Suddenly there seems to be some very unsettling actions taking place in what is known as the “General Collateral Repo Rate Market.” This market is one segment every business needs to both know and understand, whether you’re a solo-practitioner or, CEO of a global concern. The reasoning is this is where businesses of all types secure funding for their operational transactions.
This market is very liquid, or at least has been, when it comes to the transaction processes. However, in the final days of 2018 on Friday the market suddenly spiked in a one day record move, bringing the overnight rate to its highest since 2001.
However, this move was being explained away by many as a “one day, year end, balancing the book” type phenom. Then, it did it again as in – today.
That’s not something that is suppose to happen unless there’s something wrong. What that “wrong” may be is anyone’s guess. And guessing much of the “experts” are doing just that, for, again, this was only suppose to be a one-off-thing possible on the last day of the trading year.
And now here it is again – on the first. (here’s a link to a ZH article breaking it down in more detail if you wish)
Here’s my two-cents for why this phenom requires one to pay very close attention…
It could be the subtle clue to show you just how fragile and how quickly everything can go awry.
For those wondering exactly what the GC Repo-Rate market is, you can find a succinct explanation via Investopedia™here. Below is a screenshot I took from said source and underlined what I believe may give a clue for this sudden spike. To wit:
The reason why I make this point is that there are some key identifiers that should not be taken lightly in the above and could hold (again, could) significant underlying clues, which are: These have been traded and accepted as – all worth the same in response to one from the other. i.e., all the “apples” in any given basket were assumed unbruised and insect free.
However, now with there being no longer any implied “Fed Put” or other central bank insurance and a “market” that has touched bear market status in mere weeks of all time highs, it may just be the so-called “banks” or “middle-men” no-longer trust what’s in these tranches without first knowing precisely what are in them, along with precisely what they may – or may no longer be worth at first blush.
Does it mean I’m right? I have no clue yet, in that light, I’ll only point to the last time I made such an observation was when I argued that when a company sends product across the oceans with the absence of a letter of credit, it wasn’t something to demonstrate how secure vendors feel in shipping their products and getting paid as so many argued, but rather, might be a sign of desperation.
The result? China’s entire commodity complex fell apart just months later.
As always, we shall see. But for those looking for clues to stay ahead, or at least try and keep up with the daily business and market gyrations?
This is something to watch ever the more carefully.
© 2018 Mark St.Cyr