30.09.2019 – Special Report. — MystifyingCredit Crunch on the American Interbank Market – the Federal Reserve has intervened. Illiquid commercial banks received fresh short-term capital from the Fed in the past two weeks as a result of a wave of overnight repo transactions. This was exactly the same warning signal as in the financial crisis that raged a good ten years ago. Particularly worrying: even the New York Fed allegedly does not know who or what exactly froze the cash market.
Shrill warning signal from the US financial market
The alarm bells have stopped for the time being. But if you trade CFD or online stocks, then you have to expect a potential crash on Wall Street, in the DAX and especially with American banks and insurance companies. And with a global panic. Which would speak for shorts on indices and long trades in the VIX. Always keep your trading platform open with Germany’s best CFD brokers and keep an eye on regular market updates: The topic can boil up again at any time. Here are the backgrounds to ensure that you are always correctly positioned.
The same symptoms as in the financial crisis
In mid-September, interest rates for short-term loans between banks in the USA suddenly shot up to 10 percent. For the first time since the financial crisis more than ten years ago, the US Federal Reserve had to pump billions of dollars into the money market again. The Fed made a start on 17 September with a short-term transaction of 53.15 billion dollars. Banks borrowed cash from the Fed, depositing government bonds and other securities as collateral.
This was followed by further tenders. With the overnight repo transactions, the Fed first calmed the situation, the credit market seems to have thawed out again. A repo is a repurchase agreement – a seller of an asset agrees to buy it back at a later date at a higher price. According to the financial blog ZeroHedge, the Fed pumped additional capital of around 162 billion dollars into the dried up credit market compared with the usual levels. At the last repo round on Friday, only about 23 billion dollars of 100 billion provided funds were called up. In the meantime, the repo rate fell back to the targeted 2 percent.
Mysterious Repocalypse
The Apocalypse, which was just once again turned away with special replies, has raised questions. The “Manager Magazin” explained the dried-up liquidity of mid-September with, among other things, the quarterly payment of corporate taxes. In addition, banks and other investors settled the purchase of US government bonds worth 78 billion dollars. But even the lead New York Fed must first investigate exactly why banks with free cash reserves refused to lend money in the overnight market. At least that’s what Fed boss John Williams admitted on Friday.
Moreover, according to ZeroHedge, nobody knows exactly which banks were forced to take the stigmatizing step of running to the guardians for fresh money – but the blog suspects American banks. It examined the Fed report on 18 September, the date just before the cash drain began. And according to the Assets and Liabilities of Commercial Banks in the United States, the cash holdings of large domestic banks fell by 55.3 billion to 714.8 billion, the lowest level since April 2013. The cash holdings of small US banks also slipped by 18.2 billion to 272.9 billion dollars. By contrast, the holdings of foreign banks in the USA rose by 13.6 billion to around 538 billion dollars.
Even two weeks ago, “Manager Magazin” stated that the reserves parked by banks with the Fed were as low as they had not been since 2011. They totaled 1.47 trillion dollars, which is about 50 percent less than the peak reached five years ago.
Distrust among banks
But why exactly have the reserves fallen to their lowest level in years? If investors don’t know whether it’s their bank that’s gambling somewhere, then the door opens for a bank run. One thing is clear: if banks no longer lend money to each other, it is because they no longer trust their counterparts and have to reckon with the credit being lost. So the crucial question is which investments have damaged trust so badly.
CLO as a crisis factor
In the background, we assume that the recently booming Collateralized Loan Obligations market will be a major negative factor. CLOs are asset-backed securities. These are synthetic bonds backed by several bundled corporate loans as collateral. Pension funds and insurers in particular like to deposit such corporate bonds because they receive higher interest rates than US Treasuries and because they appreciate the seemingly reliable cash flows. But if the debtors tip over behind the loans because the business model does not support them, then the so-called securities are worthless and so is the asset built on them. The worst that can happen is that the creditor tips over.
We had already warned the CLO of this in a special report weeks ago. These, by the way, are astonishingly similar to collateralized debt obligations, i.e. the assets mostly backed by scrap mortgages that brought Lehman Brothers and Bear Stearns to their knees from 2007 onwards.
Bond Bubble – oil bankruptcies – bad loans
Other possible reasons for the cash drain include the current wave of bankruptcies among small and medium-sized American oil producers, who are being brought to their knees by the low oil price. It is also questionable how many students will ever repay their horrendous loans for their studies. The same applies to shopping on credit. And the above-mentioned issue of government bonds is also a problem. When investors flee into US Treasuries, the Bond Bubble lacks the money for short and medium-term transactions. And if investors are faced with the choice of parking their money with the Fed rather than pumping it into the real economy, then the recession threatens.
However, the fact that both Goldman Sachs and JP Morgan have now expressed the suspicion that the Fed will have to pump additional money into the market from now on via Permanent Open Market Operations speaks in favour of one or more serious long-term issues.
Our conclusion: Perhaps this was the last warning of the new, big crash that is coming from Wall Street and is pulling global trade into the abyss. The speculations alone can throw the financial market wildly back and forth. Because if a clammy investor urgently needs cash, he could quickly sell off large blocks of shares, which would lead to inexplicable movements on the stock market.
Secure yourselves thus absolutely – the Bernstein bank wishes successful Trades!
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