QE at $120 a month? That, by the way, is the current situation of the European Central Bank (ECB). Yield curves are more like Japan than RecoverySnider is a yield curve whisperer. I specifically asked him about one of his recent points he made about how the US yield curve is more like Japan, in the sense of the last two decades, than any kind of recovery. He launched a great statement. I quote extensively because it’s so good: “What we would expect to see when things go very wrong, which amounts to low nominal levels, to something better than very wrong, or even normal, we would expect the yield curve to steepen at first.” outward, nominal interest rates, especially the long end, are rising much faster than those on the short end. And that would tell us, ‘Okay, maybe there’s a regime change. Maybe we’ll get out of this deflationary scenario in Japan, it’s something better .’ “It started to be the case early last year, late 2020 and early 2021, especially in January and February 2021, when the yield curve steepened. The yield curve told us at the time, mainly because it was still low and not really much was in transition but it was changing that the market was getting a little bit more optimistic even if only towards 2020. Which is not very high by default by comparison but it never got much further than that the yield curve always stayed “It has essentially remained that way since March last year, but it has leveled off even more as the Fed rolls in with its projected rate hikes for this year, which has resulted in the short-term -term rate without raising long-term rates Now we have a flattening yield curve at an incredibly low level that has never really moved out of the Japanese range, for lack of a better term meaning the yield curve ve telling us not inflation, but more deflationary risks.” Jeff Snider’s thoughts on BitcoinSnider has been on “Fed Watch” twice before. Each time we discussed bitcoin. He’s been doing some different mediums recently where he can talk about bitcoin, so we wondered if his opinions had changed at all. He is not an anti-bitcoin. He loves bitcoin and wishes it luck, but doesn’t fully embrace it. His main hurdle to fully embracing it is significant, and bitcoiners would do well to listen to him and try to answer it rather than ignore it. I personally don’t agree with that, but it comes from a vast knowledge of the current system. The bottom line is that he sees no route to bitcoin as a transaction currency. He sees it as a store of value, but cannot get to a medium of exchange. The problem for Snider is the lack of elasticity. All in all, it’s a rational argument and worth dealing with. I think I will write a future post for Bitcoin Magazine about exactly this criticism. Stay informed. Thanks to Snider for coming. It was a good talk! LinksAlhambra Investments: https://alhambrainvestments.com/Eurodollar University YouTube: https://www.youtube.com/c/EmilKalinowskiLIBOR obituary by The New York Times: https://archive.ph/UfPrsCongressional Research Service at LIBOR: https://sgp.fas.org/crs/misc/IF11315.pdfIMF GDP estimates: https://archive.ph/wEZAR
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