Tip of the Iceberg: Emergency Repos Stretch to 2020 Q2

-edited

Emergency Fed actions for the end of 3nd Quarter 2019 now stretch to the second quarter of 2020.

Fed Announces $60 Billion a Month in Repos

In a term auction today, the Fed did $61 billion.

Tip of the Iceberg

The emergency repo auctions to get through the quarter end on September 30 have been extended and added to.

Today, the Fed announced it would add roughly $60 billion a month through the end of the second quarter of 2020.

Please consider the Repo Market Incident May Be The Tip Of The Iceberg by Daniel Lacalle.

The Federal Reserve has injected $278 billion into the securities repurchase market for the first time. Numerous justifications have been provided to explain why this has happened and, more importantly, why it lasted for various days.

The first explanation was quite simplistic: an unexpected tax payment. This made no sense. If there is ample liquidity and investors are happy to take financing positions at negative rates all over the world, the abrupt rise in repo rates would simply vanish in a few hours.

Sudden bursts in the repo lending market are not unusual. What is unusual is that it takes days to normalize and even more unusual to see that the Federal Reserve needs to inject hundreds of billions in a few days to offset the unstoppable rise in short-term rates.

What the Repo Market Crisis shows us is that liquidity is substantially lower than what the Federal Reserve believes, that fear of contagion and rising risk are evident in the weakest link of the financial repression machine (the overnight market) and, more importantly, that liquidity providers probably have significantly more leverage than many expected.

In summary, the ongoing -and likely to return- burst in the repo market is telling us that risk and debt accumulation are much higher than estimated. Central banks believed they could create a Tsunami of liquidity and manage the waves. However, like those children’s toys where you press one block and another one rises, the repo market is showing us a symptom of debt saturation and massive risk accumulation.

QE is Back

Lacalle notes Quantitative Easing Is Back

The Federal Reserve, through its president Jerome Powell, has indicated that it is preparing to increase its balance “organically”. The effort to separate this latest monetary policy change of course from a full-blown new QE (quantitative easing) is, at the very least, amusing. If we look at what is being discussed, it has nothing to do with organic expansion and looks a lot like a new repurchase program.

What the Fed proposes has very little to do with organic expansion. The Quantitative Easing programs repurchased between 60 to 85 billion dollars in assets per month. If we look at the organic growth of the Federal Reserve balance sheet prior to quantitative easing, it barely reached 3 billion dollars in a month. The Federal Reserve is discussing between 200 and 300 billion per quarter. That is not organic expansion but it is neither the type of measure that would trigger a surge in risk appetite from financial agents. So it is quite a lot more than organic expansion and also a lot less than what beta-chasing investors may require to keep their negative dollar carry-trade on cyclical assets.

This is a measure that will not satisfy those who need more excess liquidity and more stimuli to continue playing against the dollar but, at the same time, it further distances the Federal Reserve from normalization. If we assume the figures mentioned in different sources, the Federal Reserve balance sheet is unlikely to go below 25% of GDP in the next years.

The average investor may find contradictory messages in the Fed statements. Powell confirms that the economy is growing at a good pace, that unemployment is at the lowest level in 50 years and that core inflation remains above the Federal Reserve threshold, yet they also tell us that they have to cut rates and expand the balance sheet. Something does not match, and the explanation may lie in the need to keep an excessively leveraged market afloat and prevent the chain of bubbles in financial assets from bursting.

To me, these apparent contradictions in communication mean that the Federal Reserve is looking to prevent a financial asset meltdown while at the same time trying to avoid a higher concentration of risk. It may be, again, trying to manage the waves in the tsunami.

Supposedly Not QE, Not Monetary Policy

The Fed says these injections are not QE and not related to monetary policy.

Both statements are lies.

I commented on repos a few days ago in Fed Seeks Firm Grip On Interest Rates, Supposedly Not QE.

How the heck can operations needed to control interest rates not be considered monetary policy?

Mike "Mish" Shedlock

Comments (36)
No. 1-21
lol
lol

None that is gonna be paid back,zero,unless you think taking out another loan to pay back the old loan is paying it back!So call it what it is,fed handing out freeeeee freshly printed cash at a rate of a tril a month.

bradw2k
bradw2k

I don't understand this wonky stuff. But I'm sure the Ministry of Plenty has everything under control, 'cause it says so.

Latkes
Latkes

And gold is down...

Stuki
Stuki

As soon as someone is allowed to do something, valuable to them, in an emergency, they'll ensure there is always an emergency. Again another one of those things which is 100% certain. At all time, and regarding everyone (Christ, and perhaps Mohammad possibly excepted). Without even a theoretical possibility of even a single exception.

Of course, another 100% certainty, is that it is indeed possible to be simultaneously both naive and dumb enough, to not even comprehend something as inherently obvious as that....

AWC
AWC

The Fed will keep the zombies alive and pillaging at any cost imaginable. Book it.

Runner Dan
Runner Dan

"Do whatever it takes for however long it takes"

The new central bank mantra the world over.

Gosh, I guess we should applaud their transparency!

Bam_Man
Bam_Man

48+ years after Nixon "temporarily"closed the Gold window, this is the only way to keep the system functioning (barely).

rum_runner
rum_runner

It's soooo long and boring, this death of fiat.

Tony Bennett
Tony Bennett

"Emergency Fed actions for the end of 3nd Quarter 2019 now stretch to the second quarter of 2020."

...

Well well well ... talk about moving the goal posts ... REPEATEDLY.

September 20th Federal Reserve issued a statement emergency repos thru October 10th.

October 4th Federal Reserve issued a statement that emergency repos extended to November 4th.

Now THIS?

Puts certainty on Powell spinning a lie at the FOMC presser in September that volatility due to tax payments and some large bond issues.

September 18:

CHAIR POWELL. You know, so I would say I doubt that anyone is closer to and has more invested in carefully following the—you know, the behavior of these markets. So, of course, we were well aware of the—you know, the tax payments and also of the settlement of the large bond purchases. And, you know, we were very much waiting for that. But we didn’t expect—the response to that was stronger than we expected.

compsult
compsult

It still boggles my mind that the Fed extended $29 TRILLION (in the form of loans and asset purchases) after the GFC (http://www.levyinstitute.org/publications/29000000000000-a-detailed-look-at-the-feds-bailout-of-the-financial-system). One can only wonder what they are doing behind the scenes, unreported, right now

Maximus_Minimus
Maximus_Minimus

What is happening is the result of decades long market destabilization resulting in the financial crash. Since then, every bump in the road is met with trepidation as an over-the-cliff event, and doused with ample amount of liquidity. One day, even the FED will figure out that something is wrong with the metrics and formulas.

Zardoz
Zardoz

It’s almost like a gigantic fecal asteroid were slowly tumbling toward a gigantic rotary dispersement device...

ksdude69
ksdude69

Starting to think at this point nothing matters. And we still have idiots talking about paying down the deficit. Totally out of control but stocks seem to like it and "they are all that matters".

frozeninthenorth
frozeninthenorth

Don't really understand all the fuss about "not being repaid" the repo market is a collateralized loan market -- usually using government treasury. In a sense, the loan is "repaid upfront" since the Feds hold the collateral.

I am very concerned about the extention to Q2/20 there is an underlying problem here! My guess is that with very low-interest rates it's very hard to sell "liquid" bonds into the market.

I've been told by many friends in the funding market that the "liquidity" is skin deep, hence the use of the repo market since its a sure thing.

I suspect that all these issues are tied together, the inability of brokers to really make markets (since they cannot take positions) the very low-interest rate and a clear liquidity squeeze.

I suspect its all bad news, but I just don't know "what's the problem" you see the symptoms but you cannot make out what is the disease

Matt3
Matt3

Who is borrowing overnight and why? This is not what "normal" commercial or community banks due. Is the Repo market primarily set up to provide cheap $ to speculators? Maybe Mish can explain who doesn't have the financing they need so requires the funding that private parties are unwilling to provide (at least unwilling at these low rates).

Maximus_Minimus
Maximus_Minimus

The overnight repo market is not a problem. It was designed to work this way; inter-bank lending at a FED set target rate. The FED should only step in by buying securities if there is a shot term cash crunch. However, during the financial crash, this role was extended to provide longer term repos, as well as investment banks getting access to it. A sane response to this situation would be to raise interest rates, but in the inverted universe, they will cut, instead.

Mish
Mish

Editor

To answer Mat3 - the Fed does not discuss who is borrowing

What seems to be happening is that many small or mid-size firms, or fewer big ones, are caught in a borrow short, lend long setup dependent on overnight loans. Those with funds to end, don't trust the collateral.

Casual_Observer
Casual_Observer

This looks more like a foreign buyer of treasuries walked away.

Democritus
Democritus

Is there some link with the dollar not having negative rates, as opposed to the euro? Is there a nightly demand for dollars because of that somehow?

Mark52
Mark52

In former times developing countries' governments stuffed the banks with treasuries and the central bank printed money to fund the banks. Local populations endured terrible inflation in their daily lives. That is happening here but the asset markets and especially the stock market has expressed all the inflation that would have otherwise flowed to real goods and services; healthcare and colleges excepted, which have monopoly pricing and have generated some real inflation. Government self financing by electronic money creation owns some of the problem - the TBTF banks and their ecosystem own the rest.