A Tsunami of Fake Money about to hit The Markets !!

When an econo-financial world based on never-ending credit meets the reality of suspicion about inability to repay debt, all bets are off. Last week saw the end of the beginning of a crisis of liquidity in credit-driven capitalism in the United States. This week, more information is available to confirm our fears. As we head towards the tidying of balance sheets at the year-end, more tartan paint salesmen are about to become IPOs on already squeamish markets. The signs are not good . later on Wednesday morning, when in an "unexpected" move, the Federal Reserve expanded the size of its two dollar funding operations, the overnight and term repo, from $75 Billion to $100 Billion, and from $30 Billion to $60 Billion heading into quarter-end, effectively injecting up to $250 billion in funding ($30 Billion in already concluded term repo as well as two $60 Billion term repos yet to come, together with the $100 Billion overnight repo, assuming full allottment on all operations, for a grand total of $250 Billion ). This is getting worse. Remember, this started with 53 Billion last week. We’re now up to 139 Billion and we haven’t heard the overnight number yet (30+60+49). Sure, it could have been worse today, but the trend is still going up, not down. The spike in the repo rate might have a technical explanation: a misjudgement was made in the Fed’s money market operations. Even so, two conclusions can be drawn: managing the money markets is becoming harder and from now on banks will be studying each other’s creditworthiness to a greater degree than before. Those people, who struggle with the minutiae of money markets and that includes most professionals, should focus on the causes and not the symptoms. Financial markets have recovered from each downturn since 1980, because interest rates have been cut to new lows. Post-2008 they were cut to near zero or below zero in all major economies. In response to a new financial crisis they cannot go any lower. Central banks will look for new ways to replicate or broaden Quantitative Easing. (At some point governments will simply see repression as an easier option). Then there is the problem of ‘risk-free’ assets becoming risky assets. Financial markets assume that the probability of major governments such as the US or UK defaulting is zero. These governments are entering the next downturn with debt roughly twice the levels proportionate to GDP that were seen in 2008. This liquidity problem is a signal that trading desks are loaded up on inventory and can't get rid of it. Repo is done out of a need for cash. If you own all of your securities (i.e. a long only, no leverage mutual fund) you have no need to "repo" your securities - you're earning interest every night so why would you want to 'repo' your securities where you are paying interest for that overnight loan (securities lending is another animal). So, it is those that 'lever-up' and need the cash for settlement purposes on securities they've bought with borrowed money that need to utilize the repo desk. With this in mind, as we continue to see this need to obtain cash (again, needed to settle other securities purchases) it shows these firms don't have the capital to add more inventory to, what appears to be, a bloated inventory. No comes the fun part: the Treasury is about to auction 3's, 10's and 30 year bonds. If I am correct (again, I could be wrong), the Fed realizes securities firms don't have the shelf space to take down a good portion of these auctions. If there isn't enough retail/institutional demand it would lead to not only a crappy auction but major concerns to the street that there is now no backstop, at all, to any sell off. At which point everyone will want to be the first one thru the door and sell immediately . . . but to whom? If there isn't enough liquidity in the repo market to finance their positions, the firms would be unable to increase their inventory. We all saw repo shut down on the 2008 crisis. Wall St runs on money. . .OVERNIGHT money. They lever up in order to inventory securities for trading. If they can't get overnight money they can't purchase securities. And if they can't unload what they have, it means the buy side isn't taking on more either. It seems too convenient that the Fed has specifically mentioned stepping in for a long enough timeframe to see how the auction shakes out. Begs the question. Are these supposed overnight loans (REPOS) really being paid back in 24 hours and collateral returned, or is demand decreasing because these are actually stealth POMOs where the FED has actually kept the collateral and issued money on a long term basis. Certainly could explain the decline in loan applications. Maybe if the FED's balance sheet reporting is honest, we may soon discover it has somehow increased net month. Or maybe this all disappears like the other 21 trillion . It's Friday. no liquidity shortage on Fridays, only booze shortage needs to be fixed.










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