September 18, 2019 – 12pm-

On Monday night, the overnight lending rates between banks jumped as high as 10%, significantly higher than the Fed Funds targeted rate of 2 – 2.25%, often used as a general benchmark. By Tuesday morning, the Federal Reserve of New York had to inject over $55B in funds to quell the demand and calm the rates. This type of activity hasn’t happened since 2008, during the financial and liquidity crisis. The market on Tuesday was relatively muted and, while no one could really explain or understand just what happened, it didn’t seem like a big deal or even something to be concerned about. As the day wore on, the unanimous explanation became a ‘freak’ confluence of events and pointed to a corporate tax deadline and excessive bond redemptions, whereby banks needed excess cash and there was simply not enough to go around. It was said to be a freakish, one-day event. One could imagine my surprise when Tuesday night the rates blew out once again; and, on Wednesday morning, the Fed had to step in, this time with $75B in liquidity. If the economic backdrop is so strong and bank balance sheets so healthy, why has there been an overnight run on cash not once, but twice in a given week? Unfortunately, not a single person can factually articulate just why this is happening. Speculation abounds. 

As I write this, the stock market doesn’t seem to care.   However, I don’t like this one bit and am choosing to take advantage of the complacent response to do some much needed profit taking and rebalancing after what  has been an exceptional year. 

While these liquidity infusions may end up being nothing, I believe it is extremely prudent to take this opportunity to rebalance accounts and reduce risk as we head into the 4th quarter. In addition to these liquidity events, I continue to watch the October 1 date very closely. 

For the past few weeks, the Chinese discussions have been peaceful, which makes sense considering the 70th anniversary of the People’s Republic of China (PRC) on October 1, and their desire to have a calm, and generally peaceful, anniversary celebration. I do not, however, believe the negotiations are over, and it is my opinion that we may just be seeing the beginning of the heated back and forth. 

In summary, we have been busy selling down some of our long exposure in our managed accounts this morning and rebalancing our overall equity exposure. I am positive about taking off risk and watching to see how this plays out in the coming weeks and months.

Keep your eyes and ears peeled for more discussion about any bank liquidity issues as this could easily become a story that moves from page 4 to page 1, above the fold, very quickly. 

Until next time.