Category 5 hurricane in cash markets – Dollars, Bitcoins, …

The USD suffered a serious cardiac liquidity episode in late September. Not as bad as the 2013 China`s one but of course, with substantially larger global impact. This time it even affected the seemingly unaffected digital asset class.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

It has been two full years now that it is not science fiction anymore in my mind, that we could build a dashboard showing real-time global cash flows in a knowledge graph format. Of course, there are several reasons that this may not happen but nonetheless, it is becoming plausible.


One of the main reasons that it won’t happen is we cannot and will not agree on, who will control this dashboard. It is a dashboard much like the ones on Star Trek and Captain Jean Luc Picard of cash flows, unfortunately, cannot be found because there are at least 3-4 almighty existing reserve currencies (USD, Euro, Yen, Pound) and one other species (Renminbi, pegged to the USD for now) that cannot and will not arrive at a consensus for a Captain.

Cash flows and liquidity nightmares in the banking system, have surfaced again recently, as madness hit the USD repo market in September. It brought shivers to many all timers, as we are all old enough to remember so well the 2007 precursor of the subprime crisis.

The short-term funding mechanism – repo market – is in the trillions and the past two weeks, the Fed has been increasing substantially the amount of overnight cash loans and 2-week loans. The latter was doubled in size, reaching $60billion and the overnight $100bill.

These dealings (lending USD) are all digital in the conventional sense of the term[1]. The Fed intervened to calm the extreme interest rate spikes in the repo interest rates.

Matt Levine[2], reported on Sep 18, wild swings in these wholesale market interest rates between 9%  and 5.25%. While previously the range had been 2.21% – 2.09% and with the 52week high just over 3%.

This volatility is happening, in a market with a Fed Funds rate is 2.25%, one-month Libor is about 2.04%, one-month Treasury bill rates are about 1.96%.

This is a cardiac episode caused by the lack of Liquidity in USD and on a historical basis it looks like one of a kind.

REpo history

This situation seems an extraordinary global macro event that needs to be put into perspective, as the new normal is `Abnormal spikes and volatility`.

BoFA economists[3] report that the Fed needs to pump around $400billion in the market to normalize and have a buffer (in short term loans and Treasury purchases).

Some puzzling and worrisome snapshots, of the market of cash and short-term loans (at the wholesale and retail level):

  • Paying to lend: The amount of negative-yielding debt has crossed the $17 trillion mark and is rising.
  • Paying to hold cash – passing on the costs to wealthy individuals: UBS plans to charge its Swiss clients 60bps per annum for deposits above 500,000 euros ($560,000), down from an earlier limit of 1 million euros. Credit Suisse will impose 40bps on accounts of more than 1 million euros.
  • Holding more cash – USD: In the 1st quarter of 2019, Capgemini[4] reports that wealthy investors had increased their cash holdings to 27.1% of their assets (in the US).
  • Cashing out of Cryptos: The recent crash in cryptocurrencies of roughly $30billion and the Tether/BTC surge (more than 25%), could mean an exodus for USD. Bitcoin remains benchmarked against USD anyway.

Screen Shot 2019-09-30 at 11.27.56

The Question remains

We humans are not comfortable with uncertainty. Data and AI, could help us on this front, if only we agree on building that Digital dashboard to monitor real time cash flows. But since we won’t, we will continue operating with lots of questions in mind. These recent interest rate spikes are very worrisome. They also bring up another valid question

`Are cryptocurrencies really uncorrelated with fiat currencies, repo markets, and QE?`

It is logical to infer, that a liquidity squeeze in a fiat reserve currency as powerful as the USD at the wholesale level, is very much related to cryptocurrency exchange rates to fiat.

It is also obvious to me that this USD shortage is related to the disappointing Bakkt BTC futures launch.

Keep asking this question.

`Are cryptocurrencies really uncorrelated with fiat currencies, repo markets, and QE?`

Source of images:

“Nobody Knows What’s Going On”: Repo Market Freezes As Overnight Rate Hits All Time High Of 10%

The Unstoppable Surge in Negative Yields Reaches $17 Trillion

Neo4j Graphs

[1] Digital in the conventional sense because they are all accounting entries in a database (not actual printed physical dollar bills). They are not, however, tokenized assets in the Blockchain sense (an asset that can be held in natively in a digital wallet and transferred peer-to-peer).

[2] Money Stuff Interest Rates Shouldn’t Be Interesting, Bloomberg

[3] The Fed Becomes the Repo Man

[4] Capgemini wealth Report

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