Tag: finance

When it comes to the shady events in the shadow banking world of collateral assets and repurchase agreements, nobody does it better than interdealer broker, ICAP, which is not only intimately familiar with just how the Fed’s plumbing vision takes place in the real world, but also happens to be the go to firm for pricing on such suddenly critical market stress indicators as repurchase rates.

And sure enough, it was none other than ICAP which first – correctly – said this morning when overnight G/C repo hit 10%…

… that the Fed would announce its first repo hike in a decade, but also did so with alarming accuracy and detail, as the following note sent out by Icap’s Mike Derrico at 6:45am laid out:

Tax Date Funding Squeeze:  Overnight System RPs?

This week’s funding squeeze has raised a number of questions about the outlook for the Fed’s balance sheet.  We’re going to punt most of the longer-term questions because we want to focus this morning on one very short-term option that the Fed might consider:  for the first time in many years, we think it is at least conceivable that the Fed’s Open Market Desk this morning might arrange an overnight system RP with primary dealers of the sort that was commonplace before the expansion of the Fed’s balance sheet in 2009.

The Desk has stood by and watched any number of episodes of temporary repo market pressure in recent years without responding by injecting cash.  (The most notable case was the spike in the Treasury GCF average to more than 5.00% on December 31.)  While the Desk has some leeway to respond to major market -functioning disruptions (blackouts, etc.), the FOMC has never instructed it to intervene solely for the purpose of limiting repo-rate volatility.  The Desk’s directive is framed solely in terms of the FOMC’s effective federal funds rate target.

This week’s episode is different.  We think there is a significant risk that the fed funds rate for Tuesday will set above the 2.25% target upper boundary of the Fed’s target rate.  Our very tentative guess is that the effective funds rate for Monday, due out at around 9:00 this morning, will remain within the range, but only because the effective rate is calculated as a median.  A significant volume of activity, including much that trades directly rather than in the broker market, may have been booked before the extent of the repo market carnage was apparent.  The mean weighted average for fed funds on Monday probably moved above the target range, but the median may have been below it.

That probably won’t be true to today.  With overnight repo trading at rates above 3% in the reg market yesterday afternoon, lenders in the fed funds market are likely to be pickier this morning.  Even if repo market pressure in general eases a bit from yesterday, the effective funds rate could move up from yesterday’s level.  We think the odds favor a reading above 2.25% for September 17, regardless of whether the September 16 fixing that will be published around 9:00 AM today is in the target range or not.

That poses a challenge for the Fed.  On the one hand, traditional funds rate-targeting guidelines would not only allow a traditional overnight RP with the primary dealers this morning; they would appear to call for one.  On the other hand, the first large-scale system RP in a decade would raise a huge number of questions in the market, which might be difficult to disentangle from the broader policy message.  We will confidently predict that many traders in many markets would gloss over the nuances of the difference between EFFR and GCF volatility, and jump directly to the conclusion that Fed balance sheet policy had reached another major inflection point.  Even though we think that an overnight or short-term system RP with the primary dealers would qualify as “business as usual” in some important ways, we also know that the first system RP in a decade would reverberate through the markets. 

We have been lobbying for months for the Fed to pre-announce its intention to arrange traditional RPs with the dealers on key pressure points (mid-month, month-end) as a way of limiting the scope for overnight volatility and to gather information about how Fed repo injections would affect broader market conditions.  Despite that, we’ll confess that we are a little daunted by the communications challenges of making a technical change of this nature purely reactively, and on the first day of an FOMC meeting to boot.  We think a strong argument could be made for arranging a system repo this morning, but we’re not sure it’s a convincing argument.

Operational Details.  If the Fed does arrange an overnight or term RP this morning, we would expect the operation to follow the format of the Desk’s most recent small-value “operational readiness” exercise.  As matter of “prudent planning”, the Desk conducts small-scale test operations with the primary dealers on a regular basis.  The most recent tests were in May, when the Desk arranged $75 million of 2-day terms RPs on May 8 and $75 million of overnight RPs on May 13. 

Both operations were multi-tranche RPs in which the Fed accepted Treasury, agency and MBS collateral, with potentially different stop-out rates for each of the three asset classes.  (The MBS stop-out was just 1 basis point above the Treasury stop-out in those operations, but the Desk might impose a wider spread if it were to conduct an operation today.)  We would not expect the Fed to pre-announce a size for any operation conducted this morning, as there would be a benefit in reviewing dealer propositions before determining the amount of funding to provide. 

The Desk has generally employed a multi-price discriminatory format than a Dutch-auction format for its open market repo operations.  We have no reason to expect that to change.

The Desk would presumably want to give dealers some time to think through their bidding strategy if it were to announce an RP this morning.  The two May operations both closed at 10:00 AM.  If the Fed has not announced an operation by 9:00 AM, the odds of a repo injection this morning would drop off quickly.  (If the Fed’s goal is to prevent the median fed funds rate from rising above the target range, it needs to make its intentions clear as early in the session as possible to prevent early trades from going through at elevated levels.)

So what happens next? Well, now that the Fed has successfully put out the fire in the monetary basement, if only for the day until the repo rolls tomorrow, the question is what the Fed will do or say tomorrow to ease the market’s fear that a funding crunch is deteriorating (immediately catalysts for today’s move being temporary notwithstanding). Here, according to ICAP, there are at least three other longer-term options that the FOMC could consider in its implementation note tomorrow afternoon. 

• Another IOER Tweak. Picking up on what BofA’s Mark Cabana said overnight, namely that the Fed will cut IOER by at least 5bps and as much as 10bps depending on sustained FF pressure, ICAP notes that there was a lot of speculation yesterday about the possibility of another 5 basis point IOER tweak.  On the assumption that the top of the target range will be lowered by 25 basis points to 2.00%, the IOER could be cut by 30 bp to 1.80%, which would be just 5bps above the 1.75% bottom range of the Fed Funds rate. ICAP notes that it has “no institutional objection to such an adjustment, but we’re not sure it would address the particular challenges the Fed faces at present.” Specifically, as Derrico explains, the problem yesterday was disorderly trading rather than a continued incremental evolution in the spread between the major overnight indexes and the IOER.  As such, it’s not clear that tweaking the IOER by 5, or even 10, basis points will help a lot on a day when fed funds traded up to 3.00%.  Still, ICAP “wouldn’t rule out an IOER tweak, but our guess is that the FOMC would conclude that another tweak would not address the specific problem the FOMC is facing.”
• A Standing Repo Facility. Having been discussed for months, the interdealer broker notes the Fed is likely to introduce a standing repo facility at some point in the coming six to twelve months, “but this remains an extremely complicated issue for the Fed. ” Questions of who would have access, at what price and for what specific purpose remain to be determined, and the FOMC is not going to rush into any decisions. As such, this will likely be a 2020 discussion, not a 2019 event.
• Pre-Announced System RPs on Peak Pressure Dates. We haven’t disguised the fact that we’re in favor of this as a short-term expedient.  Even if the Fed does not intervene in the repo market this week, we would encourage it to announce tomorrow that it would be prepared to intervene on the September 30 quarter-end statement date, and on future high-pressure days.  We think we would all learn a lot from the results, and the Fed would be able to reduce near-term funding cost volatility in the process.
• QE. A fourth option would be to resume permanent purchases of Treasuries on a net basis to prevent the further erosion in reserve balances.  As ICAP notes, “this may have been the single most popular suggestion in our conversations with customers, but we think it is highly unlikely that the Fed would rush into something that would be perceived as a resumption of quantitative easing in response to a couple of days of technical pressure.” Derrico’s view is that this week’s squeeze reflects temporary seasonal flows “and can be best addressed by temporary open market operations”, i.e. QE.  It is highly unlikely that the Fed would consider doing additional outright purchases large enough to ease funding market pressure on the scale seen this week, and it is almost certainly unnecessary as well.  If the Fed is feeling aggressive, two-week term RPs would meet the market’s needs quite well.

Which one (or more, or none) of these four options the Fed picks will be unveiled tomorrow (somehow we doubt Powell will launch QE but who knows – at least it would get Trump off his back); Meanwhile, all else equal, the market has the following funding considerations in the coming week, all according to ICAP.

• Wednesday:  The influx of GSE cash on Wednesday may provide a little relief.
• Thursday:  The widely-anticipated quarter-point Fed rate cut will push all the major overnight indexes down on Thursday.  However, the precise degree of pass-through to the secured and unsecured markets is uncertain given the extent of the technical distortions in the early part of the week.
• Friday:  Our highly tentative and very low-conviction guess is that technical pressures will retreat heading into the weekend.
• Monday:  In our (perhaps overly optimistic) base case, mid-month pressures could recede a little more on Monday.
• Tuesday:  Bill settlement pressures and the initial outflow of GSE cash could push rates higher next Tuesday.

Bottom line: even if the Fed does nothing tomorrow, convinced that today’s repo was sufficient to put out the funding fire, things will be relatively normal… until next Tuesday when the  blowout in repo rates is likely to repeat.

As the left-wing smear against Supreme Court Justice Brett Kavanaugh continues to unravel amid a journalistic malpractice scandal at the New York Times, original Kavanaugh accuser Christine Blasey Ford’s “lifelong friend” and alleged witness now doubts her story. 

Leland Keyser, who Ford claimed was one of five people at a party in the 1980s where she says Kavanaugh sexually assaulted her, told New York Times reporters Robin Pogrebin and Kate Kelly “I don’t have any confidence in the story.” 

Keyser – who said she was pressured by Ford’s ex-FBI buddy to lie and say that she didn’t remember the party instead of saying that it never happened – originally said through her attorney that she “does not refute Dr. Ford’s account,” however “the simple and unchangeable truth is that she is unable to corroborate it because she has no recollection of the incident in question.”

“I was told behind the scenes that certain things could spread about me if I didn’t comply,” Keyser told the Times journos – who felt it wasn’t notable enough for their smear article.

Now, Keyser says she doesn’t believe Ford’s story at all. 

“We spoke multiple times to Keyser, who also said that she didn’t recall that get-together or others like it,” wrote Pogrebin and Kelly in their new book, The Education of Brett Kavanaugh: An Investigation (yet another item that didn’t make it into their inflammatory Times article). “In fact, she challenged Ford’s accuracy.“

“Those facts together I don’t recollect, and it just didn’t make any sense,” said Keyser. “It would be impossible for me to be the only girl at a get-together with three guys, have her leave, and then not figure out how she’s getting home,” she added. 

CBS News: Christine Blasey Ford’s close HS friend (who Ford says was at the party when Kavanaugh allegedly assaulted her) said Ford’s story isn’t believable and told the FBI Ford’s allies pressured her, threatened her with a smear campaign to say otherwise pic.twitter.com/8mQyci9vjp

— Ryan Saavedra (@RealSaavedra) September 17, 2019

During Kavanaugh’s confirmation process, Ford (whose lawyer recently admitted the goal was to place an ‘asterisk’ next to Kavanaugh’s name before ‘he takes a scalpel’ top Roe v. Wade) alleged that Kavanaugh and classmate Mark Judge from the all-boys Georgetown Prep, held her down and sexually assaulted in an upstairs room of a home in suburban maryland during a party. 

Kavanaugh and Judge have vehemently denied the incident, while a third man who Ford claimed was at the party – Patrick J. Smyth, also denied any recollection of the event, telling the Judiciary Committee in a statement last September: “I understand that I have been identified by Dr. Christine Blasey Ford as the person she remembers as ‘PJ’ who supposedly was present at the party she described in her statements to the Washington Post,” Smyth wrote in his statement. “I am issuing this statement today to make it clear to all involved that I have no knowledge of the party in question; nor do I have any knowledge of the allegations of improper conduct she has leveled against Brett Kavanaugh.”

Meanwhile, The New York Times was forced to issue a major correction on Monday after Pogrebin and Kelly claimed to have uncovered another alleged incident in which Kavanaugh’s penis was thrust into a female student’s hand.

A classmate, Max Stier, saw Mr. Kavanaugh with his pants down at a different drunken dorm party, where friends pushed his penis into the hand of a female student. Mr. Stier, who runs a nonprofit organization in Washington, notified senators and the F.B.I. about this account, but the F.B.I. did not investigate and Mr. Stier has declined to discuss it publicly. (We corroborated the story with two officials who have communicated with Mr. Stier.) –New York Times

Except – much like Keyser’s bombshell which undercuts Blasey Ford’s story, the Times journos omitted the fact that the new accuser refused to be interviewed, and has no memory of the incident.

Yellow journalism at its finest, courtesy of the New York Times. 

….”That story (Kavanaugh) is nowhere near the standard that should be met in publishing a story.” @brithume @FoxNews

— Donald J. Trump (@realDonaldTrump) September 17, 2019

Authored by Marie Huillet via CoinTelegraph.com,

Equities portfolio manager turned crypto fund executive Travis Kling has argued that Bitcoin has come into its own as a unique hedge within the current macroeconomic climate.

image courtesy of CoinTelegraph

In an interview with CNN on Sept. 15, Kling argued that the specific properties of Bitcoin make it an exceptional insurance policy against monetary and fiscal irresponsibility from central banks and governments globally.

“Crypto has been created for such a time as this”

Kling — a veteran of the multi-billion-dollar hedge fund Point72 —  outlined how his interest in cryptocurrencies had evolved over the course of Bitcoin’s decade-long history and how, as he garnered more knowledge, he had come to recognize the asset as being the “most significant investment opportunity of a generation.”

While developments within the crypto markets may formerly have been isolated from the traditional financial sector, Kling argued that the latest, compelling evolution in Bitcoin’s identity is its present interaction with legacy markets. He said:

“Now is an incredibly interesting time from a global macro perspective and […] it appears that crypto has been created for such a time as this. With what we have in terms of monetary and fiscal policies from central banks and governments, big tech overreach, government overreach, data privacy issues that are coming to the center of the collective consciousness.”

As a “non-sovereign, hard cap supply, global, immutable, decentralized digital store of value,” he said, Bitcoin should be considered separately from other crypto assets — for these very properties are what distinguishes it as a particularly robust and timely investment.

“The hardest money in human history”

Kling observed that the world needs Bitcoin as an insurance policy “more today than it did yesterday” and that it’s going to need it “more tomorrow more than it does today,” in light of what central bank and government policies:

“It’s apparent that central banks are all racing to devalue their currencies […] What are they devaluing against? They’re devaluing against assets that have provable scarcity […] Bitcoin has even more provable scarcity than gold, it’s the hardest money in human history.”

In the throes of an uncertain world economic picture, Kling’s perspective has been broadly — if not unanimously — shared by analysts of different stripes. 

In August, digital asset research firm Delphi Digital published a report arguing that the present macroeconomic landscape is creating the “perfect storm” to ignite Bitcoin price appreciation.

Also, this summer,  the head of global fundamental credit strategy at Deutsche Bank remarked that central banks’ dovish policies are positively impacting “alternative” currencies like Bitcoin. 

Anthony Pompliano, meanwhile, has echoed this in proposing that the European Central Bank’s dovish turn will be “rocket fuel” for Bitcoin’s price performance.

The US has reportedly traced the cruise missiles used during a weekend attack that crippled half of Saudi Aramco’s oil production back to their point of origin: Iran. Or at least that’s what one US official is telling CBS News.

Many have argued that there’s zero upside for Iran in carrying out attacks like this (the region has also endured several attacks on oil tankers that have been blamed on Iran), but the US has insisted that Tehran was responsible for the attack, and that the missiles used were beyond the sophistication of Yemen’s Houthis, who had initially taken credit for the attacks.

Senior US officials have told CBS they’ve identified the locations in Iran from which a combination of more than 20 drones and cruise missiles were launched against the Saudi oil facilities. They say the locations are in southern Iran at the northern end of the Persian Gulf.

— Paul Danahar (@pdanahar) September 17, 2019

According to US sources, 17 missiles or drones were fired, not the 10 the Houthis claim. Cruise missiles may have been used, and some targets were hit on the west-northwest facing sides, which suggests the projectiles were fired from the north, from Iran or Iraq.

Investigators have reportedly identified the exact location, purportedly in southern Iran, where a combination of more than 20 drones and cruise missiles were launched against the Saudi oil facilities.

Additionally, The Wall Street Journal reports that Saudi Arabia is increasingly confident that Iran directly launched a complex missile and drone attack from its southern territory on Saturday that battered the kingdom’s oil industry, according to people familiar with the investigation.

“Everything points to them,” said a Saudi official who wasn’t authorized to speak to the media, referring to Iran.

“The debris, the intel and the points of impact.”

Nevertheless, lawmakers from both parties in Washington have expressed reservations about the prospects of an American military strike on Iran.

Authored by Patrick Buchanan via Buchanan.org,

“Iran has launched an unprecedented attack on the world’s energy supply,” declared Secretary of State Mike Pompeo.

Putting America’s credibility on the line, Pompeo accused Iran of carrying out the devastating attack on Saudi oil facilities that halted half of the kingdom’s oil production, 5.7 million barrels a day.

On Sunday, President Donald Trump did not identify Iran as the attacking nation, but did appear, in a tweet, to back up the secretary of state:

“There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom (of Saudi Arabia) as to who they believe was the cause of this attack and under what terms we would proceed!”

Yemen’s Houthi rebels, who have been fighting Saudi Arabia for four years and have used drones to strike Saudi airport and oil facilities, claim they fired 10 drones from 500 kilometers away to carry out the strikes in retaliation for Saudi air and missile attacks.

Pompeo dismissed their claim, “There is no evidence the attacks came from Yemen.”

But while the Houthis claim credit, Iran denies all responsibility.

Foreign Minister Mohammad Zarif says of Pompeo’s charge, that the U.S. has simply replaced a policy of “maximum pressure” with a policy of “maximum deceit.” Tehran is calling us liars.

And, indeed, a direct assault on Saudi Arabia by Iran, a Pearl Harbor-type surprise attack on the Saudis’ crucial oil production facility, would be an act of war requiring Saudi retaliation, leading to a Persian Gulf war in which the United States could be forced to participate.

Tehran being behind Saturday’s strike would contradict Iranian policy since the U.S. pulled out of the nuclear deal. That policy has been to avoid a military clash with the United States and pursue a measured response to tightening American sanctions.

U.S. and Saudi officials are investigating the sites of the attacks, the oil production facility at Abqaiq and the Khurais oil field.

According to U.S. sources, 17 missiles or drones were fired, not the 10 the Houthis claim, and cruise missiles may have been used. Some targets were hit on the west-northwest facing sides, which suggests they were fired from the north, from Iran or Iraq.

But according to The New York Times, some targets were hit on the west side, pointing away from Iraq or Iraq as the source. But as some projectiles did not explode and fragments of those that did explode are identifiable, establishing the likely source of the attacks should be only a matter of time. It is here that the rubber meets the road.

Given Pompeo’s public accusation that Iran was behind the attack, a Trump meeting with Iranian President Hassan Rouhani at the U.N. General Assembly’s annual gathering next week may be a dead letter.

The real question now is what do the Americans do when the source of the attack is known and the call for a commensurate response is put directly to our “locked-and-loaded” president.

If the perpetrators were the Houthis, how would Trump respond?

For the Houthis, who are native to Yemen and whose country has been attacked by the Saudis for four years, would, under the rules of war, seem to be entitled to launch attacks on the country attacking them.

Indeed, Congress has repeatedly sought to have Trump terminate U.S. support of the Saudi war in Yemen.

If the attack on the Saudi oil field and oil facility at Abqaiq proves to be the work of Shiite militia from inside Iraq, would the United States attack that militia whose numbers in Iraq have been estimated as high as 150,000 fighters, as compared with our 5,000 troops in-country?

What about Iran itself?

If a dozen drones or missiles can do the kind of damage to the world economy as did those fired on Saturday — shutting down about 6% of world oil production — imagine what a U.S.-Iran-Saudi war would do to the world economy.

In recent decades, the U.S. has sold the Saudis hundreds of billions of dollars of military equipment. Did our weapons sales carry a guarantee that we will also come and fight alongside the kingdom if it gets into a war with its neighbors?

Before Trump orders any strike on Iran, would he go to Congress for authorization for his act of war?

Sen. Lindsey Graham is already urging an attack on Iran’s oil refineries to “break the regime’s back,” while Sen. Rand Paul contends that “there’s no reason the superpower of the United States needs to be getting into bombing mainland Iran.”

Divided again: The War Party is giddy with excitement over the prospect of war with Iran, while the nation does not want another war.

How we avoid it, however, is becoming difficult to see.

John Bolton may be gone from the West Wing, but his soul is marching on.

There’s something rotten in the Five Eyes intelligence alliance, an intelligence sharing community that includes the US, Canada, the UK, New Zealand and Australia. Canada on Friday revealed that it had arrested the former director general of the RCMP’s National Intelligence Coordination Center, one of the country’s top intelligence officials, but Canada wouldn’t say exactly what he had done.

That has allowed unsavory suspicions that he was some how in league with Russian criminals who laundered money through Canada to fester.

All we know is that Cameron Ortis, a director general with the RCMP’s intelligence unit, has been charged under a 2012 security of information law used to prosecute spies. According to Reuters, his arrest on what amounts to charges of leaking secret information could hurt intelligence operations by “allied nations,” the RCMP said on Monday. And that could hurt Canada’s standing inside five-eyes.

Here’s the RCMP’s only comment on the arrest so far:

“We are assessing the impacts of the alleged activities as information becomes available,” RCMP Commissioner Brenda Lucki said in a statement. “We are aware of the potential risk to agency operations of our partners in Canada and abroad and we thank them for their continued collaboration.”

[…]

“Mr. Ortis had access to information the Canadian intelligence community possessed,” said Lucki. “He also had access to intelligence coming from our allies both domestically and internationally.”

Creating even more suspense, RCMP Commissioner Lucki told Reuters that the “extremely unsettling” allegations against Ortis have “shaken many people throughout the RCMP.”

Lucki is expected to provide an update on Tuesday.

But this didn’t stop Reuters from quoting Bill Browder, the UK money manager who became a booster for the Russia collusion narrative that afflicted the first two years of the Trump Administration.

Browder said he met Ortis in 2017 twice after requesting the RCMP look into money laundering by Russian criminal groups.

“If he is compromised in any way then it obviously raises questions about whether the investigation we had tried to initiate was compromised,” he said by phone from London, adding that the arrest had been “a complete surprise.”

Has Moscow managed to penetrate five eyes? There’s no evidence of that, at least none that has been shared with the press or the public, but as Reuters makes clear, it shouldn’t be ruled out.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Over the last few days, the internet has been abuzz with commentary about the spike in interest rates. Of course, the belief is that the spike in rates is “okay” because the market are still rising. 

“The yield on the benchmark 10-year Treasury note was poised for its largest weekly rally since November 2016 as investors checked prior concerns that the U.S. was careening toward an economic downturn.” – CNBC

See, one good economic data point and apparently everything is “A-okay.” 

Be careful with that assumption as the backdrop, both economically and fundamentally, does not support that conclusion. 

While the 10-year Treasury rate did pop up last week, it did little to reverse the majority of “inversions” which currently exist on the yield curve. While we did hit the 90% mark on August 28th, the spike in rates only reversed 2 of the 10 indicators we track. 

Nor did it reverse the most important inversion which is the 10-year yield relative to the Federal Reserve rate. 

However, it isn’t the “inversion” you worry about. 

Take a look at both charts carefully above. It is when these curves “un-invert” which becomes the important recessionary indicator. When the curves reverse, the Fed is aggressively cutting rates, the short-end of the yield curve is falling faster than the long-end as money seeks the safety of “cash,” and a recession is emerging.

As I noted in yesterday’s missive on the NFIB survey, there are certainly plenty of warning signs the economy is slowing down. 

“ In turn, business owners remain on the defensive, reacting to increases in demand caused by population growth rather than building in anticipation of stronger economic activity. 

What this suggests is an inability for the current economy to gain traction as it takes increasing levels of debt just to sustain current levels of economic growth. However, that rate of growth is on the decline which we can see clearly in the RIA Economic Output Composite Index (EOCI). 

All of these surveys (both soft and hard data) are blended into one composite index which, when compared to GDP and LEI, has provided strong indications of turning points in economic activity. (See construction here)”

“When you compare this data with last week’s employment data report, it is clear that recession” risks are rising. One of the best leading indicators of a recession are “labor costs,” which as discussed in the report on “Cost & Consequences Of $15/hr Wages” is the highest cost to any business.

When those costs become onerous, businesses raise prices, consumers stop buying, and a recession sets in. So, what does this chart tell you?”

There is a finite ability for either consumers or businesses to substantially sustain higher input costs in a slowing economic environment. While debt can fill an immediate spending need, debt does not lead to economic growth. It is actually quite the opposite, debt is a detractor of growth over the long-term as it diverts productive capital from investment to debt service. Higher interest rates equals higher debt servicing requirements which in turns leads to lower economic growth.

The Risk Of Liquidity

In the U.S., we have dismissed higher rates because of a seemingly strong economy. However, that “strength” has been a mirage. As I previously wrote:

“The IIF pointed out the obvious, namely that lower borrowing costs thanks to central banks’ monetary easing had encouraged countries to take on new debt. Amusingly, by doing so, this makes rising rates even more impossible as the world’s can barely support 100% debt of GDP, let alone 3x that.”

That illusion of economic growth has kept investors blind to the economic slowdown which is already occurring globally. However, with global bond yields negative, the US Treasury is the defacto world’s risk-free rate. 

If global bond yields rise, by any significant degree, there is a liquidity funding risk for global markets. This is why, as I noted this past week, the ECB acted in the manner it did to increase liquidity to an already illiquid market. The reason, to bail out a systemically important bank. To wit:

“We had previously stated the Central Banks are going to act to bail out systemically important banks which are on the brink of failure – namely, Deutsche Bank ($DB) Not surprisingly, this was the same conclusion Bloomberg finally arrived at:

“Deutsche Bank AG will benefit the most by far from the European Central Bank’s new tiered deposit rate. Germany’s largest lender stands to save roughly 200 million euros ($222 million) in annual interest paymentsthanks to a new rule that exempts a big chunk of the money it holds at the ECB from the negative rate the central bank charges on deposits. That’s equivalent to 10% of the pretax profit the analysts expect the bank to report in 2020, compared with an average of just 2.5% for the EU banks included in the analysis.”

When you combine rising yields with a stronger U.S. dollar it becomes a toxic brew for struggling banks and economies as the global cost of capital rising is the perfect cocktail for a liquidity crunch.

Liquidity crunches generally occur when yield curves flatten or invert. Currently, as noted above, the use dollar has been rising, as the majority of yield curves remain inverted. This is a strong impediment for economic growth as funding costs are distorted and the price of exports are elevated. This issue is further compounded when you consider the impact of tariffs on the cost of imports which impacts an already weak consumer. 

Yes, for now the US economy seems to be robust, and defying the odds of a slowdown. However, such always seems to be the case just before the slowdown begins. It is likely a US downturn is closer than most market participants are predicting.

If we are right, this is going to leave the Federal Reserve in a tough position trying to reverse rates with inflation showing signs of picking up, unemployment low, and stocks near record highs.

Concurrently, bond traders are still carrying one of the largest short positions on record, leaving plenty of fuel to drive rates lower as the realization of weaker economic growth and deteriorating earnings collide with rather excessive stock market valuations. 

How low could yields go. In a word, ZERO.

While that certainly sounds implausible at the moment, just remember that all yields globally are relative. If global sovereign rates are zero or less, it is only a function of time until the U.S. follows suit. This is particularly the case if there is a liquidity crisis at some point.

It is worth noting that whenever Eurodollar positioning has become this extended previously, the equity markets have declined along with yields. Given the exceedingly rapid rise in the Eurodollar positioning, it certainly suggests that “something has broken in the system.” 

You can see this correlation to equities more clearly in the chart below. 

Did Something Break?

The rush by the Central Banks globally to ease liquidity, the ECB restarting the QE, and the Federal Reserve cutting rates in the U.S. suggest there is a liquidity problem somewhere in the system. 

Ironically, as I was writing this report, something “broke.” 

“Rising recession concerns in August – manifesting in the form of an inverted yield curve, cash hiding in repo, and a slow build in UST supply – kept secured funding pressures at bay. However, the dollar funding storm we warned about has just made landfall as the overnight general collateral repo rate, an indicator of secured market stress and by extension, dollar funding shortages, soared from Friday’s close of 2.25% to a high of 4.750%, a spike of 250bps…” – Zerohedge

This is likely just a warning for now.

[ZH: Things went a little more turbo this morning as Effective Fed funds soared above IOER and the Fed suddenly rushed to the rescue with $53.2 billion in overnight-repo funding]

Given the disproportionate role of quant-driven strategies, leveraged traders, and the compounded risk of “passive strategies,” there is profound market risk when rates rise to quickly. If the correlations that underpin the multitude of algo-driven, levered, risk-parity portfolios begin to fail, there is more than a significant risk of a disorderly reversion in asset prices. 

The Central Banks are highly aware of the risks their policies have grown in the financial markets. Years of zero interest rates, massive liquidity injections, and easy financial standards have created the third asset bubble this century. The problem for Central Bankers is the bubble exists in a multitude of asset classes from stocks to bonds, and particularly in the sub-prime corporate debt market.

As Doug Kass noted on Monday, roughly 80% of loan issuers have no public securities (which serves to limit financial disclosure) and 62% of junk issuers have only 144A bonds.

Source: JPM, Bloomberg Barclays, Prequin

However, here is the key point:

“While a paucity of financial disclosure is not problematic during a bull market for credit, it is a defining feature of a liquidity crisis during a bear market. Human beings are naturally inclined towards fear–even panic–when they are unable to obtain the information they deem critical to their (financial) survival.” – Tad Rivelle, TCW

As noted, liquidity is the dominant risk in the multitude of “passive investing products” which are dependent upon the underlying securities that comprise them. As Tad notes:

“There is yet another feature of this cycle, that while not wholly unique will likely play a major supporting role in the next liquidity crisis: the passive fund. Passive funds are the epitome of the low information investor. 

Anyone wonder what might happen should passive funds become large net sellers of credit risk? In that event, these indiscriminate sellers will have to find highly discriminating buyers who–you guessed it–will be asking lots of questions. Liquidity for the passive universe–and thus the credit markets generally–may become very problematic indeed.”

The recent actions by Central Banks certainly suggests risk has risen. Whether this was just an anomalous event, or an early warning, it is too soon to know for sure. However, if there is a liquidity issue, the risk to “uniformed investors” is substantially higher than most realize. As Doug concludes:

“Never before in history have traders and investors been so uninformed. Indeed, some might (with some justification) say that never before in history have traders and investors been so stupid!

But, the conditions of fear and greed have not been repealed — and will contribute to bouts of liquidity changes that range from, and alternate between, where ‘anything goes’ and ‘nothing is believed.’

Arguably, stock and bond prices have veered from the real economy as the cocktail of easing central banks and passive investing strategies produce a constant bid for financial assets, suppresses volatility and, in the fullness of time, will likely cause a liquidity ‘event.’ 

While the absence of financial knowledge, disclosure and the general lack of skepticism are accepted in a bull market, sadly in a bear market (when everyone is “on the same side of the boat,”) it is a defining feature of a liquidity crisis.”

While those in the mainstream media only focus on the level of the S&P 500 index to make the determination that all is right with the world, a quick look from behind the “rose colored” glasses should at least give you a reason pause. 

Risk is clearly elevated, and investors are ignoring the warning signals as markets continue to bid higher.

We saw many of the same issues in 2008 when Bear Stearns collapsed. 

No one paid attention then either.

Stunning pictures have emerged from Swedish website Aftonbladet showing a Tesla Model S fully engulfed in flames after the car’s passenger seat reportedly caught fire while the car was being driven.

And the fire looks like it may just be another case of a Tesla spontaneously combusting. The car was reportedly not involved in a crash, according to the report. “The car started to burn by itself,” the report says. 

The car began burning on the “E18 at Annelund’s traffic area, in the direction of Västerås from Stockholm,” a translated version of the article says.

The driver was able to calmly stop the car and get himself out unharmed.

Peter Pettersson, management operator at the Stockholm rescue service said that after the fire, there is only a “shell” of the car left. 

We will follow up on this story as more details become available. 

Authored by Tom Luongo,

When President Trump fired National Security Adviser John Bolton last week rational people the world over cheered.

When there was news that Trump would meet on the sidelines of the U.N. General Assembly in a few weeks there were sighs of relief.

When Benjamin Netanyahu goes to Moscow to get Vladimir Putin’s blessing to continue airstrikes in Syria was told no, the world said, “Finally! Enough is enough.”

The problem is that there were also very powerful people who were not happy about these things.

Moreover, there are a lot of nervous people out there worried that Tuesday’s election in Israel will not go the way they want it.

A lot of people have invested a lot of time and money in ensuring Netanyahu stays in power. And I don’t just mean Bibi himself, who will likely go to jail on corruption charges if he doesn’t win.

I mean a lot of people in the U.S., Saudi Arabia, the U.K. and in Europe, all of the places where anti-Russian, anti-Iranian and pro-Israeli sentiments abound.

And this brings up the main question I always have in the wake of one of these major escalations of tensions with the country currently catching the Twin Eyes of Sauron in D.C. and Tel Aviv.

Why do they always seem to occur right after moments of de-escalation and there’s the threat of peace breaking out somewhere?

Why is it that every time President Trump tries to push the U.S. and the world away from war within a few days there’s an incident which pushes us right back to the brink of it?

Trump visits Kim Jong-un in North Korea, making history, there are attacks on UAE oil tankers. Trump refuses to attack Iran over them shooting down a Global Hawk drone in Iranian airspace escorted by a fully-crewed Poseiden P-8.

Britain seizes the Grace 1 oil tanker. Israel attacks Shi’ite Militia targets outside of Baghdad.

Go back to President Trump first, and biggest, geopolitical blunder. The Syrian Army wins a major battle and is on the verge of victory, and a chemical weapons attack happens deep in Al-Qaeda controlled territory blamed on the SAA.

Trump then launches 57 tomahawks at the Al-Shairat airbase.

Trump declares we’re pulling out of Syria, Israel openly bombs targets deep in Syria. His staff, including John Bolton, freak out and walk it back.

The Houthis send a couple of drones at an Aramco facility far beyond their known capabilities and the UAE pulls out of the Saudi coalition in Yemen.

Moscow has had its fill of Netanyahu. He’s openly mocking Trump at international forums, first offering to sell the U.S. Russia’s hypersonic missiles at the G-20 and then offering to sell S-400 missile defense systems to the Saudis to protect their people from outside actors.

All with tongue firmly implanted in cheek.

Things look bad for the alliance between the U.S., Israel and Saudi Arabia, when your opponents are laughing at you openly. In that moment Putin exposed that the emperor truly was standing naked in front of the world.

And yet, after all of these coincidences I’m supposed to believe, without evidence again, that Iran would jeopardize its future at the very moment when everything is beginning to break their way and the U.S. maximum pressure campaign is failing?

The very fact that we have been shown zero proof of what happened more than 48 hours after the event which has every neocon in the U.S. clamoring for war is your biggest tell that there is something very off about this incident.

Even President Trump doesn’t believe this as he is taking the same tack rhetorically now that he did after the U.S. Global Hawk drone was shot down.

We’ve gone from:

Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!

— Donald J. Trump (@realDonaldTrump) September 15, 2019

To

“I don’t want to have war with anybody” but our military is prepared, Trump says at the White House, where he was meeting with Bahrain Crown Prince Salman bin Hamad Al Khalifa. Furthermore, the president said the US is not looking at retaliatory options until he has “definitive proof” that Iran was responsible for attacks on Saudi Arabian oil facilities.

Still, Trump told reporters in the Oval Office that the US “is prepared” if the attacks warrant a response.

Also notably, when asked if he has promised to protect the Saudis, the president responded “No, I haven’t promised the Saudis that… We have to sit down with the Saudis and work something out.”

Moreover, the stunning lack of support from Europe and the rest of the world makes it incredibly suspect that the story that we’ve been told to date, just like with the Global Hawk drone, is anything close to the real one.

And it seems Trump may believe that as well.

In the end, as always, we should be asking the most salient question surrounding this attack.

Cui Bono? (Who Benefits?)

Because it certainly isn’t Iran.

But we know who. The bombs had barely hit their targets when AIPAC’s favorite son, Lindsay Graham, was out in full throat for war. Secretary of State Mike Pompeo told the world Iran was behind 100 strikes of this kind.

Not a shred of evidence. And Trump’s first response was to subordinate U.S. troops sworn to uphold the Constitution and defend the U.S. to the terrorist-funding, repressive regime in Saudi Arabia to do what, exactly?

The Saudis needs $80+ per barrel oil.

The U.S. frackers need $60+ and zero-bound interest rates to keep the red ink flowing just slow enough to get yield-starved pension funds to bite on the next round of unpayable loans.

Israel needs a strong alliance and U.S. presence in the Middle East lest it have to act like a normal country by respecting its borders and making nice with its neighbors now that it has been exposed as one of the chief architects and supporters of the project to turn Syria into a failed state run by Takfiri crazies and anyone else no one wants in their back yard.

But the biggest question of all in this is simple. How dumb do these people think we are?

We can read licence plates from space but we can’t tell where a swarm of missiles that hits one of the most strategically important piece of real estate in the entire world came from?

Seriously?

Whenever a major incident like this happens there’s always this ridiculous fog of war over what happened to obfuscate reality and blame the current enemy of the empire.

The truth is that the Houthis could have pulled this off with help from Iran and there’s little to stop it from happening again and again. They proved their point a few weeks ago.

The Saudis have lost in Yemen. They are now losing a helluva lot more than that.

Iran is serious about taking everyone’s ability to sell oil off the table if they are denied.

Why should anyone be surprised that the Houthis want to cripple Saudi Arabia for its disastrous war and Iran wouldn’t want to assist them in doing so?

Moreover, why isn’t their response justified given the blatant aggression against both?

When is someone in D.C. going to finally realize there is no winning play with Iran anymore?

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