This Market Is Insane

Over at a financial forum...

P - This market is insane -  Saw this tweet re yesterday: "stocks rallied because oil rallied, oil rallied because the dollar sold off, the dollar sold off because stocks sold off, I'm going home now."

I made this comment yesterday on Tues forum - "Well if the Dallas Fed has banks not marking energy debt to market, and the 3:30PM pump squad pushing up oil, energy, ETF's, ETN's, then they forgot to tell the debt ratings people"

Volume in the March West Texas Intermediate futures contract surged on Wednesday to more than 777,000 lots traded, its second highest volume on record, according to data via ThomsonReuters' Eikon. DWTI volume was also unusually heavy on Wednesday, with more than 1.9 million shares traded.

In addition, unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note (ETN) bailed out early this week after jumping into the fund in January, ETN data show. Some 1.8 million shares worth more than $602 million were redeemed on Tuesday, the largest outflow from the ETN in the past year, according to data from FactSet Research.  As a result, the mass exodus likely forced the ETN's issuer, Credit Suisse, to quickly buy back short positions as investors redeemed shares.

I made this comment yesterday: "Somebody busted out the fun house mirror for bonds and the dollar."

Yesterday was the largest dollar one day loss for KING DOLLAR in SEVEN years.  Here are the sequence of events preceding: BOJ goes negative, Yen tanks, stocks spike, dollar hits 99.9. ISM service slowing + ISM manufacturing recession = probably no more Fed rate hikes = some people put 2+2, so dollar longs unwind = bond vigilantes and gold bugs go wild = commods and energy get a bid, despite the bad inventory and energy debt downgrades.  Sounds realistic enough for the press?  Print it and the simpletons and parrots will be happy and I shall be done with this.

But that's not what really happened under the sheets, so if you want the truth, go back to the first event in the chain, take the red pill and follow me....  

If you thought that NIM was uber thin for Japanese banks before, try shoehorning into that shrinking slipper with NIRP. Those Asian banks (PBOC, Japan, et al) were just told in a kind way to repackage their idle reserves. The only NIRP in the BOJ is on any NEW reserves, so the old excess reserves from the last 10 QE's are still getting paid +0.1%.

This is why I always harp about bank BALANCE SHEET positions. So if your a bank, why hold "excess" funds in interbank balances at negative rates?  Banks pay for their liquid assets in order to have wholesale liquidity. If ledgered money market balances are idle and now taxed under NIRP, why continue that carrying cost when one can save precious NIM by not participating in those non profitable market making activities which require said liquidity and effectively disintermediating?

If your only choices for idle cash are negative central bank accounts, negative unsecured (Eonia, Euribor, now, JPY LIbor, Fed Funds, Libor, to come) or negative secured (repo), then perhaps going to cash might be the least worst option.  I can hear it now, have I told you how much I like CASH, lately???

Fallout, a Japanese bond auction was postponed, several companies are considering not floating their bonds.  In other words, say you float new bonds at -5 bps in "yield" and get paid to borrow, but then you are faced with -10 bps in the interim and have to pay for holding cash, who would bother doing this? 

Now, think Mrs Watanabe (Japan) and Mrs Chin (China),individual investors faced with their savings being taxed by NIRP. It might be tough to front run those ladies, as it would seem, from yesterdays market action, that both Mrs. Watanabe, and I would wager Mrs. Chin are not the only ones engaging in said behaviour. 

So take that magic dust and sprinkle it across pension, ins.co's, banks, corporates etc. Yesterday, the market was flooded with dollars while somebody was (and has been) concurrently on a UST's buying spree. Definitely, not the JPY/USD carry trade as the dollar tanked and the Yen jumped.

Where and when negative becomes the norm, the front runners who "can", go to the can, coffee that is. Some are converting to cash while others who don't have that luxury are in the midst of a major rotation, involving the liquidation of many dollar assets. Happened in Europe, now happening in Asia and it will effect systemic wholesale liquidity. TBD. If the change in Fed verbiage actually indicates ZIRP on its way, which IMHO it does, that is a really scary proposition. Out.