![]() ![]() Last summer, we began realizing the Fed was likely going to have to effectively bail out the Eurodollar system. We have long been saying that in the next downturn, the Fed could easily have to do $250-350B per month in QE we thought we were being aggressive. ![]() What is incredible is that it isn’t enough, as risk assets have fallen sharply on the week and spreads in the “deepest, most liquid market in the world” (the UST market) are still reportedly quite wide…and this balance sheet growth is without the US fiscal spending stimulus that hasn’t even really started yet. The Fed’s balance sheet has begun hyperinflating (dare we say), rising at a $17.5 trillion annual rate in the last week, and a $7.4T annual rate the past 3 weeks. We noted: In the last week alone, the Fed’s balance sheet grew at a $17.5T annual rate (80% of US GDP annual rate) source: Federal Reserve, via Lyn Alden We researched, put on our thinking caps, considered history, politics, fear, and more over the next 13 pages of that issue.įor instance, as a subscriber you would’ve read: There’s plenty to unpack in that one “tree ring” but we didn’t stop there. Spiking repo rates are a sign the US fiscal problem is getting acute, and since the Fed will ultimately be forced to add ever-growing amounts of liquidity to address this (at least until the USD falls enough to attract a bigger foreign private sector bid for USTs), our view on spiking repo is not “Run away from gold & risk assets” as it was in past crises, but rather “Run INTO gold & risk assets.” As such, we agree with those saying spiking repo rates are not a sign of trouble in the US banking system – that is 100% correct. low enough to not blow up the system), then what the Fed is effectively doing is financing the US government through the banking system. Bank of America’s Mark Cabana is one of the world’s foremost experts on the US monetary plumbing and he has it exactly right – if US deficits are the core reason that repo rates are spiking (because US deficits are crowding out the US banking system), then when the Fed launches a large repo program to get the repo rate back “under control” (i.e. ![]() However, we believe they are missing the forest for the trees. We are finding that many traders and people deep in the weeds on the plumbing are focused on merely the mechanical aspects of the new large repo program the Fed launched this week. We opened the report that week with “One of the most important macro quotes of 2019”:ĭespite the noise and panic around the US Banking System, we went on to explain why we did NOT think this was primarily a US Banking System problem. That’s the signal we were listening for as we wrote the Septemissue. “…the mainstream media, with their strong links to the world of banking and large investment funds, have remained silent about the fact that once again, the public authorities are forced to come to the rescue of big banks…”īut was the problem really the US Banking system or was something else going on? “This differential represents at least 40 standard deviations from the average which is an extremely unlikely, if not an impossible, event occurring according to a statistically normal bell-curve distribution.”Īgain, lots of stats and charts and, of course, commentary.Īka., noise. Zero Hedge calculated that, since 2006, the average difference between the GC repo rate and the federal funds rate was 0.25%, whereas on 17 September 2019 the differential reached was 7.7%. And no doubt the financial newsletter companies were adding to the noise by firing up their doom and gloom pitches. So as you can imagine, it produced quite a bit of noise in the markets. This was the largest intraday move in the history of the repo market and the 10% rate reached was the highest rate recorded in decades. TWO – the federal funds rate (the official interest rate) rose to 2.30% in response to the dramatic move in the repo rate which was 5 basis points above the target band of 2% to 2.25% set by the Federal Open Market Committee (FOMC). ONE – the ‘general collateral (GC) repo rate’ exploded to 10% up from 2.42% from the previous closing day, representing a 7.58% intraday movement and On Tuesday, September 17th 2019, two unusual and unexpected events took place in the US money markets.
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