The theme of Making Sense Episode 52 is how an environment reacts to an anomaly. Resilient systems keep these aberrations constrained. But fragile ones can retroactively redefine what had earlier been labeled as an "irregularity", "oddity" or "operational error" to something altogether more unsettling: "cause", "spark", "trigger".
In part one, Jeff Snider continues his multi-week review of historical breaks to the smooth functioning of interbank payment and messaging systems. This time a look at a sequence that led to a week-long disorder to Fedwire in August 1990. Part two, also a continuation of a multi-week review, ponders what may be causing the disquieting twist in the US Treasury yield curve. Is the demand for short-term collateral a disqualification of reflation, as was the case during 2013's so-called Taper Tantrum? Lastly, some words on oil and the developing Texas power market credit crisis, in which electric retailers failed to make $2.1 billion in required payments and put the largest power generation and transmission cooperative into bankruptcy.
Fedwire "operational error[s]". Unsettling demand for Bills. Texas margin calls. An approaching quarter-end seasonal low point in liquidity. A looming regulation-mandated US Treasury cliff on April Fools' Day. All anomalies... in a resilient system.
----------WHY----------
PART 01: Fedwire, the interbank system that transmits billions between 9,000-plus members, broke on Wednesday. The Fed says, "operational error" implying mere technical trivia - an anomaly. Why do some breaks stay mere anomalies while others trigger volatile, systemic consequences?
PART 02: The US yield curve has twisted as Bill yields fall and Bond yields rise. We review a similar situation in 2013 popularly known as "the Taper Tantrum", WHICH WAS NOT A TAPER TANTRUM! Then - like now - a collateral scramble in Bills and a relief sell-off in Bonds.
PART 03: What does the oil market (production, demand, inventory) in the USA tell us about the economic recovery in early 2021? Also, is a power market credit crisis in Texas causing a national run on banking-system collateral?
----------WHERE----------
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----------WHAT----------
Why Price Alone Does Not Render An Asset Class 'Safe': https://bit.ly/3suB0Td
‘Operational error’ disrupts Federal Reserve payment system: https://on.ft.com/3stDlOe
Fed needs to ignore ‘taper tantrums’ and let longer rates rise: https://on.ft.com/2O5ECMm
What Might Be In *Another* Market-based Yield Curve Twist?: https://bit.ly/2ZVz4qE
Hot Oil, Cold Weather, Uncle Sam’s Green: https://bit.ly/3sxGJb0
Power market credit crisis looms as Texas bills come due: https://on.ft.com/3dOWoOY
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7
----------WHO----------
Jeff Snider, Head of Global Investment Research for Alhambra Investments with Emil Kalinowski, anomaly. Art by Winterfell resident, David Parkins. Podcast intro/outro is "Some Thing" by Rambutan at Epidemic Sound.