Posted on 11/05/2011 6:47:08 AM PDT by Squidpup
The most important news announcement of the day was not anything to came out of Cannes (as nothing did), nor from Greece (the merry go round farce there continues unabated). No, it was a brief paragraph distributed by the CME long after everyone had gone home, and was already on their 3rd drink. It is critical, because not only is this announcement a direct consequence of what happened with MF Global several days ago, but because also it confirms one of our biggest concerns: systemic liquidity is non-existanet. We confirmed interbank liquidity in Europe was at an all time low earlier today, and can only assume the same is true for US banks. But what is very disturbing is that this is just as true at the exchange level, where it appears the aftermath of the MF collapse is just now being felt. What exactly was the announcement. Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product. Because as of close of business on November 4, today, the CME just made the maintenance margin, traditionally about 26% lower than the initial margin for specs, equal. For everything. Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America... and the world. Just like when Lehman blew up, it took 5 days for Money Markets to break. Is this unprecedented elimination in the distinction between initial and maintenance margin the post-MF equivalent of the first domino to fall this time around?
...snip...
The whole MF thing is very weird and doesn't make any sense -- missing half-billions -- so the situation is ripe for speculation in the absence of tangible evidence of anything.
This does seem like a clue. Maybe MF's raise detere -- and it had one that was more than being a FCM -- was to provide liquidity with smoke and mirrors. I certainly believe there were carrying water for the Treasury and laundering "stimulus" money for Democrats.
I meant, “raison detre”, of course.
ping
If this reading is correct you will likely see the biggest impact in the commodities futures markets. Let’s see if they sell off big Monday. It might also cause a short squeeze in stocks if margin is heavier on the short side. The effect on ETF’s is harder to tell.
Also watch out what happens with some of the closed-end funds that use leverage. If they get margin calls they might be forced to liquidate positions to get back to 100% equity. That could cause a double-whammy: Losses on sales and lower payouts on leveraged interest-earned makes these funds less attractive.
One stock to watch is AGNC. Its approach is to leverage Agency paper 7:1. If they are required to reduce leverage the stock could hit big (I am a financial adviser and I am not recommending anything long or short, just trying to point out a possible risk to this equity).
At the high risk of sounding dumb...I’m no financial guru at all...
But is this talking about a liquidity crisis? Which if it is, then we’re entering a severe deflationary cycle?
While I sort of grasp that this won’t affect everyday stuff right away ...it will in th elong term?
Not a liquidity crisis in the economy but a potential liquidity squeeze in the financial markets. Much of the futures trading markets are based on margin accounts. It looks like the CME is going to ask for either a lower level of borrowing behind the positions OR put up more collateral in the existing positions. Let’s see how that plays out Monday before we know the answer to the new policy.
I don’t think this Fed Board led by Bernanke will let a deflationary spiral occur if they can help it. For his faults on policy, one thing Bernanke certainly has is a full historical understanding of the Depression and the role monetary policy played in it. He will try to offset the reduction in velocity with increases in the money supply itself.
It’s a heck of a balancing act and mistakes can occur. We’ll know better at the close of Monday how big a deal this policy change is.
Thank you.
“...increases in the money supply itself.”
(shakes head in confusion...)
Sorry.
If velocity of money declines (meaning the average dollar changes hands less frequently because people aren’t spending or investing) you need to increase the money supply to keep prices stable. Otherwise deflation kicks in. As we continue to work down our debt (non-governmental) we need to not let deflation occur because it makes paying off the debt much harder.
Frankly, given how much the money supply has increased, overall inflation increases haven’t been too bad. Gas prices and food have inflated but housing costs have come down so much of it has been a wash, regardless of what the CPI and other inflation stats show.
So far the balancing act has had some success, lets hope it continues as we work our way out of this mess.
And here I thought we were mixing SHTF scenarios, where a coronal mass ejection (CME) impacted the financial markets somehow (other than the obvious incineration potential).
It seems to me we're entering the trap that Professor Nouriel Roubini of New York University alluded to back in 2009.
I would also look for those having sold “naked call options” to see a margin call.
Over all affect to the financial markets may be a zero sum gain or loss though as so many instruments are “insured” to make the net result a near zero if they have to be sold.
Just IMO of course, not by any means an expert or even an amature in such things.
If you sell a naked call option and it is in the black this rule won’t change anything. Margin only kicks in when the option is losing money.
My gut feel is that this will have some effect on short stock positions that might get called in by the margin call; that would mean some upward pressure on prices.
bump...
Lots of things happening over the weekend.
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