You came creeping with your fears
Telling me your sorrow
In the trace ends of your tears
--Firefall
Am increasingly wondering whether repos might be central to the Next Time Down. Repos have become a primary source of leverage, as traders swap liquid collateral such as Treasuries for borrowed funds. Repos have also been a means for the Fed to control market liquidity.
Through its QE programs, however, the Fed has essentially been buying Treasuries and other liquid assets off the market. Collateral shortages are developing as well as repo 'fails.' As participants are withdrawing from the repo market.
What this sets up is a deleveraging event. Deleveraging means that traders sell risky assets to take projects funded with debt off their books.
As dominos hit each other, prices broadly decline.
position in SPX
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1 comment:
Many of the new financial products that have been created, with financial derivatives being the most notable, contribute economic value by unbundling risks and shifting them in a highly calibrated manner. Although these instruments cannot reduce the risk inherent in real assets, they can redistribute it in a way that induces more investment in real assets and, hence, engenders higher productivity and standards of living.
~Alan Greenspan, March 6, 2000
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