Loading ...Odds are mounting that de-risking/deleveraging dynamics attain destabilizing momentum. Many hedge funds now have losses for the year, which forces managers to take down both risk and leverage in anticipation of year-end outflows. I believe deleveraging is having a growing impact on marketplace liquidity around the world – and across asset classes. Yields are rising and spreads are widening throughout global fixed-income. Unstable equities markets around the globe are indicating a fragile liquidity backdrop. And this week’s $2.68 (4.3%) drop in WTI has all the appearances of a major leveraged speculating community panic liquidation (portending challenges for the – to this point – resilient junk bond market).
Bloomberg this week posed a most-pertinent question: “When will funding squeezes impact the Fed?” The market continues to focus on building rate pressures throughout the money markets, with added concern now that year-end funding issues are coming to the fore. The system is, after all, in its first experimental unwind (QT or “quantitative tightening”) of some of the Fed’s QE holdings. Market analysis is only further challenged by the enormous issuance of T-bills necessary to fund ballooning fiscal deficits. Three-month LIBOR added another two basis points this week to a decade high 2.61%. The effective Fed Funds rate (2.20%) remains stubbornly near the top of the Fed’s target range (2-2.25%). There are also hints of waning liquidity in the mortgage marketplace. Furthermore, ebbing foreign demand at Treasury auctions is an increasing concern.
At this point, conventional analysis has yet to factor in the liquidity impact from speculative deleveraging – in terms of money market rates, fixed-income yields and the risk markets more generally. The degree to which speculative leverage has accumulated over this long cycle is The Momentous Unknowable. Indeed, there’s a portentous lack of transparency for something of such vital importance. For the most part, the contemporary realm of speculative leveraging operates outside of traditional banking. As such, this issue was just too convenient for the Bernanke Fed and global central bankers to ignore as they collapsed borrowing costs, flooded the world with liquidity and committed to market liquidity backstops.
At this point, I seriously doubt the Fed has a solid grasp of the (direct and indirect) sources of the Trillions of global liquidity that have flooded into U.S. securities and asset markets over the past decade. I take them at their word that they don’t discern the degree of leverage that would typically indicate a Bubble. Yet this has been the most atypical of global Bubbles. I am not convinced the Fed knows where to look for the leverage most germane to today’s global Bubble. And, I’m compelled to add, the whole world seems oblivious. Speculative deleveraging is not on the Fed’s radar, and this is a problem for the markets.
Bloomberg this week posed a most-pertinent question: “When will funding squeezes impact the Fed?” The market continues to focus on building rate pressures throughout the money markets, with added concern now that year-end funding issues are coming to the fore. The system is, after all, in its first experimental unwind (QT or “quantitative tightening”) of some of the Fed’s QE holdings. Market analysis is only further challenged by the enormous issuance of T-bills necessary to fund ballooning fiscal deficits. Three-month LIBOR added another two basis points this week to a decade high 2.61%. The effective Fed Funds rate (2.20%) remains stubbornly near the top of the Fed’s target range (2-2.25%). There are also hints of waning liquidity in the mortgage marketplace. Furthermore, ebbing foreign demand at Treasury auctions is an increasing concern.
At this point, conventional analysis has yet to factor in the liquidity impact from speculative deleveraging – in terms of money market rates, fixed-income yields and the risk markets more generally. The degree to which speculative leverage has accumulated over this long cycle is The Momentous Unknowable. Indeed, there’s a portentous lack of transparency for something of such vital importance. For the most part, the contemporary realm of speculative leveraging operates outside of traditional banking. As such, this issue was just too convenient for the Bernanke Fed and global central bankers to ignore as they collapsed borrowing costs, flooded the world with liquidity and committed to market liquidity backstops.
At this point, I seriously doubt the Fed has a solid grasp of the (direct and indirect) sources of the Trillions of global liquidity that have flooded into U.S. securities and asset markets over the past decade. I take them at their word that they don’t discern the degree of leverage that would typically indicate a Bubble. Yet this has been the most atypical of global Bubbles. I am not convinced the Fed knows where to look for the leverage most germane to today’s global Bubble. And, I’m compelled to add, the whole world seems oblivious. Speculative deleveraging is not on the Fed’s radar, and this is a problem for the markets.