Collapsing Market Liquidity
Collapsing market liquidity is flashing red everywhere.
The Federal Reserve’s Repo hit a record 351BN, its biggest weekly jump in history in the first week of November.
The Repo market is an important component of the capital market, which provides short-term liquidity
The last time the $3 trillion Repo Market blew up was in mid-September 2019 when the Repo rates spiked to 10%.
I remember forecasting market turbulence, bearing in mind the Fed at the time was justifying monetary tightening, their reason was that the economy was doing fine. But a raft of contrarian economic indicators suggested otherwise. The asset bubble was ripe to pop if the Fed continued tightening in a fragile economy. Doesn’t this feel like deja vu?
As it played out, central banks had the perfect excuse to pivot, the pandemic and not a fragile economy was the excuse to create trillions of dollars of currency and to continue inflating the global debt away.
So COVID, which was lethal as the global flu for healthy adults, was ingeniously packaged, marketed, and branded using celebrities as a pandemic. The solution was global lockdowns and a face-saving reason for central banks to keep keyboarding currency, which kept asset prices pumped up and continued to inflate the debts away.
This game always ends in collapsing liquidity, leading to a worse crisis and even more liquidity as the solution
Is the end game a deflationary depression and a nuclear war? The dead don’t make claims on their cash deposit accounts, nor do they claim precious metals held in custody. Higher central bank interest rates will not reduce the hyperinflation in food and energy. Instead, it will lead to collapsing market liquidity. But reducing aggregate demand due to a slimmed-down population, due to manufactured wars, pandemics, and depression is deflationary.
Could this be how our overlords save face and solve hyperinflation and a collapsing liquidity crisis?
Collapsing market liquidity, and a currency crisis.
The whole monetary system as we know it is collapsing. That was what the bond crisis in the UK was about” – Martin Armstrong.
As I noted in September, the UK’s two trillion GBP sovereign bond crisis, known as the gilt market, is a bond credit crisis triggered by collapsing market liquidity. The Bank Of England decided to pivot, and buy gilts that investors were steering clear from, thereby suppressing yields and preventing a systemic crisis, a pension fund wipeout, and a GBP currency collapse.
Recent Fed bank bailouts are further evidence of collapsing market liquidity
In late October, in a piece entitled “Stealth Bailouts,” I wrote, “the largest USD swap in history, dollar squeeze panic is currently playing out”
SWAP lines are a short-term fix to a liquidity crisis brewing in the plumping of the financial system.
Collapsing market liquidity and margin calls in the crypto market
Spiraling Fed fund rates have exposed another crypto exchange’s fraudulent use of client money. The era of cheap money fuelled mal investments and con artists. The FTX exchange, a Ponzi scheme, is now bankrupt. Surprisingly, a string of top-notch investors will lose billions.
Would you have trusted Sam Bankman-Fried with your hard-earned money?
Collapsing market liquidity leads to massive margin calls where everything gets sold, but that creates opportunities in value.