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Liquidity Shortage

Last week the price of gold rose $28, and silver $0.53. But the prices of the metals was not the big news last week. The price of repo — a repurchase agreement, to sell and repurchase a treasuries — skyrocketed. Banks were thirsty for liquidity, and only cash can quench it.

Last week’s “oops” moment in repo land as the overnight general collateral rate briefly soared to 10% (we will soon publish a detailed summary of the sequence of events that has led to this hicc-up). [PT]

Just another day in the fool’s paradise of centrally planning an irredeemable currency and its interest rate. Just another crisis, to be tamped down by the central planner. Keep Calm and Carry On.

This is a curious phenomenon, where the market is offering a risk-free trade to give up one’s dollars and get them back tomorrow plus a return. Yet no bank or other trader is taking the bait. The problem was not a shortage of trust, but of liquidity.

When trust in the system collapses, then gold will withdraw its bid on the dollar (which most people will wrongly perceive as the disappearance of offers to sell gold). This will be permanent gold backwardation.

So the question that should be on everyone’s mind is: did gold drop into backwardation this week? Or silver? Read on to see graphs of the gold and silver co-basis (backwardation is strictly when the co-basis > 0).

Fundamental Developments

Let us look at the only true picture of the supply and demand fundamentals. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

…click on the above link to read the rest of the article…

Liquidity Shortage Getting Worse: Fed’s Repo Oversubscribed As Funding Demand Soars 50% Overnight

September 18, 2019

Liquidity Shortage Getting Worse: Fed’s Repo Oversubscribed As Funding Demand Soars 50% Overnight

20 minutes after today’s repo operation began, it concluded and there was some bad news in it: as we feared, yesterday’s take up of the Fed’s repo operation which peaked at $53.2 billion has expanded substantially, and according to the Fed, today there was a whopping $80.05BN in bids submitted, an increase of $27 billion, or 50% more than yesterday.

It also meant that since the operation – which is capped at $75BN – was oversubscribed by over $5BN, that there was one or more participants who did not get up to €5 billion in the critical liquidity they needed, and that the Fed will see a chorus of demands by everyone (because like with the discount window, nobody will dare to be singled out) to either expand the size of its operations, implement a fixed operation and/or – most likely as per the ICAP note yesterday – transition to permanent open market operations, i.e. QE

By comparison this is what yesterday’s repo operation looked like:

What is immediately notable is that except for agency paper, there was a greater use of both Treasury ($40.9BN to $51.6BN) and Mortgage-backed ($11.7BN to $27.8BN) collateral. The only silver lining: the step out rate on agency paper dropped from 3.00% to 2.1% however with virtually nobody using that, it is a largely meaningless easing in terms.

Finally, the worst news is that immediately after the operation, overnight repo remained elevated, with Reuters reporting the rate was 2.25%-2.60% after the latest repo operation, confirming that the liquidity shortage continues with the high end of repo still far above fed funds.

…click on the above link to read the rest of the article…

The Corroboration and Costs of Fear Gold

August 29, 2019

The Corroboration and Costs of Fear Gold

Gold is the ultimate hedge, but it is far from perfect. Unlike, say, sovereign bonds there should be no expectation for a negatively correlated price. You can buy a UST or German bund even at negative yields and at least expect the price to rise when things are at their worst. Flight to safety or flight to liquidity.

You can’t with gold. One big reason is its seemingly opposing uses. I got a chance to sit down once again with Erik Townsend of MacroVoices to talk about gold, negative rates, and the lies (of omission) of Janet Yellen, but to further that discussion, particularly the gold parts of it, I’ll add more here.

While a UST will rise in value during a liquidity event partly or even mostly because of its status in repo, the opposite happens in the gold market. Though gold is a collateral of last resort, too, it isn’t as flexible and so it gets dumped whenever deployed that way. Very negative for its price.

So, it ends up in a tug-of-war between what I’ve called collateral gold (negative price) and fear gold (positive price). What ultimately might determine which one wins out is hard to predict, and it’s not a precise and straightforward mix at least inferring ahead of time.

As I wrote last December during the landmine:

Gold may be collateral of last resort but many still treat it as a hedge against everything going wrong – including central banks and their numerous big errors (forecasts). Therefore, even with renewed deflation and market liquidations tied right into collateral problems gold has been moving in that other direction – UP…
In other words, if there wasn’t this fear bid, gold would probably be down huge likely more than it was after April 18. That it’s not and is in fact at multi-month highs is a testament to the level of anxiety permeating global markets right now.

In 2008, for example, collateral gold was unleashed in the immediate aftermath of Bear Stearns – which makes sense given what Bear taught the marketplace about illiquid securities and the need for repo reserves. Gold was down sharply as collateral became very hard to source.

…click on the above link to read the rest of the article…

History Being Made: Negative Rates, Fake Markets, & The Imminent “Daily Liquidity” Crisis

August 25, 2019

History Being Made: Negative Rates, Fake Markets, & The Imminent “Daily Liquidity” Crisis

Transformational Markets: History Being Made

No-Bond World And The Risk Of A Daily Liquidity Crisis

Rates hit new lows this month. Symbolically, the 50-year swap rate in Europe dived into negative territory. Bonds as an asset class are in extinction, a major shift in modern finance as we know it, inadvertently turning ‘balanced portfolios’ into ‘long-equity portfolios’. The ‘nocebo effect’ of enduring negative interest rates is such that negative rates are deflationary, hence self-defeating. Meanwhile, they have potent unintended consequences for systemic risk, which spreads around, leading the market into an historical trap. A ‘Daily Liquidity Crisis’ may result. All the while as markets get off the sugar rush of Trump rate cuts, and Europe has his banking sector at risk of implosion.

History Being Made

It must be a great thing to witness history being made during the span of your career, to find yourself in a market where so much happens for the first time in the history of finance, and close to everything else is at an extreme over the past decade. Nothing much is left around us which is trading regularly, or around historical averages.

In no particular order: the whole of the US interest rate curve dropped below 2% in mid-August, for the first time in history. The whole of the German interest rate curve dropped below zero. The Swiss, Swedish, Japanese curves are also negative for their entirety or whereabouts. The 10yr Swiss government bond yields a mind-blowing -1.2%, a sure bet to make no less than 12% in capital losses by maturity. Peripheral Europe joined in: the 10yr Portugal government bond is close to 0% yield now, about to dive in negative land too.

…click on the above link to read the rest of the article…

Liquidity Stress Fractures Begin to Show in the Federal Reserve System

May 19, 2019

Liquidity Stress Fractures Begin to Show in the Federal Reserve System

The Fed's great recovery rewind is rapidly depleting the very bank reserves the were built up to protect from bank runs like those in the Great Depression.

In my January Premium Post, “An Interesting Interest Conundrum,” I laid out how the Federal Reserve was losing control over the Fed funds rate — a loss of control over its bedrock interest rate that indicates financial stresses are building in the banking system that increase the risks from runs on the banks:

After the financial crisis, when there was a risk of runs on banks, the Fed … require[d] the banks to hold more money in reserves … as a regulation safeguard when the Fed was trying to avoid total economic collapse. Deposits, after all, are liabilities because depositors are guaranteed they can demand instant cash at will. Depositors get extremely unhappy if this guarantee is not fulfilled. That looks something like this:

Federal Reserve's Great Recovery Rewind is reducing reserves banks hold as protection against runs.

And you don’t want that.

The Fed funds rate is the Fed’s target rate for the amount of interest banks charge each other to make overnight loans to each other from their reserves. In a crisis, when banks need their reserves, the interest they charge each other will naturally skyrocket. To keep the monetary system from freezing up because banks won’t loan to each other, the Fed tries to push that rate down.

During the Fed’s Great-Recovery bond-buying program (quantitative easing), aimed at pushing that rate down, the Fed deposited huge amounts of money created out of thin air into bank reserve accounts to make sure they remained flush so there would be no panic runs on banks, but banks don’t like just sitting on huge piles of money, instead of making even more loans with those piles, especially after the crisis abates. The Fed, however, wanted them to continue to maintain those reserves in case crisis returned.

…click on the above link to read the rest of the article…

China’s Looming Liquidity Shortage (Or Why Endless Stimulus Isn’t Working)

March 16, 2019

China’s Looming Liquidity Shortage (Or Why Endless Stimulus Isn’t Working)

Chinese Premier Li promised yet more stimulus measures overnight from tax cuts to focused rate reductions (but, he admitted, not blanket liquidity provision).

But, after over 60 different ‘stimulus’ measures in the last few months and last night’s promises, nothing seems to be working as China’s economic data continues to tumble.

As Goldman’s Andrew Tilton (Chief Asia Economist) suggested:

“There are reasons to be concerned [that easing is becoming less effective]. Local government officials who typically implement infrastructure spending and other forms of stimulus are facing conflicting pressures. The emphasis in recent years on reducing off-balance-sheet borrowing, selecting only higher-value projects, and eliminating corruption has made local officials more cautious. But at the same time, the authorities are now encouraging local officials to do more to support growth, like accelerate infrastructure projects. President Xi himself recently acknowledged the incentive problems and administrative burdens facing local officials.”

And Nomura’s Ting Lu has an explanation for why China stimulus i snot working…

Chinese easing- / stimulus- escalation being a likely requirement for any sort of “reflation” theme to work beyond a tactical trade:

yes, more RRR cuts are coming eventually (a better way for Chinese banks to obtain liquidity vs borrowing from MLF or TMLF, bc it’s cheaper and more stable)…

…but that the timing of such a cut is primarily dependent on the Chinese stock market, as the “re-bubbling” happening real-time in Chinese Equities (CSI 300 +26.8% YTD; SHCOMP +24.4%; SZCOMP +34.0%) likely then constrains the room and pace of Beijing’s policy easing / stimulus

This “Chinese Equities rally effectively holding further RRR cuts hostage” then could become a serious “fly in the ointment” for near-term / tactical “reflation” (or bear-steepening) themes, as Q2 is on-pace to see a significant liquidity shortage.

Ting estimates the liquidity gap could reach ~ RMB 1.7T in Q2 due to the following factors:

…click on the above link to read the rest of the article…

Blain: It Feels Like A Liquidity Storm Is Coming Soon

February 20, 2019

Blain: It Feels Like A Liquidity Storm Is Coming Soon

I note with some delight Bernie Sanders plans to stand for US President. One of my US chums sent me the story of the Half-a-Bernie sign propped up against a wall. Someone had cut it neatly in two and left the wooden handle affixed to the remaining half. Attached was a note: “Dear Bernie; you had a sign and I didn’t, so I took half. I’m sure you understand.”

I did feel something of a market judder yesterday – just a moment where it felt like all the negativity was on the verge of swamping markets. Whether is the cumulative effect of US rate path expectations (Fed today), China Trade Wars, Trump vs Europe, (ECB tomorrow), Brexit, and all the rest.. or the UK mid-term holidays, the whole market feels thin and rudderless.

At least Wal-Mart surprised to the upside! One of my top stock technical commentators is my old buddy Steve Previs of Mint who calls it “complacent.” That’s never a good thing. His charts are telling him to look for a “corrective C wave” but for now he’s patient as “FOMO” (Fear of Missing Out) continues to drive the current trend.

I am fortunate enough to work with some very bright folk here at Shard. Yesterday we were shooting the breeze on the current market uncertainties, threats and fears. We came to the conclusion we’ll know the moment we hit the Reefs of Crisis when we hear the crashing wail of market liquidity vanishing. What’s that sound – it’s the Macro Liquidity Storm! Coming to a market near you. Maybe Very Soon!

…click on the above link to read the rest of the article…

For the First Time Since 2007, Central Banks Are Net DRAINING Liquidity

February 8, 2019

For the First Time Since 2007, Central Banks Are Net DRAINING Liquidity

Yesterday was a wake up call for the bulls.

Unfortunately it’s only going to get worse. The fact is that no matter what verbal interventions Central Banks or the political elite issue, liquidity is now rapidly leaving the financial system.

The Fed continues to drain $50 billion in liquidity via its QT program every month. The ECB is no longer engaged in QE, which means it too is now draining liquidity as bonds on its balance sheet come due.

This leaves the Bank of Japan, which is running out of assets to buy, resulting in it not being able to expand its QE program (the one that has been running since 2013). Finally, China is attempting to launch its own version of a QE program, though given the insane leverage in its financial system (the country is issuing $25 in new debt for every $1 in GDP growth) this will have little effect.

Bottomline: for the first time since 2007, Central Banks are NET draining liquidity rather than adding it.

No matter how you spin this, it means stocks are on borrowed time.

And the markets KNOW it.

Indeed, we’ve broken the bull market trendline from the 2009 lows. The ultimate downside for this collapse is at best 2,000, and more likely than not we’ll go to the high 1,000s (think 1,750-1,800).

A Crash is coming…

The ECB’s Quantitative Easing was a Failure–Here is What it Actually Did

January 14, 2019

THE ECB’S QUANTITATIVE EASING WAS A FAILURE — HERE IS WHAT IT ACTUALLY DID

The main reason why the ECB quantitative easing program has failed is that it started from a wrong diagnosis of the eurozone’s problem. That the European problem was a demand and liquidity issue, not due to years of excess.

The ECB had been receiving tremendous pressure from banks and governments to implement a similar program to the US’ quantitative easing, forgetting that the eurozone had been under a chain of government stimuli since 2009 and that the problem of the euro-zone was not liquidity, but an interventionist model.

The day that the ECB launched its quantitative easing program, excess liquidity stood at 125 billion euro. Since then it has ballooned to 1.8 trillion euro.

“Only” after 2.6 trillion euro purchase program and ultra-low rates.

Eurozone PMIs are atrocious. The euro-zone index falls from 52.7 in November to 51.3 in December, well below the consensus forecast of 52.8. More importantly, France’s PMI plummeted from 54.2 in November to a 34-month low of 49.3.

Unemployment in the euro-zone, at 8%, is double that of the US and comparable economies. Youth unemployment rate remains at 15%.

Economic surprise has plummeted as the ECB balance sheet reached 41% of GDP (vs 21% of the Fed).

More than 900 billion euro of non-performing loans remain in the banking system, which keeps a trillion euro timebomb in its balance sheets (read). A figure that represents 5.1% of total loans compared to 1.5% in the US or Japan.

Deficit spending is rising. Government debt to GDP has risen to 86.8%.

The number of zombie companies -those that cannot pay interest expenses with operating profits- has soared to more than 9% of all large quoted firms, according to the BIS.

…click on the above link to read the rest of the article…

Market Commentary: Issues 2019

January 12, 2019

Market Commentary: Issues 2019

When I began posting the CBB some twenty years ago, I made a commitment to readers: “I’ll call it as I see it – and let the chips fall where they will.” Over the years, I made a further commitment to myself: Don’t be concerned with reputation – stay diligently focused on analytical integrity.

I attach this odd intro to “Issues 2019” recognizing this is a year where I could look quite foolish. I believe Global Financial Crisis is the Paramount Issue 2019. Last year saw the bursting of a historic global Bubble, Crisis Dynamics commencing with the blow-up of “short vol” strategies and attendant market instabilities. Crisis Dynamics proceeded to engulf the global “Periphery” (Argentina, Turkey, EM, more generally, and China). Receiving a transitory liquidity boost courtesy of the faltering “Periphery,” speculative Bubbles at “Core” U.S. securities markets succumbed to blow-off excess. Crisis Dynamics finally engulfed a vulnerable “Core” during 2018’s tumultuous fourth quarter.

As we begin a new year, rallying risk markets engender optimism. The storm has passed, it is believed. Especially with the Fed’s early winding down of rate “normalization”, there’s no reason why the great bull market can’t be resuscitated and extended. The U.S. economy remains reasonably strong, while Beijing has China’s slowdown well under control. A trade deal would reduce uncertainty, creating a positive boost for markets and economies. With markets stabilized, the EM boom can get back on track. As always, upside volatility reenergizes market bullishness.

I titled Issues 2018, “Market Structure.” I fully anticipate Market Structure to remain a key Issue 2019. Trend-following strategies will continue to foment volatility and instability. U.S. securities markets rallied throughout the summer of 2018 in the face of a deteriorating fundamental backdrop. That rally, surely fueled by ETF flows and derivatives strategies, exacerbated fragilities.
…click on the above link to read the rest of the article…

Kass: Follow The Money

January 8, 2019

Kass: Follow The Money

The Tremor Before the Quake and the Fed’s $450 Billion Balance Sheet Reduction

“The combination of rate hikes and balance sheet reductions from the Federal Reserve in 2018 sucked up global U.S. dollar liquidity and put emerging markets under immense pressure in 2018. Emerging market equities were 20-30% lower from February through October, then the S&P played catch-up to the downside. This, combined with tariffs from the White House, has placed global manufacturing in a significant slowdown that has begun to circle back into the United States. After all, over $60T of global GDP is OUTSIDE the USA.” – Lawrence McDonald, “Fed Cave-athon Driving Stocks Higher For Now“

Why did Fed Chairman Jerome Powell’s comments on Friday get such a ringing endorsement from the equity market?

The answer is simple.

The driver to market movement is not valuations. Rather, it is the degree of the system’s liquidity condition.

Valuations generally don’t matter much when liquidity is injected and expanding price- earnings ratios don’t end bull markets.

But when markets perceive a drying up in liquidity or central bankers pivot, as in late 2018, markets suffer.

Watch the money!

The problem is not rising interest rates in 2019. Regardless of the Fed’s actions this year — and I continue to believe there will be no fed fund hikes this year — the bloated Fed balance sheet will be running off as quantitative easing (QE) is reversed.

The relationship between liquidity and capital markets volatility is inversely related. That is why in the first half of 2018 I called for a new regime of volatility, which we have gotten in spades since late September 2018. And that is why I see a continuation of heightened volatility throughout this year.

Tightened Liquidity

Last week, Dennis Gartman produced this chart of the declining monetary base:

…click on the above link to read the rest of the article…

Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)

January 7, 2019

Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)

Being I’m not an economist nor associated with any financial or investment institutions nor do I have anything for you (dear reader) to buy or sell, I have total freedom to say what I please and freedom to share what I see.

In that spirit, I round back on the Federal Reserves balance sheet versus the curious case of excess reserves of the mega-banks. Last week I detailed that every time the Fed has ceased adding to its balance sheet or outright reduced, the outcome has been decidedly negative for asset prices (HERE). However, like everything, there is a little more to the story.

The chart below shows the rise in the Fed’s Treasury’s (blue line), Mortgage Backed Securities (red line), and rise plus fall of Bank Excess Reserves. What is so interesting is that bank excess reserves didn’t begin declining when the Fed’s Quantitative Tightening began, but immediately upon the conclusion of QE in late 2014. And excess reserves have already declined by $1.2 trillion while the Fed’s balance sheet has declined by “only” about $400 billion.

Now, if I were cynical, I’d say it’s almost like the Fed’s plan with the excess reserves was to use them like a sponge to soak up liquidity during QE and then continue releasing liquidity long after QE ended…and even well after QT was underway (actually, I’m quite cynical). The term for this is “monetization”, something the Fed said it would “never do”.

The chart below shows the massive rise in the Fed’s balance sheet (white line), bank excess reserves (black line), and the quantity of monetization (yellow line) floating in the system just waiting to be leveraged into 5x’s or 10x’s or perhaps even 20x’s that amount.

…click on the above link to read the rest of the article…

The Everything Bubble Has Met Its Needle… and It’s Named Jerome Powell

January 4, 2019

The Everything Bubble Has Met Its Needle… and It’s Named Jerome Powell

In December, Jerome Powell confirmed that he is going to implement a financial reset.

That reset will crash stocks.

We know this because the Fed didn’t even HINT at tapering its Quantitative Tightening program at this latest Fed FOMC despite stocks staging the worst December since the Great Depression.

This tells us that the Powell Fed is going to normalize the Fed’s balance sheet no matter what. And THAT is the real issue for the financial markets (the withdrawal of liquidity) NOT rate hikes/cuts.

This is what the market is reacting to. Stocks now know that the era of easy money is over. The Fed is being run by a man who doesn’t see it has his job to create/sustain asset bubbles.

And that is why The Fed Has Confirmed It Will Crash Stocks

In December, Jerome Powell confirmed that he is going to implement a financial reset.

That reset will crash stocks.

We know this because the Fed didn’t even HINT at tapering its Quantitative Tightening program at this latest Fed FOMC despite stocks staging the worst December since the Great Depression.

This is what the market is reacting to. Stocks now know that the era of easy money is over. The Fed is being run by a man who doesn’t see it has his job to create/sustain asset bubbles.

And that is why we are going to crash.

…click on the above link to read the rest of the article…

What Is Behind The Market’s Record Liquidity Collapse

December 30, 2018

What Is Behind The Market’s Record Liquidity Collapse

One week ago, when we first previewed this week’s infamous $60 billion pension fund rebalancing out of equities and into bonds which resulted in historic market gyrations, and a violent snapback in the S&P from what was shaping up to be the worst December on record for stocks, we warned that while the buying would “finally be some good news for the bulls” however “the problem is that the sudden deluge of last minute buying may simply be too much for the market to handle, as liquidity has collapsed to the lowest level on record“ and as a result “investors and traders looking for a desperately needed respite from market gyrations may have to deal with yet one more “seismic bout” of volatility.“

That’s precisely what happened, and while many are still trying to understand the cause behind last week’s market violence which prompted comparisons to watching the cult classic Pulp Fiction, where chaos is the only constant, the bigger problem that has emerged is a far greater one: how does one trade in a market in which, as we showed last week, liquidity has dropped to the lowest on record?

Practically speaking, the problem is simple as Bertran de la Lastra, CIO at Bestinver Gestion summarized: “If you go into the large caps and you try to do a significant trade – let’s say in a big fund company of $200 billion you’re trying to do a $50 million clip, a $100 million clip – you should be able to do it fairly quickly.” However, “the reality is that you may have to be working on it for a few days.”

…click on the above link to read the rest of the article…

What Is Behind The Market’s Record Liquidity Collapse

December 29, 2018

What Is Behind The Market’s Record Liquidity Collapse

…click on the above link to read the rest of the article…

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