Tag Archives: Liquidity

Federal Reserve Admits It Pumped More than $6 Trillion to Wall Street in Recent Six Week Period, by Pam Martens and Russ Martens

You get the feeling that everybody is holding their breath, hoping the repo market doesn’t blow up, but that it’s going to blow up. From Pam Martens and Russ Martens at wallstreetonparade.com:

If the Federal Reserve was looking for a media lockdown on news about the trillions of dollars in cumulative repo loans it has funneled quietly to Wall Street’s trading houses since September 17 of last year, it could not have found a better cloud cover than Donald Trump. First the impeachment proceedings bumped the Fed’s money spigot from newspaper headlines. Then, this past Friday, as the Fed released its December meeting minutes at 2:00 p.m., with its highly anticipated plans to be announced for the future of this vast money giveaway to Wall Street, that news was ignored as the media scrambled to cover Trump’s “termination” of General Qasem Soleimani, the head of Iran’s Quds Force, which raised the immediate specter of a retaliatory strike against the U.S. by Iran.

The Fed’s minutes revealed that after multiple expansions of this vast money spigot, which was previously set to lapse in January after getting the Wall Street trading houses through the year-end money crunch, instead it may be extended through April. The minutes read as follows:

“The manager also discussed expectations to gradually transition away from active repo operations next year as Treasury bill purchases supply a larger base of reserves. The calendar of repo operations starting in mid-January could reflect a gradual reduction in active repo operations. The manager indicated that some repos might be needed at least through April, when tax payments will sharply reduce reserve levels.”

Corporate and individual tax payments occur every April. The Fed offers no explanation as to why this April is different and requires a multi-trillion-dollar open money spigot from the Fed.

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A “Market” That Needs $1 Trillion in Panic-Money-Printing by the Fed to Stave Off Implosion Is Not a Market, by Charles Hugh Smith

The Fed cannot conjure buyers when everyone wants to sell. From Charles Hugh Smith at oftwominds.com:

It was all fun and games enriching the super-wealthy but now the karmic cost of the Fed’s manipulation and propaganda is about to come due.

A “market” that needs $1 trillion in panic-money-printing by the Fed to stave off a karmic-overdue implosion is not a market: a legitimate market enables price discovery. What is price discovery? The decisions and actions of buyers and sellers set the price of everything: assets, goods, services, risk and the price of borrowing money, i.e. interest rates and the availability of credit.

The U.S. has not had legitimate market in 12 years. What we call “the market” is a crude simulation that obscures the Federal Reserve’s Socialism for the Super-Wealthy: the vast majority of the income-producing assets are owned by the super-wealthy, and so all the Fed money-printing that’s been needed to inflate asset bubbles to new extremes only serves to further enrich the already-super-wealthy.

The apologists claim the bubbles must be inflated to “help” the average American, but that claim is absurdly specious. The majority of Americans “own” near-zero assets that earn income; at best they own rapidly-depreciating vehicles, a home that doesn’t generate any income and a life insurance policy that pays off only when they pass away.

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“Massive… Huge… Largest Ever”: Fed Will Flood Market With Gargantuan $500 Billion In Liquidity To Avoid Year-End Repo Crisis, by Tyler Durden

It looks like the Fed will bring in very heavy artillery to prevent an end-of-year repo crisis. From Tyler Durden at zerohedge.com:

In previewing today’s Fed statement regarding repurchase operations, on Tuesday Curvature Securities repo expert Scott Skyrm said that he expects the Fed to announce a $50 billion (at least) term operation for Monday December 23 (double the current term ops) and a $50 billion (at least) term operation for Monday, December 30. This prediction was in response to Zoltan Pozsar’s warning that reserve levels are too low and the result would be a market crash that could spark QE4.

Well, moments ago the NY Fed did publish it latest weekly “Statement Regarding Repurchase Operations” as expected laying out the Fed’s expected repo operations for the period December 13 – January 14… and it blew Skyrm’s expectations out of the water

According to the statement, the NY Fed will continue to offer two-week term repo operations twice per week, four of which span year end. In addition, the Desk will also offer another longer-maturity term repo operation that spans year end. The amount offered in this operation will be at least $50 billion, just as Skyrm expected.

But there was more. Much more.

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“It’s About To Get Very Bad” – Repo Market Legend Predicts Market Crash In Days, by Tyler Durden

The nice thing about the headline prediction is that we’ll know fairly soon if it’s correct or not. From Tyler Durden at zerohedge.com:

For the past decade, the name of Zoltan Pozsar has been among the most admired and respected on Wall Street: not only did the Hungarian lay the groundwork for our current understanding of the deposit-free shadow banking system – which has the often opaque and painfully complex short-term dollar funding and repo markets – at its core…

… but he was also instrumental during his tenure at both the US Treasury and the New York Fed in laying the foundations of the modern repo market, orchestrating the response to the global financial crisis and the ensuing policy debate (as virtually nobody at the Fed knew more about repo at the time than Pozsar), serving as point person on market developments for Fed, Treasury and White House officials throughout the crisis (yes, Kashkari was just the figurehead); playing the key role in building the TALF to backstop the ABS market, and advising the former head of the Fed’s Markets Desk, Brian Sack, on just how the NY Fed should implement its various market interventions without disrupting and breaking the most important market of all: the multi-trillion repo market.

In short, when Pozsar speaks (or as the case may be, writes), people listen (and read).

$1.6 Trillion Fund Spots A New, Ticking Time Bomb In The Market, by Tyler Durden

If mutual funds specializing in bonds and other forms of debt all head for the exit at the same time, banks will be unable to handle the demand for liquidity. From Tyler Durden at zerohedge.com:

First it was the shocking junk bond fiasco at Third Avenue which led to a premature end for the asset manager, then the three largest UK property funds suddenly froze over $12 billion in assets in the aftermath of the Brexit vote; two years later the Swiss multi-billion fund manager GAM blocked redemptions, followed by iconic UK investor Neil Woodford also suddenly gating investors despite representations of solid returns and liquid assets, and most recently the ill-named, Nataxis-owned H20 Asset Management decided to freeze redemptions.

By this point, a pattern had emerged, one which Bank of England Governor Mark Carney described best when he said last month that investment funds that promise to allow customers to withdraw their money on a daily basis are “built on a lie.”

And now, the chief investment officer of Europe’s biggest independent asset manager agrees with him, because while for much of 2019 the biggest risk bogeymen were corporate credit, leveraged loans, and trillions in negative yielding debt, gradually consensus is emerging that investment funds themselves may be the basis for the next liquidity crisis.

“There is no point denying we are faced with a looming liquidity mismatch problem,” said Pascal Blanque, who oversees more than 1.4 trillion euros ($1.6 trillion) as the CIO of Amundi SA, according to Bloomberg’s Mark Gilbert who in a Bloomberg View piece writes that Blanque told him that the prospect of melting liquidity is one of “various things keeping me awake at night.”

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Is the 9-Year Long Dead Cat Bounce Finally Ending? by Charles Hugh Smith

Charles Hugh Smith calls the last nine years in financial market just a dead cat bounce, because fundamentally nothing has been fixed. SLL is not arguing with him. From Smith at oftwominds.com:

Ignoring or downplaying these fundamental forces has greatly increased the fragility of the status quo.
The term dead cat bounce is market lingo for a “recovery” after markets decline due to fundamental reversals. Markets tend to bounce back after sharp declines as participants (human and digital) who have been trained to “buy the dips” once again buy the decline, and the financial media rushes to reassure everyone that nothing has actually changed, everything is still peachy-keen wonderfulness.
I submit that the past 9 years of market “recovery” is nothing but an oversized dead cat bounce that is finally ending. Here is a chart that depicts the final blow-off top phase of the over-extended dead cat bounce:
Why are the past 9 years nothing but an extended dead cat bounce? Nothing that’s fundamentally broken has been fixed, and none of the dynamics that are undermining the status quo have been addressed.
The past 9 years have been one long dead cat bounce of extend and pretend, i.e. do more of what’s failed because to even admit the status quo is being undermined by fundamental forces would panic those gorging at the trough of the status quo’s lopsided rewards.
This 9-year dead cat bounce was pure speculation driven by cheap central bank credit and liquidity. Demographics, environmental degradation, the decline of middle class security, the erosion of paid work, the bankruptcy of public and private pension plans, the global debt bubble, soaring wealth and income inequality, the corruption of democracy into a pay-to-play bidding war, the destruction of price discovery via market manipulation by those who have turned markets into signaling devices that all is well, the laughable distortion of statistics to mask the real world decline in our purchasing power (inflation is near-zero–really really really), the perverse incentives to leverage up bets in financial instruments that have no connection to the real-world economy–none of these have been addressed in the market melt-up.

Back To Reality, by Robert Gore

This site spends little time discussing and analyzing central banks’ policies. Some of the media’s preoccupation with central banks reflects an ideological endorsement of command and control SLL does not share. There are people, mostly well-educated, who actually believe that economies with millions of producers, consumers, and businesses, engaging daily in billions of transactions, can be directed by a group of central bank bureaucrats manipulating short-term interest rates and exchanging the government’s debt for their own fiat debt. Historically Efficacious Government and Central Bank Control of Economies is an even shorter book than The Humility of Donald Trump. The titles of both are longer than the contents, but while faith in central banks waxes and wanes, it never dies. Some of the aforementioned preoccupation is journalistic and analytical laziness: it’s easier to speculate and report on central bank statements and policies than it is to determine what’s actually going on with an economy.

SLL devoted two paragraphs to the Fed’s latest move, and the thrust of those paragraphs was that markets had already marked up rates for a substantial segment of borrowers, starting about six months ago, and the Fed, as it usually does, was following the market. The Fed’s zero rate federal funds target took short terms rates lower than they would have been absent that Fed policy. Europe and Japan’s negative interest rates are an even greater distortion from free market rates. However, the global economy was burdened with more debt than it could sustain back in 2008, when the Fed kicked off the global central banks’ easy credit campaign. That excess of debt ensured that interest rates would remain low by historical standards (for the most creditworthy borrowers), whether central banks intervened or not.

Credit expansion and contraction have two constituent elements: psychology and hard economic reality, and the former is more important than the latter. From too indebted in 2008, the global economy has gone to an even more indebted extreme, led by governments and central banks. The change from debt expansion to debt contraction is not based on some hard ratio of debt to ability to service it, but rather on the psychology of the herd changing from optimism to pessimism.

By late last year it was objectively clear that crashing commodity prices, particularly oil, would impair the creditworthiness of commodity producers (see “Oil Ushers in the Depression”). Every debt is someone else’s asset. Fraying creditworthiness, given this accounting identity and the inextricably intertwined nature of credit in the debt-based global economy, will spread from any significant part of the economy to other parts of the economy. Commodities qualify as a significant part of the global economy. They are certainly a bigger sector than the US housing and mortgage-finance market was in 2008, and we need no reminder that the housing implosion turned into the global financial crisis. So it was also objectively clear late last year that deteriorating creditworthiness in commodities would not remain confined to commodities.

Nevertheless, it has taken most of this year for the equity herd to get the joke. It has watched the hole of Fed policy and not the doughnut of the global economy and souring credit. Who says they don’t ring a bell at the top? Credit markets have been clanging since mid year. Interest rate spreads on commodity producers debt widened first, followed by financial stress and actual insolvency and bankruptcies in that sector. The stress has spread. What is erroneously referred to as “contagion,” is actually a widening margin call: deteriorating asset prices and shrinking economic activity pressure related industries, forcing cutbacks and asset sales. This contraction has been reflected in financial markets, where deteriorating liquidity for lower-quality credit of all issuers, not just commodity producers, has forced mutual funds and exchange traded funds that invest in those credits, faced with surging redemptions, to either sell at fire sale prices or bar redemptions until, they hope, prices improve.

Markets are nothing if not bipolar, so the stock market staged a euphoric rally after the Fed announced its rate hike Wednesday. However, with the Fed out of the way, it was back to the depressing reality of credit contraction and the shrinking global economy. Thursday the market gave back the entire rally, and Friday the Dow closed down 367 points.

On a day-to-day basis, SLL makes no attempt to predict what markets are going to do. However, if the ever-changing speculative psychology has switched from Fed-preoccupation to contemplation of the abysmal state of the global economy and the ongoing credit carnage, the next two weeks may be “interesting” in the sense of that old Chinese proverb. Many traders and institutions have already closed their books on the year and will not be transacting. Thus, a falling stock market may encounter even less buy-side liquidity than when the herd scatters during “normal” market drops.

Or perhaps the market just meanders, or rallies. Nobody is infallible in these matters, which is why it’s best to stay focused on economic and financial reality. Right now, regardless of what the stock market does before New Year’s, that reality looks bleak.

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Commodity Trading Giants Unleash Liquidity Scramble, Issue Record Amounts Of Secured Debt, by Tyler Durden

One lesson the world will have to relearn from the last financial crisis: liquidity is money or some other easily monetizable and unencumbered asset. Revolving lines of credit, letters of credit, and other bank committments become debt when drawn upon. They have an unfortunate tendency to dry up when the debtor most needs them. Even when they are available to be drawn upon, they have to be paid back. When a company starts talking about all its bank commitments and its confidence in its own liquidity, it’s usually a sign of trouble dead ahead. From Tyler Durden at zerohedge.com:

Earlier today, in its latest attempt to restore confidence in its brand and business model after suffering a historic stock price collapse, Glencore – whose CDS recently blew out to a level implying a 50% probability of default – released a 4 page funding worksheet which was meant to serve as a simplied summary of its balance sheet funding obligations and lending arrangements to equity research analysts who have never opened a bond indenture, and which among other things provided a simplied and watered-down estimate of what could happen if and when the company is downgraded to junk.

Meanwhile, in a furious race to shore up as much liquidity as possible, Glencore – which a month ago announced a dramatic deleveraging plan – and its peers have been quietly scrambling to raise billions in secured funding. Case in point none other than Glencore’s biggest competitor and the largest independent oil trader in the world, Swiss-based, Dutch-owned Vitol Group, whose Swiss unit Vitol SA earlier today raised a record $8 billion in loans.

It is not alone.

As Bloomberg reports, another name profiled previously here, privately-held (but with publicly-traded debt) Trafigura “won improved terms on a $2.2 billion loan refinancing deal on Oct. 1 via a group of 28 banks. Swiss commodity traders Gunvor Group Ltd. and Mercuria Energy Group Ltd. are also marketing credit facilities totaling $2 billion.”

Louis Dreyfus Commodities, the world’s largest raw-cotton and rice trader, said in its interim report last month that it had six revolving credit facilities with staggered maturity dates totaling $3.3 billion. In June, it amended and extended its North American facilities totaling $1.6 billion and in July it refinanced a $400 million Asian lending facility with the company securing an option to request an increase of $100 million.

Noble Agri, the agricultural commodity trader majority owned by China’s Cofco Corp., attracted four new lenders to its $1.58 billion one-year revolving credit facility, people familiar with the matter said this month.

In short – a race against time to pledge as much unencumbered collateral as possible for future funding needs, because as every CEO knows you raise capital when you can, not when you have to. Yet this is odd, because even as the companies hold investor meetings and publicly comfort investors that they are adequatly funded and see no need for a liquidity-raising scramble, that’s precisely what the world’s commodity traders are doing.

Mom And Pop “Will Probably Get Trampled”: Alliance Bernstein Warns On Bond ETF Armageddon, by Tyler Durden

What looks like liquidty may be a mirage, especially when Mr. and Ms. Retail Investor try to hit the bid. From Tyler Durden at zerohedge.com:

Right up until China threw the financial world into a frenzy by devaluing the yuan right smack in the middle of a stock market meltdown that Beijing was struggling to contain, bond market liquidity was all anyone wanted to talk about.

Of course we’ve been talking about it for years (literally), as have a few of the sellside’s sharper strategists, but earlier this year the mainstream financial news media caught on, followed in short order by the rest of the Wall Street penguin brigade, and before you knew it, even the likes of Jamie Dimon were shouting from the rooftops about illiquid corporate credit markets.

The problem, in short, is that the post-crisis regulatory regime has made dealers less willing to warehouse bonds, leading to lower average trade sizes, sharply lower turnover, and a generalized lack of market depth. That in turn, means that trading in size without triggering some kind of dramatic move in prices is more difficult.

But that’s not the end of the story.

Seven years of ZIRP have i) herded yield-starved investors into riskier assets, and ii) encouraged corporates to take advantage of voracious demand and low borrowing costs by issuing more debt. The rapid proliferation of ETFs and esoteric bond funds has encouraged this phenomenon by giving investors easier access to corners of the bond market where they might normally have never dared to tread. These vehicles have also given investors the illusion of liquidity.

Ultimately then, the picture that emerges is of an increasingly crowded theatre (lots of IG and HY supply and plenty of demand) with an ever smaller exit (dealers increasingly unlikely to inventory bonds in a pinch).

To continue reading: Mom and Pop “Will Probably Get Trampled”

He Said That? 8/26/15

Theodore Feight is a Lansing, Michigan-based financial advisor. He had set up an automatic sale, called a stop-loss, at $108.69, which would have been a 14 percent loss for an exchange traded fund he owned. In Monday’s tumultuous early trading, when the Dow opened down over 1000 points, Mr. Feight’s stop-loss was triggered. However, he did not get $108.69, he got $87.32, a 31 percent loss. By noon, Monday, the ETF had bounced back and was trading at $121.18, a 4.3 percent loss. From Mr. Feight:

“I’m really disappointed. They weren’t as liquid as they should have been.”

The Wall Street Journal, “Trading Tumult Exposes Flaws in Modern Markets,” 8/26/15

Liquidity in financial markets is often an illusion, disappearing just when market participants need it the most. That is not, contrary to the title of the WSJ article, a modern phenomenon. As a financial advisor, Mr. Feight should have known that liquidity dries up in crashing markets.

There is a more general lesson here. Countless speculators and investors during bull markets tell themselves that they will outsmart the market, and get out when the market starts to decline in earnest. The problem is, when they recognize that the market has begun to decline in earnest, so has everybody else. There are no bids that are even remotely close to the recent highs; bids often vanish before they’re hit, and even bids that are good are usually for small size. If you think a market is frothy, don’t fool yourself that you’ll sell after it starts down and hang on to almost all your profits. It doesn’t work that way. The time to get out of a frothy market is while it’s still frothy. You will never sell at the top, so you’ll leave some profits on the table, but the old trading adage is sell when you can, not when you have to. Bernard Baruch, who made a shekel or two in financial markets, is reported to have said: “I made my money by selling too soon.”

The other huge mistake that will be made in abundance will be by investors and speculators who belatedly realize the market is not all it is cracked up to be, vow as it crashes to sell on the first rally, and then, when the rally comes, do not sell but rather hope that they can get back to even, or even profit. The aphorism that rising markets climb a wall of worry is well-known. Another aphorism, not as well-known, comes from Robert Prechter: “Falling markets descend a slope of hope.”

There is a huge difference between professional traders who consistently make money in markets and the amateurs who consistently lose money. The pros know how and when to take a loss. As a rule, leave your emotions at the door if you want to have any chance of making money over the long-term.