“If a bank closes a $200 billion balance sheet on Friday and doesn’t open on Monday, someone’s $200 billion wasn’t hedged by definition,” Zoltan Pozsar wrote Sunday, reminiscing about a late-night briefing just prior to Lehman’s bankruptcy.
The implication was that Russia’s SWIFT ban, which came together rapidly over the weekend once Germany dropped its opposition, is analogous in some ways.
Last week, Pozsar weighed in on the possible ramifications of financial penalties levied against Putin’s Russia. Additional escalations, he cautioned, would likely have “a direct impact on FX swaps and US dollar Libor fixings given Russia’s vast financial surpluses and where those surpluses are deployed.”
Read more: Pozsar Cautions On ‘Market Event’ From ‘Russia’s Vast Financial Surpluses’
In his Sunday missive, Pozsar first compared the fallout from Russia’s SWIFT ban to the initial domino effect of supply chain disruptions associated with COVID. “All global payments go through SWIFT (including payments for commodities) and so exclusions from SWIFT will lead to missed payments everywhere again,” he warned.
As for the sanctions on The Bank of Russia, that’s a problem, to put it mildly. I wrote about it extensively on Saturday. Pozsar summed it up. “Sanctioning central bank reserves can turn a surplus agent into a deficit agent overnight [and] The Bank of Russia has neither Treasurys to repo with the new FIMA repo facility, nor dollar swap lines with the Fed,” he noted. “If its assets are frozen, it can’t raise dollars to provide for its domestic banks.”
On Sunday, CBR said only that it would supply “continuous” ruble liquidity, which is nice except that… well, nobody wants rubles in a pinch. Not even Russians, which is why they were apparently queuing at banks to withdraw hard currency, with limited success.
“I’ve stood in lines for an hour, but foreign currency is gone everywhere, just rubles,” a twentysomething named Vladimir told Bloomberg, while waiting in what the linked article described as a “long line at an ATM in a Moscow shopping mall.” This Vladimir was incredulous that the actions of the other Vladimir ended up putting regular people in a bind. “I got a late start because I didn’t think this was possible. I’m in shock,” he sighed.
Effectively, Russia is now cut off from what Pozsar called “inside money,” or, more simply, claims that are someone else’s liability. But Russia does have “outside money,” where that just means gold which, as every gold bull in modern history will shout at you, is no one’s liability.
After describing gold as Russia’s “money under the mattress,” Zoltan noted that Moscow actually has more of it than it does deposits at foreign central banks (figures below).
Pozsar effectively suggested Russia will need to figure out a way to repo that gold (for dollars) with another central bank that has collateral (i.e., Treasurys) to pledge.
“One can accumulate dollar surpluses anew through ongoing commodity exports away from financial centers in the West by seeding financial centers in the East,” he added, before characterizing the options as “limitless.”
Nevertheless, he was clear that this isn’t going to be any semblance of smooth. Pozsar compared the current situation to Lehman. “We believe there is no difference between Lehman unable to pay back money funds because its tri-party clearing agent is unwilling to unwind O/N repo trades, and banks unable to receive and make payments because they are out of SWIFT,” he said, noting that “banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf.”
So, what comes next? Well, for one thing, Pozsar suggested central banks will have to restart daily USD swap lines. “Central banks should stand ready to make markets on Monday again,” he remarked, on the way to a characteristically provocative conclusion.
“And so the Fed’s balance sheet might expand again before it contracts via QT, and not just because of the swap lines,” he wrote. “The FIMA repo facility is also there to turn collateral into dollars — anonymously, away from the prying eye of dealers, if a central bank becomes a friendly correspondent for a sanctioned central bank turning gold into cash.”
What happens when we ponder a mixture of a Cuban missile crisis with a Lehman moment? The mechanisms of crisis and risk are ramping up with the main difference between prior catastrophic circumstances is high speed internet and smartphone dynamics.
In no way do I mean to denigrate this situation or take away from analysis, but I continue to be baffled by Putin’s dramatic madness.
In that regard, Pozsar’s characteristics of pending financial crisis helps ramp up market tension and gives perspective to possible unforseen risk. Additionally, Putin jawboning with nuclear option is madness squared.
Thus, the endgame of madness and the blitzkrieg like speed of what’s going on seems calculated as if a game is underlying this tragic sequence of events.
In light of the insanity related to this, is it in some way unrealistic to imagine Putin’s good friend Trump is involved in this nonsense? Yes, that’s crazy, but what if, this crisis paints sleepy Joe Biden into an impossible corner, and as this play progresses, enter Trump from stage right to save the day as a negotiating hero, talking Putin off the ledge? Who can understand what goes on in the world of madness and starving egos?
Back to Pozsar’s vision, the Lehman moment is less likely to become a global threat, simply because much has been learned in 15 years and as big as Putin’s actions are, the pandemic offered many lessons in terms of managing risk.
The nuclear option obviously is a reset moment for all humanity and something everyone will ponder in terms of catastrophic dynamics. I imagine that threat will weigh heavy until the world as a collective reigns in madmen.
Of all the concerns I have about this crisis, one is not Trump becoming a hero. I don’t think Putin ever had any respect for Trump. As a psychologist, I am quite concerned about Putin’s mental health.
As an organism living on planet earth, I am quite concerned about Putin’s mental health.
Maybe China will take the gold that Russia offers?
China certainly has a lot of US Treasury bonds which can be turned into dollars in exchange for Russian gold…… for a deep discount.
Everyone is rightly focusing on Putin’s mental health and the isolation he has experienced during the pandemic. But I think all of us , and particlulary Putin, have not realized that the world’s collective mental health, our COVID induced cabin fever, is one of the key psychological drivers of the massive and almost euphoric support that Ukraine is receiving worldwide. We are all just crawling out of the wreckage that COVID inflicted on our societies, mad and scared and frustrated. COVID was hard to fight, sneaky with its shape-shifting variants and impersonal in the death and illness it spread.
But with this immoral invasion, evil comes that is concrete, conveniently embodied in one man and that can be fought in a straighforward way, with speed being of the essence. Having suffered “The slings and arrows of outrageous fortune” we are hankering and primed “to take arms against a sea of troubles, And by opposing end them”, with apologies to Will for stealing from the best.
Putin has become almost a Jungian archetype, an embodiment of selfish evil whose nose we all want to bloody. We are all raring to have a go and this penultime bully just knocked over a baby carriage! He is not understanging why the whole street has just turned and is coming for him. Timing is everything and Putin stepped into the ring thinking he was going to fight a nebbish and found out he is taking on a cranky world.
My take is slightly different in that I see an America that is war weary from Afghanistan, Iraq, and Syria and unwilling to commit to stopping a clear assault on freedom and democracy that we have always pretended to protect. For the first time in my life I see both American political parties being anti-war in a case where there is clear motivation to act. I was on active duty when Saddam invaded Kuwait, and American was quite ready to take up arms to protect a smaller country that was invaded by a dictator. Are we scared to act in the same way today because Russia has nukes, or are we just tired of using the most expensive military in the world?
Maybe we’re tired of being the only military on call.
There are two reasons America can’t act militarily here. First, we haven’t actually won anything since WWII. Second, we can’t afford it; we already spent our bad war allowance in Iraq and Afghanistan. COVID took the rest.