Let’s be honest, no one would have bet on all the #Mag7 #stocks to close red on the first trading day of 2024, led by #AAPL down 3.58% (and it could have been worse without that relief #7bn MOC #stocks pump that put some lipstick on the #Nasdaq pig snouts at close).
Is the US PMI coming in below expectations to blame? Come on, let’s be serious, of all the days the market could start caring about bad economic data being effectively “bad news”, this was surely not the one.
Was there too much window dressing into the end of 2023? Well, maybe, but traditionally, asset managers take down their Christmas decorations from their portfolios after the first week of January when there is no more a Santa Rally to ride.
So what the hell triggered the sell-off? Liquidity issues.
Wait a second, didn’t #313bn of cash just come out from the #FED RRP? Well… yes… but as I have tried to explain many times, there is a big difference between “cash” and “liquidity”. Paradoxically, the less cash market makers, investment managers and brokers hold outright, the better liquidity in the market, especially in the derivatives market. Why? Because assets can be re-hypothecated multiple times as collateral while cash cannot! ? Furthermore, no one wants to post cash as collateral to its derivatives exposures because, unless secured in a tri-party agreement (quite rare in non-cleared OTC transactions because is an expensive service), cash collateral is one of those assets that is hard to carve out from a bankruptcy estate in case your counterpart goes bust.
The decline of the FED RRP is a big drain of pristine collateral (i.e. T-Bills) from the market. And when a market is so overwhelmingly driven (or better said manipulated) by derivatives flow like the one today, less pristine collateral (that means collateral that doesn’t suffer a haircut) means less liquidity support for big derivatives positions.
Many reasons why T-Bills are better than cash… And when you see the first ones being drained or dumped for the second, it tends to be quite a bad omen for market liquidity.
What can force a market participant to dump prized assets for cash when everything is awesome and buying #stocks is a sure win trade? Lenders asking for their money back. And considering the big maturity wall incoming in 2024 (see post below), you better don’t expect this pressure to come off anytime soon.
As I have flagged countless times, the stress in the money market is obvious. If before year-end a company like British Petroleum couldn’t pay its Commercial Paper on time (TwitterX), you should really start making preparations for big to hit the fan rather than dreaming about wings growing on the back of the bull so it can start flying.
Seeing that #DTCC default notice immediately reminded me of GE Capital in 2008. At that time as well, the “markets” arm almost took down one of the biggest corporates in the world. Ask yourself, how many corporates today (especially large ones) are overly reliant on their “markets” activities, financial engineering, and commercial paper financing compared to 2008? Pretty easy answer here.
My “for you” section here on X is already polluted by #fomo gurus stampeding one over the other to call this mini sell-off a “healthy pullback”. Whatever you want to call this, and perhaps the #stocks run will resume today without much of a fact, it doesn’t change that the real world is diametrically opposite to whatever is being priced by the market (as the latest US PMI just reminded everyone).
It is customary to make predictions for the year to come. After all, everyone has its own crystal ball. My prediction for 2024? 1Y T-Bills at a 4.80% guaranteed return by year-end is a certainty (better than “king” cash). I’d carefully consider this rather than continue betting on wings growing on the back of this bull…
