“Problem with central banks getting so involved in funding markets is it makes financial conditions appear easier on the surface with tighter fra/ois the effect. It kind of masks what’s going on beneath the surface. Volatility, real yields and inflation exp still one of the best ways to see what’s happening in broader liquidity conditions. All major financial institutions that matter have measurements of risk they can take with their balance sheet that is predicated on some sort of var model. When volatility is low in markets and economic conditions improving they basically have a free pass to extend risk and take on more activity on their balance sheet. But when we get the explosion in volatility in markets and underlying economic activity, the whole financial system is forceably derisking which is a very reflexive dynamic. This sets up one hell of a default cycle and destruction in usd supply. There really is a self reinforcing process going on beneath the surface which is being masked and sucking in participants particularly shorter horizon traders. So in current climate, instead of funding markets blowing up at the same time as volatility, dynamic has changed where the concurrency is in favour of volatility first. So long volatility is superior to a trade based off tightening funding markets. And if markets are going to make a big move in one direction, they kind of have to set up for it with a bit of a suckers move in the opposite direction which is what I thinks happening with the dollar. Best trade expressing a long vol and deteriorating funding markets is long usd.”