- The prices of facts on the bond market are declining At the same time that the stock market suggests that there can be a liquidity crisis in the financial sector at the same time as the commercial prices crisis. The two phenomena could be on the level of the 2008 financial crisis, if President Trump does not change course. Some investment managers call for intervention by the American federal reserve.
You can forgive yourself if, before today, you had never heard of “basic trade”. You had no reason.
But we could be about to learn a lot about basic transactions in the same way as we suddenly have to discover “credit failure exchanges” and “titles backed by mortgage claims” during the great financial crisis of 2008.
Because this moment – with the price program of President Trump threatening to push the planet into a recession, as shares and obligations drop – is just as dangerous as on August 3, 2007, when Jim Cramer suddenly started screaming CNBC That the American federal reserve had to “open the reduction window” (which means being more generous for the big banks that were in difficulty) because the former president of the Fed, Ben Bernanke, had “no idea how bad it is!”
This was the moment that presumed the 2008 crisis. The S&P dropped 50% of its value over the next two years, because, slowly at first, then with an increasing alarm, everyone realized that the economy had taken much more mortgage than ever.
Tuesday, the S&P 500 collapsed at less than 5,000, or 18% lower than its summit of 6,144 in February.
Usually, when shares decrease, investors flee the security of obligations and the obligations increase.
But the obligations also fell. The yield on the 10 -year treasure went from 3.9% and briefly reached 4.51%. (Do not forget: if yields increase, this means that the prices of bonds drop).
It was unusual
Scary, mysteriously unusual. This meant that there was nowhere “safe” for money to hide.
Then, also Tuesday, Torsten Sløk, the chief economist of Apollo management, published a fantastically useful Note explaining the probable problem on the bond market: “Basic trade”.
It turns out that since the great financial crisis of 2008, hedge funds have put bets with up to 100 times the lever effect on the price difference between treasury vouchers and cash flow contracts. In the bet, to put it simply, you buy the Treasury obligation, then runs the long -term contract at an expensive price on a similar obligation. While the obligation appears on its expiration date, the convergent prices. The lower price drops and your short bet is paying.
The price differences are low, and that is why hedge funds use a lever effect 100 times to make them money.
“What is the size of the basic trade?” Sløk asked. “It currently represents around $ 800 billion and a large part of the 2 billions of dollars in progress in the prime brokerage sales.”
The liquidity problem
The only problem with the lever effect, of course, is that you have to reimburse it.
And what the bond market – with its drop in prices – signaled to report is that there was a liquidity problem among the hedge funds and the banks that rushed to leave the bases of the bases in order to raise and maintain species.
When there is a liquidity problem on this scale, you potentially have systemic institutional problems. Ark Invest Wood Cathie Posted on XAlthough in reference to a different aspect of the bond market, there were “serious liquidity problems in the American banking system”.
“This crisis calls for … serious support from the Fed,” she said.
She is not the only one to worry.
Jefferies chief, the American economist, Thomas Simons, published a note to customers on Wednesday morning entitled “We could see the intervention of the Fed soon”.
Nick Lawson, managing director of the Ocean Wall investment group, said to Financial time“While things in a spiral, they are [the hedge funds] Being forced to sell everything they can – even good active ingredients – just to stay afloat … If the federal reserve does not approach soon, it could turn into a crisis in its own right. It’s so serious.
It looks a lot like 2008
This is why it is so frightening.
But this time, it is potentially worse than 2008.
The trigger for this crisis is not only a few hedge funds that make bad bets on treasury bills. These are President Trump’s commercial prices. The White House almost called an international trade with America – and the stock market reacts negatively accordingly.
To put the magnitude of what Trump does in perspective: Trump’s prices could spell the end of Apple’s iPhone for American consumers. The prices on China mean that the price of a new iPhone could reach $ 3,500, according to Wedbush analyst Daniel Ives. This price supposes Apple Could make an iPhone inside the United States, thus avoiding the Chinese price. But it is impossible, says Ives, because it takes years to build the type of semiconductor manufacturing factories necessary for a smartphone. And even if you could do it, the phones would be too expensive for anyone except the very rich. “The reality of an iphone of $ 1,000 being one of the best -made consumer products on the planet would disappear,” explains Ives.
Goldman Sachs sent its customers a note on Wednesday which says: “The demotion of implicit growth on April 3 and 4 [from the tariffs] has exceeded everything seen outside the initial cocovid shock, an episode of GFC and black Monday in 1987, “wrote analysts Dominic Wilson and Vickie Chang.
With these perspectives, it is not surprising that actions are sold. The prices will simply prevent many companies from being in the company in which they are.
In February – it looks like a life, but it was only a few weeks! – All the chatter focused on “gentle landing” that the American federal reserve seemed to have designed for the American economy. The American economy had struck a few bumps last year, but it was fundamentally solid. The actions provided for good times to come. Even the recent employment numbers for March seemed good.
Everything that’s now gone
Of course, there is a remedy for this. Trump can reverse his trade policy. But he is not known to have fallen or admitted that he may have made a mistake. Alternatively, the congress could intervene and adopt a bill with control of the tariff policy.
In the absence of these two conditions, we can now have one but two crises on a 2008 scale at the same time, both nourishing each other: the crisis between companies which suddenly cannot exchange; And a crisis in the financial sector, which suddenly cannot locate enough money to remain liquid.
This story was initially presented on Fortune.com
