Contractions in Money Flows and Market Liquidity - Part 5

Summary

• A discussion of potential market inflection points and the perfect storm.
• Along with rising risk premia, multiple measures of money flow; market liquidity and economic conditions are in a contractionary trajectory.
• The potential for a dollar spike, commodities "flash crash" in December and further economic downturn exist.
• Who or what fills the Eurodollar gap? The elephant prints of QE and of the Eurodollar.

For a better understanding, I highly recommend reviewing the potential narrative and charts laid out in Part 1, Part 2, Part 3 and Part 4 of this missive.

Who or What Could Fill The Eurodollar Gap?

Salmo Trutta: "If the E-D system is not to repeat the tragic record of all previous prudential reserve banking systems two things are necessary: (1) the U.S. dollar must remain acceptable as the world's transactions currency (this requires that the chronic deficits in the U.S. balance of payments cease), and (2) the E-D system must be subjected to the restraints of controllable legal reserves and reserve ratios.

If history is a guide it is obvious these requisite conditions (1 and 2 above) will not be achieved. But the alternative is, at some point in time, a flight from the U.S. dollar and, therefore, the Euro-dollar. This will generate hyperinflation in terms of U.S. and Euro-dollars, and an international financial crisis of unprecedented proportions."

Again, who or what fills the ED market gap? Unless somebody refills the trough with debauched dollars, or in an attempt to snag ED marketshare (hegemony), starts debauching their own currency? The ECB and China may take this opportunity to debase the euro and RMB in an effort to gain a larger portion of the ED funding market and potential carry trade. Can the Reichsmark troika and Chinese pull a Mr. Big (outlined here, here, here andhere) on the masters?

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