MMFs - Money Market Failings
Ned Naylor-Leyland - 15.2.10
On the back of recent changes to the US Money Market Fund (MMF) regulatory framework, I felt that a refreshed consideration of global currency markets might be worthwhile. This crucial tweaking of the rules was hidden in the middle of a long reform package in January and relates to the providers of MMFs who can now freeze redemptions ‘in extremis’. Quoting the legislation, Money Market Fund Managers can now "suspend redemptions to allow for the orderly liquidation of fund assets."
The above may appear to be a minor footnote in light of the past year’s excitements, however thefurther concentration of moral hazard implied by this change is not to be underestimated. TheMMF industry ‘manages’ trillions of Dollars of retiree and institutional cash in order to improve onthe rate of interest offered by a regular bank deposit. Banks and big money players are driven onthe back of this to the relative security and guaranteed liquidity of Treasuries and short-termT-Bills. Yield, it appears, has once again become secondary to certainty. The core rationale forowning MMFs is the dual concept of ‘risk free return’ and absolute liquidity. The disappearingyield in 1 month T-Bills is a reflection of the potential breakdown of the MMF concept andsuggests that smart money is again heading for safe harbour.
This development is yet another reflection of currency markets and a global economy in flux.Over the first weekend of February the World’s central banking community convened for a ‘secret’(read: no media coverage) meeting in Australia, arranged by the Bank of International Settlementsto discuss the global economic crisis. Presuming that the meeting wasn’t convened specificallyto deal with the world’s notional $1.4 quadrillion derivative market (about which the B.I.S keepsstatistics) then surely it was to discuss the global currency market architecture. The world musttransition to new world currency order in accelerated fashion if we are to avoid the unimaginableconsequences of serial sovereign default. The result of these Central Bank and G-7 meetings,whenever it crystallises, is likely to be as significant as the Bretton Woods accord of 1944.
Gold £
Source: Bloomberg
Gold €
Source: Bloomberg
Catalysing and accelerating the need for such an agreement to be rolled out is the re-emergenceof food price inflation in developing nations. Should food prices start to rally across the board,then the likelihood of a full scale currency crisis will be increased substantially. Bearing in mindthat while we in developed countries spend around 10-15% of our income on food, in thedeveloping world that figure is nearer 50%. The relative lack of credit for farmers combined withpoor weather and reduced yields in grains-producing countries, has left the world perilously closeto potentially experiencing the twin horror of falling asset prices and rising food pricing. Wheatfutures are still down 70% from the high of 2008 and yet currently there is rioting in eastern Indiadue to the spiralling cost of basic foodstuffs. In our globalised world it seems highly unlikely thatthis pressure on food pricing can be restricted to the Indian subcontinent for long. The greatconcern from my viewpoint is that no agreement of substance will be put in place by governmentsbefore the real purchasing power of irredeemable currencies is brought into question by risingfood costs. In such an environment the risk of contagious fiat currency organ-rejection by theglobal population looms large.
Fuel to the paper-based fire (andcentral to the Goldbug viewpoint)should come on March 25th whenthe CFTC are holding a publichearing into the issue ofSpeculative Position Limits in Goldand Silver Futures and Options. Avisible and public debate about theprop-book trading of the bigcommercial banks, while unlikely tolead to prosecution or even asatisfactory judgement (it isnonsensical to expect the fox toshow the farmer the trail offeathers leading to his den) – maywell lead to substantial shortcoveringin the interim. Theincipient breakout of Gold in non-USD currencies, as shown in thegraphs (right), is a reflection ofwhat looks to be the next stage ofa bull market for historical moneyas opposed to its modernmanifestation. In God we Trustmay be approaching the end of itsshelf-life.
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