Notes From Underground: The Use of Swap Lines …HMMMM

Posted at 12:50 AM (CST) by & filed under General Editorial.

Dear CIGAs,

After Secretary Geithner told the CNBC audience that he was going to Poland as an observer of the ECOFIN meeting on Friday, it seems he changed his mind. U.S. policymakers have woken up to the fact that the European credit crisis is the real deal and risks sending the entire global financial system into a period vicious cycle of asset liquidation. The Obama administration has come to realize that a severe credit crisis can certainly undermine the JOBS PROGRAM AND ANY OTHER STIMULUS PROGRAMS IN THE WORKS. If the world frets of a U.S. renewed recession, then imagine the global trepidation of a simultaneous credit crunch in Europe. A EUROPEAN MELTDOWN WOULD BRING THE U.S. TO INCREASED UNEMPLOYMENT AND A CERTAIN DEFEAT FOR THE OBAMA ADMINISTRATION.

The summer vacation in Europe is over and it is time to SOUND THE TRUMPETS calling for renewed vigour from the world’s financial authorities for massive amounts of liquidity. Swap lines were the jolt from the defibrillator of economic therapy as the ECB and others try to halt the arrest of the European banking system. Of special interest is that the FED, SNB, BOE and the BOJ were the central banks named as the providers of DOLLAR SWAPS for Europe–the Canadians were missing from the list of usual suspects. Again, it seems that the G-7–with White House prodding–wants it to appear that policy makers are attempting to get ahead of a potential financial calamity in the European banking system. The DOLLAR SWAPS will also buy the ECB some time and room for manoeuvre as it relieves some of the pressure on ECB bond purchases.

It was noted that there has been very little use of the present seven-day swap facilities but the authorities seem to be more worried about end-of-year funding problems and thus moved to provide a 90-DAY FACILITY. It was noted in a WSJ article that the swap lines have been underutilized as European banks were using private deals to borrow DOLLARS by pledging DOLLAR ASSETS to U.S. banks. If there was plenty of DOLLARS available, then today’s announcement was an example of Hank Paulson pulling the “bazooka” and letting the markets know that the global policymakers are serious about Europe. Any liquidity addition of a SYMBOLIC NATURE in a zero-rate environment should boost all asset prices, and, once the FOG OF WAR clears, WIND UP PUTTING A NEW BID TO GOLD.

Imagine that it is possible for both GOLD and STOCKS TO RALLY. Time to examine the GOLD/CURRENCY charts as the fear of deflation causes all the world’s central banks to throw monetary caution to wind created by helicopter rotors. The SWISS NATIONAL BANK HAS ESTABLISHED A NEW LEVEL OF INTERVENTION FOR THE ENTIRE FINANCIAL SYSTEM. EUROPE entered the arena today, which makes me wonder what the quid pro quo will be for Japan’s cooperation: Will the BOJ get the nod of approval for a new effort to drive the YEN lower? With a G-20 meeting next week in Washington the markets will be on heightened alert.

Quick Hitter: An article in today’s London Telegraph by Ambrose Evans-Pritchard is a must read (“China to ‘liquidate’ US Treasuries, not dollars”). The bottom line is that China will demand securities as they begin to sell BONDS. Will the U.S. authorities allow the Chinese SWFs to purchase U.S. corporate assets as they sell off their treasury holdings? This has been an issue of NOTES for a long time and we look for it to surface again as the BOND market reaches ridiculous levels.