Jeffrey Snider of Alhambra Investment Partners just published a piece at TalkMarkets and at Seeking Alpha, “Huge Repo Warning”, wherein he alerts us to a sudden and severe US dollar shortage, the likes of which we haven’t seen since 2008. He monitors the Repo fail rate, which tracks failure to deliver on contracts for people buying the dollar: (click on images to enlarge)
This measure of dollar shortage has just now leaped past the September, 2011 spike to the 2008 crisis level. This reflects problems in the US. But it may not all be fears over the US.
This January 12 article from the Wall Street Journal may go a long way toward explaining the disruptive dollar shortage – it is titled “Chinese Consumers Race To Buy Dollars As Yuan Slides”.
During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said. The tight supply means ICBC customers applying to change yuan for dollars on Tuesday have to wait four days to complete the transaction, rather than the normal one day, he said. Another person who works in retail banking at a leading Hong Kong bank in Shanghai said she estimates the amount of U.S. dollars bought by Chinese residents in December is roughly double what it was in June, the last peak.
These jams come and go, but Snider, who has been watching this dollar thing like a hawk for awhile, seems to think the magnitude of this latest liquidity crunch is an urgent warning for stocks. His conclusion:
It is difficult to accept this level of fails as anything else other than a liquidity warning as all the prior versions had been …And it’s not like repo is the only indication of a desperate financial shortage.
In fact, that is the growing consensus among the deeper, internal eurodollar indications. From swap spreads to cross currency basis swaps to countries literally begging for dollars, they all point to the same imbalance – a dollar shortage.
It seems yet another warning that the financial world is “on the clock”… With a countdown already in place from whatever the PBOC had been doing in January (and this very well could be related to that), it would be truly a bad sign if those clocks synchronized especially heading into the final two weeks of a quarter and the typical window dressing illiquidity space. I would not be surprised at all if this surge in repo fails was the starter pistol firing to sound the beginning of dollar run #3
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