Zoltan Stares Into The Abyss: Here Is What The Fed Must Do Right Now To Avoid Global Devastation

Tuesday, March 17, 2020
By Paul Martin

by Tyler Durden
Tue, 03/17/2020

Two weeks ago, on March 3, before a liquidity panic had gripped capital markets, corporations and global banks, Credit Suisse repo icon and former NY Fed staffer, Zoltan Pozsar issued a recommendation to halt the funding crisis early in its tracks, writing that the Fed should “combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.” Unfortunately, since then the coronavirus supply chain (and payments) crisis has been joined by the oil price war, which has crippled the petrodollar exchange system by sending the price of oil sharply lower and exacerbating the global dollar funding shock.

And even though the Fed belatedly followed through with all of Pozsar’s March 3 policy recommendations, going so far as throwing a commercial paper bailout facility which was also recommended by BofA’s Marc Cabana (another former NY Fed staffer), the market remains unconvinced that any of this is enough, especially with JPMorgan warning that the world is facing an unprecedented dollar margin call, as a result of the $12 trillion synthetic dollar short, some 60% of US GDP.

Faced with this unprecedented dollar shortage, the Fed has so far failed to assure the world it can provide all the funding needed. Furthermore, as we said yesterday, in some ways we sympathize with the Fed, as every day something new breaks among this record funding strain:

One day it is ETF NAV discounts blowing out;
The next day the treasury Treasury Cash/Swap basis surges and funds suffer a historic VaR shock amid forced liquidations;
Day three sees the FRA/OIS explode higher as a massive dollar funding margin call strikes;
Then, day four sees the same repo crisis that was supposed to be fixed back in September return with a vengeance, as banks freak out about counterparty risk.

As we further said, “what the Fed needs is the monetary equivalent of Dr. House: someone who can diagnose what is actually wrong with the monetary plumbing, instead of using the same old shotgun approach of shoveling trillions in blunt liquidity into the market, which clearly is not working anymore.”

Alas, that is not a credible option, meanwhile the Fed’s liquidity injections are failing with the BBG dollar index – the simplest proxy of dollar demand alongside FRA/OIS and FX basis swaps – continuing to surge as various actors rush to procure what, with all due respect to Ray Dalio, is the opposite of trash.

Confirming our take that everything the Fed does, including this morning’s Commercial Paper facility restart, is either insufficient or targeting the wrote underlying cause (today even BofA’s Marc Cabana who pushed for the CPFF slammed it, saying “this facility does nothing to assist the money funds trying to raise cash and address outflows”), is none other than Zoltan Pozsar who in his latest note published this morning, writes that “all segments of funding markets – secured, unsecured and FX swaps – continue to show growing signs of stress”, prompting him to conclude that “the Fed may have to do more still.”

Scratch “may”, and replace with “will”, unless Powell wants to watch the dollar short squeeze go all “Volkswagen” on him.

The Rest…HERE

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