It’s Repo Madness

Heard any good news about global growth, earnings forecasts, Trump’s impeachment, the China trade impasse, or American relations with Iran? No need when the Fed is pumping money into the financial markets at two times the rate of peak quantitative easing.

Oh, QE was halted in late 2014, then the Fed stopped it and then tapered by selling off bonds in 2018 into 2019…

Then that suddenly stopped in mid-September, when overnight repo rates shot up to 10% from 1.5-1.6%. The large banks that normally fund overnight loans for banks, and leveraged investors who need to meet margin or reserve balances, just simply and immediately stopped lending.

Why did this happen? The Fed thought it could taper its balance sheet and QE stimulus… and the financial system is telling them, “No way! We need this liquidity to survive as we are still largely insolvent”.

This just shows that central banks didn’t fix the 2008-09 financial crisis, they just covered over it and kicked the can down the road. Now the Fed is caught funding this repo market and they have had to inject $505 billion now since mid-September, with the latest injection a whopping $83 billion in early January. Peak QE was at $60 billion a month. This is averaging $127 billion, or more than double that!

(Click on image to enlarge)

Note that $339 billion of this is directly funding repo agreements that the banks were no longer funding. But in addition to that, they added $166 billion in T-bill purchases through mid-December – good old-fashioned QE. Their balance sheet peaked in late 2014 at $4.52T (trillion) and it fell to $1.76T – a drop of $754B (billion), or 17% – in September.

But the reserves at banks held at the Fed for liquidity dripped from $2.72T to 1.26T, $1.46T or 54% – much more than the balance sheet. There was that point where the larger banks simply were not comfortable using their funds for repos creating too low reserves… and what happens if we get another Long Term Capital Management hedge fund that blows up overnight?

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