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Is The ‘Mother of all Bubbles’ About to Pop?
Is The ‘Mother of all Bubbles’ About to Pop?
When the New York Federal Reserve began pumping billions of dollars a day into the repurchasing (repo) markets (the market banks use to make short-term loans to each other) in September, they said this would only be necessary for a few weeks. Yet, last Wednesday, almost two months after the Fed’s initial intervention, the New York Federal Reserve pumped 62.5 billion dollars into the repo market.
The New York Fed continues these emergency interventions to ensure “cash shortages” among banks don’t ever again cause interest rates for overnight loans to rise to over 10 percent, well above the Fed’s target rate.
The Federal Reserve’s bailout operations have increased its balance sheet by over 200 billion dollars since September. Investment advisor Michael Pento describes the Fed’s recent actions as Quantitative Easing (QE) “on steroids.”
One cause of the repo market’s sudden cash shortage was the large amount of debt instruments issued by the Treasury Department in late summer and early fall. Banks used resources they would normally devote to private sector lending and overnight loans to purchase these Treasury securities. This scenario will likely keep recurring as the Treasury Department will have to continue issuing new debt instruments to finance continuing increases in in government spending.
Even though the federal deficit is already over one trillion dollars (and growing), President Trump and Congress have no interest in cutting spending, especially in an election year. Should he win reelection, President Trump is unlikely to reverse course and champion fiscal restraint. Instead, he will likely take his victory as a sign that the people support big federal budgets and huge deficits. None of the leading Democratic candidates are even pretending to care about the deficit. Instead they are proposing increasing spending by trillions on new government programs.
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Fed Goes Nuts with Repos & T-Bills but Sheds Mortgage Backed Securities
Fed Goes Nuts with Repos & T-Bills but Sheds Mortgage Backed Securities
The fastest increase in assets for any two-month period since the post-Lehman freak show in late 2008 and early 2009.
Total assets on the Fed’s balance sheet, released today, jumped by $94 billion over the past month through November 6, to $4.04 trillion, after having jumped $184 billion in September. Over those two months combined, as the Fed got suckered by the repo market, it piled $278 billion onto it balance sheet, the fastest increase since the post-Lehman month in late 2008 and early 2009, when all heck had broken loose – this is how crazy the Fed has gotten trying to bail out the crybabies on Wall Street:
Repos
In response to the repo market blowout that recommenced in mid-September, the New York Fed jumped back into the repo market with both feet. Back in the day, it used to conduct repo operations routinely as its standard way of controlling short-term interest rates. But during the Financial Crisis, the Fed switched from repo operations to emergency bailout loans, zero-interest-rate policy, QE, and paying interest on excess reserves. Repos were no longer needed to control short-term rates and were abandoned.
Then in September, as repo rates spiked, the New York Fed dragged its big gun back out of the shed. With the repurchase agreements, the Fed buys Treasury securities and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, or Ginnie Mae, and hands out cash. When the securities mature, the counter parties are required to take back the securities and return the cash plus interest to the Fed.
Since then, the New York Fed has engaged in two types of repo operations: Overnight repurchase agreements that unwind the next business day; and multi-day repo operations, such as 14-day repos, that unwind at maturity, such as after 14 days.
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THE WOLF STREET REPORT: What’s Behind the Fed’s Bailout of the Repo Market?
THE WOLF STREET REPORT: What’s Behind the Fed’s Bailout of the Repo Market?
Whose Bets are Getting Bailed Out by the Fed’s Repos & Treasury Bill Purchases?
“Panic At The Repo”: One Of The World’s Top Repo Experts Explains What Really Happened
“Panic At The Repo”: One Of The World’s Top Repo Experts Explains What Really Happened
Panic At The Repo
As a professional trader, I keep an eye out for the next panic or market crisis. Since the beginning of my career, there was a crash or panic every few years in one market or another. You try to think about what market is overbought. What market is in a bubble. What market just appeared on the cover of Time Magazine! Little did I ever imagine the Repo market would experience the next big panic. This is a market consisting of AAA-rated risk-free securities backed by the United States of America! How can there be a crisis in U.S. Treasury securities? We didn’t even make the cover of Time Magazine!
I write about the Repo market every day. As a service to our clients, I decided to put everything I know about the Repo market collapse down on paper. So here it is!
Modern Day Bank Run
We’ve seen the old pictures or films of people lining up outside of a bank to collect their deposits. Think of the Depression in the 1930s. Knowing that a bank can’t make good on all of their customers’ deposits means the first people to get their money are more likely to get their money. Period. Banks never keep all of their customers’ deposits as cash on hand. They invest those customers’ deposits by making loans – like a mortgage loan to a family to buy a home or loan to a business to help start a new venture. Banks invest in loans and borrow money through deposits. That also means they loan long-term and borrow short-term. Don’t worry, this is important later on.
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Interbank Market Collapsing
QUESTION: Mr. Armstrong; Has interbank lending collapse due to a lack of confidence concerning counter-party risk?
Thank you for being a rare source with experience
ER
ANSWER: Yes that is a correct statement. The failure of Lehman and Bear Sterns was the result of interbank lending when they could not make good on the collateral they posted the day before in the REPO market. Then we had the collapse of MF Global, which was also a loss linked to the overnight markets. Now mix in the LIBOR scandal and banks were scrutinized for manipulating LIBOR rates in the interbank market.
The interbank lending market is a market in which banks extend loans to one another for a specified term, typically 24 hrs. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate (also called the overnight rate if the term of the loan is overnight).
The collapse of this market is a clear warning that liquidity is extremely vulnerable. When crisis strikes, liquidity will simply vanish entirely. This warns that volatility will rise sharply and it appears to be predominantly focused in on the debt market.
With Sweden’s QE Officially Broken, The Riksbank Doubles Down: Lowers Rates Even More Negative; Boosts QE
With Sweden’s QE Officially Broken, The Riksbank Doubles Down: Lowers Rates Even More Negative; Boosts QE
It was precisely one week ago when we described how, for the first time in history, QE had officially failed to achieve its stated objective of pushing yields lower (ignoring that the real purpose is to push stock prices higher). In fact, it the outcome was precisely the opposite because as a result of the ongoing QE by Sweden’s Riksbank, and not enough collateral, the “soaking up” of eligible debt made the market so illiquid, buyers were unwilling to touch the bonds until yields rose enough to offset the liquidity risk.
As Danske Bank explained: “Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbank’s QE program.”
We added that the Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product.
And the punchline: “any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply“, SEB AB and Danske Bank have said.
This also came just days ahead of the latest BIS semiannual report in which it blasted central banks for engaging in wanton, endless QE which has pushed stocks to all time highs only at the expense of bond market liquidity.
So what did the Swedish central bank do? Overnight the Riksbank confirmed that it neither learns from its own mistakes, nor reads BIS reports when at 9:30 CET, it shocked central bank watcher all of whom were expecting no rate change from the bank, and announced it is not only engaging in yet another rate cut, taking the key rate even further into record NIRP territory, from -0.25% to -0.35%…
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