Wednesday, July 23, 2014

Government is letting us know that they are not going to save the markets next time.

It used to be that "breaking the buck" for a money market fund was a form of default.  Defaults cause panics.  Common (con-man) wisdom is that panics have to be stopped by government "for the good of everyone".  The solution?  Redefine what "panic" means.  In other words, change the goal posts when few people are looking.  That is exactly what the result of the coming vote at the SEC on breaking the buck will be.  In short, the government is telling the markets that it should be suddenly considered "normal" for a money market fund's value to vary.  In truth, this is the free market way of operating because it means there is risk in the activity.  Money market funds are just investments like any others.  They contain risk.  Government should not isolate anyone who is gambling from receiving losses.

However, I foresee two unintended but likely not unanticipated consequences:
1) derivative chaos.  The breaking the buck taboo has been in place for so long that I suspect it is used as some kind of metric for market instability by derivative contracts.  In other words, it could cause these contracts to pay off for someone when it might not have happened before the rule change.
2) if these funds can float (i.e. crash without being considered a crisis) then what stops desperate fund managers from dipping into them in order to backstop other risky leveraged bets which are receiving margin calls?  The fund manager can just break the buck and call it normal market fluctuation.

The timing of this move should not be overlooked.  It is happening right here, right now for a reason.  The powers that be know they will soon be losing control of this debt Ponzi big time and they are changing the game for investors who have been getting an artificial backing from government.  Again, it is a forced return to honest practices, not done because anyone wants to but rather because failure to do so will have grave implications on the government hacks. 

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