The Global Collateral Trap

Published on
May 8th, 2019
29 minutes

The Global Collateral Trap

The Expert View ·
Featuring Michael Howell

Published on: May 8th, 2019 • Duration: 29 minutes

Could a global collateral crunch cause "hair-trigger" markets to plunge into a 2008-style sell-off? Michael Howell, founder and managing director of CrossBorder Capital, breaks down the causes, and likely effects, of a liquidity crisis in global financial markets. Filmed on May 2, 2019 in London.



  • IA
    Ivan A.
    16 February 2020 @ 15:15
    What a great interview. Looks to have panned out!
  • dm
    david m.
    21 June 2019 @ 15:33
    More of this gentleman please.
  • JG
    Jeff G.
    9 May 2019 @ 01:57
    What happens when US bonds are no longer considered coladeral?
    • AM
      Andrew M.
      10 May 2019 @ 10:07
      USTs or corporate BBBs? USTs will always be collateral (if there's a functioning monetary system) BBBs is going to be a problem. many funds with IG-only mandates will be forced to sell and the HY bond market will get crowded out, forcing yields to rise and likely spurring more defaults. but more importantly, as Howell points out, there will be real fears over which BBB bonds will get downgraded next (and lose their status as HQLA and high-grade collateral). that creates a run-on-the bank scenario in interbank lending; i.e. no one will accept BBB bonds as collateral - the same as MBS and sub-prime in '08 - and trust will break down in the IG bond sector. the question then becomes political. Will Moody's and S&P actually downgrade those issuers? my bet is that they won't, and that we'll see something like '08 unfold if bankruptcies start to creep up into the BBB / IG space (just like AAA-rated MBS started to default). the other implication is that the BBB threat will force the Fed to dramatically cut rates if we see another credit scare (like December). for all the talk about equities, inflation and jobs, they are far more worried about credit as this poses a systematic risk (as explained above). Hence, lower forever rates and zombie companies / economies are likely to become the norm. some more here:
    • AM
      Andrew M.
      10 May 2019 @ 10:15
      The BBB- market is also big but not gigantic (600-650bn). It's possible that the Fed could put it on it's balance sheet much like TARP. definitely something to consider as US growth looks to slow
    • DH
      Daniel H.
      28 May 2019 @ 07:16
      Putting BBB- on the fed balance sheet is more bailout of the wealthy using taxpayer money to fund it. When do we ever let capitalism work and wash out the zombie companies?
  • PG
    Philippe G.
    25 May 2019 @ 15:27
  • CT
    Christoph T.
    10 May 2019 @ 10:20
    Do a Jeff Snyder with Michael Howell on global liquidity, Eurodollar system and repos! That would be legendary.
    • ww
      will w.
      21 May 2019 @ 07:46
      Yes, it's long overdue to have Jeff back on RV. BTW, Jeff's last name is spelled Snider; he's with Alhambra Investments in Florida - GREAT knowledge of the "Euro$" mess. Google Macrovoices "Eurodollar University"!
  • CB
    C B.
    14 May 2019 @ 12:19
    This is an excellent discussion of the actual nuts and bolts of the financial system. We need more analysis like this please. It identifies the weakest links in the financial chain - the most likely starting point of the next crisis, and gives us some key indicators to monitor.
  • CL
    Charles L.
    13 May 2019 @ 08:54
    Beautiful explanation of the inner crux of the financial mechanisms. @ Mr. Howard and RVTV team, Considering its importance, would it be possible to get an educational series on balance sheet structures, how double entry book keeping works, all the basics (accounting boring stuff) which maybe with expertise could be explained in a more accessible interesting way? Or else, would anyone know any youtube video or video source one can learn this without falling asleep after 3 minutes?
    • CL
      Charles L.
      13 May 2019 @ 12:09
      Sorry, I meant to write Mr. Howell, reading Howard Marks' latest book and mixed them both :s
    • MH
      Michael H. | Contributor
      13 May 2019 @ 21:48
      We have a report outlining these issues. I will ask the Real Vision people whether they can post it up.
  • DB
    David B.
    8 May 2019 @ 17:20
    Michael runs through some very interesting mental exercises here. Pensions definitely have massive issues facing them and have not matched assets with liabilities. However, the mismatch is not "Treasury" duration gap because the discount rates are based on corporate bond curves (not Treasuries). Falling Treasury rates may not necessarily translate into falling corporate bond rates (if credit spreads widen as they do during economic recessions). I know it's technical but the greater risk is that pension assets including equities or real estate could fall in value while interest rates (discount rates) stay low.
    • DS
      David S.
      11 May 2019 @ 16:28
      Compared to history isn't this already happening? DLS
  • CL
    Chris L.
    11 May 2019 @ 07:40
    Yes, please.. Tell the poor bastard with two kids who spends 10% his income on gas and another 60% on housing that inflation is low. By the way, inflation has been steadily rising as I said it would back in January. It's now 2% v 1.5% - @themacrostrat
  • GF
    Gordon F.
    11 May 2019 @ 04:40
    Great presentation, but please voice over the questions. I don't generally watch the screen, but just listen. (And I feel really repetitious, but it would be such an easy problem to fix, yet it persists.)
  • AL
    Alex L.
    10 May 2019 @ 02:30
    This would be the second time I've heard talk about funding via collateralized repo markets. I would love to hear Michael sit down with Jeff Snider and talk Eurodollars! Maybe good topic for a future Exchange episode?
  • KC
    Kenneth C.
    9 May 2019 @ 21:02
    I keep think this the best interview and then I see another. Great job RV! Thanks Michael.
  • AB
    AJ B.
    9 May 2019 @ 17:49
    Fantastic. He is basically laying out the Eurodollar market and how it will effect all prices. Would like to see him back on a 1 hour episode.
  • KO
    Kieran O.
    9 May 2019 @ 16:47
    Phenomenal. It's always great to see Michael Howell share his incredibly unique and well researched perspective. One of the top 5 people real vision brings on.
  • SL
    Seth L.
    8 May 2019 @ 16:46
    Question: If the wholesale banking system runs on collateral, then how is QE a liquidity injection? It takes collateral out of the system and replaces them with excess reserves which just sit there.
    • MH
      Michael H. | Contributor
      9 May 2019 @ 13:44
      That could of course be the case. However, we distinguish supply from demand. Wrinkle in system is that as the Fed withdraws liquidity (adds back collateral) investors panic and demand far, far more safe assets. Hence Fed on knife-edge. Bit like a modern day Faust!
    • SL
      Seth L.
      9 May 2019 @ 16:20
      Thanks a lot. Very helpful!
  • RM
    Robert M.
    8 May 2019 @ 19:08
    I'm always frustrated listening to Michael. I learn nothing. I hear only generalities about liquidity and duration mismatch. That Dec18 risk off was driven by these things WITHOUT any further explanation! RV you need to press him on some detail. This happened in this market which caused this as highlighted by this metric.
    • MH
      Michael H. | Contributor
      9 May 2019 @ 13:41
      Liquidity based on collateral. Collateral wobbled in December and will wobble again. Hence liquidity down unless Fed adds support
  • LP
    Lynn P.
    8 May 2019 @ 21:03
    Is he asserting that BBB debt is "good" collateral in the global repo market (around 8:15)? Is that true? He is describing the global financial system, as described in more detail by Perry Mehling in his book The New Lombard Street, which not only describes the system but explains how and why the system broke down in 08-09. Would love to have Mehrling as a guest interviewed by Grant or Raoul.
    • MH
      Michael H. | Contributor
      9 May 2019 @ 13:39
      Sorry I was not asserting rather ‘hoping’ it is... that is my point. If it turns into junk we all have a problem
  • HK
    H K.
    8 May 2019 @ 22:11
    How is that chart at 10:21 (global liquidity cycle) constructed? It's some scaled version of liquidity on the y-axiz from 0 to 100, but I'm not sure what it's indicating. Appreciate it if you could shed some light. Thank you.
    • MH
      Michael H. | Contributor
      9 May 2019 @ 13:36
      More detail is available on our research website Broadly our methodology is similar to the Financial Stress Indexes creates by the StLouis, Kansas and Chicago Fed Districts
  • PV
    Peter V.
    9 May 2019 @ 07:43
    Would be very nice if an interview started with 1-3-5 and 10 year returns of the investor interviewed!
    • JH
      Jay H.
      9 May 2019 @ 09:32
      Wouldn’t that bias your view of the arguments presented?
    • MH
      Michael H. | Contributor
      9 May 2019 @ 13:34
      Our fixed income strategies are on our website
  • so
    steven o.
    8 May 2019 @ 17:05
    He mentions 'austerity' and the lack of sovereign debt issuance. What am I not getting? As far as I can tell, we're swimming in a sea of govt (and corp) debt issuance. How to interpret his statements? Also, he seems to be projecting the past few years into the future. Doesn't the increasing push for MMT and infrastructure spending change the inflation outlook?
    • CH
      Charles H.
      9 May 2019 @ 10:14
      Yep, governments are more indebted than they have ever been, yet here he’s talking about lack of sovereign debt for collaterisation purposes?
  • ah
    ahmed h.
    9 May 2019 @ 10:12
    great, insightful - think im going to have to listen to this a 2nd time though to get more out of it!
  • DS
    David S.
    9 May 2019 @ 00:56
    Mr. Howell has a lot of ammunition, but most RVTV contributors believe that the CBs caused a lot to the current problems. I feel a little anxious about how well they can solve the next crisis better. I will watch again and try to understand why the CBs will be the only way to save the financial system again. DLS
  • VS
    Victor S. | Contributor
    8 May 2019 @ 19:53
    • RM
      Ryan M.
      8 May 2019 @ 23:22
  • SW
    Sean W.
    8 May 2019 @ 21:05
    Absolutely do NOT trust his claims that the Federal Reserve says inflation is not an issue, nor that BlackRock confirms this analysis. Two very untrustworthy actors in the system. His bond duration mismatch for asset liabilities in pension obligations is on point though.
  • JG
    Joseph G.
    8 May 2019 @ 19:23
    Remarkably insightful discussion. I worry that Fed moves take time to affect the financial markets and what Michael describes would suggest rapid responses might be needed to head off a significant meltdown.
  • TS
    Tim S.
    8 May 2019 @ 19:00
    Really enjoyed the discussion, added a new set of narratives and lenses to my fundamental understanding. More please.
  • VP
    Vincent P.
    8 May 2019 @ 18:53
    It bums me out that we've become so dependent on Central Banks, that even smart people openly attest to it. I know, I know, you can't fight the FED etc...but it would be more fun if they (Central Banks) would just go away! Good format :)
  • WS
    William S.
    8 May 2019 @ 18:09
    Excellent , plz bring back...seems to dovetail with Snider's view of Alhambra
  • AM
    Alonso M.
    8 May 2019 @ 16:57
    What if the problem is solvency and not liquidity? What if the zero yields in Europe go up to match and exceed the yields in the U.S.? The entire world has been turning into Japan, so the long-term trend of lower yields is more of the same where central banks step in to bail out a system that supposedly has a liquidity problem. This should be expected. The part that seems contradictory is to call something a liquidity problem and then go on to say the government has to bail it out.
    • SL
      Seth L.
      8 May 2019 @ 17:04
      I agree in part. Liquidity is, in my view, the proximal issue behind the larger debt problem. In this sense, it's an effect/symptom. If you have lower leverage, you don't have severe asset-liability mismatches. Liquidity is the band aid for a much larger problem. It has, and never will, be a long term solution.
  • IH
    Iain H.
    8 May 2019 @ 14:57
    Michael i s a favorite of mine. Need to listen a few time to take it all in, Would love to hear a long form interview where he lays out his frame work in detail. Cheers RV
  • TJ
    Terry J.
    8 May 2019 @ 13:33
    Excellent presentation from Michael that nicely compliments what we heard from Brian Reynolds and how pension growth mismatches in the US are fuelling the share buy back bonanza. I think Michael is spot on with the opportunity in Treasuries, and I would love to see Dr Lacy Hunt back on RV as the accuracy of his longer duration Treasury interest rate forecasts over several decades are unrivalled. There are also other debt markets with much higher yields and a solid economic backdrop such as India that would add to the diversification argument Michael is making, even allowing for forex risk. While I also agree with Michael's thoughts on a likely meIt-up over the next couple of years in Wall Street stocks for all the reasons he espoused, I am not so sure I agree with his bullish views on the UK or Germany but hope he is right.
  • IT
    Ivan T.
    8 May 2019 @ 12:40
    Michael is on another level. I could listen to a few more hours of this. The format you've selected for this presentation makes much more sense than an interview. Kudos realvision!
  • JO
    JOHN O.
    8 May 2019 @ 11:14
    Good presentation. I agree with his thesis and wish the markets would get on with it. "It's different this time" works until it doesn't and its starting to look like we are quickly approaching that point. P.S. I like the new format and increased content. Just wish I had more down time to take it all in.
  • AM
    Artur M.
    8 May 2019 @ 08:36
    Excellent! Important to understand liquidity & collateral in eurodollar system. Puts additional light to Jeff schneiders view. Thanks