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A fascinating article, thank you.
So we are all living in a very large global “house of cards” with hard to fathom inter-dependencies (e.g. Tether to Evergrande). What will knock the first card down, and where will the collapse ripple to?
Interconnectedness, and opaque levered collateral chains are the backbone of our credit driven financial markets. This is why market pros with skin in the game should always keep a set of indicators or tickers to monitor whether the narratives at play match up to the facts in the real world. Chinese property developers, certain currency pairs that finance carry trades, credit spreads, yield curve shapes, IPO performance, crowded trades… there are scores of them. I would call it the modern day version of the tape reading done by the best traders in the days before computers.
The financial markets are like a living organism that sends out signals of its rude health or impending sickness. The structural changes of the past 10-15 years that are too numerous to list not only made markets too important to fail, but also relegated these nuanced signals to the dustbin of relevancy… Ultra loose monetary policy, consistent fiscal stimulus and corporate financial engineering rarely waver or alter their risk budget based on market signals.
Knowing these currently signal falsely a high percentage of the time in the current construct, I am still hardwired to pay attention! There is currently a shortage of good collateral (US bills) and it is manifesting in yields below Fed floors, TIC data, repo, and the dollar strengthening vs a universal chorus it should weaken. This is never good for risk assets…eventually. The US 10 year has not collapsed 50 basis points due to mysterious technical factors that Wall Street and the Fed mumble over. The wavering market signals are piling up for us old time tape readers.
Great piece, Marc, as always. Question - why were they funding in USD? Was RMB funding not available or was USD funding cheaper (ignoring currency risk)? Could they have growth their balance sheet so quickly without access to USD funding?
Work for an organisation bought by EG. Spending has been frozen for the past year… Senior management leaving. Very opaque we do not know what will happen and are now trying to fundraise money to sustain salaries.
The potential for a cascade is interesting. If real it would be a massive issue as was pointed out above interconnectedness and collateral chains are definitely the water in which we swim.
I’m now much more cynical in my old age and I’m starting to wonder (thanks Rusty!) if it’s a manufactured wall of worry.
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