Those who remember the Lehman collapse also remember the famous 666 Working Paper which showed that the deflationary move, which led to Lehman collapse has been triggered by a dive in financial paper (and only after that the Fed acutally froze a few billions in a credit line) . Those who believe that the Fed has engineered the 2008 deflationary event are point (with some good reason) to the findings of that working paper from Mineapolis Fed.
A very predictable flawed logic and dominated by fallacies tend to be outright funny. I had a good laugh reading that FT article about the money market funds building liquidity.
Here are some quotes with my highlights:
While the funds will continue to hold US Treasuries in the event of a downgrade or default, they are building up liquidity and shunning certain securities due to fears that a failure to raise the debt ceiling could trigger client redemptions.
So let me get this straight! US gov defaults on its debt but the MMF continue to keep UST paper while shunning "certain securities"?
Next there is a not so funny part:
Government-only money market funds have boosted the amount of cash available to meet redemptions within one week to 68 per cent of assets, from 48 per cent at the end of March, according to Barclays Capital. “We’ve built up liquidity with a rather meaningful amount of maturities prior to the debt ceiling,” said Robert Brown, head of Fidelity’s money market business.
If this is true than the whole thing has just become very serious. A deflationary event has already started at the bottom of the liquidity fountain, the question being just how serious the deleveraging will be. I believe it is hard to know at this stage.
Now we get the monetary surrealism part:
Wow! This is priceless, but the effect of the deflationary regime engineered by the FED for UST seems to prove it's usefulness.Even money market funds rated triple A will be able to hold securities which are not themselves triple A rated, provided that the US retains at least a single A rating.
Under more drastic default scenarios, funds could also continue to hold government debt assuming that the default is temporary: a commonly heard reference is a chastened Congress passing the Troubled Asset Relief Programme in 2008 after the stock market plummeted in reaction to its initial no vote.
They would then leave the proceeds of maturing notes uninvested. Yields on short-term money are already so low that “the cost of doing that today is almost nil”, said the head of one money market trading desk.
And in the end a little bit of vague contact with reality:
I had a smile on face reading the last part.Providing some reassurance to money market providers, however, is the lack of an alternative to US government debt in the size and volume required by clients.
“It’s a question of whether a flight to quality – when there isn’t another instrument of quality out there – invokes the same kind of panic”, said Deborah Cunningham, head of money markets for Federated Investors.
If the debt ceiling is approved, but the pathetic show in Washington plunges the whole world in deflation this would be a great achievement in financial markets manipulations.
So far, by using circular money creation, (by paying interest on excess reserves and lending at the same rate money back to depositor institution) the Fed has succeeded to produce a huge expansion of the monetary base without any significant inflationary effect.
Just by speculating the Debt Ceiling Show, we can have Timmy and Ben creating a global deleveraging move without an actual hard default, just by invoking the spectre of such a default. If they can do that, there is one question which comes to mind: are the vast majority of financial players (on a global scale) absolutely stupid or some sort of a members of a cult which is compelled to donate continuously part of the wealth to the top levels of the power pyramid on Wall Street? I reason that they can't be that stupid so it must be some sort of secret religion.
9 comments:
Two words: DARK POOLS.
That's where the real money is, right?
What's going on there?
I AM sure TBTB wanted to have a "show" for the proles before they had their medicare axed and SSI inflated away with the new, "chain-CPI".
I am NOT sure this was an intended outcome, though.
Why?
A family-member's friend works on K street, and he said that the Republicans told all the big biz honchos that, "They have this under control." Well, apparently not... it seems that it was a big bluff, and now, of course, everyone's panicking.
THAT SAID, I got emails from ibankers in SINGAPORE who were asking me how much the market will crash, best things to short, etc.
In essence, you are completely correct in your deleveraging thesis. However, we still have a huge bid in the commod complex. It is rather frightening that despite ALL of the deleveraging that has occurred, the IEA release, and other jawboning, oil is still this high. I call out Syria and Libya as the two sole causes, but wtf do I know.
The dark pools were very active short-selling in key Italian banks before the EFSF_UBER_TARP became active, and I am curious if they've been BTFD (buying the fucking dip) during the past panic-session. I need to ask a buddy with a bberg what they're up to... since I gave up trading and only do long-term investing, I just don't give a shit as much as I used to :)
Isn't it funny that the USD gets trashed to pieces when there is NO printing and in fact impending austerity? To me, it's pretty simple: the 'G' in "GDP" is potentially going to get smashed, and so the market needs to adjust for the deficit in 'G' with more fucking exports with our trading partners: hence the USD carnage.
Still, I expect the dollar to move lower over the intermediate term, and it has fuck-all to do with the Fed, as you've articulated, and everything to do with an emerging Asian middle class post-reval.
The perma-bears are getting very kinky these days....
@ qadi. Your guess is correct and the question now is what will be the reaction of the dark pools. If they are going to adopt a cautious strategy they will stay in cash waiting for the right moment to buy things on the cheap. This will amplify the deflationary trend.
My guess is they are starting a shorting fest in ROW financial institutions and on select bonds.
I had it also from my sources that the situation of the debt ceiling is supposed to be under control. However I believe the politicians are ready to play chicken till the last minute and things can go under control by some honest mistake or random event.
About the commodities bid, let's not forget than everybody and his cousin knows that USD is supposed to go down in midterm (after China's export machine falls apart) and this Fx game is expected to secure profits (in theory).
This global deflationary event in UST (not in USD) may create a favourable mild inflationary regime in the domestic US economy, since we can expect a capital repatriation from Europe and Asia.
We have talked long time ago about this mechanism.
Remember that what we consider USD is actually a bi-component currency. As a result we may see a paradox of stock markets soaring and generally an improvement in the economic conditions in US, due to this flight to safety of the capital repatriated or simply exported into US by foreign individuals who see their local economies hit by recessions and government imposed capital controls.
About perma-bears, what can I say? They should be used by now to take their losses with grace... :)
By the way, in the previous entry about the artificial scarcity induced by the financial sector in commodities, I forgot to mention the leverage by hedging in physical commodities.
This is actually a very nice way to hedge your commodity derivative contracts, of course only if you are a giant financial capital entity and you can afford to set up massive storage facilities. Once you do this the money keeps flowing from the synthetic fountain and you can start fleecing the aggregate of dumb investors who try to preserve their portfolio in commodities.
If you thought it happens only in China with pig farmers hoarding physical copper, I have news for you: in US it's done by big banks and funds and it is a pervasive trend.
Of course Goldman is everywhere in this game too. I am not talking only about oil. They are now using their dark pool contract hedging even for aluminium.
Read this article and have a good laugh:
http://business.financialpost.com/2011/07/28/goldmans-new-money-making-machine/
If you ask me how do I think the commodity prices will evolve on short term, my answer would be that it depends how Goldman (and others like them) intend to fleece their clients and how much money dumb investors have to put in commodities.
With oil, it's just going to be so easy:
Apparently, today, over 5,000 Syrian soldiers rebelled with their weapons.
It's beginning!
Btw, not only does a Syrian revolt help my E. European gas bet, but it also hurts my Nemesis, who is the chairman of the board of a company of a company operating there.
Meet the Wrath of Hashem... and the Kurds LOL
Why I'd be worried to own gold:
http://www.bloomberg.com/news/2011-07-28/goldcorp-ceo-sees-gold-price-at-1-700-an-ounce-by-end-of-year.html
QE3 would force a Chinese reval and could smash Chinese/Indian gold/silver demand.
@ quadi. Currently oil is really easy to smash, plus we are dealing also with a new revolutionary government in Libya which will be forced to open all the oil well spigots in order to pay for the recovery from the civil war.
With respect to Syria, Assad is over, unless China and Russia flex their muscles and decide to start baking Iran in the stand-off. That is quite improbable.
I agree that gold is primed for a dive, but right now I can't find any clear indication on the magnitude and timing of this move.
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