The Nasdaq Future tagged the downside objective of the huge 8/24 pattern and rebooted today. The SP flitted in to the 1862 "sell" level on the lows the this morning. The selling back and fill has collapsed the curve and Eurodollar year spreads sunk to new LOWS. The Red/Green pack spread is a paltry 48.25 basis points. Edh16/Edh17, a spread we have liked when down here, is back at 57.
The inclination is to pin the pancaking on the equity slide. The situation may be becoming self- reinforcing, however. As we have opined since 2009, the financial system plumbing has been retooled. The regulatory and operational funding of the wholesale funded system has been bypassed. That Eurodollar relationships can be this flat, after a year of Fed jawboning!, is the starkest evidence of failure. Long term swap spreads have swung negative, as they did during the crisis. More importantly, since the Aug 24 pattern date, shorter maturity swaps have collapsed also. Thee are practical reasons flowing from the repo side that encourage the situation but it is difficult to not view the landscape as impaired.
The palindrome of "curve compression, stocks to sell off, causing curve to flatten....needs to be broken at the most basic level of the money market. The widely accepted position after several QEs and years of ZIRP is there has to be plenty of "dollars out there." From oil to commodities to the color coded Eurodollars, the evidence remains there are too few. Equity markets, globally, are forced into the recognition that they must recede to a level more connected to the actual, smaller and constrained system. Even sludgy, briny Martian water must flow home.
Our motto remains- Steep is GOOD.
Pit brokerage was falling like a rock. At Dean Witter we were still paying $1.25 a car when most clearing firms had already cut to 90 cents. I was told by the suits to go to a buck. When I told my 2nd option broker I had to cut, a guy I had already made a millionaire, he said he would not fill it. I was disappointed, to say the least.( I would soon learn many broker groups had been "rebating" 25 cents back to the execution teams for quite some time - sound familiar?)
A young guy on the pit knew the kind of business I threw in and asked if they could have the order flow. The broker he worked for was not the greatest but the kid showed some moxy and I said, "Let's do it." In the subsequent weeks, he would hang out at my desk during slow times getting to know me. The guy mentioned he could name any actress that had appeared nude in a movie and the scene. Now this was a Merc talent ! I would put him on direct lines with customers and they would grill him with names. He was amazing !
So, other guys in the pit began to hear about his "hobby" and some radio gigs were booked. He did Steve Dahl and Kevin Matthews and that led to a spot on Letterman. He would wear a bag on his head and went under the alias Mr. Skin. He took some backing from some other pit guys and built a porn site empire worth millions. The Tv appearance was seen by Judd Apatow and he became the inspiration for the slacker in "Knocked Up." The clerk walked the red carpet at the opening !
It all started in the 2nd option of the Eurodollars.
The FOMC is trying to present the more unified case for rates and tonight Yellen will muddy the water more with a chat. As the Fed bashing has heated up this past week, we have been happy to point out the policy directive is openness, not correctness. As long time Zip It advocates, we are taking pleasure in the bull market in monetary policy confusion.
The Fed tilt in our view remains, if not for x, we would raise the rate (insert inflation or global issue into x). The graph above - clicketh to maketh bigger - shows the KTF ( I heard that guy was awesome) model for the NEUTRAL funds rate. This is the rate the market would set it if it was the market's choice, the level that is neither easy nor snug.
The Fed desk under Potter is using a "belt and suspenders" approach to policy tools. Vocalizing the intent and firing the Death Star. Their fear is they can't raise the floor. The picture above shows movement in the proper direction but no support, yet.