August TIC: Trying To Get Collateral Out Of The Shadows

The second most frustrating aspect of trying to analyze global shadow money is how the term “shadow” really applies in this case. It’s not really because banks are being sneaky, desperately maintaining their cover for any number of illicit activities they are regularly accused of undertaking. The money stays in the shadows for the simple reason central bankers don’t know their jobs; even after a somehow Global Financial Crisis in 2008, they don’t realize the full scope of what goes on offshore or why it might be so important.

And that’s actually the most maddening part. If they would see past their own rigid ideologies, and be open to a world that doesn’t work the way they tell everyone it does, we wouldn’t have to go digging through statistics and data that was never designed to track and measure some of what goes into, and comes out of, those offshore shadows.

I’m speaking specifically about TIC and how it might help us put some further estimates on repo. The reason we might want to do this has finally become self-evident. At least until everyone forgets about mid-September.

The place to start is inside TIC but outside of repo. The month of August 2019, which is the latest data made available last week by the Treasury Department, wasn’t a pretty one. The Fed had just “cut rates” for the first time in a decade and though Jay Powell had said it would be one and done the market immediately took off – the wrong way.

UST prices spiked and yields worldwide plummeted. The Fed had, in fact, confirmed to the bond market anyway that officials, too, had become concerned enough they would act on them. And they are among the last to figure these things out (Economists talking about stock market are the very last).

The repo rumble showed up in the middle of the following month.

According to TIC, during August as UST prices skyrocketed with the demand for collateral, among other flight to liquidity factors, foreigners were selling tons of their UST holdings. It’s pretty much the opposite of what the BOND ROUT!!!! folks say should happen. In reality, when foreigners “sell” their US$ assets it’s a dependable sign the global dollar shortage has become acute (which drives the “strong worldwide demand for safe assets”).

In fact, for foreign official holders of UST’s August 2019 was among the worst months. That actually makes sense in the context of the bond market and the Fed’s ridiculous attempt at claiming a “mid-cycle adjustment.” No one was buying it, and that pushed foreigners into “selling.”

The reason I use the scare quotes around the word “selling” is repo. It’s not really clear that’s what particularly foreign official institutions (FOI’s) do with their holdings. It seems like it should be very straightforward; you own something or you don’t. That’s not how the global monetary system really works, though, and there is quite a bit of gray area in between.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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