Picking Up the Warnings Whispered in the Breeze

You all know my biases about financial news-reporting: much of what you read and hear is either old news that is no longer actionable, or it mistakes cause for effect, or it’s just totally wrong, or all of the above.

The most fundamental market in the world, on top of which everything else rides, is the overnight repo market. The mainstream business press rarely reports anything about it. Maybe because it’s not glamorous like the stock market, or something.

But repo is the canary in the coal mine. It reliably predicted major short-term disruptions last summer, late last fall, and during the Bear Stearns flap.

And repo is getting ragged, weird, and illiquid again. Corporate bond issuance has become very slow. Central-bank demand for short-term agency paper is also unusually low.

Part of this is probably the late summer doldrums, with the B-players manning the trading desks while the A-players are on the beach. But the money markets have been so prescient during this whole crisis that I thought you all should be keeping a weather eye out for some kind of financial disruption in the next few weeks.

There’s plenty of talk that the disruption will involve Fannie Mae and Freddie Mac. Again. There are a lot of other rumors, but it’s still too early to talk about them in public.

-Francis Cianfrocca