Friday, September 20, 2019

What the Heck is Phugoid Dollar Funding and Why Does It Matter?

So far this week, markets have encountered a major disruption in oil supply, an interest rate cut, three repo auctions, and the usual assortment of nonsense from Washington, DC.

Through all that, stocks have barely budged, leading up to a quad-witching day on Friday, with multiple options and futures expirations expected to add some volatility to the week. If it goes anything like the prior four days, the week will end with a thud, rather than a bang.

After the Fed's unsurprising announcement to lower the federal funds rate 25 basis points on Wednesday, a third straight repo auction was held Thursday morning, offering cash settlements on another $75 billion in collateral, mostly Treasuries and MBS.

While the repos signal some cash flow issues for some unidentified primary dealer banks, cause for the cash shortfall has not been ascertained.

Perhaps, as described in the link below, it is a case of Phugoid Funding, a condition which matches up pretty well with the current out-of-kilter global economy.

In an incredibly prescient post - although from April, 2019 - from Alhambra Investments (some of the brightest minds out there) about what is happening with the ongoing liquidity crunch that has the Federal Reserve conducting three consecutive repo auctions (Tuesday, Wednesday, Thursday), Phugoid Dollar Funding is explained in detail with an explanation of how it applies to current economic conditions.

At the Close, Thursday, September 19, 2019:
Dow Jones Industrial Average: 27,094.79, -52.29 (-0.19%)
NASDAQ: 8,182.88, +5.49 (+0.07%)
S&P 500: 3,006.79, +0.06 (+0.00%)
NYSE Composite: 13,111.25, -8.05 (-0.06%)

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