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Strategies & Market Trends : John Pitera's Market Laboratory
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To: John Pitera who wrote (21183)8/11/2018 10:57:06 AM
From: robert b furman4 Recommendations

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3bar
Don Green
John Pitera
roguedolphin

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HI John,

Besides the Turkish bonds going into default (which will get sucked up by the ECB), here's what I fear is happening in spades right now.

If you were a Turkish business man and wanted to lock in an interest rate on say :

1) your floor plan or it can also be done on:

2) the financing of your land and building vs a mortgage that is a floating rate at 175 basis points over a 90 dayloan.

3) international receivables of a manufacturer

It is done on large blocks of money and it fixes one's interest rate for 5 years (with a 3 year buyout clause - which gives you a lesser spread The buyout clause is triggered at the wants of the underwriting bank.

So say you enter into a credit derivative that locks in your interest rate on 30 million dollars or (euros more likely) at say 175 basis points over 90 day libor.

So you now have 5 years of a fixed interest rate on 30 million. These interest rate credit derivatives are written by big banks (I worked with JPMorgan when I was contemplating our 4 dealership combined floor plan) which approached this examples numbers.

I hear that Deutsche Bank is the 800 pound gorilla on these.

So when you lock in that interest rate the bank is the counter party in that deal. The bank can find another counter party to take that side or the bank can hold it themselves (after all they're booking 175 basis points
of profit).

When you see an interest rate sky rocket like they did this week in Turkey, up hundreds of basis points in a day - somebody is paying that differential that has ballooned to a multiple of the 175 points spread.

Someone is paying that rate differential!

That means someone or a bank is bleeding capital. It does not end well when those differentials balloon out.

If the bank did find someone to take their SIDE OF THEIR STRUCTURED DERIVATIVE. They'd better have big deposits and keep them in that bank cuz their being drained daily.

That enters into mass confusion much like we saw with Bears Stearns who got bought up for free by JPM or a big scary BK like what HAPPENED WITH LEHMAN.

I don't know the degree to which a lot of interest rate credit derivatives have been written on the assets of Turkish people, whether they be in euros or liras - some one is bleeding capital !

It is the stuff of systemic worries - if large in degree.

I wonder if shorting DB is the best stab at it - or short the Euro or long the Pound.

One thing for sure - there's a run to security happening on the Dollar.

I'm thinking interest rates from the fed on on ice.

I doubt Jamie Dimon is dumb enough to do this, but J Powell may be forced to find a US bank that wants to bail out a European bank that is belly up!

It may well be the case that the Fed proves once again they are the central bank of the world.

I do not know the degree of size this may be - it could be easily absorbed or it could be choker of a fur ball.

WE SEEEE

Bob

Bob
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