Contractions In Money Flows And Market Liquidity - Part 6

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.
• A Flashpoint to Singularity? A hypothetical in gravitational and dark forces.

For a better understanding, I highly recommend reviewing the potential narrative and charts laid out in Part 1, Part 2, Part 3, Part 4 and Part 5 of this missive.

Flashpoint to Singularity?

From Part 2: "This contraction could be the flashpoint or tipping point, just prior to collapse into singularity, rapid, violent and destructive. Cause and effect, a self reinforcing vortex, wash, rinse, spin, repeat."

Regarding the correlation of ED (eurodollar) futures to the SP500 brought up at the end of Part 5... I can hear it now, as one reader might say, what the hell did I just try and read? Inquiring minds want to know, what the hell do loans (which is what eurodollar futures are) on dollar deposits in a foreign bank have to do with energy, oil, commodities, interest rates, USTs, bonds, high yield, emerging markets, the dollar, market liquidity and asset inflation? As Ricky would say to Lucy, we are going to "splain" the giant elephant sitting in the middle of the room. 3 month ED futures positioning by the large commercial traders is calling for a capitulation in contract prices, starting within the next 30 days.

When shorting, the elephants are borrowing today (locking in at a lower rate) and betting on lower contract prices, meaning higher libor rates (rising) and higher dollar (rising) at the time of expiration. Why? Hmm, the real professionals aren't buying into the media narrative? Perhaps they see some of the following? Contracting economic trajectory across the board, pointing to slowing economic conditions, less petro dollars in the ED market. Resulting in a spiking dollar, and higher risk premia, self reinforcing the cycle and causing a December flash crash in commodities. Pushing oil, energy, HY and EM bonds further into distress, potentially causing a reversion to the mean in defaults, snowballing into higher rates, causing hedging (derivative futures, illiquid ETFs at $18T, now exceeding US GDP) and term mismatches, leading to potentially severe market liquidity issues. And the Fed doesn't even have to raise for any of this to occur, that would be more sauce for the goose. We will visit the asset inflation later.

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