Even the IMF Has Thrown In the Towel On Global Recovery

The GC repo rate opened this holiday-shortened week right where it shouldn’t have been. Ever since September 17, monetary authorities and the public have been paying closer attention to this part of the global money markets. An unexplained eruption finally created some skepticism, forcing the Federal Reserve to respond. A fourth adjustment to IOER, a first to the RRP, constant overnight repo operations, term repos, and now a balance sheet expansion plan that isn’t QE.

And for all of that the repo rate published by DTCC on Tuesday was an astounding 47 bps above the RRP wholesale floor. Wednesday was not meaningfully better, a spread of almost 37 bps.

One key reason is how despite the names the US central bank gives to some of the things it is doing they are quite removed from the target. An overnight repo operation isn’t the Fed intervening by injecting liquidity into the repo market, as you are led to believe, it is the Fed mimicking a repo transaction between itself and some of the 24 specific primary dealers.

More smoke and mirrors from moneyless monetary policy while the consequences, big and small, keep piling up. The repo market is one risk and now relatedly the WTI futures market and its curve has flipped into contango, a more ominous sign just like last October.

It is most ominous for China. The place with the world’s biggest dollar problem has a lot riding on what may seem by comparison the small matter of tens even hundreds of billions in US$ repo liquidity. The latter feeds the former, a condition that country can increasingly not afford. The externality of any elevated dollar issue becomes internal to Chinese money adding to the volatile mix of growing economic fears and political paralysis.

More than a slowdown, more than a downturn, China is being pushed dangerously into reactionary territory.

In March 2016, as is customary Premier Li Keqiang sat next to President Xi Jinping during the plenary sessions of the National People’s Congress. According to media reports, they never shook hands, speaking with one another only briefly while quite obviously avoiding eye contact. An uncomfortable spectacle.

That contrasted sharply with each’s behavior during the National Congress held the year before, in 2015. Xi and Li, China’s top two leaders, were photographed glad-handing and smiling for the TV cameras if nothing else.

In between, of course, Euro$ #3 and the negative impacts it held for China’s struggling economy. In August 2015, seemingly out of nowhere, the Chinese yuan had been “devalued” sharply leading to all sorts of financial chaos around the world. Wall Street even experienced a limited crash two weeks later.

Because it wasn’t a devaluation at all; it was the dollar shortage escalating beyond the capabilities of China’s beleaguered leaders to handle. That much became increasingly clear as the nation’s economy plodded its way toward the end of 2015 under suspicions of a “hard landing.”

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