Multiple Blows to Leveraged Ponzi Finance
This week marks an historic liquidation of foreign central bank (FCB) held US securities. The total tossed overboard was $17 billion, which also brings the three week total sold to $22.0 billion. This was likely necessitated by the need for US Dollars particularly as European banks were squeezed by insolvency issues ( I refuse to use the term “liquidity”). That’s what reserves are for in theory, emergencies and not just subsidizes for Americans. If you are looking for a causa proxima to market swoons of late, look no further. Old Maid Card issuers in the US are heavily reliant on this opiate.
An aged and senile Ponzi finance system needs prodigious quantities of new credit to keep functioning. As I’ve repeated ad nauseam there comes a point where this simply hits the wall, collapsing under it ’s own weight. That point would probably look like the following chart on asset backed securities (left scale). Some crony capitalists (see yesterday’s blog) are already calling on ABS to be monetized.
Loose and easy margin requirements for various futures contracts are going by the wayside. The trading strategy of picking up nickels in front of steamrollers has morphed into something more real life and unpredictable (especially to the same models being used over and over). This of course means less leverage, and after the unwinding takes place, less trading. Look for parasites at the large trading houses to be laid off in the not to distant future. Also some firms doing business on the exchanges are using Sentinel for cash reserve purposes.
Aug. 16 (Bloomberg) — CME Group Inc., the world’s largest futures exchange, increased margin requirements on some currency, interest-rate and stock-index contracts to reduce the risk that leverage will fuel losses amid financial-market instability.
Some firms that do business on the Chicago Mercantile Exchange use Sentinel for investment services, according to CME Group.
How is commercial paper that backs up a large part of most money markets holding up? Quite shaky is the answer.
“The turbulence in subprime mortgages has now spread to the commercial paper market — a $2.2 trillion market in the USA that is the working capital lifeblood for the corporate sector,” David Rosenberg, North American economist at Merrill Lynch, wrote in a note to clients on Wednesday. “This is looking worse than just another credit cycle.” Rosenberg noted on Wednesday that more than half of the commercial paper market is backed by residential mortgages, credit card receivables, car loans and other bonds.
The Fed cut the discount rate to 5.75% from 6.25%. The discount window is open to member banks. So far this year average daily borrowing there have been averaging only $190 million. So the question: is this just symbolic, and will significant money be borrowed there at 5.75%? I think this is largely technical, and is to be used for the purpose of squaring accounts at the end of the day. In a “you pay me first” environment any responsible central bank would put this out there to help banks facilitate transactions. This not some kind of bail out or monetization program.
If the Humpty Dumpties on the wall think the later, it is my sense that they will be proven wrong, once again. Regardless of what they think, the Fed is unable to provide the kind of rescue that a collapsing Ponzi system requires, and to even attempt the Lawrence Kudlow scheme would be the ultimate in sleaze and inefficiency. Write on the chalk board 100 times: this is not a liquidity issue, it√¢‚Ǩ‚Ñ¢s an insolvency issue. Although I could retract it in a millisecond, I am giving the Fed a B grade up to this point, and I’m a harsh critic. Except for the fuzziest of thinkers, a B grade for the Fed should not be confused with bullish.
I think the most bullish thing the markets have going short term is that a lot of the Yen carry trade has already been unwound. I will post the link to COT positions this afternoon. The question though, is where are the corpses from the rapid unwind? The answer is probably extremely bearish and ought to be hitting the wires soon enough.
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