Just Wondering

As we've speculated before, the aggressive stance of the monetary regime (QE for sound bites) was dialed up because the Financial System was being heavily re-regulated at the same time. We would have preferred prosecuting criminals over ad hoc and poorly constructed oversight. This has led to a well documented reduction in capacity on FI desks at home and around the world. At the same time, Elephant and Whale sized customer players have proliferated. This creates a mismatch of participation heft.

If we look at LTCM experience, dealers expanded capacity into the wholesale inventory of the products the most valued customer (The Nobel Guys) wanted. The same could be said for the Mortgage Mess. In the long slog of QE, system capacity has been drawn down steadily. This is now showing up with epic term structure adjustments thus far leading to chatter of levered player pain but little Dealer problems. Chinese institutions are getting caught out in a levered system-levered customer pair.

Put simply, the market prices are moving wildly but the consequence is limited to massive levered and virtually unknown participants. The big Street names are just not in that business anymore. Or as Greenspan liked to say, "Sell to who?"

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