Zoltan Pozsar Declares Dawn Of ‘New World Monetary Order’

“Anyone in the commodities world is experiencing a perfect storm as correlations suddenly shot to 1, which is never a good thing,” Zoltan Pozsar wrote, in yet another ambitious missive, the latest in a string of provocative notes.

Commodities are experiencing a historic rally that’s manifesting in wholly anomalous moves in everything from wheat to natural gas to nickel. Last week, wheat prices surged more than 40%, raising the specter of societal upheaval in food insecure locales. On Monday, European gas prices staged a terrifying 80% rally, underscoring the cost of procrastination vis-à-vis reducing dependence on Russian energy. Then, on Tuesday, the LME was forced to suspend the nickel market amid a 250% two-day squeeze.

It’s chaos, for lack of a better word. And that chaos is driving a bid for cash, Pozsar said. There are three issues. First, non-Russian commodities now command a premium to Putin’s contraband, and that’s set against a backdrop of ever higher prices. So, leveraged commodities traders have to borrow more from banks to facilitate the commodities trade. Second, Zoltan noted that if “you’re long non-Russian commodities and short the related futures, you’re likely having margin calls that need to be funded.” For evidence of that, look no further than the linked articles (above) or the endless deluge of Bloomberg headlines documenting a dizzying spiral across seemingly every raw materials-related futures contract on Earth. Third, anyone short Russian commodities and long the related futures is probably getting margin calls too, and those likewise need to be funded.

Just yesterday I was having a discussion with someone outside of finance who was shocked at the extent to which the commodities market poses an existential threat not due to the fact that human beings need to eat, travel and keep warm (there’s that too, but that part’s self-evident), but rather due to the potentially disastrous domino effect of margin calls and, dare I suggest, defaults and exchange blowups.

In his latest, Pozsar underscored the point. “The commodities market is much more financialized and leveraged today than it was during the 1973 OPEC supply crisis, and today’s Russian supply crisis is much bigger, much more broad-based, and much more correlated,” he said. “It’s scarier.” He proceeded to pose a series of questions, as he’s wont to do:

The aggressor in the geopolitical arena is being punished by sanctions, and sanctions-driven commodity price moves threaten financial stability in the West. Is there enough collateral for margin? Is there enough credit for margin? What happens to commodities futures exchanges if players fail? Are CCPs bulletproof?

There are no answers to those questions. We don’t know. And that’s the problem.

Pozsar then outlined what he called “the birth of Bretton Woods III, a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.”

He returned to a familiar set of talking points and analogues established across his last several notes. Commodities are now fragmented or, more aptly, bifurcated. There’s Russian commodities and then there’s everything else. The former are now like subprime mortgage products and the latter like AAA collateral. Pozsar wrote that,

Commodities used to trade at tight spreads until now. There was one global market across all commodities that the large commodities traders arbitraged, much like a bond RV hedge funds arbitrage the cash-futures basis. Mortgages were like that too before 2008 — public or private, prime or subprime, they all traded at par, until they didn’t. Commodities no longer trade at par. There are Russian commodities that are collapsing in price and there are non-Russian commodities that are rallying — this rally is due to the 2022 Russia supply shock that we referred to above, which, once again, is driven by present and future sanctions-related stigma. Russian commodities today are like subprime CDOs were in 2008. Conversely, non-Russian commodities are like US Treasury securities were back in 2008. One collapsing in price, and the other one surging in price, with margin calls on both regardless of which side you are on. The “commodities basis” is soaring!

Ultimately, there has to be a backstop in a crisis. In 1997 it was the IMF. In 2008 and 2020, it was the Fed. In 2022, a year Pozsar suggested will be remembered for a “crisis of commodities,” it may be the PBoC.

I’ve repeatedly emphasized over the past several days that the West (and its allies, which is pretty much everyone sans Beijing, Tehran, Kim’s hermit kingdom and Maduro’s “paradise”) can’t and, more importantly, won’t, close spreads in commodities because the whole point is to isolate Russia and turn what it sells into contraband. Of course, a formal ban on Russian energy isn’t ideal because Europe might freeze to death (something Alexander Novak was keen to point out on Monday), but an explicit embargo is to some extent superfluous because traders have effectively imposed their own sanctions on Russia’s raw materials, hence the now widely-publicized “buyers’ strike” and accompanying basis blowout.

As Pozsar put it, “Western central banks cannot close the gaping ‘commodities basis’ because their respective sovereigns are the ones driving the sanctions.” Obviously, traders can’t help either because every reserve currency-issuing country is participating in the measures which have now made Putin’s Russia the most sanctioned nation on the planet.

Enter the PBoC. “It banks for a sovereign who can dance to its own tune [and] to make things more complicated, China is probably thinking deep and hard about the value of the inside money claims in its FX reserves, now that the G7 seized Russia’s,” Pozsar went on to say, before detailing what he said are Beijing’s two options. To wit, from Zoltan:

Sell Treasurys to fund the leasing and filling of vessels to clean up subprime Russian commodities. That would hurt long-term Treasury yields and stabilize the commodities basis and would give the PBoC control over inflation in China, while the West would suffer commodity shortages, a recession and higher yields.

The PBoC’s second option is to do its own version of QE — printing renminbi to buy Russian commodities. If so, that’s the birth of the Eurorenminbi market and China’s first real step to break the hegemony of the Eurodollar market. That is also inflationary for the West and means less demand for long-term Treasurys.

From there (and I’ll be generous), Pozsar ventured into speculative waters — figuratively, but also literally.

His idea is to go long freight rates on the notion that “renting boats is like renting balance sheet at a dealer to fund inventory.” Beijing, he said, might print yuan in order to effectively monopolize… well, boats, on which China could store massive amounts of Russian commodities in the event Xi runs out of storage space on the Mainland.

Zoltan closed with a flourish. And I do mean a flourish. It’s simply impossible to paraphrase his conclusions without losing something in translation, so here they are, as written:

Do you see what I see? Do you see inflation in the West written all over this like I do? This crisis is not like anything we have seen since President Nixon took the US dollar off gold in 1971 — the end of the era of commodity-based money. When this crisis (and war) is over, the US dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasurys with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities). After this war is over, “money” will never be the same again. And Bitcoin (if it still exists then) will probably benefit from all this.

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22 thoughts on “Zoltan Pozsar Declares Dawn Of ‘New World Monetary Order’

  1. Please ensure any comments are based on an assessment of the thesis, not your view on the analyst or his employer. In other words: Make sure the discussion is about the macro and the geopolitics, not about Zoltan or Credit Suisse.

    1. I very much agree with the comparison to gold in ’71. Our chaotic world, especially today, inspires prediction. Sure, the Chinese are more balanced in their approach, but they’re imperfect. Their limitations and weaknesses are less obvious. But they are capable of shooting themselves in the foot. Whatever may become of the markets and Chinese power, I wonder whether they will ever play the democracy card. And if so, how they would play it?

  2. It’s the most serious and consequential game of chicken I’ve ever seen in my lifetime. I hope I’m correct in saying it will end sooner rather than later. But I do reckon the west can win this game and the Russians will lose. Sad for them that their leadership has his measly head in a hole in the ground.

  3. So couple of thoughts……

    (i) I assume the Western central banks are aware of this thesis at a general level – who doesnt read influencial Mr. Pozsar ? And therefore they have at least a semblance of mitigation game plan for this crisis and more strategically and geo-politically, Russia and its commodities falling into China’s lap on the cheap.

    This is a case of unintended consequences – and worse still if they totally did not anticipate and prepare for it. Perhaps I give them too much credit.

    The crisis may be manageable at small level – whack a mole type situation but it if becomes broad based tsunami, all bets are off and this is how the West was lost.

    Perhaps Zoltan putting it out there wakes them up to the dangers but the question is will it be manageable ?

    (ii) Russians are reading this too. What can they do to make our pain more acute, our mitigation plans fail and totally F**K us. You can bet they are thinking of this.

    (iii) How do we solve this crisis and not let Russia fall into China’s hands long term ?

    1. The Russians have set the table to their own disadvantage, leaving themselves limited plays. Assuming the Ukrainians get jets and more anti-aircraft systems, I don’t believe the Russians have the stamina to outlast the Ukrainians or the west.

      1. We are already seeing what Zoltan’s referring to with the Londons metal’s exchange this morning. We may not have a lot of time for Russia to come to its knees…the dominos are starting to fall.

    2. The Russians will cry to the Chinese. The only question in my mind is the extent to which the Chinese will give them comfort (beyond buying Russian oil and gas).

      1. Chinese are not into giving them or anyone else comfort. They are known for their patience and pounce strategy. They have waited patiently with the Treasrury holdings for a long time, if they see a strategic edge to weaken the dollar hegemony surely they will pounce in full force.

  4. I think that the last two weeks have shown us that the world is complicated and that offering simplistic predictions (i.e. “Bretton Woods III backed by outside money (gold bullion and other commodities)”) is probably unwise. Will Putin be in power in a year? Will Russia be a member of the EU within five years? I love Benjamin Graham’s comment “Long-term investors must be careful not to learn too much from recent experience.”

  5. In many ways I hope Zoltan is wrong but usually (and minimally ) he is at least directionally right. May be all this blows over in a few weeks/months without much damage to the Euro-dollar system – that would be the best case but should the script flip, the costs and implications are monumental. This why his piece is so profound.

  6. Thirty years ago I suggested that Europe needed to go its own way and NATO/EU should have invited the entirety of Eastern Europe including Russia into a new reformed NATO and the EU over a 10-20 year time horizon. My German American friend was horrified. In my view it was time for Europe to grow up and bringing Russia on board. While costly in the short term would have been very fruitful in the long term (see East Germany). As usual the Germans did not want to play and put their own parochial interests first. My view was not unique- others suggested the same. We are now in a very frightful situation where you cannot rule out nuclear war- and US interests are somewhat different from the EU. As far as Pozar’s speculation goes, it is intelligent speculation. I would not be so fast to write off the US$ and elevate the Chinese yuan myself. China has some monumental problems as a country attempting to go from developing to middle income (often harder to do than expected) with a rapidly aging demographic. They have a lot of other wood to chop domestically as well. Crypto is going to be a factor, but not the private version. Private money has a long history of going out of business. It might take 10 years or more but I am fairly confident that crypto as it exists today won’t be around over the long term. So what happens in the next 25 years? We probably will see several reserve currencies of different weights with the US$ still being the most important currency. The Euro is probably going to be a supplemental reserve currency (Boeing vs Airbus anyone?).

    1. RIA. Interesting. I am reminded of the reign of Peter the Great who very much wanted to bring Russia into Europe. He even created a second capital close to the Baltic countries. Trouble was, the east end of Europe was in turmoil and wanted confrontation not cooperation. I always thought that would have been a great time to break Russia in half at the Urals. Eastern Russia was a primitive uncivilized sort of place that was always going to create more costs than benefits. Western Russia would have been more manageable, especially if it included the Ukraine.

  7. Re: “Dawn Of ‘New World Monetary Order”

    The key economic word here, in this epiphany, is demand.

    This epiphany is predicated on a conceptual framework that Russia is a stable economy with growing GDP and plumbing related to per capita productivity.

    China, India, etc may have the means to support limited international trade and currency exchange mechanisms, but the one thing they have in abundance is poor people who don’t contribute much to future growth.

    As Russia is sanctioned to death, those poor people will not benefit from a flood of devalued rupees or yuan .

    The new order most likely will be forced labor and a grinding down of social order, versus the altruistic pipedreams of those who see the Ukraine crisis as a trading opportunity.

  8. I’ll admit up front that this is hardly my expertise. With that caveat, my two cents (or three rubles):
    1. I believe, based largely on following Michael Pettis over the decades, that for a major currency to become the global trade and reserve currency, the issuer has to permit its currency to float, freely flow in/out, have a reliable legal system, accept a floating current account including deficits, and so on. Essentially the issuer has to give up control. USD (and EUR?) meets those requirements, RMB does not. I wonder if China is willing to pay the price required for RMB to replace USD.
    2. How much long-term impetus is there for a replacement to USD? Yes, the US/Europe has shown they will weaponize USD/EUR, but in truly extreme situations. How many G7 or G20 countries plan to do something that will trigger this kind of response? Other than China.
    3. Therefore, I think (really, more of a “posit”) that rather than trying to take on the burden of RMB becoming the global currency, China will instead create a RMB trade and reserve currency sphere, consisting largely of itself and those countries that (a) have resources that China wants a lot, and (b) have become cleaved from the USD/EUR. That might be something like China + Russia, Syria, Iran. Or, in rock band terms, “China & The Outcasts”.
    4. The result will probably be to give China preferential access to and growing ownership of those countries’ valued resources (and if they have none, then it may get booted from the band – that’s you, Syria). In practical terms, China will get its commodities cheaper than everyone else, as Russia’s main remaining customer and the growing owner of Russia’s resources.
    5. This might also solve China’s “where to put my reserves” issue. With guaranteed access at favorable prices in its own currency to its northern vassal’s oil, gas, wheat, water, and other commodities, would not China be increasingly insulated from Western sanctions?
    6. China might find a sufficiently compliant Russia a useful foreign policy tool as well.
    7. If Putin / advisers see this future scenario, they surely doesn’t like it. Becoming Xi’s little [coarse language forgone] can’t be a tolerable outcome for Putin. Who is he going to try to make a deal with – the rock, the hard place, or a little of both?
    8. Russia as China’s resource reserve and loyal follower also isn’t an optimal scenario for the US / Europe.

    1. The most profitable trade might be to go long Russian commodities and simultaneously put out a short “contract” on Putin.

  9. Re: “Dawn Of ‘New World Monetary Order”

    There are two great lessons to be found in the great movie, It’s a Wonderful Life, which are useful macroeconomic concepts, related to crisis.

    Putin’s not buying, he’s selling.

    The Russian economy is fragile and has had many decades of trouble. Global sanctions will increase Russia’s ability to be productive or improve its economy or standard of living. Russia has no future without global trading partners. They can sell limited amounts of oil but it’s likely they will be able to increase trade as their economy spins downward.

    You’ve got this all wrong, the money’s not here like a bank, it’s in Putin’s house and in the yachts and jets of wealthy neighbors…

    The concentration of Russia’s economy into a few corrupt hands causes instability, which reduces production, which impacts demand resulting in weak GDP and a society filled with decay, decline and hopelessness. Are we to suspend our disbelief and think Putin is going to make Russia Great Again, by feeding his citizens rupees and yuan?

  10. Purim’s gotta hate selling positions in Russian companies to China. It’s the first step to becoming their client state.

  11. Sell Treasurys to fund the leasing and filling of vessels to clean up subprime Russian commodities. That would hurt long-term Treasury yields and stabilize the commodities basis and would give the PBoC control over inflation in China, while the West would suffer commodity shortages, a recession and higher yields.

    Short-term, sure. But long-term? Chinese stockpiling of commodities on boats is not sustainable, and China’s increased reliance on Russian commodities puts downward pressure on “western” commodities. It’s all fungible, Russia is not the sole source for anything. If this is a short-term problem, then none of this matters anyway. If it’s a long-term problem, then supply chains just take a more circuitous route than they did before.

    The PBoC’s second option is to do its own version of QE — printing renminbi to buy Russian commodities. If so, that’s the birth of the Eurorenminbi market and China’s first real step to break the hegemony of the Eurodollar market. That is also inflationary for the West and means less demand for long-term Treasurys.

    Yeah, it’s inflationary in a good way — China printing covers for the US de-printing (rising rates, asset sales). Look what happened in 2018 when the US tried to raise rates, even while every other central banks balance sheet stayed flat.

    Long term this is also de-incentivizes Chinese transition to renewables, and incentivizes the switch to renewables in the West. It’ll also artificially hold down the price of consumer goods since Chinese inputs will be lower, decreasing inflationary pressure in the West and just increasing the trade imbalance, forcing China to hold even more treasuries.

  12. https://www.ibtimes.com/nod-russia-ukraine-says-no-longer-insisting-nato-membership-3428691

    “President Volodymyr Zelensky said he is no longer pressing for NATO membership for Ukraine, a delicate issue that was one of Russia’s stated reasons for invading its pro-Western neighbor.

    In another apparent nod aimed at placating Moscow, Zelensky said he is open to “compromise” on the status of two breakaway pro-Russian territories”

    The outlines of a climb-down are emerging.

  13. It’s hard to imagine the world will want to save long term in a currency that is subject to the whims of a central planning committee made out of politicians and not independent technocrats. One thing the world can count on is that the US will look after its commercial interests above its politics. Even the weaponization of the dollar serves long term comercial interests for the US: punish those who threaten the free flow of goods and commodities (to the US).

NEWSROOM crewneck & prints