The Recent Repo Situation Investment Club |
| Posted: 24 Nov 2019 07:25 AM PST Recently, Mervyn King, the former Bank of England boss, stated that the "world economy is sleepwalking into a new financial crisis" - King said it was time for the Federal Reserve and other central banks to begin talks behind closed doors with politicians to make legislators aware of how vulnerable they would be in the event of another crisis. As well as this, the NY Fed announced that they increased their overnight repos to $120 billion, which is 60% more than what it was capped at $75 billion. Apparently the Fed needed to do this in the middle of the day, outside their scheduled meetings, and not even during the overnight lending window... PART 1: All the junk that banks are holding that they want the Fed to buy from them, the Fed isn't buying (yet). The new QE4 bi-weekly operations are for Treasury Bills, not bonds. But the big players like JP Morgan don't have a lot of t-bills, they have a bunch of notes and bonds, probably much of it overseas and negative yielding radioactive trash, that they can't pawn off (YET). PART 2: Banks need to keep a certain percentage of cash on hand every day by federal law, that's the "fractional reserve" system. Banks are constantly spending your deposits on various financial instruments to make money. Could be equities, bonds, derivatives, whatever. The riskier the better, because they make more yield, and if it gets too risky they now just expect the Federal Treasury to step in and bail them out (lol). Because of all that spending they have entire after-hours teams dedicated to making sure that the fractional reserve quota is met every night. They do this by lending out collateral (like bonds) to other banks, for a certain percentage interest that they pay back the next day. The Fed gives a "target rate" that banks should use when lending among others, but really it's a market and the buyers/sellers decide what rates to use. If there aren't enough loaners at the target rate (PART 1), then banks can't lend their collateral out. There's not enough cash being offered in the market, in other words a lack of liquidity. So banks have to ask for a loan at a HIGHER rate of interest, meaning they have to pay back MORE the next day. Since there isn't enough liquidity, in order to force the market rate back down to the "target", the Fed has to step in and offer up cash at the target rate on the taxpayers' dime. Quantitative Easing. But even with all this QE, banks are STILL having trouble getting the cash they need. That's why the repurchase operations (repos) are still straining and in some cases oversubscribed. There's still more demand than supply, and so the Fed has been forced to increase its QE limits even more. The real question is WHY aren't other banks lending to each other? You loan it out and then get paid back interest the next day. It's guaranteed money! Unless of course they don't trust each other, and think that there's a good chance they won't be getting their cash back because the bank they're loaning to is close to insolvency. Or maybe everyone in the system just has a lot less cash on reserve than everyone thinks. Or it's a combination of the above, and it's a power play by the elites (like JP Morgan) who actually WANT this repo crisis to happen, so that the Fed is forced to start buying longer term bonds and not just t-bills (PART 1) All of them are in trouble. Just the other day McKinsey & Co released a report that suggests that the majority of banks around the world (not just US or UK) don't have the equity returns to stay solvent in a market downturn. Will they be forced to merge with each other just like in 2008? The debt bubble is so much larger today (percentage wise too not just nominal terms) that it won't work. The big boys will rollover, the small banks who depend on them will follow, the whole system comes crashing down? Or will the Fed bail them out by printing trillions in cash and causing massive inflation? Nobody really knows how bad this is going to be. Based on recent history (2008 comes to mind), I would guess that it's going to be really bad for the working class poor and "middle class" (particularly those in lots of debt). But I don't think it's going to be THAT bad for those who are red pilled enough to diversify income streams and have self sovereignty over their assets. The "good" thing to do, the thing they SHOULD HAVE done back in 2008 was to just let the market crash hard, and let the banks fail because they (corrupt bankers AND The Fed's monetary policy) messed up big time. It would have been horrible, but also cleansing for the economy in the long run. The problem with that was that there was a good chance the US wouldn't have emerged as still the #1 superpower in the end. Therein lies the real dilemma and why it's not just "The Fed" but the whole aristocracy itself in Washington. Instead they chose to print more USD, and borrow ridiculous amounts of money from other nations (mostly China). The US is the biggest debtor nation in the world now - we haven't seen a debt ratio this high since WWII, and it's not even wartime (yet). They took all this money and injected it back into the banking system to bail it out and re-inflate the bubbles (think real estate and equities). So you may be asking why, if all this information is available, and this is in the public domain, then why is the market not dumping? That's exactly why corporate buybacks and insider selling is at or near all time highs. Inflows to gold, mining stocks, and gold ETFs at or near all time highs. Other countries hoarding gold (see Russia and China). CEOs know it's about to pop. They want the stock market to be propped up quietly for as long as possible so they can exit. They want to convince the dumb money that there's no recession so they'll FOMO in and buy their bags... What is the big deal anyway? The ability of a nation to exercise violence is the only REAL currency and the US dollar is backed by the ability to project military violence. The US military losing its hegemony is called WW3. With nuclear capabilities it doesn't seem feasible for WW3 to occur, but I don't think China would be stockpiling gold and building military bases in contested territory if it was planning on just going out quietly with the next wave of USD debasement... For more compounded valuable content, like and subscribe: https://www.youtube.com/watch?v=OM71gQmrLks Brave Browser https://brave.com/fin894 [link] [comments]  |
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