November 30, 2022

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Pension funds also sell chairs. But what is the next domino symbol?

blessed war. Were it not for the alignment between the celebrations of the annexation of the four Russian-speaking provinces, the European Union Energy Summit, the press conference of the NATO Secretary General, and the United Nations Security Council voting on the implications of the Russian referendums, the media would find yourself compelled to talk about this,

In short, something that can be summarized with a title more or less like this: How Britain avoided Lehman Brothers (for now)And the

unpleasant. Because if after an emergency intervention of 65 billion, the pound will return to weakness, Pension funds get rid of everything they have so they don’t collapse under the weight of margin calls And the organizers are forced to hold an emergency meeting before next week, something profound broken It is the basis of the system. and the financial times He says it plainly: Yesterday British pension funds flooded stocks and bonds to make as much cash as possible, unable to make price Compared to their needs also in view of sales. They ran to the insurance companies to ask, in effect, an emergency rescue plan.

Because the vast majority of about 5,200 funds based on benefit plans use derivatives as a hedge against price increases and inflation, they are instruments that nonetheless require cash collateral as collateral. And when the market takes a different direction from what was expected, the amount of money demanded goes up. Exponentially. Exactly how yields from GILTS, British government bonds, have done in recent days, after the new government decided to respond to rising bills and inflation to a Thatcher resident, as well as suicidal tax cuts to reinvigorate consumption and recovery.

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And this graph


The equivalent of British government bonds available in the market as collateral
Source: Financial Times

Flexibly shows the volume of emergency sales, As the market value of Her Majesty’s government bonds available as collateral only has collapsed in the past few days. And what happened has an explanation as simple as it is disturbing: according to the reconstruction financial timesthe large intermediaries (LDI) between pension funds and banks that provide hedging instruments have actually threatened the British government, forcing it to de facto To arm the Bank of England to save the sector.

For example, BlackRock has made it clear that the first margin call will also be the last: there are no other requests for increased liquidity to cover, the fund will be liquidated immediately.. In fact, each holding asset is sold to cover margin calls. Automatically and regardless of market conditions in which securities or bonds are offered to potential buyers. Like I’m saying, I sell at 30 dollars and that’s okay, just to make moneyIn short, despair. Which the government and the central bank corrected. But given the dynamics and the need for an emergency meeting of regulators, this is not enough. And potentially worse than the pit.

Because now this graph is scary:


Trend in Bank of America Global Market Risk Index

Trend in Bank of America Global Market Risk Index
Source: Bloomberg / Bank of America

Which shows how the Bank of America global risk index has just reached the peak of the pandemic. free of the crisis that, according to many insiders, could lead to a significant downsizing of the private and supplementary pension systems, Because it is clear how what happened reveals the secret of Pulcinella that they were used as mere tools cash outHere comes the million dollar question: Who will be next? Which domino symbol will fall?before coordinated support at the level of global central banks stops the carnage again, with structural support strikes? Needless to say, BTPs appear among the top candidates. It was closely followed by Credit Suisse, whose credit default swap yesterday updated a new high after Lehman.

And here comes this last graph


Deposit amount in the Federal Reserve Bank of New York's Reverse Repo Facility

Deposit amount in the Federal Reserve Bank of New York’s Reverse Repo Facility
Source: Bloomberg

Puts the risks as well as the potential and risky strategy that this may involve in a global perspective: a September 2019 effect Caused by the abuse of reverse repo. On the last day of trading, in fact, they were 108 counterparties have deposited as much as $2.426 trillion into the Federal Reserve Bank of New York’s facility. New absolute record. But, above all, something that risks opening Pandora’s box from another trick. Or worse yet, another wrong assessment. In fact, if inflation for months is described as transientHere, reverse repo is still underrated as a tool today temporary Excess reserves parking.

But with options now being bought in the form of New Year’s Eve fireworksHere’s what to stop with billions in a file investment In fact, risk-free and today’s reward at 3.05%, it appears to be a clear systemic hedging strategy and no longer just an opportunity. In fact, Fewer (risky) loans to the real economy and a greater and continuous drain of liquidity from the market, as well as the constant erosion of reserves. which are obviously deposited with the Federal Reserve for only 24 hours but during that time they are binding and untouchable.

The British example of flexible pension funds has shown us how situations can rush in a jiffy. In the face of a catalytic event and a series of margin calls, all that Fed lock-in liquidity, what impact will it have on the market? What is needed for the new month of September 2019. Indeed, to activate quantitative easing. A paradoxical and extremely dangerous liquidity crisis born through its excess, so abundant that it is stalled and stamped. Not usable when needed. Anyone looking for a controlled incident? If so, BTPs appear to be strong candidates for the sacrificial victim role.

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