To The Moon

The liquidity crisis of US bond is probably underestimated, but this seemingly dangerous problem has just become a chain that the Fed can't let go of.

The market was frightened. the BIS released a terrible number:As of June this year, the market value of unrecorded invisible US dollar bonds on the balance sheets of non-US banks and global shadow banks has reached 65 trillion!

The so-called shadow banking usually refers to insurance companies, fund companies, mutual funds, trusts, wealth management, etc., and financial or fund intermediary institutions that lend funds in ways that are difficult to record and track.

This announcement of the BIS is actually telling the whole world that a large amount of global funds already hold US dollar bonds or US dollar assets in various forms. This amount is much higher than the data on the Fed's balance sheet, and it also far exceeds the dollar debt balance data recorded on the balance sheets of all non-US banks.

This form of holding is usually in the form of quite complex foreign exchange swaps or similar exchange rate futures derivatives.

But the point is that due to derivatives accounting practices, the debt actually incurred is not recorded on the balance sheet of the financial intermediary, but only their net exposure in the form of foreign exchange swaps, which is equivalent to currency reserves, with an initial net exposure of zero, and open gains and losses similar to futures occur with exchange rate fluctuations.

Dollar assets have become increasingly attractive in the wake of the recent financial crisis, as has been the case in all non-US non-bank financial intermediaries, as well as in non-US banks. As a result, the unrecorded hidden dollar debt on the balance sheets of non-US banks and shadow banks has expanded wildly since 2008, and now it has doubled compared with 2008.

According to the BIS, unrecorded dollar bonds held by financial intermediaries outside the United States is now more than twice as large as it can be recorded

​The volume of similar US dollar bonds counted by non-US banks is larger, more than three times that recorded, and the volume has reached more than 40 trillion US dollars

​According to BIS statistics, Together, about 65 trillion US dollars bonds is difficult to record and track, because although it is held in currency swaps, it needs to be closed when it matures. When the US dollar fluctuates abnormally, these debt exposures will also fluctuate greatly, especially when swaps require margin calls.

Therefore, the risk exposure of global US dollar bonds is much larger than what we have seen and even imagined. Think about it, if the US dollar still keeps rising crazily, resulting in a large number of defaults on similar swaps, the global US dollar debt will be sold off in large quantities, which is much larger than previously thought.

The continued rise of the US dollar index will inevitably hit the liquidity of the country. In the last two years of Biden, all the political actions carried out by the newly changed Senate and House of Representatives will also be difficult. . .

So, does the Fed dare to let this happen in order to fight inflation?

IS A second dip of US stocks coming?

Just after the BIS announced this debt risk, the optimism of US stocks finally ebbed, and the S&P retreated from the 200-day moving average, reconfirming that this is a bear market rebound​​

stockcharts

​It must be said that the decline on the 200-day moving average has dealt a great blow to the overall optimism. This standard bear market rally pattern is in a great sense to open the pace of the double dip of US stocks

stockcharts

​But in the future, will S&P break the bear market low of 3600? After the 200-week moving average broke under the historical support, it was followed by the horrible trend in 2008?

​The US dollar has finally bottomed out on the 50-week moving average. Will the US dollar return to its high level in the future and keep strong pressure on the global market?

​​After the shadow debt of 65 trillion dollars appeared, This possibility is actually decreasing, which seems to be a bad thing, but it seems to be a better excuse for the Fed to raise its inflation target and lock in its hawkish pace, and it is also a good thing for the market, so if you keep bearish after reading this, can you leave yourself a dove ending trading plan?

That is, S&P will return to bull market after a second dip, while the Federal Reserve will raise its final inflation target to 3% or even 4%, and interest rates may peak ahead of schedule next year.

The answer to everything will be revealed soon

But the future is unpredictable

There is no doubt that the current stock market valuation is still too high for the end of the bear market from the ratio of the overall market value of US stocks to GDP

More importantly, we are very convinced that the last rise of the US dollar and the last fall of US stocks have not come, and the hidden debt exposure in the Asia-Pacific region has not been exposed. Although the price of US debt is picking up, as the engine of the world economy, China's bond market problems have not become a thing of the past

Imagine that there are so many invisible debts in the United States. What about the Asia-Pacific market, yen bonds and RMB bonds? With the increase of the fluctuation of the US dollar, the debt liquidity risk exposure will continue to expand. Of course, non-US debts will undoubtedly suffer a greater impact.

When the time comes, the dollar assets are still the most attractive, but the process is very ups and downs and terrible, and the United States may not be able to afford the consequences of this thunder

Fortunately, however, the Federal Reserve has already taken a dovish attitude. It seems that he does not want to press the button that is enough to thunder the global bond market. If everything can continue smoothly, the United States may still end the process of harvesting global funds ahead of schedule after raising the inflation target.

What can you say about it?

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