Where’s Bernanke?

Somebody is surely blowing up. Is it LTCM? Aussie sovereign yields are ripping higher across the curve though especially at the long end:

Although XJO has also come back, the outlook suggets this move is nonsense. It is a sovereign bond market dislocation. The AFR says hedge funds repatriating to the US.

But that is not the main story. Chris Joye does a great job of delivering that:

On March 7 I wrote to the RBA and the government again: “With central banks failing to provide any liquidity (as opposed to interest rate) support to markets that were demonstrably starting to fail over a week ago, we are seeing – as I warned – the clear emergence of a very serious liquidity crisis, which will rapidly transform into a sovereign, banking and corporate credit crisis worse than the GFC unless policymakers take rapid mitigating actions.

“While most central banks are running out of traditional monetary policy ammo, they have an almost unlimited ability to provide massive liquidity support, which will be immensely impactful in unlocking the paralysis in global markets.

“This cannot be just government bond QE – it needs to be full-spectrum, unrestricted QE across all sectors, including governments, banks and corporates on a temporary basis until the virus-induced air-pocket in liquidity has passed.

“This is precisely why we established central banks in the first place: to serve as lenders of last resort to critical funding markets when they face crises precipitated by exogenous liquidity as opposed to solvency shocks.”

There it is. Where’s the Fed. Where’s the ECB? Where’s Bernanke? Where’s the lender of last resort? Where’s “whatever it takes”?

Most pointedly, where’s the RBA?

Central banks must first buy the long end of the bond curve to stabilise the risk free rate.

Second…there is no second. Once the risk free rate is restored, corporate bonds can at least slow down. Once public debt is secured, goverenments can buy corporate debt if they need to.

Or the central bank can if needed. This is a virus after all, there’s not whole lot of moral hazard in that. Anyway, it’s a problem for another day.

If the RBA stands behind Aussie bonds then hedge funds will go sell something else. There’s feedback loop at work as the RBA dithers.

Surely this weekend.

David Llewellyn-Smith
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  1. Well I sold some bonds, to make a bet each way. I expected the RBA to act by now, but they haven’t, so more cash (USD), thanks…

    I like pretending that I know what I’m doing. Are you all convinced?

  2. Hi Ya Miggy!

    HnH if that liquidity is not forthcoming from the RBA, which has to be a possibility, is it time to sell bonds?

    • Probably mostly just volatility, liquidations to cover positions, etc…but, yeah, it’s hard to know…cash is your friend if you’re not sure, or at least reduce long bond positions…? That’s what I’ve done.

      …which means RBA will come out in the weekend and announce QE and I will have missed half of another boat. Oh well 😋😉

      • They didn’t wait for the weekend. That 8.8 billion came in handy for the cratering banks. I suppose the message is they will do whatever it takes to support the banks and crush the value of the currency (and the life savings of those who naively used bank account as savings vehicles) to support non existent (because of the FIRE industries) high value export earners. More money for the bondholders I say..

        Thanks for all the comment on the subject. HnH was right. The RBA must justify itself to its sponsors somehow.

    • So every single commentator on earth – literally – https://media.giphy.com/media/sUNqplVFtsctW/giphy.gif agrees – this global meltdown is not simply because of the Corona virus, or the oil shock – but these are merely the pins that pricked the almighty, absurd, ridiculous bubble caused by the unrelenting printing presses of QE.

      The consequences of QE are the rampant stock market, repo market, student debt, car debt, sub-prime, rampant corporate debt, historical records in inequality and rampant and rising far right etc,etc,etc.

      And as soon as the insane bubble pops, caused by that QE – people start calling for MOARE QE !!!

      Here’s a tip – Legarde, Lowe, Dimon, Bernanke and everyone else on this planet KNOWS that this is the best, greatest opportunity we have ever had to clear out the dead wood and destroy the failed experiment, restore sanity and give money back its normal value.

      There will be no QE.

      That is what is going to happen. Governments will respond with stimulus to the people – bottom up work programs, Marshal Plans – not golden showers of cash on banks.

      Did that – failed.

      Move on.

      • ErmingtonPlumbingMEMBER

        Yes,…Fk “moral hazard” and “Sovereign risk” bail out the plebs or make it all fking burn.
        UBI now!

        • A UBI is inflationary without any production and it goes straight to Capital … is it like silly season or what?

      • Great post. Not sure why but MB seems to have lost the plot with their calls for QE/ NIRP. Are they now just another vested interest?

      • Yet burning it down just increases the malefactors power or have you missed the last 50ish years … then some ponder why austerity resulted in people moving even more to the right. The right always promises authority to fix everything and people eat it up, later on they forget what they gave away and its the new norm – rinse and repeat … aka fearful people will without fault defer to authority to save them.

  3. Yeah this is what is needed and I would even support it if there were serious reforms to the system afterwards. But, I fear those reforms won’t happen.

  4. I wouldn’t touch this sh1t with Reusa’s. Capital preservation is the name of the game for me.

    • Well there just happened to be $8.8B sitting untouched in the federal health budget. It had to go somewhere………protecting the health of fatcat banker bonuses.

  5. Problem is Trump won’t want to do swap lines.
    Geithner & Bernanke chose to bail out the rest of the world. Things are different now.

    • Interesting point of view as he has been quite isolationist at times. Unfortunately, the fortunes of US banks could be highly compromised by a failure to provide dollar liquidity to foreign banks. Co-dependence through the quadrillion dollar derivatives market is enough to ensure cooperation.

  6. I thought it was agreed that QE is a failure.
    If they really want to fix the problem stop handing out cheap credit.

  7. Your problem is this:
    on a temporary basis until the virus-induced air-pocket in liquidity has passed.
    The issue with giving a junkie a high on a TEMPORARY basis, is that, they get hooked and need more and more and more.. so is that really responsible or just enabling?

  8. C-corps snorted a lot of stock by backs to build junk umph … I smell cascade …

    Agree a bit with the notion that this time is a wee bit different because the US is not ground zero for the GFC, environmental pressures have built post GFC with increased pressures globally [bush fires here], and lastly all coinciding with the election in the U.S.

  9. I would only add this all has an air of Rwanda about it, scores being settled during the Melee ….