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Will Rate Hikes Induce Margin Calls? – Bill Holter

The Fed will necessarily need to withdraw some (maybe up to $1 trillion) collateral from the system …a system already short of collateral.
This will tighten liquidity in an already illiquid credit market.

Submitted by Bill Holter, JSMineset.com

Wednesday morning before the Fed announcement, a reader sent me this:

“It is Janet Yellen’s turn to stoke the fire and evidently her news today of a rate increase has stoked the stock market fire to the tune of the Dow rising 138 points 10 minutes in.  It has the feeling of being on the Texas coast holding a hurricane party waiting for a hurricane to hit.  There are hundreds of people drinking and partying.”  SO TRUE …and party they did!  The rate hike was not even the biggest news of the day as you’ll see…and maybe they were all connected, we’ll get to that shortly.
 



Where do we go from here after a rate hike?  First and foremost we need to see several things.  First, can the Fed actually get rates to rise?  The longer end of the Treasury curve actually went down so there was some flattening.  Next, can they make the rate hike stick?  We also need to watch to see the mechanics of the rate hike.  The Fed will necessarily need to withdraw some (maybe up to $1 trillion) collateral from the system …a system already short of collateral.  This will tighten liquidity in an already illiquid credit market. 
  No doubt the world as a whole is treading water at best and most probably contracting economically.  The rate hike will only serve to put more pressure on the emerging markets in the form of a margin call.  This margin call will also be issued across the board.  I believe we now wait patiently to see where the stress is evidenced.  It may take only a couple of days or a couple of weeks but stress and weakness is coming.  Trade, growth and corporate profits and importantly “velocity” are all weak and declining, now the financial sector will need to deal with a withdrawal of liquidity equal to approximately what QE2 added. 
  We must ask the question, “how will the Fed respond to additional credit stress”?  For the common man, the question will be what will the Fed do with a “16” or even “15” handle on the Dow?  Will they reverse the rate hike?  Or even go straight to another round of QE?  By the way, the world collectively sold $55 billion worth of Treasuries in the latest TIC report for October.  Where did those go?  Did the Fed indirectly shovel these into a hidden corner?  I still believe the rate hike …with a background of economic and financial weakness is a huge policy error and can only be “covered” for with some sort of false flag.  When the collapse comes, it will be…