Federal Funds Is Not Falling With The Rest Of Them

It’s difficult a lot of times to easily and succinctly describe what’s going on inside a monetary system that; 1. Spans the entire world, easily jumping across if not erasing geographical boundaries; 2. Is located in the shadows, leaving us with no direct data or statistics; 3. Often works in a dizzying array of complexities. I have to believe that even a competent and talented writer would have a lot of trouble with this eurodollar thing.

The short version is really just this: funding markets are increasingly afraid of something. In looking around and surveying the landscape, I have to believe this something is the potential for a global collateral bottleneck. That’s why, I think, China’s markets are linking up in eurodollar terms, too. April 17 is a new and worse May 29.

For a lot of the world, in US$ terms, the repo market is all that’s left. As I wrote last week:

What we observe here, as well as other data, is how the repo market is the last line of liquidity defense in the offshore world. It has become the lender-of-last-resort because the central bank cannot be counted on for what used to be its primary use (raising the question, are central banks, in fact, useless? This isn’t just a rhetorical flourish on my part, it is a legitimate doubt.) This was the major evidence of 2008, reinforced a second time, echoing Bernanke’s bewilderment about transmission, in 2011.

Therefore, if anyone inside that system really starts to question collateral terms, haircuts, and whatnot, we’ve seen through history how it plays out. You better have UST’s on hand, or Chinese governments, else you risk becoming Bear Stearns (or Baoshang, not that this one is comparable in systemic importance).

It is the post-crisis intersection between a chronic problem – the repo system never did replace the MBS portion scrubbed out of use – and the potential for an acute flareup. The world is already short of collateral, thus how far can the system be stretched before being pushed beyond the current limits?

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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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Gary Anderson 3 weeks ago Contributor's comment

Chilling. If repo goes..