NECRO'd: FED having to put money into the overnight repo market?

[FromMyColdDeadHand]

UPDATE 11/21
Posted here for historical data and references. I think that big money knew about COVID in mid Sept 19. THe Virology institute took their data base off line on Sept 12, the overnight fed funds rate and market went GOOOFY soon after- like they were worried about a Black Swan event. The best explanation of this is that some people knew about COVID and the high probability of a global pandemic. It would be interesting to look at shorts positions.


***** Update ******
Someone had another thread about the FED intervention in the overnight market. As you can see from this thread, this is nothing new- but it a recent phenomena, and by phenomena, I mean there isn't a widely agreed upon reason for it, except since Corona when everything is goofy.

I hope this gives some background and understanding.

****** ************






https://www.breitbart.com/economy/2019/09/19/fed-pumps-75-billion-into-financial-system-again/


Here’s how it works. Traders at the big Wall Street firms put in bids to borrow cash overnight and cash investors accept bids, typically striking deals by 10 a.m. The bids are promises to pay an interest rate and a pledge to post securities as collateral. After the market closes at the end of the day, the securities get allocated to the cash investors. The following day, at 8:30 in the morning, the repos get unwound. The cash investors get their cash back and the Wall Street banks get their securities back. Then it starts all over again.


At the start of the week, the repo rate unexpectedly jumped higher, indicating that there was a shortage of dollars compared with demand. On Tuesday, the Fed stepped into the market by supplying $53 billion of cash in exchange for securities. On Wednesday, the Fed supplied $75 billion of cash–and said it had bids for an additional $5 billion of repos. On Thursday, the Fed supplied $75 billion again and said this time the facility was oversubscribed by nearly $9 billion.


What the heck is going on here? Not looking for an anti-FED punchfest. Looking for why something like this is going sideways. This money flows like the tides- in and out, like a metronome.

Buddy has a degree in finance and he is scratching his head too.

Is this like all the water rushing out when you are at the beach? We know what that means.

[SomeOtherGuy]

Usually Zerohedge has some insight, but not much for this issue:

https://www.zerohedge.com/markets/fed-begins-repo-operation-funding-rates-ease

Mish is usually a good commentator, but I don't see anything on the repos:

https://moneymaven.io/mishtalk/

Karl Denninger is an interesting loose cannon - he definitely says what he really thinks, and has some insights but a lot of hyperbole. He has two interesting posts on the repo issue:

https://market-ticker.org/akcs-www?post=236871
https://market-ticker.org/akcs-www?post=236872

My 2 cents - there are three different things all going on:
1) There is some real economic problem out there festering away.
2) There is a cold war between Trump and the Fed, and this is a move by the TBTF banks to bolster the Fed's position.
3) But most importantly, TBTF banks and Wall Street are predatory and got away with the greatest theft of all time in 2008-09, and they are setting the stage to do it again. An artificial crisis is being designed and manufactured right now, and will hit at exactly the right time to hurt Trump's re-election bid - probably around March 2020 - and to get away with another brazen theft of trillions of dollars.

[SomeOtherGuy]

And it's getting worse, fast:

https://www.zerohedge.com/markets/liquidity-scramble-fed-announces-overnight-repos-every-day-next-week-introduces-term-repos

Still not sure what's happening but it definitely isn't good. I suspect the festering economic problem is one or more BIG debtors that have quietly postponed scheduled payments, freaking out the TBTF banks - but quietly to avoid a wider panic. I also suspect that there are strong pressures for deflation that the Fed is trying to fight off.

[The_War_Wagon]

What the heck is going on here? Not looking for an anti-FED punchfest.

Oh... well... OK then!

[thepatriot2705]

So I’ve been watching some movies related to the 08 crash lately. The crap banks did is unbelievable. Before the crash, they all said everything is fine. Look how that turned out....

Car repos are jumping. $1.6 trillion in student loan debt. $15 trillion in corporate debt. $500 billion in corporate cash. $1 trillion credit card debt. Trillions of mortgage debt. It’s a house of card.

Back in 08, banks were leveraged 30x, 60x, 1000x....etc... there were bets upon bets upon bets via Collaterlized debt obligations. $1 in MBS security rolled into a CDO could have $60 in bets on it. I don’t know if any suspect areas have quite that leverage now, but red flags are flashing big time. Something is up and we are not being told the truth. Take what I have to say with a grain of salt as the products being traded in 08 were incredibly complex and no one even knew how to price them.

So my theory going forward...retail has around $400 billion in debt. $100 billion of that is below investment grade (source: Capital IQ). Out of those companies, 1 million people are employed. Assuming their is a liquidity problem combined with decreased spending, these companies go bankrupt. These job losses will cascade as it will slow down the economy. The auto industry will get Destroyed as car repo rates skyrocket. Ford has $200 billion in car loans IIRC. If one or two car manufacturers go bankrupt, it will trigger turmoil in the supply chain causing even more job losses.

Now let’s say that happens, in a free market, we would enter a recession or depression and everything associated with it. But with the intervention from the feds, free market economics is out the window. Do they bail out these companies? If they do, will the debt be monetized.



TLDR: I might sound like a complete idiot but it’s a house of ******* cards and when, not if, it crashes, it will be bad. Hopefully I’m wrong


Edit: just looked...1 in 20 US Jobs is related to the auto industry. If the auto industry goes belly up, hello Great Depression part 2. The feds will understandably intervene. Precious medals is the play.

[pinzgauer]

If the auto industry goes belly up, hello Great Depression part 2. The feds will understandably intervene. Precious medals is the play.

So how exactly do you make that play? Most peoples "wealth" is in the form of 401Ks or IRAs other than property and businesses.

Which for most need to appreciate to meet retirement goals. Metals at best are an inflation hedge. OK to try to maintain value relative to a inflationary currency.

Moving most of your liquid savings into precious metals to "protect it" puts you at risk to the ever varying speculative nature of the metals pricing.

You can't pay bills with precious metals in most cases... You looking ahead to trading junk silver coins for toilet paper?

Gold does not appreciate if you look at it over a long window. It only appears to do so because currencies depreciate due to constant printing of money.

This is not too hard to confirm, just for fun recently I plotted the price of a base Ford F-150/100/1 in ounces of gold going back from the 50s to now. There is some short-term variation due to the price of gold and currency but overall is relatively constant. This is the modern analogy I came up with to the "an ounce of gold buys a well-made suit in London".

Just curious how you plan to execute that strategy with 6 or 7 figure investments.

The above doesn't mean that I don't think the banks deliberately made a killing at our expense. And would happily do it again. While some argue with the movie "The big Short", the core facts are pretty accurate.

[FromMyColdDeadHand]

That's funny Patriot, I've been watching clips of The Big Short and Margin Call on Youtube. Almost wonder if the google brain is signalling something....

The modern economy is a moving, breathing entity based on assumptions and continued growth. That doesn't make it flawed, but the level of stupid that goes into that needs to have repercussions when people guess wrong. And we need to make sure that the most pain is on the people making the stupidest decisions. But there is the old updated joke that if you owe the bank a billiom, they have you by the shorts. Owe them a trillion, and you have them by the shorts.

Add in people more than willing to go full socialist, even when things are going well- and when things get dark next time, say goodbye to your 'excess capital'.

I'm really just trying to figure out what exactly the issue is with the overnight market.

[THCDDM4]

That's funny Patriot, I've been watching clips of The Big Short and Margin Call on Youtube. Almost wonder if the google brain is signalling something....

The modern economy is a moving, breathing entity based on assumptions and continued growth. That doesn't make it flawed, but the level of stupid that goes into that needs to have repercussions when people guess wrong. And we need to make sure that the most pain is on the people making the stupidest decisions. But there is the old updated joke that if you owe the bank a billiom, they have you by the shorts. Owe them a trillion, and you have them by the shorts.

Add in people more than willing to go full socialist, even when things are going well- and when things get dark next time, say goodbye to your 'excess capital'.

I'm really just trying to figure out what exactly the issue is with the overnight market.

http://www.shadowstats.com

A good place to view now and then regarding the economy and stats.

I'd say that we are in our "Weekend at Bernies" phase. Bernie's dead. But no one wants him to be dead. I mean he throws such great parties with cocaine and margaritas flowing like water, who'd want to stop the party, right?

Dress him up, traps him around and ensure everyone he is just fine.

He's rotting from he inside out.

Keep the charade going for as long as possible.

The Fed is like the witch/voodoo doctor in "Weekend at Bernies 2". Use some magic to get things dancing around for a bit, push off the inevitable.

[6933]

Precious metals should average 5-15% of a portfolio with multiple factors going into the decision of asset allocation. Advice without an in-depth knowledge of the individuals circumstances should be circumspect. Metals are used as a hedge against inflation and currency debasement. Also keep in mind that the IRS considers metals to be collectibles.

An increase in monetary supply does not necessarily lead to an increase in prices. Money isn't distributed evenly in the economy. IF the economy is going to take a hit, as in 2008, in won't be this year and probably not 2020. Ups and downs as always, but not 2008 event. Feds dropping interest rates, which will happen again before year is out, will help keep economy moving along despite slowing job growth. We hit an inverted yield curve recently so a recession is highly likely. However, same old-same old. Market is cyclical. If close to retirement, adjust stock to bond ratio accordingly with a thought towards recession probability. America didn't implode in '29-'33, '81'-'82, '07-'09, or during any of the other multiple recessions. Recessions are a part of the business cycle.

[FromMyColdDeadHand]

They yield curve isn't the usual kind of inverted curve that signals a recession.

There is ALL kinds of cash out there, the problem is that is all locked up and isn't leading to inflation, yet. The velocity of money is really low? Lots of it dead still it would seem.

We are 10 years since the GFC. While it's effects are still being felt, no one under the age of thirty has seen a recession in their adult lives. That is what? 40% of the population? I don't know what that means- will they freak if we have a slow down like 93-94? Or will they ride it out because the GFC was so bad that a normal recession won't phaze them?

The economists that I deal with say that we chugg along with small recessions every couple of years, but in about 2030 is when the real suck hits.

[6933]

Yield curve meaning when short term Treasury yields pay more than longer term. An inverted curve on these definitely has precedence in recession predicting.

I can see the 2030 area time frame being problematic in economic terms. As in another deep recession.

Hell, FromMyColdDeadHand, if you and I could juuuust time the market...

[horseman234]

Here's another article with an interesting perspective...

https://seekingalpha.com/article/4292945-fed-loses-control-benchmark-interest-repo-rates-roof?lift_email_rec=false

[FromMyColdDeadHand]

Here's another article with an interesting perspective...

https://seekingalpha.com/article/4292945-fed-loses-control-benchmark-interest-repo-rates-roof?lift_email_rec=false


Well that’ll scare the crap out of you. I barely follow it, I think I get the general idea, it’s kind of like they’re saying the Fed is a pilot of an airplane who is not quite sure which way the controls move the airplane.

[THCDDM4]

Well that’ll scare the crap out of you. I barely follow it, I think I get the general idea, it’s kind of like they’re saying the Fed is a pilot of an airplane who is not quite sure which way the controls move the airplane.

Scarier, even. ^That’s the best case scenario.

Worst case- it’s a pilot who has seen trouble ahead for a long time, will not admit or correct course but instead decides to stear into it knowingly, instead of correcting the course when eminent disaster is approaching and there is still hope and admitting mistakes made that lead to the trouble in the first place.

A better example would be an apartment building.

Structurally it is defective, but instead of rectifying the issue, you just keep building on top of it and adding temporary band aid fixes that will keep the building standing for a little while longer while you can squeeze as much profit from the tenants all the while knowing it will lead to a much worse catastrophic failure.

If they would fix the problem now, some people would be hurt and profit lost, corrections would be made and time would heal the wounds- but if you keep it going for as long as possible you can make a killing; sure more people will be hurt and some will die even, but you can run away with all that $$$ and do it all over, again and again...

[recon]

That is some crazy stuff there. A lot of money was passed just to keep this country afloat?

[pinzgauer]

There was a decent Forbes or Fortune article on this yesterday. Explained it without fear-mongering.

Also points out that any easing (money printing) is quickly offset by tightening (absorption). so it's not like the large-scale quantitative-easing, but does temporarily increase the money supply to keep things flowing.

The anomaly is that some banks are willing to pay way higher interest than you would expect. Which implies something is wrong.

The assumption is that some very large banks are under capitalized, with some evidence.

Also it points out the weirdness of those financial transactions in general because at any given time that money is technically owned by two or more entities. Could be as high as 3.

[thepatriot2705]

So, this is a rabbit hole, but intriguing. Apparently Deutsche Bank is close to insolvency and about to declare bankruptcy. The overnight rate shot up to 10% last week. My understanding, maybe incorrect?, is that banks lend to each other overnight. However, there is an unnamed bank that other banks see as to risky to loan to even at a 10% rate. It’s well known that Deutsche is in trouble. Question is how much? They have $49 trillion in notional derivatives exposure. These should be cross covered/hedged. But what percent isn’t?

What if Deutsche Bank had a massive short position in oil and the oil spike from the Saudi attack caused a margin call on Deustche bank and broke the camels back?


The other suspect bank is Commerzbank. Haven’t done much research on them yet.

For some reason the dollar has been strengthing despite the repo market operations. Doesn’t make much sense to me, unless there is major trouble brewing elsewhere.

[FromMyColdDeadHand]

Patriot- that is an interesting theory on D-bank. That would be the classic reason for the problem.

In 2005 and 2007 when we were looking at buying a house, I knew that there was an issue. We even rented because I said "It isn't a housing market, it is a suicide pact". After the GFC I was pissed that I knew that there was a problem, but I couldn't figure out how to make money. Outside of shorting the stock market, what is the concentrated play that makes money off of this?

[horseman234]

Here is another interesting article from Zero Hedge. I believe the Russian economist Kondratiev was substantially correct is his assessment of debt waves, but the economy is far to complex with a myriad of outside factors, to establish any definite timelines.
https://www.zerohedge.com/news/2014-05-13/if-economic-cycle-theorists-are-correct-2015-2020-will-be-devastating-us

And here is a graph from Jurrien Timmer at Fidelity showing the correlation between working age adults and interest rates. I apologize to those not on Twitter, but I can't seem to get the image to copy from Twitter to the forum.

https://pbs.twimg.com/media/EFQIFO4XoAUEyuJ?format=jpg&name=medium

[6933]

Deutsche Bank has been "reported" to be in trouble for the past five yrs.

[NWPilgrim]

There certainly is something rotten at the core if world economies. Because the Petro Dollar forces everyone else to buy dollars eventually, any weakness in our economy gets ripples out to everyone else buying oil. With that and collusion from the Fed our give has been able to run $300 billion to $1.5 trillion DEFICITS EVERY YEAR for over a decade!! And that was after the mortgage and derivatives debacle that really was not fixed, just shuffled around. Risky mortgages, loans, and derivatives are still in play. The rot got plastered over only to fester into a worse condition but now spread throughout most countries (who are forced to follow our debt lead).

There will be reckoning and it will be much worse than 2007-2008 and it will be worldwide. How long they can keep kicking the debt down the road? No idea. This is unchartered waters and as the Fed pretty much admits, the controls no longer respond the way they used to and there is no clear path to a “fix”, not that any politician wants s fix. That would require limiting spending to revenues!!!! Or worse, paying down the debt!!!!

The elephant in the room no one wants commoners to consider is outright default on the total debt to central banks, and start over with blank slate and forced balanced budgets. Either the banks get wiped out by general defaults, or the commoners will be drained into serfs. No other way out that I see in the long term (next 50 years).

[FromMyColdDeadHand]

https://www.realclearmarkets.com/video/2019/11/22/the_financial_system_is_broken_with_jeff_snider.html

I’ve only listen to it once, so I’m not sure exactly what it all means. But this is one of the most cohesive and coherent discussions of why the federal overnight rate has gone goofy. My rough interpretation is that nobody wants to be left holding a bag of dog crap if on the overnight something happens and all the economy collapses. So that means to me that we are one key stroke or one in the rouge trader away from somebody starting a chain reaction that makes 2008 look like a milk run.

If the Armageddon that these bankers are trying to avoid being involved in is as large as it probably will be, I frankly don’t understand their push towards getting in on a lifeboat. If this goes the way it probably will it’s a complete collapse and the ocean around your lifesboat is on fire.

[6933]

https://www.realclearmarkets.com/video/2019/11/22/the_financial_system_is_broken_with_jeff_snider.html why the federal overnight rate has gone goofy. The repo rate has been decreasing steadily. IOW banks are buying instruments again.

My rough interpretation is that nobody wants to be left holding a bag of dog crap if on the overnight something happens and all the economy collapses.Sort of. Collateral, which can mean things like mortgage backed securities, has "improved" in quality. In could also be that banks are more comfortable having larger cash reserves, and not leveraging them; which is why the rate went so high so as to induce banks to put those reserves to work.

This isn't the first time this has happened.

[FromMyColdDeadHand]

This isn't the first time this has happened.


That source goes over that this is not the first time it’s happened since 2008. 2011 and 2014 I believe also where times when this phenomenon happened. Why was May 29 of this year an inflection point?

[6933]

The problem is there are a LOT of large financial transactions that take place out of the purview of the Fed and market watchers. We don't always have a clear picture of "behind the scenes" goings on. So, what we see happen in the repo market isn't always clear.

However, May 29th could be a reflection of the increasing national debt. We have to finance that debt through treasury collateral sales. Banks were hesitant to buy so repo rates jumped. Something behind the scenes spooked people. Repo rates have been decreasing so the cause of the "spook" seems to have abated. Probably never have a clear idea of what happened.

[FromMyColdDeadHand]

Over $100,000,000,000 as we speak, like right now, tonight.

https://www.wsj.com/articles/new-york-fed-adds-108-95-billion-to-markets-11574864855
argh, paywall

While I remember that sales of Treasuries was soft, that isn't really the issue as I see it- this is an overnight thing, like an overnight risk thing. The rates are in line now because the FED is dumping a metric ass-load of money into the market.

So are you saying that there is or isn't an issue here?

[6933]

In the short term, not a problem.

Could be as simple as the financial institutions were used to the easy money; QE. Now that Quantitative Tightening is occurring, there may be a correlation between the Tightening and the banks being hesitant to buy the collateral(assets) being sold by the FED. Most of this collateral was .gov debt, i.e. U.S. Treasuries and Mortgage Backed Securities. Possibly some of these debt instruments such as the MBS' were sub-prime in nature and therefore no one wanted to purchase. Never understood why anyone would take a chance on bad paper. Anyway, U.S. Treasuries are also included in the QT which are generally considered safe. Maybe the banks learned from 2008 and like the cushion large cash reserves provide. Reserves are at an all-time high.

I can't see an overnight event wrecking the economy short of an EMP, solar flare etc. A bad decline jump started by a couple of very bad days; possibly. A sideways market could happen anytime. A 1000pt. drop is just an approx. 3.6% drop. Servicing the interest on an ever increasing debt will eventually cause ripples. Something will have to be done or to happen, but I don't see it in the foreseeable future.

[FromMyColdDeadHand]

Thanks for that. What had me concerned was the reverse of your argument that there isn't an overnight event that bad- the market seems to think there is, and perhaps even odder is that no one will talk about it. You agree that one explanation is that they act like it is musical chairs with an overnight timeframe for the music stopping?

I agree the US debt has to have an effect eventually, but I've spent 30 years saying it is right around the bend... and... and. It is (or isn't) till it ain't (or is) a problem.

[6933]

You agree that one explanation is that they act like it is musical chairs with an overnight timeframe for the music stopping?

Possibly, but I see a higher probability the music stops over a couple of days followed by a slow, steady erosion.

In the immediate future I see the market at +5% to +10% to -5-10%. The bull still has room to run. I think the -5% to -10% is less likely.

[rjacobs]

In the immediate future I see the market at +5% to +10% to -5-10%. The bull still has room to run. I think the -5% to -10% is less likely.

Tomorrow(Dec 2) will be a test IMO to see where the market is going to go based on what went on in Hong Kong and China and Trump signing the bill supporting Hong Kong. Friday(the 29th) isnt a great indicator as the trading is relatively light, but the market didnt drop much...I expected it to drop more than it did. China trade(and our overall relationship with them) is what is going to drive the market with maybe some other odds and ends thrown in(USMCA, holiday retail sales, etc...) barring any other huge global issues. That is, until the election. If Trump wins I see the market going higher. If a Democrat wins(and the likely top 3, save for probably Biden, are ALL rabidly anti big money, big bank, hypocrites), I see the markets tanking. Just my un-educated opinion.

[FromMyColdDeadHand]

https://finance.yahoo.com/news/federal-reserve-hopes-to-steer-clear-of-repo-market-flare-up-121019679.html

So the regulations that were put in place to help prevent crises by making sure banks were “healthy“ along with the desire to have advantage in the repo market could lead to the seizing up of the capital markets and of another global crash.

Dark matter and the repo market just shows how little the experts really know....

[armtx77]

https://finance.yahoo.com/news/federal-reserve-hopes-to-steer-clear-of-repo-market-flare-up-121019679.html

So the regulations that were put in place to help prevent crises by making sure banks were “healthy“ along with the desire to have advantage in the repo market could lead to the seizing up of the capital markets and of another global crash.

Dark matter and the repo market just shows how little the experts really know....

Only the brightest, from the Ivy League.

[FromMyColdDeadHand]

Someone had another thread about the FED intervention in the overnight market. As you can see from this thread, this is nothing new- but it a recent phenomena, and by phenomena, I mean there isn't a widely agreed upon reason for it, except since Corona when everything is goofy.

[The_War_Wagon]

To paraphrase Al Cervik...

https://cdn.newsbusters.org/images/al_cvervik.jpg


"You either own gold or silver, or you own a popcorn fart."

I'm a contrarian, and a silver bug specifically, although I do like some base metals - like, copper, lead, brass... preferably assembled... :cool:

[FromMyColdDeadHand]

https://www.realclearmarkets.com/video/2019/11/22/the_financial_system_is_broken_with_jeff_snider.html

I’ve only listen to it once, so I’m not sure exactly what it all means. But this is one of the most cohesive and coherent discussions of why the federal overnight rate has gone goofy. My rough interpretation is that nobody wants to be left holding a bag of dog crap if on the overnight something happens and all the economy collapses. So that means to me that we are one key stroke or one in the rouge trader away from somebody starting a chain reaction that makes 2008 look like a milk run.

If the Armageddon that these bankers are trying to avoid being involved in is as large as it probably will be, I frankly don’t understand their push towards getting in on a lifeboat. If this goes the way it probably will it’s a complete collapse and the ocean around your lifesboat is on fire.


In the short term, not a problem.

Could be as simple as the financial institutions were used to the easy money; QE. Now that Quantitative Tightening is occurring, there may be a correlation between the Tightening and the banks being hesitant to buy the collateral(assets) being sold by the FED. Most of this collateral was .gov debt, i.e. U.S. Treasuries and Mortgage Backed Securities. Possibly some of these debt instruments such as the MBS' were sub-prime in nature and therefore no one wanted to purchase. Never understood why anyone would take a chance on bad paper. Anyway, U.S. Treasuries are also included in the QT which are generally considered safe. Maybe the banks learned from 2008 and like the cushion large cash reserves provide. Reserves are at an all-time high.

I can't see an overnight event wrecking the economy short of an EMP, solar flare etc. A bad decline jump started by a couple of very bad days; possibly. A sideways market could happen anytime. A 1000pt. drop is just an approx. 3.6% drop. Servicing the interest on an ever increasing debt will eventually cause ripples. Something will have to be done or to happen, but I don't see it in the foreseeable future.


Thanks for that. What had me concerned was the reverse of your argument that there isn't an overnight event that bad- the market seems to think there is, and perhaps even odder is that no one will talk about it. You agree that one explanation is that they act like it is musical chairs with an overnight timeframe for the music stopping?

I agree the US debt has to have an effect eventually, but I've spent 30 years saying it is right around the bend... and... and. It is (or isn't) till it ain't (or is) a problem.

We’ll, Necro’d a necro here, but I wanted to put some context here. IN sept 2019 we were talking about how the overnight fed funds market was going nuts.

Sept 12, the Wuhan Virology Death Machine took their database off-line. At the time, it seemed like the big-smart money was very concerned about a Black Swan event— something that could majorly hurt the world economy, quickly. Maybe something like the realization of a new Chinese flu pandemic.

I think the big-smart money knew about the coming pandemic because with in a week of the Chinese knowing that they had a problem, the over night market got spooked.

[markm]

I think the big-smart money knew about the coming pandemic because with in a week of the Chinese knowing that they had a problem, the over night market got spooked.

They got the memo on the release date of the virus.... err... I mean that a bat in the flea market had a virus... yeah... that's the ticket.

[Honu]

Look how quick Turkey fell yesterday !
We are not them but WOW they got hit quick in some sense but also many saw it coming ?