Why Blaming The Repo Market Is Like Blaming The Australian Bush Fires

The repo market problem isn't the problem. It's a sideshow, a diversion, and a joke. It's a symptom of the problem.

Yesterday, I got a note from Liquidity Trader subscriber David, a professional investor, and it got me to thinking.

Here’s what David wrote:

Lee,

The ‘experts’ I hear from keep saying that once 300B more in reserves have been added then the repo market will go back to normal. Everyone seems to assume that demand in the repo market has not gone up and has no analysis of what’s driving repo demand. What’s your take?

Also, I talked to a money market PM who thinks the Fed will need to create a standing repo facility so that other FDIC insured banks can get access to repo market. He said the root problem is that JPM, GS are not lending their cash to the banks who don’t have access to repo. He thinks there is no chance of a legal change to the ‘liquidity coverage ratio’ during an election year. Thoughts?

What are the ramifications of a standing repo facility? I certainly don’t know.

Dave

I want to thank Dave for sending me these questions. It reminds me that I need to keep hammering home the message that I believe, rightly or wrongly. is the correct one.

Hammering Home the Message

David, your sources don’t know what they’re talking about. They’re blowing it out their ass. They’re not talking to the Fed or the Primary Dealers. They’re talking to each other. They don’t know, and neither do I. I just track the data that I think is important to correctly identifying and staying with the market trend as it stands now.

What difference do their ruminations make anyway? Do you think they know when the Fed will stop? I sure don’t know. They don’t either.

But knowing or not knowing the Fed’s next move doesn’t matter. The market will react when the Fed stops. Or the market will break before the Fed stops. We don’t need to make wild guesses. We just need to follow the data, both the liquidity data, and the market technical data.

So what if we guess right and we’re early. The stock market will go up either until the Fed stops, or the bond market breaks down and dealers are forced to deleverage. At that point the Fed ends up pushing on a string. I just don’t think that it serves any purpose to try and anticipate when those scenarios will play out.

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