by David Kranzler
Investment Research Dynamics
A massive financial system crisis building. Evergrande is a small part of the cause but it may have been the “black swan” trigger. The move into the dollar is likely a reflexive flight to safety by professional investors globally and foreign banks. While it’s easy to define Evergrand’s on-balance-sheet debt, there’s no way to know what lurks off-balance-sheet in the form of OTC derivatives and contingent liabilities. Not just for EG but also for the big banks that make wrath of God money underwriting and selling credit default swaps etc.
As evidence that the Fed/Central Banks knew that a financial hurricane was brewing, recall that the Fed quietly announced the establishment of a $500 billion repo facility at the FOMC meeting in July. Why do this when currently the Fed has been keeping over $1 trillion of liquidity circulating in the banking system in a sort of “suspended animation” via the Reverse Repo mechanism?