Emergency measures from Central Banks to support Hedge Funds

Life is strange, here we were thinking 2020 was going to be a good year with Boris on his political honeymoon, then, boom it is all over.

The Bank of England has reduced interest rats by 0.5% to help calm the markets after a start to the week that makes it feel like 2008 again. It is the biggest move by the bank in ten years.

We may wonder, why does moving interest rates down from 0.75% to 0.25% make any real difference to the economy? And we would be right, as this move has next to no impact on the real economy. Unless you happen to be re-mortgaging today (tick for me!) and are able to take advantage of it, it makes no difference. It is not like Amex or Wonga are going to pay any attention  and help their 'customers' and it is not like Banks were paying any interest on deposits anyway - such has been the ruination of our economy since 2008.

So why do it? Well this is all about banks and hedge funds. The hedge funds are borrowing money to play the markets and the ones that are doing well need more cash, the ones that are doing badly are facing huge margin calls. Some of the Asian ones facing margin calls are proving difficult to get hold of I hear.

These huge calls on the banks  to lend or borrow in busy markets mean they themselves can run short of cash very quickly. The key thing for them is to be able to access the central bank Repo markets to get more money very quickly...but this money is not quite free, nearly free, but there is a price. So the banks find the busy markets a very expensive place to be and that can mean they consider limiting the action.

So they could choose to call in the money and not lend, but that runs the risk of further drops in the market, more margin calls and from 2008 we know where that leads. So instead the Central Banks are reducing the rates that they lend money at to keep the markets as liquid as they can and the Banks solvent. Keeping the banks solvent though, now means keeping the Hedgies solvent.

The side effect of all this is that Hedge Fund keep playing and Prime Brokerage banks make some lovely fat margins.

So when you see pictures in the newspapers about the lack of chinese imports or other real world causes like Corona virus, just smile to yourself. This is all about the traders and the trading. As it happens, the US Repo market is 50% busier overnight than it was in September 2008, now partly of course inflation has reduced the value or money and the economy has grown, but it is a sign that things are very awry in the financial markets.

A key week ahead I feel.