Dr. Liquidity and Mr. Volatility

Shades of 2008 as liquidity drains from the market and volatility pops. Were you forwarded this email? [Sign-up to Rude Awakening here.]( [Unsubscribe]( [The Rude Awakening] It’s come to our attention that you might be missing out on extra benefits exclusively for Rude Awakening subscribers. Check out our website where you can find archives, updates, and everything else included in your subscription. You can access it by [clicking here now](. Dr. Liquidity and Mr. Volatility - Liquidity is draining out of the US Treasury market. - The S&P futures liquidity is also down, leading to volatility spikes. - Developments parallel 2008, which was a liquidity crisis first, then a market crash. Recommended Link [Trump’s Secret Tech Revolution ($15.1 trillion at stake)]( [Click here for more...]( What if Trump recently did something that could see him become a HERO in Silicon Valley? According to the man dubbed “The Tech Prophet” by Forbes, it’s true. A single Federal Ruling in the final year of Trump’s presidency could be about to unleash a tech revolution worth an estimated $15.1 trillion. In the words of one tech insider – a CEO who works closely with Microsoft, Intel and Google – it “will rewrite the rules of what is possible.” And it could create countless ways for you to grow your wealth. [Click Here For The Full Story]( Sean Ring Editor, Rude Awakening Happy Hump Day! As we get through the muddied waters of the Ukraine mess, our attention has been diverted from what really matters. But surely war matters, Seanie? Well, yes, but a ground war in Eastern Europe between Russia and America was never going to happen. Because it could not, and cannot, happen. That’s because neither side wants it, nor can afford it. So Russia stood down, claiming to have proven the Western propaganda machine was broken forever. (If only!) And America gets to say it scared Russia off, though it has yet to verify Russian troop withdrawal. How convenient for both sides! Well, enough of that nonsense for now. Because we’ve got far bigger fish to fry. It seems our markets are on the verge of a major malfunction, one that slips under the radar until it’s too late. London 2008 I first got into financial training in March 2007, a full year after I quit being a futures broker. I wrote a one-sentence letter of resignation in February 2006, and walked out of the office an hour later. For the entire year, I dabbled with writing and traveled around Europe. I also visited my parents at their then-new house in Texas, which was the first time I was ever Deepinthehearta. But once I ran out of bonus funds, I needed to get a job. I landed with a company called 7city Learning, which, unbeknownst to me, was where all the training all-stars worked. It was like walking into the 1927 Yankees’ locker room and having the men of Murderers Row teaching me how to hit. The boys there were, and still are, the best trainers in the world, though we’ve scattered to different places. And they taught me everything I know about teaching. I’ve never been more grateful or happier working anywhere else, as far as a J.O.B. is concerned. (I don’t consider the Rude a J.O.B., by the way!) What amazed me about the teaching process was how they knew how to break any subject into bite-sized pieces so that anyone in the class could understand. It’s something I try to do every day in this newsletter, sometimes more successfully than others. The other astonishing thing was how little I knew about my craft, though I had spent ten years in the markets and had two finance degrees. It was like my knowledge was built in one specific area, and as a castle in the sky; I had no real foundation. So I spent my first two years there relearning everything I thought I already knew about finance. And one thing that I learned very quickly was how necessary liquidity was. Liquidity and the Interbank Market Almost no one knows how the money markets work. And most people don’t need to. But when banks were expanding like crazy in the early 2000s, they did it by borrowing money… from each other in the form of eurodollars. Quickly: eurodollars don’t refer to the currency pair of EURUSD, though we call that eurodollar, too. Market professionals call the pair eurocurrency not to confuse it with eurodollars. So What Are Eurodollars? Eurodollars are US dollars outside of the United States. And there are far more dollars outside the US than inside. Eurodollars were inadvertently invented by that bastion of capitalism, the Soviet Union. Afraid of the US bank accounts being frozen stateside because they invaded Hungary in 1956, those chess-playing Ruskies used their British-chartered bank, Moscow Narodny Bank, to redeposit their dollars in America. Of course, the US government couldn’t shut down a British bank, so the Soviets got to keep their dollars. Smart. The rest of the world cottoned onto the fact that the Federal Reserve couldn’t regulate these dollars, and thanks to the Marshall Plan - and higher interest rates paid to creditors for these dollars - the market flourished. London recaptured its crown as the world capital of finance thanks to this. (No, it’s not New York.) [One blog]( estimates the size of the eurodollar market at $57 trillion. So How Did Banks Fund Their Growth? Here’s a straightforward example. Let’s say Apple Corporation is loaded with cash. They decide to deposit $100 million at Lehman Brothers. Lehman is happy to accept the deposit and pay 2% on it. Let’s also say Ford Motor Company requires cash, as no one is buying their cars. They need $150 million. Lehman is happy to loan Ford the money, but Ford must pay 3%. Lehman is earning a 1% spread on these transactions, except there’s a problem. Lehman is short the $50 million between the deposit and the loan. So Lehman turns to its good friend JP Morgan. Jamie runs JP Morgan, and they’ve got loads of dollars. So JP Morgan loans Lehman $50 million @ LIBOR. LIBOR is the London Interbank Offer Rate, the rate banks borrow from each other. (Remember, this is 2008.) Everything is hunky-dory. And everything was fine for the 61 years before 2008, which was when the last money market crisis happened. But then, the markets started to worry about Lehman. [Matt King wrote a report]( now famous on Wall Street for asking, “Are the Brokers Broken?” The Street assumed he meant Lehman. What happens next is this: JP Morgan and the rest of Wall Street stop lending money to Lehman. Lehman then runs to Daddy - the Fed - to ask for help. The Fed refused, and you know the rest. In essence, the story of 2008 was about liquidity risk creating default risk in the money markets. That contagion crashed the stock market only in the end. But as a futures broker, I never had seen liquidity dry up. It was unheard of. I traded some of the most liquid markets in the world. Recommended Link [Prepare yourself NOW for a CRASH]( A massive market crash could be as early as March 10th. [This new must-see presentation]( exactly how and WHEN it could happen… You’ll learn 5 CRITICAL steps every American should take to help protect themselves. And details a strategy we believe has the power to 10X your money while the market tanks. So there is NO time to sit by and wait for it to happen. Because if and when this next crash hits… It will be FAST and it will be BLOODY. [Watch This Video Now]( After Liquidity Goes, Volatility Pops So while Mom and Pop remember the stock market pooping itself that fateful October, the story started long before. And that’s why I’m concerned. The boys over at [Zero Hedge published a piece]( about bond market liquidity drying up. The charts that follow all come from that link. If there’s one lesson to be learned about crashes, it’s that the bond markets always warn the equity markets of trouble. Equity investors rarely listen, and that’s why they get destroyed every decade or so. Treasury liquidity is down, according to Bloomberg: High yield, or junk, bond liquidity is decreasing as well. Of course, that could be both the Fed hiking and liquidity drying up there, too. And that’s having a knock-on effect in the equities market: Wrap Up It’s just another brick in the wall of information warning you to be careful. Is it all coming apart tomorrow? No. But seeing liquidity dry up is frightening because we now know what usually follows. With fewer players in the market, it’s easier to see violent swings in asset prices. The problem with always looking at the stock markets is that they are the last to feel the effects. The bond markets are warning us that something wicked this way comes. We should listen to them… for a change. Until tomorrow. All the best, Sean Ring Editor, Rude Awakening [Whitelist Us]( | [Archive]( | [Privacy Policy]( | [Unsubscribe]( Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [unsubscribe](. Please read our [Privacy Statement.]( If you are you having trouble receiving your Rude Awakening subscription, you can ensure its arrival in your mailbox by [whitelisting us.]( © 2022 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. 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