The Fed has an ult as spicy as wasabi snooters, and they started stage 2 of it today. Before I get into how the Fed might actually unfuck the bulls, some context.
The externalities that are affecting the market right now are downright marvel movie ridiculous.
– A growing bubble of stock valuation (like the dot com bubble)
– A growing corporate debt bubble akin to 2008, but instead of Amanda buying a truck and a condo as a hooters waitress, its WeWork being… well WeWork.
– A supply chain disruption that disrupted 94% of the Fortune 1000, that isn’t priced in yet (I’ll ge to that later)
– A small sovereign debt crisis (Lebanese bond default) forming like Greece bangin rails whiter then snow.
Literally one of those is enough to trigger a correction event, but fuck that it’s 2020 we go big or go home, there’s FOUR major externalities hitting the market within weeks.
But why does this all matter? Well large corporations like Boeing have large lines of credit with large banks like JP Morgan Chase. JP will credit an amount, say $100, to be drawn down at any point. JP has hundreds of thousands of businesses under its credit line. From your local pizza shop with a $5,000 credit, or GE with $19.8 Billion in credit across 6 banks. But not all companies will need to draw down on credit at the same time – so no need to keep liquid capital = to your commitments on hand.
That is – unless some externalities like ModelobolaBeerVirus show up right in the middle of a Saudi-Russian pillow fight turned knife fight because the dumbass babysitter China passed out on Xans and cant watch the children.
So now every company and their mom is trying to draw down credit to cover losses anywhere from supply shortages to payroll to legal fees.
Well now wtf does JP Morgan and friends do if it has credit line obligaitons it can’t pay?
You take out a credit card… but from who? THE FED!
Well what can the Fed do? This isn’t QE4 – A New mortgage, atleast not yet. Then what the everloving shit was Powell thinking sleeping on the print button to the tune of 500 billion in offered liquidity TODAY, and more importantly – where did that money go?
Well, liquidity isn’t going to equities. That was apparent by the almost immediate crash after the announcement of repos and relative flatening of value. The liquidity isn’t going to solve solvency issues, there hasn’t been enough time for a firm to declare insolvency. Well then where is that liquidity (cash) going?
So my Thesis?:
Repo Ops are being offloaded to Banks who are using the liquidity to fill credit line obligations, in turn selling those credit lines as bonds through securitized bond swaps to Banks 2: euro boogaloo, who are then using those SBS’s to securitize their obligations on negative yield ECB bonds.
First, what’s the ECB? It’s the Feds autistic cousin in the eurozone.
See the ECB has the same job as the Fed, regulates monetary policy for the eurozone, and that for some reason includes giving debt out for free, and paying people to take loans and bonds. See, the negative debt ratios in Europe are assblasting bad. Like, 96% of your debt you are paying to loan out bad (looking at your Switzerland)
So all this negatively yielding liquidity can be attained in the market – free money that can be amortized over 100 year bond obligations by Euro banks like Deustche Bank.
Well how does SBS get ahold of the money to pay back these bonds. They transact an SBS with an American bank who have these lines of credit and their obligations. What is a SBS? an SBS is a bond swap. Easy right? A bank like JP will gather a group of bonds that are securitized
–(grouped together (tranched) for risk, I would also note the actual mechanics of an “SBS” is much more complex then just throwing a shitload of corporate bonds together, and this is just to make this train of thought as simple as possible.) —
Then JP will go diddle his skull and crossbones fuck buddy at Deustche Bank, and ask for a swap. Deustche Bank, always in the mood for felatio, will go to the ECB and take out 100 euros in German backed 100 year treasury bond at -.69% interest. Deustche Bank will then bend over after said felatio, and give JP that 100 euros – or $112 to JP in exchange for that SBS. The SBS obligation from groups of companies like Boeing have long term value as long as the companies do not become insolvent and thus default.
Because The Euro has a favorable exchange rate, the US bank can then turn back to the fed same day and payback their Repo obligation with interest, and have some cash to spare.
GE gets their tendies to pay for hookers and blow so long as they can rollover to the next month and pay their interest.
JP Morgan Chase gets their money to pay Daddy Powell and not get sued by GEs dad’s lawyer for making promises it couldn’t keep.
Deustche Bank gets a % value of the obligated credit line, and say they helped and can keep playing options like it’s roulette.
And Germany has a securitized bond obligation against corporate bonds and can keep paying gibs.
Literally can’t go tits up.
However, this game of grab ass only works so long as the market allows firms like GE to stay solvent. If enough of these corporations with credit line obligations default – we are fuk.
And this is why the externalities are throwing a monkey wrench into Wasabi snooter time. If no companies are operational because beervirus wants siesta time, and meaningful gross domestic product stops the Production part, it doesn’t matter how much appetite the Eurozone has for bondage, the interest payments will eventually not get covered.
Corporate credit is 50%+ BBB or lower rating – absolute junk. Sound like 2008 all over again? It is.
Once a percentage of those corporate bonds are not paid, the whole securitized bond swap tranche is GUH, and Germany will restart the Weimar republic part 2. As that happens, the circus stops, and the entire world economy grinds to a halt. Any company with debt obligations it cant meet will collapse, the Euro will be worthless, the German Casino will finally get around to kicking Deutsche Bank out of the casino entirely, JP Morgan Chase will get absolutely reamed by daddy democracy, and the FED will be stuck being the cause of the collapse of the modern economic system – all because they wanted bigger numbers on balance sheets.
This is not 1907, this is not 2008, this is not 1929 – It is MUCH MUCH worse.
We won’t know if the credit lines can stay liquid, but after today it looks as though the fed wants to keep the flood gates open for when the liquid capital is needed. Of the 500 Billion offered in addition to the “normal” ~200 billion offered, only 90 billion was taken by JP Chase Morgan and buds.
And so while everyone is happy making tendies off puts, seriously be aware of the implications, because the Fed and Co. are tryna fly to the sun, and might end up getting burned.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.