Two weeks ago, on March 3, before a liquidity panic had gripped capital markets, corporations and global banks, Credit Suisse repo icon and former NY Fed staffer, Zoltan Pozsar issued a recommendation to halt the funding crisis early in its tracks, writing that the Fed should “combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.” Unfortunately, since then the coronavirus supply chain (and payments) crisis has been joined by the oil price war, which has crippled the petrodollar exchange system by sending the price of oil sharply lower and exacerbating the global dollar funding shock.
And even though the Fed belatedly followed through with all of Pozsar’s March 3 policy recommendations, going so far as throwing a commercial paper bailout facility which was also recommended by BofA’s Marc Cabana (another former NY Fed staffer), the market remains unconvinced that any of this is enough, especially with JPMorgan warning that the world is facing an unprecedented dollar margin call, as a result of the $12 trillion synthetic dollar short, some 60% of US GDP.
Faced with this unprecedented dollar shortage, the Fed has so far failed to assure the world it can provide all the funding needed. Furthermore, as we said yesterday, in some ways we sympathize with the Fed, as every day something new breaks among this record funding strain:
- One day it is ETF NAV discounts blowing out;
- The next day the treasury Treasury Cash/Swap basis surges and funds suffer a historic VaR shock amid forced liquidations;
- Day three sees the FRA/OIS explode higher as a massive dollar funding margin call strikes;
- Then, day four sees the same repo crisis that was supposed to be fixed back in September return with a vengeance, as banks freak out about counterparty risk.
As we further said, “what the Fed needs is the monetary equivalent of Dr. House: someone who can diagnose what is actually wrong with the monetary plumbing, instead of using the same old shotgun approach of shoveling trillions in blunt liquidity into the market, which clearly is not working anymore.”