Save Yourself Some Grief

This graph has started floating around the internet, with some ominous captions of doom, with good reason.  But before I explain why, I'll explain the chart.  For whatever reason, probably to simply confuse the masses, these terms are loaded with jargon.

Simply put, the Federal Reserve allows hundreds of banks and non banks to buy, for cash, highly rated securities, overnight.  The entities that participate in these transactions use this vehicle on the last trading day to "window dress" their portfolio to make it look less risky than it is in reality.  Why they are allowed to perpetrate a fraud on their investors is the subject of another post.  But, you say Bob, they are exchanging cash for Treasuries how is that hiding risk.  Glad you asked.  In comes the third party.

This group will buy, for a fee of course, their assets, overnight, for cash, at face value, in order for them to take said cash and buy Treasuries from the Fed.

The sheer size of this auction suggests that these entities are stuck with illiquid but not yet impaired assets, and are desperate not to alert their investors.  The size of this auction also drove the Fed funds rates far below the Feds new range they achieved when they rose said rates.  This means the Fed underestimates the problem in front of them.

My view is that the bond market is mismatched again in terms of the ability to liquidate their investments against investor demands, and that they also have not repriced the value of these assets. This is a repeat of 2008, and we will see the same stress in the market.

If you are in illiquid assets (assets you can't sell easily in a short period of time) your only hope is to short by hedging against the industry you invested in.  I imagine for most that is spec real estate. Start getting comfortable with SRS, REK, and even volatility.  We are in for a rough ride ahead.