There is a source of funding for large banks called Rehypothecation. Rehypothecation is simply re-using or re-pledging someone elses collateral. Banks and Brokers love to rehypothecate. They take someone else’s collateral and pledge it to recieve funds. Well, in order to rehypothecate something you must have collateral. If collateral dries up than so does the funding. Simply put, collateral is beginning to dry up as Hedge Funds, Pension Funds, and Retail Clients are beginning to become more risk averse because of the issues involving Europe. A lack of collateral causes a strain in shadow funding for large banks. I believe the break down in the rehypothecation market will be similar to the epic fall of AIG due to bad Credit Default Swap positions. I continue to believe we are in a major deflationary market. Holding large cash positions and safe securities like treasury or municipal bonds seems wise. I continue to believe when the next wave of deflation hits the market great opportunties will be available in select equity securities. Holding cash and waiting for this opportunity seems both wise and potentially lucrative. Below is a great article on what Rehypothecation: the velocity of capital

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