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  • JEFF SNIDER: My name is Jeff Snider.

  • I work for Alhambra Investments.

  • I'm the head of global research there.

  • It's a registered investment advisor based out of Florida.

  • What I do is, as the head of global research, is I focus in on the monetary mechanics, the

  • plumbing, so to speak, behind what actually goes on in the world.

  • I take a particular focus on something I call the Eurodollar system because as a global

  • currency, it really is the global reserve currency.

  • Because it's a global reserve currency, what that does is that touches pretty much every

  • part of the global economy in almost every part of the global markets.

  • The way in which that happens is it's a lot of times very complex.

  • A lot of times, it's hard to decipher, but what you should know is that the Eurodollar

  • system is everywhere.

  • It's out there, it's happening, it goes on, and very few people pay attention to it, and

  • a few still understand what really means and what it really does.

  • It was way back in early part of my career, I started looking at bank balance sheets,

  • for example, as an equity analyst, as a return a portfolio management firm.

  • You take a look at banks, and what you found out was that the way the banks operate and

  • the way that individual banks balance sheets were put together was not what you were taught

  • in school.

  • There was all the things going on, on these balance sheets and in this monetary system

  • that was very different from what everybody was saying, what everybody believed in and

  • so I started investigating that.

  • What really drove me to look at it was the fact that nobody had any answers for these

  • things.

  • These things would happen, you could see them on balance sheets, and you could see that

  • there was more behind them but when you stop to talk to people who were supposedly in the

  • know, people were supposed to know these things.

  • You listen to central bankers and economists, for example, it was very clear they didn't

  • have a very good understanding.

  • For me, it just drove me further and further that hey, maybe someday this will be important.

  • Of course, first you had the dot-com bust and then of course, what happened in 2008.

  • You started really to think, okay, there's something really going on here that's worth

  • investigating and worth understanding in a particular level, because there's a lot that's

  • attached to it.

  • Well, what literally happened last week was the repo rate shot up.

  • Because it shot up, there's various linkages between the repo market and the Federal Funds

  • market.

  • Monetary policy at the Federal Reserve operates on Federal Funds so as Federal Funds rose

  • in the range, and then actually broke out of the target policy range, that caught the

  • Fed's attention.

  • They can't any longer ignore something going on the repo market that's spilling over into

  • Federal Funds.

  • That's literally what happened, was that these report rates skyrocketed because of a lack

  • of liquidity, which forced the Fed to respond, which they did with these overnight repo operations

  • that have become daily, which are now sprinkled in with term repo operations simply because

  • there's a lack of liquidity in the system.

  • We're not really sure why.

  • The Fed doesn't know, most people in the mainstream don't know, there's really not a whole lot

  • of answers about what's really going on there.

  • There's certainly been a lot of theories, but there hasn't been a lot of answers.

  • For what I said, what I've been saying for a long time is that this didn't just happen

  • out of the blue.

  • We've been talking about Fed funds repo, for in this particular case, for over a year and

  • a half.

  • In fact, the Federal Reserve knew something was going on because they have been altering

  • their mechanics, just a little slightly here along the way.

  • Going back to June of last year, for example, June of 2018, they changed IOER for the first

  • time.

  • They dropped it five basis points below where it was.

  • The idea was that that would help liquidity in the marketplace, that would get banks to

  • lend some of their free reserves into essentially repo and then have that trickle down into

  • Federal Funds.

  • That never happened.

  • They kept on adjusting IOER expecting that this little nothing of a problem would just

  • go away.

  • They kept finding out that, hey, there's something going on here.

  • There's something else going on here.

  • Really, that's the big message behind all of this.

  • When you stop and look at what's going on in the repo market, Federal Funds and some

  • of the wider issues with the fixed income marketplace as a whole, what you keep coming

  • back to is there's something going on here.

  • First, you say there's something missing.

  • Obviously, there's something missing.

  • We saw that last week.

  • There's a big piece of liquidity missing, but there's something else going on here because

  • this keeps building and building, and what happened last week was it finally broke out

  • into the open so that everybody started paying attention to what was essentially something

  • that had been happening for quite some time beforehand.

  • IOER is the rate the Fed pays on excess reserves.

  • Going back to 2008, the Fed has created excess bank reserves and it pays a specific rate

  • on those reserves to the banking system.

  • The idea is that helps the Fed control money market rates like the Federal Funds rate.

  • The reason it is because where they place IOER in the range of their policy range or

  • in the range of actual transactions gives banks alternatives of where they can put free

  • cash or free funds, however you want to call bank reserves.

  • The idea is if I lower IOER, that means I'm going to pay banks-- as the Fed, I'm going

  • to pay the banks a little bit less to give them a little bit more incentive to go into

  • repo or Federal Funds that will bring those rates down and add a little bit more liquidity

  • to the system where it's supposedly needed.

  • That didn't happen.

  • Every time they reduced IOER, you didn't see much of a response in either repo or Federal

  • Funds.

  • Federal funds kept rising inside the range.

  • In fact, earlier March of this year, Federal Funds broke above IOER for the first time

  • and they responded by just lowering IOER again expecting, again, the idea that will pay banks

  • a little bit less on their reserves so that they'll chase a higher return which was by

  • then a much higher return in Federal Funds and repo.

  • Again, we come back to that same question, why didn't the banks do that?

  • Where were they?

  • What are we missing here?

  • Thanks for not taking that advantage of what should have been of much higher incentives

  • to add liquidity into repo and Federal Funds and these other places.

  • They weren't doing it.

  • What we're really talking about here is banks being constrained.

  • The reason they're not going into these marketplaces is because they don't want to there.

  • There's something else going on in the system.

  • I think it goes back to last year.

  • If you look at May 29th , 2018 for example, what happened on May 29th , 2018 was nothing

  • more than interest rates tumbling.

  • They fell sharply.

  • What that said was that the market was concerned about something.

  • Something happened on May 29th . We may not know exactly what it is, but because it wasn't

  • just US Treasury yields, you had German bond yields and other yields of sovereign bond

  • yields around the world tumbling on May 29th, what it did was it announced that something

  • had just happened in the global system.

  • Again, we're talking about a global reserve currency, therefore a global monetary system.

  • Something happened on May 29th that wasn't good that forced mostly banks in the system

  • to buy and value Treasury bonds, German bonds, those types of instruments.

  • What happened after that point is, and you see this in all of the charts, all the charts

  • that matter anyway, May 29th turned out to be an inflection point.

  • Everything changed after.

  • Inflation expectations for example, before May 29th, it was going along the way-- the

  • TIPS market was going along the way that Jay Powell said it was.

  • The economy was booming, everything was great, we're going to have an inflationary breakout,

  • inflation expectations in the TIPS market were rising.

  • May 29th happens, that's no longer the case.

  • Inflation expectations plateaued and then they have been falling ever since.

  • Something changed on May 29th, and because it was US Treasury bonds, because it was German

  • bonds, what that suggests is that there was a problem in collateral, which is the other

  • side of the repo market.

  • The repo market has a cash side and also has a collateral side.

  • You can't go in the repo market and fund whatever you're trying to do if you don't have the

  • acceptable collateral that the repo market's looking for.

  • What we know from May 29th is something happened, and likely happened in the collateral system,

  • that ever since that point, ever since May 29th of last year, these banks, this global

  • banking system, this global monetary system has been increasingly reluctant to respond

  • whenever you see these other opportunities, let's call them, to offer liquidity to offer

  • to funds.

  • They don't want to do it, they're staying out of it.

  • Again, something's missing, something is absent.

  • I think a lot of it has to do with the collateral side in the repo market.

  • The collateral side is not an easy thing to explain because it's one of those things,

  • it's part of the global framework of modern money.

  • It's just, again, the stuff that you were never taught in school how it actually works.

  • It's a very complicated, almost bizarre, weird place.

  • A lot of different things happen on the collateral side.

  • It's something called securities lending, but even the idea of lending securities is

  • probably foreign to most people because it sounds fantastic.

  • Why would you be lending securities?

  • Oh, by the way, we're not just lending securities, we're also transforming securities.

  • We have collateral lending, we have rehypothecation, we have collateral transformation, we have

  • all these weird things going on, that these dealer banks know is going on.

  • Not only do they know what's going on, they probably have a decent idea of who it's going

  • on with and they also have an idea of how much this is taking place.

  • If there's an issue in the collateral system, we can suspect, again, we don't have any direct

  • evidence for these things because it's hidden in these offshore spaces of this global marketplace.

  • We can begin to suspect by what we see in market prices and dealer bank behavior that

  • there's some concern about all of the things that were going on the collateral side of

  • the repo market, may be in danger of creating bigger problems.

  • That might answer, in my view, probably does answer at least a good part of why dealers

  • are reluctant to step in when they should be stepping in, when they should be taking,

  • hey, I got lower IOER, why am I not taking advantage of the spread to repo or Federal

  • Funds?

  • Well, if I'm worried about all these other things, I'm probably going to be shy about

  • everything.

  • In many ways, we've never recovered from 2008.

  • Before 2008, as people know, from the term subprime mortgages, mortgage bonds were a

  • very big part of the collateral chain, they were a big part of the collateral system in

  • the repo markets.

  • Once the financial crisis became severe enough, those mortgage bonds were no longer really

  • acceptable in repo.

  • What we were left with is pristine collateral, which is the top layer of collateral out there,

  • it was nothing more than US Treasuries and for a while, it was all the European sovereigns

  • until 2011 when those Portuguese, Italian and Greek bonds suddenly, they were no longer

  • acceptable either.

  • What we're really talking about here is, the availability or supply of collateral in the

  • system has been impaired and has been cut back since 2008.

  • Nothing has ever been done about that, at least not an official level.

  • Now, the banking system has tried at various points along the way to deal with what is

  • essentially a systemic or chronic shortage of collateral, which is what we're really

  • talking about here with Treasuries and German bonds.

  • The way that they've done that is by various points along the way, they've transformed

  • other forms of collateral, lesser forms of collateral, using the limited availability

  • of the top tier stuff, the pristine collateral, and attempting to essentially get around what

  • is this chronic shortage.

  • When you do that, you're adding elements of risk to the system and the way collateral

  • trades and the way the collateral is redistributed is almost like-- it's almost currency like

  • in its own behavior.

  • There are times when dealer banks are more than happy to do all these lending and transformations

  • and all that stuff.

  • There's also times when they're shy about it.

  • It's almost like there's a collateral multiplier.

  • I know that's weird to say and that's weird to contemplate, but that's really the truth

  • here.

  • When the collateral multiplier is big, or pot big, largely positive, the repo market's

  • fine.

  • There's plenty of collateral, I don't want to say plenty, but there's collateral out

  • there in the system, it's distributed, it flows where it needs to go or where it largely

  • needs to go.

  • On the opposite times when banks are a little bit less sure of things, more aware of the

  • risks involved, that collateral multiplier tends to collapse a little bit and that causes

  • problems because what do you do in that case?

  • Where do you go to if you don't have good collateral?

  • Well, the one thing you do is you buy the top tiers.

  • You buy US Treasuries.

  • You buy German bonds.

  • The insiders in the system, because again, we have very little-- we can't really see

  • what's going on in this offshore system because a lot of it takes place outside of the purview

  • of anybody.

  • There's not any statistics.

  • Basically, the only people who know what's going on are the people involved in it, the

  • big banks and the banks who deal with the big banks in this global dollar redistribution

  • scheme.

  • If they're looking at what's going on out there, we don't really have a direct way of

  • observing what's going on out there.

  • If they're acting quite shy about what they perceive is going on, or what they know is

  • going on, that's a pretty clear signal that something must be going on and something is

  • making them reluctant to take advantage of what should be an easy arbitrage in Federal

  • Funds or IOER, therefore we should take from that the idea that, hey, something's going

  • on out there that they probably see that they're reacting negatively to that it's got to be

  • a substantial thing.

  • Oh, by the way, it's preventing them from reacting in a way that would allow for this

  • normal functioning in these other markets that people are paying attention to in the

  • places that we can see.

  • Regulations definitely have played a role here.

  • They played a procyclical role, which is obviously the opposite of the intent.

  • The regulations, when you're talking about basal three, the liquidity coverage ratio,

  • HQLA, all that good stuff, it codified what banks were doing anyway, which was they were

  • holding more of a pristine collateral inventory on their own anyway but yes, the regulations

  • did play a role in making banks hold even more.

  • There's already an existing liquidity margin that has built into whether it's perception

  • or regulation, that's already built into the system in the post-crisis era.

  • You also have to factor in quantitative easing, too, which was the Fed essentially were raising

  • some of that collateral by buying it up and storing it into its summer portfolio.

  • It's a multi-dimensional problem that is a chronic problem, a systemic problem but it's

  • not a straight line problem.

  • It shows up in these different, in these discrete periods along the way, but regulations definitely

  • did play a role.

  • They have made banks hold probably more collateral than they might have otherwise.

  • No, it's definitely hand-waving.

  • The reason is, look, the Fed did overnight repo operations daily.

  • They have been since last week, and it hasn't had much of an effect.

  • The repo rate isn't as elevated as it was in the middle of last week, but that was just

  • because that was a seasonal low point on the calendar.

  • All that happened that brought the report back down where it was before was that the

  • seasonal bottleneck had passed.

  • Before the bottleneck, you had the repo rates and the Federal Funds rate elevated suggesting

  • lack of liquidity.

  • Then after there were the bottleneck, you had elevated repo rates and Federal Funds

  • rate.

  • Not as elevated as middle of last week, but still elevated this week.

  • Oh, by the way, there are now standing repo facility, but there are now overnight repo

  • operations, and these term repos along with it.

  • They accomplish much, because the repo market Federal Funds is in the same shape as it was

  • before the bottleneck.

  • That hasn't really done much in the answer.

  • The reason is because the Federal Reserve is looking at this from the perspective of

  • only bank reserves.

  • They're all in the large part doing it because they're only looking at it from the perspective

  • of Federal Funds.

  • Monetary policy is only concerned about whether or not the Federal Funds rate, the effective

  • rate stays within their range.

  • The only reason we got overnight repo operations was because it broke out of that range.

  • They're looking at it from the perspective, a narrow perspective of just Federal Funds,

  • just bank reserves, and therefore, the idea is maybe we need to keep Federal Funds in

  • this range and the way we do that is through a standing repo facility, which is only bank

  • reserve.

  • Has nothing to do with collateral, has nothing to do with why dealers are sitting on their

  • hands when they should be acting in the marketplace.

  • It's only allowing some variation in the level of bank reserves.

  • What I tell people is well, if we go back to the pre-crisis era, there were no bank

  • reserves.

  • There was maybe 10 billion in the system.

  • For a multi-trillion dollar system, there were no bank reserves in the system before

  • 2008.

  • Yet the repo market functioned fine.

  • What was the repo market using to settle this liquidity when there were no bank reserves,

  • or was using other forms of liquidity, other forms of bank driven liquidity?

  • The answer in the repo market today can't just be bank reserves, because the repo market

  • encompasses so much more than just what the Fed is offering.

  • The Fed is offering a small slice of what might help the repo market.

  • We've already seen that the problem is much bigger.

  • Again, going back to May 29th, why are dealers refusing to act in these places?

  • That's the real question, has nothing to do with a standing repo facility, nothing to

  • do with overnight repo operations.

  • It's why are dealers not being involved when they should be?

  • Everything, everything in the marketplace says these guys should be acting.

  • You see the repo rate skyrocket to 10%, why are you sticking at 2.1 in IOER?

  • You should be in the repo market.

  • There's tons of opportunity there.

  • That's the real issue here.

  • It's not the level of bank reserves.

  • It's not standing repo facilities.

  • It's why are banks refusing to get involved here?

  • Well, I think people are focused rightly because nobody knows, nobody really understands the

  • system as it actually works.

  • That includes policymakers, by the way, sadly.

  • The fact is that monetary policy is not a money policy.

  • It's not about understand liquidity and understanding this global system.

  • Monetary policy is only about managing people's expectations.

  • That's what the Fed's doing.

  • What happened last week was the Fed found out it's hard to manage people's expectations

  • when you have an obvious problem in a way that everybody's talking about it.

  • If you have a situation where the Federal Funds Rate breaks out of its range, it's hard

  • to manage people's expectations positively.

  • In fact, the economy in a positive way is policymakers expect if you have this problem

  • in repo.

  • In fact, everybody keeps talking about this problem repo because it raises uncomfortable

  • questions, and you don't have the answers to why, what is going on in repo?

  • Why is it still going on in repo?

  • If you don't know, it makes it much more difficult.

  • The idea here is that the level of monetary expertise, the level of expertise about the

  • monetary system as it actually functions is very low.

  • It's even lower in the general public because for a very long time, nobody paid attention

  • to these things.

  • Everybody just thought, well, Alan Greenspan's got it covered.

  • Ben Bernanke's got it covered.

  • We don't need to understand repo because somebody out there does.

  • Therefore, nobody's ever asked any real questions about the monetary plumbing of the system.

  • That includes policymakers who thought we'll just do some QEs or something.

  • Whether it works or not, as long as people think it works, then good enough for us.

  • Overall, it's a lack of understanding about how things actually work.

  • That's not a small thing because again, as I touched on in the beginning, this is a global

  • monetary system that affects every part of the global economy and a lot of global markets.

  • I think it's also important to point out that this is not the first time we've seen this

  • tightening.

  • This is actually the fourth time this has happened since 2008.

  • The first one, obviously, everybody knew about.

  • That was the Global Financial Crisis in 2008.

  • Everybody focused in on subprime mortgages, but that was only maybe the catalyst which

  • kicked things off.

  • We know from things like the dollar swaps that the Federal Reserve did with the foreign

  • central banks.

  • What really happened in 2008 was a global dollar shortage, same kind of dollar shortage

  • we're talking about today.

  • What has happened over the last dozen years or so, is we've had these intermittent dollar

  • shortages show up.

  • Last year and a half is just the fourth in a series of them.

  • There was a second one in 2011-2012.

  • There was another one in 2014-2015, lessens in early part of 2016.

  • Then this one showed up early on in 2018.

  • Well, everybody's been talking about trade wars.

  • Before anybody paid attention to repo, everybody was experts in tariffs in Chinese goods.

  • No, this stuff is just repeating.

  • We see that consistently across these markets, the same market signals that we have today

  • telling us that there's a dollar shortage going on now that's leading up to repo and

  • collateral, all this other stuff we talking about.

  • We saw the same market behaviors three times before now.

  • It's important to understand that this isn't the first time that's happened.

  • The reason we want to understand that is because we want to understand what the real problem

  • is.

  • It's a systemic issue.

  • Collateral is only part of the story.

  • Again, it's a systemic thing, where it's causing a negative effect again across the entire

  • global economy.

  • It's leading to uncertainty in a lot of marketplaces.

  • It's leading on to just generalized uncertainty in whether you're talking about politics and

  • social factors.

  • What I'm saying is that what people have focused in on trade wars and trade wars are not helpful.

  • That's a negative.

  • That's definitely a negative pressure in the real economy.

  • What's happened in the global economy overall is more about a dollar shortage, a repeated

  • dollar shortage and is about trade wars.

  • The reason people are focused on trade wars is because there's a lack of any alternative

  • explanation.

  • What else could it be?

  • Nobody else has any real answers.

  • Again, like the repo thing, what else could it be?

  • Nobody has any answers.

  • Because nobody really pays attention to these things.

  • Even after 2008, there's been a lack of curiosity about the global monetary system, which is

  • to me is strange, but it makes sense because most people just want to believe that Ben

  • Bernanke, Janet Yellen, Jay Powell, they all have it covered.

  • We don't know how they haven't covered, but we want to believe that they do.

  • Therefore, they say everything is fine, it must be trade wars, because we don't have

  • an alternative explanation but in truth, the dollar problem showed up before the trade

  • wars did.

  • Not only that, this is just the fourth iteration of the same event.

  • People are attributing the effects of this dollar shortage to trade wars because they

  • don't have any other explanation.

  • Well, it's a systemic issue, because we go back to the pre-crisis era, banks would just

  • expand and part of that expansion was liquidity, money.

  • Well, it's difficult if not impossible to define money and liquidity but we know that

  • was there, because everything was going gangbusters in the pre-crisis era.

  • Subprime mortgages were a symptom of that expansion.

  • It was a monetary expansion.

  • It was a global monetary expansion.

  • Even the authorities knew what was going on.

  • They just misunderstood.

  • Ben Bernanke in 2005 called it a global savings block.

  • It wasn't a global savings block, it was a global monetary block.

  • They just happened to take place offshore outside the US jurisdictions.

  • Then this just crisis happens.

  • Starting in August of 2007, the banking system began to doubt itself.

  • Why wouldn't it?

  • Because a lot of what was going on was going on based on myths and short hands and perceptions

  • about things that weren't real.

  • As the banking system began to ask real questions about the stability of everything, bank behavior

  • changed, especially once Bear Stearns failed, or nearly failed, was turned into a "merger".

  • What happened with Bear Stearns was it reminded everybody that there was suddenly a very real

  • downside to doing all of these things that they used to do exponentially.

  • The downside was, hey, you really can go out of business here.

  • They could take the entire bank with it.

  • Then, of course, that message was reinforced later in 2008 with Lehman Brothers, AIG and

  • all the rest.

  • The system began to doubt all the things that it used to do before the crisis, all these

  • liquidity things, securities transformation, repo markets, commercial paper.

  • All those things that happened before the crisis era, banks began to attach real risk

  • to them, and then they didn't really want to do them anymore.

  • Then the problem was that the global system-- because remember, this is a globalizing economic

  • system up until 2008, it required those things to be done, it needed the monetary and financial

  • resources in order for the economy to move.

  • If the banking system says I don't want to do those things anymore, all of the sudden,

  • it's hard to do all the things that would in economic terms as well as market terms,

  • that happened before the crisis era.

  • If the bank don't want to create the liquidity, you're going to have a constant liquidity

  • problem.

  • In an overview sense, what it is, is the system was unstable to begin with.

  • It operated for a very long time, because everybody assumed it was stable.

  • They also assumed that the Federal Reserve was behind it, which turned out to not be

  • true, too.

  • A lot of these assumptions have been challenged and proven false and then it's led to this

  • situation where we have this constant malfunctioning system that requires banks to expand when

  • they're no longer willing to do that.

  • This fourth eruption, what we've seen over the last year and a half, and what we saw

  • last week in repo is just an extension of that problem.

  • When there's an opportunity for banks to extend and create liquidity, they're saying we don't

  • want to do it.

  • Yeah.

  • It's two different things, or two things that are related to each other.

  • Number one, 2008 was not a one-off event.

  • Everybody assumes it happened, it's over with, we're onto something else.

  • No, it was an inflection point.

  • The system that existed before 2008 no longer exists today.

  • It's still in place, but it doesn't work.

  • It doesn't work for the people inside it, it doesn't work for the people outside it.

  • Because very few people are aware that it's there, very few people are aware of what it

  • does, it hasn't received the recognition that requires and it deserves.

  • The other thing is that what was going on in the system that existed before 2008, as

  • I said before, was unstable.

  • It was a ridiculous system because it rewarded all the worst behaviors.

  • In some ways, it was like a spinning top.

  • A spinning top that spins fast seems stable but as soon as it starts to slow down, it

  • wobbles and falls down.

  • The banks that operate this-- because what we're really talking about here is a credit

  • based global monetary system, and credit based means something.

  • It means that it requires bank balance sheet capacities for this thing to operate in at

  • least the appearance of stability.

  • If the banks aren't willing to put in the resources, to put in liquidity, to put in

  • the balance sheet expansion for that system to operate, it is inherently-- the inherent

  • instability in it shows up and it shows up in these discrete periods that we've talked

  • about, these four different dollar shortages that have erupted along the way.

  • 2008 was a monetary break, was a systemic break and collateral is just one part of that

  • systemic break.

  • A lot of it has to do-- we all come back to, again, we're asking the question, where are

  • the banks?

  • Why are they sitting on their hands?

  • That's the reason.

  • If you're looking at it from an overview perspective, going back to 2008, the system was never ever

  • fixed.

  • That's the real point here is that there's really survivability at stake here, because

  • that's what we saw.

  • Bear Stearns went out of business.

  • Yes, Bear Stearns was merged and as far as the Fed was concerned, that was a successful

  • rescue.

  • If you're a manager at Bear Stearns, you're a shareholder at Bear Stearns, that's not

  • how you view it.

  • You lost everything.

  • The partners of Bear Stearns and shareholder of Bear Stearns, they saw what the downside

  • of this is.

  • That message was transmitted to all the rest of the banks.

  • They understand post-crisis, there's no Fed behind everything, liquidity is shaky, you

  • know what, we don't really want to do this anymore.

  • Even when the repo rate is 10%, that's not really enough, because we're aware of the

  • potential downside and the potential risks that could be out there.

  • Oh, by the way the Fed isn't.

  • The main takeaway is simply that something's going on.

  • Even if you don't know exactly what it is, you got to say, hey, something's going on

  • here and it doesn't seem like our policymakers, the authorities have a whole lot of answers.

  • That's important too because you have to realize that what's going on in the system, what may

  • be going on in the system, if there's nothing behind it, if there's no backstop behind it,

  • which everybody's thought from day one-- the Fed is the lender of last resort.

  • What if there is no lender of last resort?

  • That's a very different risk spectrum.

  • Then if you thought, well, Jay Powell will just do a standing repo facility and we'll

  • forget about this stuff.

  • In other words, there's something going on here, it's a substantial thing.

  • It entails risks, not just to the repo market, not just to Treasury markets, which would

  • be a positive thing for Treasury markets because people would go into those markets, interest

  • rates would fall further.

  • We've already seen the effects in the global economy.

  • Think about what happened in 2018, or what was supposed to happen for 2018 to 2019, authorities

  • were saying the economy's booming, inflation is going to break out, we're going to do more

  • rate hikes in 2019.

  • What happened in 2019?

  • The opposite.

  • We've got questions about a global recession, and some economies that look like they're

  • already in recessions, important ones like Germany, that already looked like they're

  • in recession.

  • There's no inflation, inflation expectations have fallen, as I said before, since May 29th

  • . Oh, by the way, now, the Fed's cutting rates and they're not the only ones.

  • It's global, central banks around the world are all cutting rates.

  • We've already seen the effects of the global monetary tightening.

  • What we're really talking about here is a global monetary tightening in the system that

  • very few people understand.

  • It's already had serious effects in the entire global economy.

  • What does repo rumble or whatever it was last week, it just emphasizes this fact that there

  • are negative monetary risks that have very real implications for pretty much anywhere

  • around the world.

JEFF SNIDER: My name is Jeff Snider.

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