Why is this “basic transaction” moment so dangerous?
- Bond market prices are declining At the same time, the stock market suggests that there may be a liquidity crisis in the financial sector, which is occurring simultaneously with the trade tariff crisis. If President Trump does not change courses, both phenomena could be on the scale of the 2008 financial crisis. Some investment managers are calling for intervention by the US Federal Reserve.
If you have never heard of a “basic deal” before today, you can forgive yourself. You had no reason.
But just as we suddenly had to learn about “credit default swaps” and “mortgage-backed securities” during the great financial crisis of 2008, we may be trying to learn a lot about basic transactions.
This moment – President Trump’s tariff program threatens to drive the planet into a recession as stocks and bonds fall, so when it’s as dangerous as August 3, 2007. Jim Kramer suddenly started screaming CNBC The US Federal Reserve had to “open a discount window” (which means it’s more generous for large banks in trouble) and former Fed Chairman Ben Bernanke said, “I don’t know how bad it is!”
That was the moment when I predicted the crisis of 2008. S&P has found that, over the next two years, dropping 50% of its value, and increasing the alarm slowly at first, everyone is adopting more mortgage debt than the economy will pay off.
On Tuesday, the S&P 500 collapsed to under 5,000. This is 18% below the February 6,144 record high.
Typically, when stocks go down, investors will escape to the security of bonds and bonds will rise.
But the bonds were down too. The Treasury yield in 2010 rose from 3.9%, a short hit to 4.51%. (Remember: if yields are rising, that means bond prices will fall.)
This was a rare thing
Scary, mysteriously rare. That meant there was no “safe” place for money to hide.
Then on Tuesday, Apollo Management’s Chief Economist Torsten Sløk announced that it would be fantastically useful Notes explaining possible issues in the bond market: “Basic Transactions.”
Since the major financial crisis in 2008, hedge funds have been betting on the price difference between the Ministry of Finance and Ministry of Finance’s futures contracts by up to 100 times. The bet, simply put, buy Treasury debt and shortens futures contracts at different prices on similar bonds. When bonds occur at the expiration date, the price converges. Futures prices will fall and your short bets will pay off.
The price difference is small, which is why hedge funds use 100x leverage to make money.
“How large is the basic transaction?” It was extinguished. “It currently has around $800 billion, a key part of the $2 trillion in Prime Securities trading balance.”
Fluidity issues
Of course, the only problem with leverage is that you have to pay it back.
And what the bond market is considered a signal in its price decline was that it had liquidity issues between hedge funds and banks that were rushing to withdraw trade to raise and hold cash.
If you have liquidity issues at that scale, you have potentially systematic institutional problems. Ark Invest’s Cathie Wood Posted on xwhich is related to different aspects of the bond market, “there was a serious liquidity problem in the US banking system.”
“This crisis… calls for serious support from the Fed,” she said.
She’s not the only one who’s worried.
Jeffries’ chief US economist Thomas Simons published a note Wednesday morning to a client entitled “I could see the Fed’s intervention right away.”
Nick Lawson, CEO of the investment group Ocean Wall; I said Financial Times“Like a spiral, they’re forced to sell as much as they can (hedge funds) – even good assets are just floating. If the Federal Reserve doesn’t step in right away, this could turn into a full-fledged crisis. That’s not too serious.”
This is very similar to 2008
That’s why it’s so scary.
However, this time it is potentially worse than 2008.
The trigger for this crisis is not some hedge funds that have some bad bets on the Treasury. It’s President Trump’s trade tariffs. The White House has not been called a halt of international trade with the United States. As a result, the stock market has responded negatively.
To put the scale of what Trump is doing in vision, Trump’s tariffs may spell the end of Apple’s iPhone for American consumers. According to Wedbush analyst Daniel Ives, China’s tariffs mean the price of the new iPhone could rise to $3,500. That price is estimated apple You can make an iPhone in the US and avoid Chinese tariffs. But that’s not possible, Ives says. This is because it takes years to build the semiconductor manufacturing factory needed for smartphones. And even if you could do that, a mobile phone would be too expensive for anyone other than a very rich person. “The reality that the $1,000 iPhone is one of the best consumer products on the planet will disappear,” says Ives.
Goldman Sachs sent a note to his client on Wednesday. “The implicit growth downgrade on April 3rd and 4th (from tariffs) surpassed what you can see outside of Black Monday, one episode of GFC in 1987,” writes analysts Dominic Wilson and Vicki Chan.
With these prospects, it’s not surprising that the stock is being sold. Tariffs only prevent many businesses from joining the business they are in.
Back in February, it feels like it was a lifetime ago, but it was only a few weeks! – All chatter was about “soft landings” that the US Federal Reserve seemed to have designed for the US economy. Last year, the US economy had several conflicts, which were fundamentally sound. Stocks were predicting a good time. Even the recent workloads in March seemed good.
It’s all gone
Of course, there is a cure for this. Trump can reverse his trade policy. However, he is not known for retreating or admitting that he may have made a mistake. Alternatively, Congress could pass on a bill that would regain control over customs policy.
Without these two conditions, we might now have two crises of 2008 rather than one at the same time. And the financial sector crisis suddenly fails to find enough cash for liquid storage.
This story was originally introduced Fortune.com