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ETF Issuers Quietly Prepare For "Market Meltdown" With Billions In Emergency Liquidity
Between the dramatic sell-off in German Bunds that unfolded over the course of three weeks beginning on April 21 and the erratic trading that ensued on Tuesday following the weakest JGB auction since 2009, the chickens, as they say, have come home to roost in government bond markets where thanks the ECB, the Fed, and the BoJ’s efforts to monetize anything that isn’t tied down, the market has become hopelessly thin.
As we’ve documented exhaustively — and as every pundit and Wall Street CEO is now suddenly screaming about — the secondary market for corporate credit faces a similar dearth of liquidity and at just the wrong time. Issuance is at record levels and money is pouring into IG and HY thanks to CB-induced herding (i.e. quest for yield) and record low borrowing costs (again courtesy of central planners), but thanks to the new regulatory regime which ostensibly aims to curtail systemic risk by cutting out prop trading, banks are no longer willing to warehouse corporate bonds (i.e. dealer inventories have collapsed), meaning that in a rout, investors will be selling into a thin market. The result will be a firesale.
So while policymakers are still willfully ignorant when it comes to honestly assessing the effect their actions are having on government bond markets, the entire financial universe seems to have recently become acutely aware of the potentially catastrophic conditions prevailing in corporate credit. These concerns have now officially moved beyond the realm of lip service and into the realm of disaster preparedness because as Reuters reports, some of the country’s largest ETF providers are arranging billion dollar credit lines that can be tapped to keep illiquidity from turning an ETF sell-off into a credit market meltdown:
The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown.
Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show.
The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis.
They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.
"You want to have measures in place in case there are high volumes of redemption so you can meet those redemptions without severely impacting the liquidity of the underlying securities," said Ryan Issakainen, exchange-traded fund strategist at First Trust…
Under the Wall Street reform act known as Dodd-Frank, banks have been shedding their bond inventories, resulting in less liquidity in fixed-income markets. Because there are fewer bonds available for trading, a huge selloff in the bond markets could worsen the effect of a liquidity mismatch in bond ETFs.
Vanguard, the second-largest U.S. ETF provider, lined up its first committed bank line of credit last year and now has a $2.89 billion facility backed by multiple banks and accessible to all of Vanguard's funds, covering some $3 trillion in assets, the Pennsylvania-based fund company told Reuters. The new setup is to "make sure that funds will be available in time of market stress when the banks themselves may have liquidity concerns," Vanguard said.
Essentially, ETF providers are worried that in a pinch (i.e. when ETF sellers outnumber ETF buyers), they will be forced to liquidate assets into structurally thin markets at fire sale prices in order to meet redemptions, triggering a collapse in the underlying securities (like HY bonds). In the pre-crisis days, this would have been mitigated by banks’ willingness to purchase what the ETF providers are looking to sell, but in the post-Dodd-Frank world this isn’t the case so the idea now is that bank credit lines will essentially allow the ETF providers to become their own dealers, meeting redemptions with borrowed cash while warehousing assets and praying waiting for a more opportune time to sell.
In case it isn’t clear enough from the above that ZIRP is in large part responsible for this, consider the following:
"These funds offer daily or even intraday liquidity to investors while holding assets that are hard to sell immediately, thus making the funds vulnerable to liquidity risk," U.S. Federal Reserve Vice Chair Stanley Fischer said in a speech in March in Germany, pointing directly to ETFs and saying they have mushroomed in size while tracking indexes of "relatively illiquid" assets.
That is all exacerbated because investors have been pouring money into bond ETFs, while banks, under regulatory pressure to limit their own holdings, have been slashing their bond inventories.
Growth in fixed-income ETFs also means there are now more products tied to corners of the bond market previously untapped by ETFs. Assets in U.S.-listed fixed-income ETFs are up nearly six-fold since 2008, to $335.7 billion at the end of April, according to Thomson Reuters Lipper data.
And why, one might ask, are investors suddenly interested in exploring “corners” of the bond market where they had previously never dared to tread thus creating demand for ever more esoteric ETF products? Because when risk-free assets are at best yielding an inflation-adjusted zero and at worst have a negative carry, investors are forced into credits they would have never considered before just so they can squeeze out some semblance of yield without simply dumping everything into equities.
Of course liquidity protection comes at a cost:
Banks facing their own reserve requirements against these lines are charging commitment fees that can range from 0.06 percent to 0.15 percent, according to company filings. If a line is actually drawn upon, there would be additional interest charged on any amount borrowed. In many cases, these costs are included in the ETF's annual expense ratio, and borne by the funds' investors.
To recap: central banks have created a hunt for yield that's driven investors into fixed income categories they wouldn't have normally considered, creating demand for ever more esoteric ETF products. Thanks to curtailed prop trading, the market for the underlying assets is even thinner than it would have otherwise been, meaning fund managers would be forced into a firesale should a wave of redemptions suddenly rear its ugly head. To mitigate this, ETF issuers are setting up credit lines with the very same banks who in the pre-crisis world would have acted as liquidity providers. The cost of these credit lines is passed on to investors via higher expense ratios meaning fund holders can go ahead and shave another 15bps off of their fixed income ETF returns which are already pitifully low thanks to ZIRP.
In the final analysis, these liquidity lines are essentially distressed loans when drawn down, and the effect is to create yet another delay-and-pray ponzi scheme whereby liquidation is temporarily forestalled by borrowed money.
Recall that Howard Marks recently warned investors against ignoring the fact that an ETF can't be more liquid than the underlying assets and the underlying assets can be highly illiquid. So while Marks may have wondered rhetorically what could happen in a worst case scenario, the market is itself now quietly taking steps to avoid that moment as long as possible
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I do not see what good that will do last time we saw credit markets freez up at the first sign of panic ..
Looks like their plans are coming around quite rapidly now, war is on the horizon, economic collapse, militarization of police, and of course that begs us to ask, what's next?
Imagine tomorrow... http://galeinnes.blogspot.com/2015/05/imagine-tomorrow.html
For all those who missed out on a bullshit 5 year ride up, this is your chance to capitalize in a much shorter time frame - short all government debt!
beware playing any paper games when this ponzi comes apart......they'll wipe you out,,,,they won't let the "little people" collect....
True but we think your chances of strolling down to the bank and collecting on all those "winnings" are well.... slim.
Yes, but they had a much smaller lever back then.
Now, who wants to be the fulcrum?
The Federal Reserve will step in with some sort of Special Investment Vehicle (Off Balance Sheet of course) that they plucked out of their arse to fund the EFT Creators to absorb any panic selling. The 0.01%'ers will be very happy so all will be good to go for new all time highs. The Ponzi will not die until the CB's are cremated. And the CB's will not be cremated until the Large Banks, aka CB Stock Holders of the CB, start to turn on each other.
absolutely correct.
Collapse comes only when the oligarchs start trying to dupe each other out of the lifeboat's queue
haha, perhaps the fed's goal is increasing leverage to such an extent that the fulcrum is crushed.
That was my first thought as well. 2008 the banks shut down those credit lines so fast almost nobody who needed to tap theirs could use it. They were completely freaked out about their counterparty risk (never being repaid because the institution using the credit line goes insolvent over a weekend). Sort of the definition of a credit market "freeze".
Also, I wonder how much of this is directed towards supporting much more pedestrian funds in the event of crisis, like, say, the recently revamped rules on stodgy old Money Markets? There's still a ton more money in those dinosaurs than there are in HY, for example. And we all remember that the shit really hit the fan after a Money Market fund "broke the buck" in September, 2008. (Certain types of Money Market funds are now/shortly will be floating NAV, not $1 as was traditionally always the case. Regardless, breaking the buck on one of them would definitely unleash the Kracken again.)
Great article, though. Good sleuthing by the Tylers on this one.
MM Reserve Fund 2008.
Exactly. I couldn't remember the name of it off the top of my head. 6 years will do that to you.
Money Markets have a TON of money in them, but if they break the buck, it won't be by 20%, like a HY bond fund easily could. It'll be by 1-2%. On the day the Reserve Fund "broke the buck" back in '08 I think it was like $0.97 and change closing NAV. (Again, from memory so don't quote me.)
one complication that will shock and confuse the fleeced is that when this baby blows the actual value of the currencies will be going with it. no one will be able to tell what a lot of money even is at that point.
Interesting comments from some investors in HY corporate bonds...
https://www.youtube.com/watch?v=qVWIh6n22Qo
That's why they will never raise rates, QE infinity forever until hyperinflation.
https://www.youtube.com/watch?v=h56UaFEpCOw
hey guys, I've got a great idea for when this beast melts down and everyone is desperate. let's get together a load of good money now to chase after the bad money later.
hahahaha. pithy.
sounds financially sound.
/sarc
Economic suicide...Funny, I don't remember any time where I volunteered for a suicide mission.....
You did when you were born.
The day you were born, you started to die.
sorry pal.. you were enlisted. you didn't know it, but the government drafted you for the Crack Debt Suicide Squad.
I made it through the first sentence.
I like it when my chickens come home to roost. They usually head for the coop at just before sundown, after eating bugs out of the yard all afternoon. I'll lock up the coop; then come back in the morning and I'll have some fresh eggs they laid for me.
What was this about again?
You got you some weird birds then. Mine lay in the day and roost at night in the coop.
I think mine lay in the day too. Morning is just the time when I check for the eggs.
I'm new to raising chickens. Got a pair of Rhode Island Reds about a month ago. What have you got?
RIR's myself. You can have them laying anytime during the day. Been good gals and pretty hardy to both hot and cold temps. Will be culling tomorrow and looking to replace with heritage gals.
Mine lay in the day, but roost at night on top of the coup unless its the winter and cold out. Black Austrolorps and Golden Buff Orphentons.
This is starting to get scary! Stop scaring Perseus son of Zeus!
2.89 billion to cover for 3 trillion????????????
Beats the shit oughta fuck all zip zilch nada zero
Mom, when I can I start playing with myself?
When your father gets home, Billy.
Is that a problem?
it's that hyper rehypothicated doozie!
The Wise owl on Winnie the Pooh says, "look! I'm walking on air!"
only enough to cover 0.01%
So, why should anyone loan money to a corp. so that they can buy their own stock, and line the CEO's pocket?
Fuck that. I'll just buy their stock instead.
Or, better yet, i'll take the money and pay off the wife's car loan. FU CB. you reap what you sow.
What an exciting time to begin exploring the possibilities of becoming an "unbanked" consumer:)
I bet the dollar will crash and too bonds as the Axis of Asian Evil silk road bank will accelerate any possible down turns by selling off their dollar and bond holding making a flight to safety appear to be a losing proposition.
Oh yes this time it will be real. Uncle bully Sam has been exposed and guess who's under that costume?
Anakin Skywalker?
Now's a good time to start, but you can never completely unbank. For instance, your pension fund and/or social security is probably going to be, at least in part, in derivatives of these ETF credit lines.
Which is exactly why as QE3 was in full force, we should have left the zero bound (if only by a token amount) essentially saying we are providing CHEAP liquidity but not FREE liquidity..
Why bother with liqudity lines for redemptions when they can just lock them down?
"Closed for WWIII' on the door.
Unfortunately, I tend to agree.
Seems they're running out of time on that front as well.
As you like to say: tick tock.
IMO, the Fed will just print moar, and activate the PPT. They won't tell you they are doing it, they will just show everyone the propaganda charts they make. How does anyone know what the Feds balance sheet truly is? When dollars are laying around like grains of sand, the Fed will still be telling everyone their balance sheet is 4 trillion.
It's not the Fed's balance sheet that's the problem in a crisis event (worse case, they could just declare that the normal rules of insovlency don't apply to them during a "national financial emergency".)
The problem is everyone ELSE's balance sheet. The cascade can affect (non-bank) companies too fast for the Fed's printed money to make it to them. Lehman went bust in a weekend. If they had made it to Monday morning they might have survived. When Lehman's debt was written off by the Reserve Fund Money Market, it caused them to "break the buck" and with that, full panic was on.
As with most things, it's like a big game of logisitcs. Having limitless printed money is only one part of the equation. Getting it where it's needed is the other half of the logistical problems. And there's nothing stopping those transmission channels from freezing up just as they did in 2008.
Ya but today, it can be wired in the time it takes to make a few key strokes on a computer. In 2008, we still had some semblence of capitalism, and they let it fail. Today, I don't think they will do that. They can basically pencil whip any number they want to with the ability to make unlimited fiat. If the market tanks now, its because they let it tank---and maybe thats their plan. Not sure the politicians will like to hear the howl of their constituents however.
That will be the signal for the RoW to finally dump the USD.
All that preparation will not go to waste.
They want the FedRes to give them a reason to justify it..
Wire transfers existed in 2008. As for letting Lehman go being a political decision....yeah, to a certain extent. I think there was an element of lost control, as well. They didn't understand the extent to which Lehman had been covering up the truth of their situation for months since the implosion of Bear Stearns. It was murky and complicated.
But Bear Stears? Absolutely, that one was an intentional decision to let them go.
Anyway, I'm pretty sure they're going to lean more heavily on shutting stuff down, limiting withdrawals and those sorts of schemes next time around. And they'll find it might even be WORSE. If you limit things by shutting markets and forbiding withdrawals now you have ZERO liquidity. You can't access ANY of it, no matter how depressed the price. And that will unlesh a whole different type of crisis that I doubt they're prepared for.
Please, such "let the majority eat cake" monetary experiments have been tried before. The outcome will be no different this time around, just the size and the scope will be much, much larger.
For those of us that produce real products of essential value to maintaining a high standard of living, we have very real inputs and input costs. These margins are pretty tight as far as I can tell. Eventually you paper promises will not cover my inputs and I will stop producing. You can have all the fucking paper in the world, but if I have the last can of beans on earth, well, my family and I eat.
Once the supply line break in earnest, then you'll see the usless paper-pushers start turning on each other and their political puppets, not before.
I agree with you guys. All I am saying is, the illusion of a dollars worth can be maintained far longer, if they don't tell us exactly how many dollars actually exist. In the meantime, they can try and paper over any kind of market crash if they so choose. Lehman may have caught them off guard, I don't think they will let that happen to another big bank. But who the hell knows, I should have listened to Robot Trader 5 years ago, and went all in. Im no great swami thats for sure. And if they are creating a ton of money, what better way to meter the flow of it than to have capital controls at the bank. You might be a millionaire, but if you can only take $300 out per day, you aren't any different than the schlub who has a few grand in the account. Thats one way to "shrink" a large monetary supply.
Window dressing?
I don't think they've yet gotten to a level of understanding that a TOTAL lock-down of everything is more likely than they're willing to accept/admit to themselves. The "Casino's closed! Thanks for playing." scenario we've knocked around on here a few times.
what can go wrong?
Wait a minute, this sounds a lot like some sort of counterparty risk. I thought that we outlawed such things along with collateral or gravity?
they know its coming and it aint far away...
1 quadrillion notional exposure.....cause of regulation???? yeah right....
kaboom!
"Nomura Holdings Inc. will no longer act as a middleman to allow clients to guarantee their swap trades with a clearinghouse, the latest bank to exit the business as new rules increase risks and costs in the $630 trillion market.
“Due to the evolving and uncertain regulatory and market environment,” Nomura will no longer offer its clients the option of clearing swap trades in the U.S. and Europe, Rob Davies, a spokesman for the Tokyo-based firm, said in an e-mailed statement Tuesday. “Our focus is to continue growing our execution business” in both private swaps and listed derivatives around the world, he said.
Nomura follows State Street Corp., Royal Bank of Scotland Plc and Bank of New York Mellon Corp. in dropping the business. Capital rules under the Basel Committee on Banking Supervision have made it more expensive for the world’s largest banks to act as clearing brokers. New rules in the U.S. and Europe also added costs to the market, which was unregulated from its inception in the early 1980s to the credit crisis of 2008."
http://www.bloomberg.com/news/articles/2015-05-12/nomura-is-latest-bank-...
Useless paper pushers and money changers only know one thing, push paper, hence more regulations...
not sustainable...
In the end it really does boil down to the people that "change the money" and produce nothing but skim off the top. Jesus was right. The founding Fathers were Right. Who are both demonized today.
Truth has always been treason in an empire of lies.
Pretty sure there was another dude that was right too...first name started with an A last with an H. No no not aldous huxley.
I am longing diaper company, Pampers.
I'd go long on Depends.
It will be the sheeple adults who will be shitting themselves.
Got Shiny?
I am with you the demographics are with Depends as more of a growth industry in the near term.
Let's get this PARTY started right NOW
But it's different this time ....right...
am i the only one who sees a number of pitfalls in this plan?
Shall we start with counter party risk? Or do we start with the fact that as soon as there is any sign of a "market"crash all liquidity lines will be withdrawn and all funds will be locked down to prevent redemptions? Where would you like to start?
aside from the above a few questions come to mind:
why are they ballz to the wallz invested instead of holding 3%+ in cash?
if they are borrowing to pay out investors does that make them prop traders in a crisis situation?
Hell, I'm buying MOAR STAWKS !!!!
Oh and maybe getting my real estate license....condo flipping is where the real money is !!!
"Condo flipping..." LOL.
Well vanguard just watched me empty out one of my long term and do I mean LONG TERM long indices funds starting last Decembers market highs. And I said on my first withdrawal ... Now I get to wait for the disaster to hit which made the guy laugh hard. That was a fund that had been there for probably thirty years if not more. And I just kept going back each time the market topped to grab more money till I damn near emptied it to go short this market.
And u know I am willing to wait years for my shorts to pay off but I don't think I have too.
musical chairs. the players are getting itchy. the boombox is stuttering.
but nobody wants to sit down early.
musical chairs on the deck of the titanic. lots of seats for everyone until she lists to the side, and the chairs all disappear over the railing
I'm 10% short, 8% long, 82% cash so no way it crashes now.
I'll let you know when I go long. Then you can worry.
My junior miners haven't gone bankrupt yet, so their is still downside potential in that sector
The new setup is to “make sure that funds will be available in time of market stress when banks themselves may have liquidity concerns”.
Something is not connecting here: if banks, in the coming “market stress” have “liquidity concerns” how will they be able to honor such lines of credit?
And, if they do provide the credit in question – and bond funds support the weak market by purchasing bonds that no one else will, how will such bond funds redeem their bonds as they mature?
We are heading for an unprecedented economic slaughter. This conclusion is even confirmer by the US Government.
I recently examined a Financial Report of the US Government… did I ever uncover a pile of… well, I found a few confusions and confessions and accounting fairly tales.
I found, for example, that the GDP includes components that subtract from production; that government accountants made 75-year projections as if the government would not pay interest on its debt instruments during that time.
And then there were street gangs and drug cartels, the government’s role in arming, protecting and forming alliances with such gangs and cartels… and a dozen or so other items. They all point to a conclusion that a vast operation is being perpetrated… I began this Part 2 (of my examination) with the question, ‘What financial shock do Judeo-Bolsheviks plan?’ Do they plan to inflate the dollar to zero… repudiate the federal debt… Issue Treasury bank notes…?’… And, how do China’s ghost cities fit into this unprecedented operation?... I would like to think that Americans could stop this horror; but, I don’t think it’s possible. They have been conquered by a lethargy induced my medication, an ignorance molded by indoctrination, and a corruption brought on by a mania for dope, foul language and perverted sex.
Banks will yank the lines as soon as they attempt to draw.
I am long NUGT and JNUG...
"redemption so you can meet those redemptions"
An ETF is different from a traditional mutual fund. In a traditional mutual fund you have the right to request redemption at the NAV published at the end of the day. With an ETF, a participating bank redeems ETF shares in exchange for a share of the underlying securities which are then held at a premium or sold at a profit. If a bank cannot realize a premium on the underlying asset vs the shares why would they request a redemption? I don't see the ETF experiencing a liquidity problem, unless there is already a liquidity problem in the underlying securities.
this is so they can meet redemptions WITHOUT SELLING THE UNDERLYING.
in other words ITS BS. ITS FAKE. ITS RIGGING THE GAME.
Fulcrum Economics
If you multi-part a line to pick a heavier load, reducing the load the motor sees, what happens to the rest of the load? What happens to speed? What is the tension on each part? Which knows more about economics, an experienced crane operator or an economist? What does the bureaucrat writing the test for crane certification know? What happens to the crane operator population when it is filtered by certification?
If a crane operator goes to work as a laborer, secretary, or programmer, what is the affect on assumptions normalized in the surrounding populations? What is the economic effect of pigeon-holing people into efficient specialization? What does an HR specialist know? If you part the load to decrease the size of the motor, what are the trade-offs? Who gets laid off when an economy stalls?
Why does an economy stall? What is the effect of printing money and measuring its multiplier effect on velocity as productivity? If a herd moves into gold, how much do you want? If you could choose one, which would you choose: a farmer, an admiral, a programmer or a doctor? What is the difference between earth gravity and feeding a herd of consumers?
Why do economists tip the load and say they never saw it coming, every time? Do G and I belong on the same side of the equation? What is integral I and derivative I, the ladder? What was the effect of giving Fed control over both money and the labor market, in terms of an electrical circuit, and why do you suppose Congress was so willing to cede control?
Money, specialization, automation and artificial intelligence – treatment, solving the problem of technology with technology, doesn’t solve the problem of being incapable of consideration, which is why all empire contracts, including the US Constitution, are worth no more than the paper they are printed on. The word of a feudalist, regardless of bipolar, divide and conquer, angenda-ism, is worth exactly nothing, no matter how many feudalists agree in public, to split the return on economic slavery.
GDP is a positive feedback signal for consumption, trade balances are an accounting ploy to swap migrants, and HR enforces feudalism, waiting for someone else to do the work and capitalize it. Empire infrastructure is artificial mobilty for artificial emotion accordingly. Voting on who administers Family Law is a waste of time, because Nature is far more effective.
The economy is like a crane, but you hold tension on one of the lines, to adjust fulcrum, load, torque and speed. If you let go, the load and crane go over. It is in the manufactured majority’s interest to interfere in your marriage, to grow the RE ponzi with your children. Raising children to accept physical poverty or control those so-bred with artificial intelligence is an efficient, but not effective approach, ignoring Nature until it is far too late.
Supply-side economics is a prison. The more prisons you build, the more prisoners you get, and they are always over-crowded, because the behavior is the product, which the Great Society is trying to hide with all the misdirection. White collar criminals paid in arbitrary credit, breeding blue collar criminals with arbitrary debt, don’t get a slap on the wrist by accident.
Depressions occur when labor moves forward, and is felt by the middle class from the bottom up, because the upper middle class landlords will believe the lie of RE inflation until it can’t, and capital will pump and dump until it can’t. Silicon Valley, the last second derivative, is still the current empire prototype, and the empire cannot see the next integral. Look at rent/wage versus population in California. Life is not a competition to become a commodity, replaced by technology.
You can only know a tiny fraction of what there is to know, which is relevant to spacetime, which is always more than the empire knows, so labor increases wages by decreasing hours, for those who can accurately set slip/traction in their private lives, to appropriately gear the economy, and the empire increases surveillance along with associated overhead, destroying its own transmission mechanism, replacing it with efficiency consultants, a few of whom are labor, to keep the machine running as long as necessary.
Procrastination is empire SOP, and most kids are simply following the lead, but not participating in the make-work, waiting for their parents to die, experiencing declining living standards, and playing with virtual toys. Archimedes is still the master, relative to the latest empire ponzi, which in over 2000 years has merely managed to travel backwards, as expected, new world order always the same as the old, old feudalists preaching stupid.
Empire is a counterweight, which the moneychangers short, to their own demise, Wyle E Coyote style.
What is this about a crane? Comparing the economy to a bird?
umm...not sure about alot of that - but i can answer the second half of the following questions "What was the effect of giving Fed control over both money and the labor market, in terms of an electrical circuit, and why do you suppose Congress was so willing to cede control?"
Answer: so they could get reelected.
poetic, I like it
The fact that banks are sitting on cash instead of putting it to work, goes to say that there is no where better to park your cash, than in cash.
Dollars will appreciate.
The value of labor will depreciate.
The value of debt will depreciate (cash back % offers will rise to incentivize spending)
The value of savings will climb (Interests rates on CDs will rise)
Banks will shrink.
Markets will deflate from low volume.
Central banks will be re-structured.
Governments will shrink (after a brief rapid expansion).
marketsrepresenting the 0.001% elitist global minority have their own logic; that is not the logic of the Statist CBs who need to get re-elected...
The crony Oligarchy is showing its cracks like a naked king (or Clintonian queen to be) sitting between two stools, moving apart, inch by excruciating inch... Ouch !
Wait to see the financial Titanic tilt and then...it'll be every man for himself to the life boats!
And damn the band that plays on the CB symphony of the bonfire of fiat vanities !
Shmehitah is coming - cancelling of credit on the way
Can we just get this over with already, please? We're simply delaying the start of a real recovery after it is over.
how cute.
that's a drop in the bucket.
may as well blow it all on moon pies and penny whistles.
According to Credit Suisse:
http://personal.crocodoc.com/waAog87
The Money Market Under Government Control
The Fed’s new Reverse Repo (RRP) facility could get big – very big – as interest rates start to rise, despite what Fed officials have been saying. The facility has been trending around $150bn, roughly 1/20th of the level of bank reserves.
A much larger RRP facility – think north of a trillion – would represent the endpoint of an evolution that began before the crisis, when large dealer repo books stood between institutional cash pools and leveraged carry trade investors to…
after the crisis, when bank balance sheets were expanded by both reserve assets and deposit liabilities created by QE to…
the future, when government-only money funds grow to hold large volumes of RRPs as assets and issue fixed-NAV shares (money) to institutional cash pools.
What are institutional cash pools? Think corporate treasuries and the cash desks of asset managers and FX reserve managers. Their demand for short-term, money-like assets has had a strong secular growth for several decades.
New regulations have constrained some investors in terms of what they can buy, and many institutions, in terms of what they can (profitably) issue.
History shows that when financial innovation occurs or rules change, the least constrained players grow.
In contrast to banks and dealers that face various charges on capital and balance sheet, and prime funds whose shares have lost “moneyness” due to regulation, government funds are relatively unconstrained.
They will likely grow, fed by an RRP facility that may grow much larger and become a permanent fixture of the financial system. In our view, this would herald the arrival of an era of financial “RRPression” in the US money market where the sovereign dominates and dealers play a supporting role – the inverse of the pre-crisis state of affairs.
While this shift would undoubtedly reap massive financial stability benefits, the main reason why the RRP facility might need to get much bigger is not financial stability related, but rather revolves around the Fed’s potential inability to control short-term interest rates in an era where Basel III and banks satiated with excess reserves hinder monetary transmission.
Why pay attention to this plumbing stuff?
Because the infrastructure of markets determines which trades can profitably be done, and which institutions will grow in importance over time.
This piece marks a return to our prior focus on shadow banking and the global financial system (see references at the end).