De-leveraging and the 28-Days of the Helicopter

I neglected to mention another important factor in the commodities volatility. De-leveraging.

Hedge Funds account for ~55% of daily trading volume. Many of these HF's are leveraged; and fixed income funds are very leveraged. If you are a nervous banker facing your own leveraging issues--you have to start weaning your clients from the leverage bottle to reduce risk and shore up your own capital ratios. To de-leverage, longs must be sold; and shorts must be covered. Every banker is revisiting his/her credit risks. I'm sure that they are reviewing their HF client's holding and making some decisions about asset and credit quality. From that they are issuing directives.

I'm always intrigued and a bit suspicious of other comparisons to other market events. Perhaps I should set aside my suspicions and remember the subtitle of Selden's book: Human impulses lead to speculative disasters. We are certainly see a speculative disaster unfolding before us! Personally, I want to see greater regulation of HF's and investment banks. In my view, there is something fundamentally wrong with an investment bank (GS) that is marketing a product on one side of the house and shorting it on the other side of the house. It is indefensible, in my opinion. I'm sure that statement will be tested, as I'm confident that lawyers are lining up.

Cat raises the specter of deflation. This is what BB studied and believed that it contributed to the Depression. One still has to wonder if adding liquidity to shore up faltering banks' balance sheets, ever really gets to stimulative uses. I talked about it here in this space in addressing some comments made by Tim Wood and Frank Barbera of FSO. If leveraging bids prices up (housing, commodities, bonds), then de-leveraging certainly must bring asset prices down. I suspect, though, that US Treasuries prices increase are not the product of leveraging, but rather the flight to quality. I would surmise that the "tell" on when to get out of Treasuries would be by watching the financials' recovery. Let's remember that the financials make up 30+% of market cap. So the flight out of financials was met by a flight to quality: treasuries, commodities, and PM. Now we are rotating out of commodities and I guess treasuries, unless money is being stuffed under mattresses.

Apparently CNN had something on last night comparing US to Japan. I did not catch it. I also promised here that I would do some research, which I've not done.

Something to be aware of, and I've not seen anyone really discuss it, is these Fed term loans. These are the "bring out your dead" where CDO's of questionable value are swapped for pristine Treasury securities. The term if 28 days. What process of discovery and/or repair is being undertaken to remove the need to swap these securities?

I cannot help but be bothered that 25% of our country's balance sheet has been pledged to support these species loans. Now, I'm don't wish to sound like a wild-eyed left winger, but we have Social Security (in addition to other programs) that's not funded. They took my contributions and those of my employers over the years and used that money elsewhere. Now the US has pledged their assets to shore up a credit debacle (which I believe was an imperative). At what point in time do these actions impugn the value of Treasuries? Where, then, is the remediation/credit stabilization that will happen in the next 28 days? And, at what point does the US say, this window is no longer open to you, come up with plan B? Hmmm...as I write, perhaps the mandate was, I'll take these securities, you go de-lever and come back in a month.

I don't pretend to fully understand the magnitude of these issues well enough to know if my concerns are misplaced. Nevertheless, I believe these to be reasonable questions.

Jobless claims are up. Who's surprised?

P. S. After I posted, Art Cashin is affirming the banks de-leveraging the HF's. It helps affirm that I'm not deep in the weeds.