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Are There Any Spokes on the Wheel?David Chuhran When things went bad with sub-prime my first feeling was that this is it - the big one. As much as I had prepared myself for the inevitable coming of the grandiose credit explosion I hadn't thought through every possibility. I always felt like money market accounts were liquid safe havens to hold my cash money between trades or in times of turmoil, but something felt wrong. I went to my brokerage's site and looked at my MM Fund's holdings. Much to my chagrin they had over 30% in CDOs, mortgage pass-throughs and a few other suspicious holdings that I can no longer remember. The reason I can't remember them is because they've been removed from the holdings page in the brokerage's fund research section. Now there's nothing but a link to the prospectus. I no longer know what's in this fund. Needless to say, my money is no longer there either. Based on the holdings I did see, I believe they were chasing yield like everyone else and were holding junk paper just like everyone else. Heck, the stuff was all AAA rated. Right? I've been following the New York Fed's System Open Market Account (SOMA) since July. Every week they show the change in the composition of Treasury holdings from the previous week. However, lately there have been no changes. It's been at least 4 weeks. How can that be? We've had unprecedented turmoil in the overnight credit markets, with the Fed reportedly injecting liquidity to stabilize things, but there are no weekly changes to the SOMA. I find it very hard to believe that two 50 bps Discount Rate cuts and one 50 bps Fed Funds Rate cut were accomplished with no change in the SOMA. Or are the Open Market Operations no longer open? Have they become the Covert Market Operations? My former MM fund has the following disclaimer: "An investment in the fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. The rate of income will vary from day to day, generally reflecting changes in short-term interest rates. Entities located in foreign countries can be affected by adverse political, regulatory, market, or economic developments in those countries. Changes in government regulation and interest rates and economic downturns can have a significant negative effect on issuers in the financial services sector. A decline in the credit quality of an issuer or the provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease." People view MM funds as safe havens for cash and forget about any potential risk based on a long history of stability, but there's risk in everything and instability is at an all-time high. If the MM Funds fail to hold a $1 NAV because they were in junk paper chasing yield we could have a New Era Bank Run. An Old Era Bank Run is one like Northern Rock just suffered through. A New Era Bank Run will take place on a computer as investors desperately attempt to move their money out of sub-par MM Funds. Eventually it could spread to any and all MM funds. As we've seen, once confidence is lost it's very hard to restore. The money market is the center of the daily financial machinery. It is the wheel that allows everything to move forward smoothly. Therefore, based on the following:
...I'm left to believe that Covert Market Operations are underway to hold up the money markets by injecting T-Bills in exchange for junk paper that is destined for monetary hell. How do I know? I don't because the information flow has ceased. However, we do know that if the MM Funds start posting sub-$1 NAVs all the spokes come flying off the wheel. We'll see if the Fed has enough hot air to keep the tire inflated. David Chuhran Copyright ©2004-2007 David S. Chuhran. All Rights Reserved. 321gold Ltd |
