The Australian financial press is shouting “Red Alert!” over last week's UK pension plan meltdown. The scary part is they may not be wrong.
But here's the killer line.
"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability."
What the Bank of England was suggesting, according to former London City trader Henry Jennings, is that when the bond market moved violently against these pension funds, they were at risk of being placed into margin calls.
That is, many funds had borrowed money to make more money. They were heavily in debt to enhance their returns.
They were about to be asked to "pay up".
The problem for the UK is that the pressures which brought the pension funds to the brink of disaster are still there.
The problem for the rest of the world, according to the Australian financial press, is contagion risk.
If they're right, the next great financial crisis is already starting. Pray they are wrong.
Pnk - Before the craziness of tomorrow - eg emergency Fed meeting and institutional collapse (forget which, deutchse bank or credit suisse?) - do you have any concerns we should be watching or following?
Thanks for your continued lead on these things Peter.
The Credit Suisse saga is shaping up potentially to be another Lehman Brothers debacle--particularly since the catalyst is once again the infamous Credit Default Swap (CDS)--the derivative at the epicenter of the 2008 Great Financial Crisis.
As for the Fed's meeting under expedited procedures tomorrow, there's no telling what will come out of it or even if we'll hear anything right away. Reddit and the Twitterverse are rife with speculation, but the posted agenda item is anodyne, generic, and susceptible to misinterpretation.
However, the probable impetus for the meeting is the UK pension crisis. As I have stated earlier, the potential for contagion has financial markets on edge.
With over $2.4T in the overnight reverse repo market as of last Friday, there should be ample liquidity to unwind any transactions on the verge of turning toxic at least for the time being.
Another factor to consider is that China is likely gearing up a defensive sale of is dollar forex reserves in an effort to support the yuan, which is getting weaker and weaker against the dollar. That's going to impact US treasury yields, and put further stress on the markets.
However, as I have been more or less preaching that the Fed's interest rate hikes were headed in a wrong direction for many months now, and have been seeing warning signals that a crisis was imminent, I certainly do not rule it out.
At this point, it boils down to what happens when and in what order.
One thing I do know is that, with the Fed's overnight reverse repo market having just the other day hit a new record, there is an inherent presumption that the US markets have ample liquidity. If $2.4T is not enough, then the derivative mess is much MUCH larger than anyone can even imagine.
In theory the US markets should have a cushion. In reality....who knows?
This derivatives mess, it is a big worry, or worse. I am concerned it will damage the faith in placing money in the US. Of course, where else is there? Nowhere, and soon not even here!
The GLOBAL derivatives market (mess) is estimated to be $1Quadrillion. The US share is merely $200Trillion.
The problem isn't the currency, it's the derivative. Derivatives are ultimately synthetic securities that amount to little more than a side bet on an underlying transaction. Somehow, by having a few side bets at long odds is supposed to "hedge" one's risk on a transaction.
The derivatives mess is lighting up this time in the UK first. Will it spread to the US? At some point, probably. Whether through pension funds or more likely hedge funds has yet to be played out.
Where else will it spread? Pretty much everywhere. Think of it as an economic pandemic.
The first step toward fixing a problem is admitting a problem.
"Houston! We have a problem!"
We've had this problem since mid 2003 at least.
Wall Street has yet to acknowledge the problem exists. What we call a problem Wall Street calls "the economy".
Pnk - Before the craziness of tomorrow - eg emergency Fed meeting and institutional collapse (forget which, deutchse bank or credit suisse?) - do you have any concerns we should be watching or following?
Thanks for your continued lead on these things Peter.
God Bless you on this Sunday.
Dt
The Credit Suisse saga is shaping up potentially to be another Lehman Brothers debacle--particularly since the catalyst is once again the infamous Credit Default Swap (CDS)--the derivative at the epicenter of the 2008 Great Financial Crisis.
As for the Fed's meeting under expedited procedures tomorrow, there's no telling what will come out of it or even if we'll hear anything right away. Reddit and the Twitterverse are rife with speculation, but the posted agenda item is anodyne, generic, and susceptible to misinterpretation.
https://www.federalreserve.gov/aboutthefed/boardmeetings/20221003closed.htm
However, the probable impetus for the meeting is the UK pension crisis. As I have stated earlier, the potential for contagion has financial markets on edge.
With over $2.4T in the overnight reverse repo market as of last Friday, there should be ample liquidity to unwind any transactions on the verge of turning toxic at least for the time being.
https://fred.stlouisfed.org/graph/?g=Uk6q
Another factor to consider is that China is likely gearing up a defensive sale of is dollar forex reserves in an effort to support the yuan, which is getting weaker and weaker against the dollar. That's going to impact US treasury yields, and put further stress on the markets.
https://markets.businessinsider.com/news/currencies/china-bank-dollar-yuan-currency-markets-economy-beijing-fed-hike-2022-9
I'm glad you find the content useful!
Thank you - unique times indeed!
Tick-Tock goes the clock! Just a matter time before the SHTF!
I don't think they are wrong.
How about you PNK?
I'm not forming any firm conclusions as of yet.
However, as I have been more or less preaching that the Fed's interest rate hikes were headed in a wrong direction for many months now, and have been seeing warning signals that a crisis was imminent, I certainly do not rule it out.
At this point, it boils down to what happens when and in what order.
One thing I do know is that, with the Fed's overnight reverse repo market having just the other day hit a new record, there is an inherent presumption that the US markets have ample liquidity. If $2.4T is not enough, then the derivative mess is much MUCH larger than anyone can even imagine.
In theory the US markets should have a cushion. In reality....who knows?
This derivatives mess, it is a big worry, or worse. I am concerned it will damage the faith in placing money in the US. Of course, where else is there? Nowhere, and soon not even here!
The "money" isn't IN the US.
The GLOBAL derivatives market (mess) is estimated to be $1Quadrillion. The US share is merely $200Trillion.
The problem isn't the currency, it's the derivative. Derivatives are ultimately synthetic securities that amount to little more than a side bet on an underlying transaction. Somehow, by having a few side bets at long odds is supposed to "hedge" one's risk on a transaction.
The derivatives mess is lighting up this time in the UK first. Will it spread to the US? At some point, probably. Whether through pension funds or more likely hedge funds has yet to be played out.
Where else will it spread? Pretty much everywhere. Think of it as an economic pandemic.
What is the "economic vaccine?"
I'm not sure I'm ready to hear this.
There is no "vaccine". This is one contagion that just has to burn itself out.
1 Quadrillion dollars should make on Hell of a bonfire, yes?