Marc Faber fears funding chaos, a view which he recently highlighted in his latest monthly market commentary for October, entitled The Threat To Academic Freedom And The Right To Freedom Of Opinion Is A Menace To Liberty. Marc Faber is a Swiss investor based in Thailand, he is best known for his Gloom Boom and Doom report, his views tend to sit comfortably in the permabear camp.
“Several experts have downplayed the recent chaotic behavior but I take it far more seriously because it indicates to me that liquidity has become tight – at least for some market players”
The US financial wonderland masks trouble in the Repo market, which is precisely where Marc Faber fears funding chaos
Banks are required to keep a certain level of liquidity at the close of every business day.
Fractional reserve lending enables banks to make loans that exceed the amount of deposit received. So a situation can arise when a bank’s daily lending activities result in less available liquidity to meet this daily liquidity level. Conversely, a bank may have been less active in making loans and thereby have surplus funds above the daily liquidity requirement.
So the bank which needs funds to finance its daily operations pledges high-grade assets as collateral in exchange for a short term daily loan paid with interest from the bank with surplus funds.
That’s the Repo market, in a nutshell, banks lending to each other on a short term basis with interest.
“Banks are required to keep a certain level of liquidity at the close of every business day”
Marc Faber fears funding chaos in the Repo market, the least of all places
Despite the Fed fund rates nearing historic lows the business of lending has become even riskier.
There is now even a divergence between the Fed fund rates nearing zero while business and mortgage interest payments remain stable or keep rising.
The recent Repo crisis, which saw short term funding rates shoot up is the clearest sign that something is very wrong. Put simply, banks are reluctant to lend to each other, despite the US economy being “in a good place,” said Fed Chair Powell in “the greatest economy in history” President Trump.
“The Fed stepping into the market to give more cash unannounced three days in a row screams something is very wrong. There is a massive lack of cash at hand” Glenn Beck BlazeTV show.
“Should widespread liquidity crunch follow – goodbye asset inflation and welcome widespread asset deflation – Marc Faber
Marc Faber fears funding chaos and he is forecasting simultaneous widespread asset deflation
“Several experts have downplayed the recent chaotic behavior but I take it far more seriously because it indicates to me that liquidity has become tight – at least for some market players” wrote Marc Faber
Marc Faber fears funding chaos could also result in a wider liquidity crunch
“Should widespread liquidity crunch follow – “goodbye asset inflation” and welcome “widespread asset deflation”, he wrote.
“I should like to emphasize that a liquidity crunch will affect all asset prices negatively albeit some more and some less,” wrote Marc Faber in his October investor’s newsletter.
Marc Faber fears funding chaos where then does the Swiss investor recommend investors should invest?
Extreme caution and a defensive stance (large cash positions) are recommended, wrote Marc Faber.