We noted at the end of our last missive, Is The TED Spread Yellen?
Since the FDIC killed off foreign overnight transfers, interbank flows have been competing with offshore dollar loans for dollar funding. Interbank flows are contracting as TED is "talkin loud" and might be a bit damaged.
What will happen to those interbank flows and the offshore dollar loans they compete with, with a furtherance of contraction in "dollar" liquidity? What affect will that have on the global value of the "dollar"? Especially when TED really starts "Yellen" due to the rate increase and subsequent yield curve flattening?
Trade du jour, will be once again the US long bond. Because you have a flatter yield curve and trouble brewing in HY with a flatter credit CDX HY curve. On top of that you have a liquidity contraction which is now showing up in our old TED spread friend. The Fed is continuing to unleash the mother of all "US Dollar" margin calls. The trend will be the same as in 2015, currency pegs will break in EM. That's a given.
In brief, this is the sixth in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely effect capital, commodity, equity, bond and asset markets.
I wish to dedicate this missive to one of my mentor's Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence in not masticating and spoon feeding the baby ducks, as in learning the hard way, by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard
HIBOR - CNH Hong Kong Interbank Offered Rate
Above note, O/N HIBOR: on 12/11 @ 1.626%; as of 12/23 @ 9.452%, for an increase of +782.6bps; the highest reading ever was Aug 24th @ 10%
Above note, 3MO HIBOR: 12/11 @ 4.69%; as of 12/23 @ 6.27%; for an increase of +158bps
HIBOR is a proxy for offshore RMB/USD liquidity. Rising ON HIBOR means increasing offshore RMB/USD ill liquidity.
LIBOR - London Interbank Offered Rate
Above note, O/N LIBOR: the cost for overnight UNSECURED intrabank lending. 12/10 @ 0.131%; as of 12/25 @ 0.367%; for an increase of +23.6bps. Rising ON LIBOR indicates a distrust in unsecured intrabank lending.
Above note, 3 MO LIBOR 10/15 @ 0.3151; 12/25 @ 0.6031, for an increase of +28.8bps. Rising 3 month LIBOR indicates a longer term distrust in unsecured intrabank lending and mortgage lending.
The TED Spread
TED SPREAD: the cost for SECURED intrabank lending
Above note, 3 month UST secondary market pricing. 10/01 @ -0.01; 12/23 @ 0.20, for an increase of 21bps. With LIBOR @ 0.367 and the Ted Spread @ 0.456, the cost for intrabank SECURED UST borrowing exceeds UNSECURED by 0.089% or 9bps. This might indicate that intrabank unsecured lending as well as unsecured corporate lending may suffer a contraction.
RP:repo and RRP:reverse repo
RP repo - a liquidity injection occurs when a bank borrows cash from the Fed in exchange for collateral at the Fed window: As of Nov 23rd GCF repo rates 0.075 UST; 0.084 MBS and Agency. Effectively, UST RP costs for large domestic banks were RP 0.08 bps plus avg 10 bps FDIC = 0.18% RP cost
As of Friday Dec 24th GCF repo rates 0.539 UST; 0.556 MBS and 0.546 Agency. Effectively, UST RP costs for large domestic banks are now RP 54 bps plus 10 bps FDIC = 0.64% RP cost; for an increase of +46bps. An increase in RP costs can indicate an increased distrust in collateralized lending. Increased RP costs can discourage banks from engaging in liquidity injections, reducing available cash and systemic liquidity.
RRP reverse repo - a liquidity contraction occurs when a bank lends cash to the Fed in exchange for collateral at the Fed window: some of these reserves or excess reserves may have been created electronically as bank credits by the Fed. As of Dec 11th RRP UST 0.05. Effectively UST RRP incentives for large domestic banks were NY Fed RRP 5 -10bps.
As of Dec 23rd RRP UST 0.25. Effectively UST RRP incentives for large domestic banks are NY Fed RRP 25bps for an increase of +15-20bps.
An increase in RRP remuneration can indicate an increased distrust in collateralized lending. As demand increases the RRP rate would decrease, indicating an increase in the volume of circulating Fed collateral and therefore a decreased distrust in collateralized lending. Increased RRP remuneration can encourage banks to siphon excess reserves to the Fed, reducing available cash and systemic liquidity.
FYI, both FDIC charges (of which the calcs are complicated and for simplicity I have averaged at 10bps) and additional wholesale capital surcharges required of global systemically important banks (GSIBs) add to bank costs or eat into any arbitrage.
Dorothy certainly had it easy with Lions, Tigers and Bears. But this ain't no Oz and since the market potential is broad in both scope and scale, our conclusion could not be more specific than the discussion already had. Again, more grief in the dollar "short" or squeeze and its associated liquidity issues, with the potential to adversely effect capital, commodity, equity, bond and asset markets. Will it happen? TBD, and forewarned is forearmed.
As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this would tie into any list of investments or assets. Those listed below happen to influence the indices more than most.
Would like to thank you folks fer kindly droppin in. You're all invited back again to this locality. To have a heapin helpin of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!
Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor. Prospective investors should read the prospectus carefully before investing.
Below, recommended reading for those invested in mutual and bond funds, ETFs, REITs, HY, leveraged, EM, oil, energy, bonds and the broader markets. Why? There are many macroeconomic cross sector and market asset correlations involved that affect your investments. Economic conditions, the eurodollar, global dollar debt and monetary policy all influence the valuation of the above and market plays below, via King Dollar's value, credit spreads, swap spread pricing, market making, liquidity, monetary supply and velocity, just to name a few.
Market Warning: Reading not only those listed below, but also every installment of these multi-part missives could lead to a better understanding of the market forces in play and how to profit from them.
- Is The TED Spread Yellen?
- The Fed, Behind The Magic 8 Ball?
- The Fed's Devil In The Details
- Petrodollars And Sovereign Wealth Funds
- Swap Spreads For Dummies?
- A Dollar Melt Up?
- Swap Spread Spike Signal?
- Mission Impossible: Correlations In Action?
- Oil: Shale Disrupts The Cost Paradigm? Part 3
- Oil: Price Impact? China's Shanghai Oil Exchange And RMB-Denominated Contracts
- Oil: Shale Moving The Goal Posts? - Part 2
- Oil: $20 Strippers - A Dangerous Swing Group?
- A Fed Raise Conundrum, Pt 3 How Much Pain?
- Oil: Shale Production Breakeven And Marginal Costs, Moving The Goalposts?
- New Paradigm For ETF, Mutual Fund, Bond Fund And mREITs
- Contractions In Money Flows And Market Liquidity
- The Fed's Ultimate Balancing Act
- The Emperor's New Clothes Or Econometric Misperception
- The Temple Grandin of Shadow Banking, Part 1
- Connecting the Dots, Part 6
- More Dollar Hegemony, In The Land Of OZ, Part 6
- Peak What? Christmastime in Hell, Part 6
- Peak What? The Quadruple D, The End
- An Unkind Bond Unwind
- The Feds Quandry with Uncle ED (Eurodollar)
For a complete missive series listing, click here.
These global economic developments could affect numerous capital and asset markets, sectors, indexes, commodities, forex, bonds, mutual funds, ETFs and stocks.
A List of Potential Market Plays (Long or Short?):
- SP 500 Trust ETF (NYSEARCA:SPY) 250K
- iShares SP 500 Value ETF (NYSEARCA:IVE) 110K
- General Electric (GE) 108K
- Bank of America (NYSE:BAC) 105K
- Berkshire Hathaway B (NYSE:BRK.B) 100K
- iShares Select Dividend ETF (NYSEARCA:DVY) 97K
- Kinder Morgan (NYSE:KMI) 81K
- Chesapeake Energy (NYSE:CHK) 78K
- Freeport-McMoRan (NYSE:FCX) 71K
- Linn Energy (NASDAQ:LINE) 57K
- Schlumberger (NYSE:SLB) 55K
- Johnson and Johnson (NYSE:JNJ) 51K
- SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) 49K
- The United States Oil ETF, LP (NYSEARCA:USO) 40K
- EOG Resources (NYSE:EOG) 40K
- Berkshire Hathaway A (NYSE:BRK.A) 39K
- Union Pacific Corporation (NYSE:UNP) 31K
- CSX Corp. (NYSE:CSX) 31K
- US Natural Gas ETF (NYSEARCA:UNG) 27K
- Vanguard Total Stock Market ETF (NYSEARCA:VTI) 25K
- iPath SP Crude Oil Total Return Index ETN (NYSEARCA:OIL) 25K
- Energy Select Sector SPDR ETF (NYSEARCA:XLE) 25K
- Baker Hughes (NYSE:BHI) 23K
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.