What to Ignore Wednesday – How About $359Bn of Repo Failures?

They are structured as repurchases for historical reasons that since the 1980’s have been superseded by this reality.


Even these days, that seems like a big number, right? It's not on the chart but you get the idea, the last time repo failure leaped up like this was ahead of the great crash of 2008 but why worry? Both mini-spikes last year led to big market pullbacks but Trump's election saved us and now we're just happily ignorning over $1 TRILLION in failures in the past 3 weeks alone.

A “repo fail” is pretty simple and straightforward; when the obligation of any seller to deliver agreed upon securities remains open following the close of business on the agreed date of the transaction. These are, after all, repurchase agreements, which means exactly what the name implies; I buy bonds from you today and agree to sell them back tomorrow (or whenever). If I don’t sell them back to you tomorrow, we have a fail. The reason for them relates to what repurchase agreements actually are; collateralized short-term loans, mostly overnight. They are structured as repurchases for historical reasons that since the 1980’s have been superseded by this reality.

In 2008, this relationship was very easily established; T-bill rates in particular would trade in equivalent yield far less than they otherwise “should” given money substitutes (such as the IOER). Bill rates fell sharply in the wake of Lehman’s insolvency, and repo fails exploded into what is now the textbook (well, one not written by an Economist, anyway) case. Thus, whenever we find an outbreak of fails it is for various reasons a tightening of collateral conditions. Some prove innocuous; most do not, especially any that would linger.

Something is hindering the flow of collateral – what it is remains to be determined…

I know there's a lot to keep track of but let's remember that Equifax was hacked and, if you are a US citizen who has ever applied for credit, then ALL of your personal information is out there. Well, not ALL – just the stuff they ask you for on a loan application. This morning we just head from Yahoo that 3 BILLION customer records were hacked at that company and, of course, there's the Wells Fargo nonsense – which shows you what someone with your financial information can do to you at will.

So far, thank goodness, there has not been any significant malicious use of that data – that we know of. But what happens if we wake up on day to find a million people have had their bank accounts raided or perhaps the reason there has been a surge in Retail Spending is because it's being done with stolen credit card data? What will the unwind look like? What will it do to day-to-day commerce.

I am NOT telling you to live your life in fear of the worst but I am telling you, again, that this is not a good time to invest without fear. We are pinning the needle on the Greed Index and that often ends badly. We are now past the 5-year high for this index and the last time we were over 80 was last August, with the S&P hitting at 2,193 and we only dropped 110 points (5%) into the election – so not too terrible but it's still nice to be hedged when we have one of these little corrections.

Speaking of corrections. Solar energy capacity Worldwide grew 50% last year, led by China but our Republicans, in their infinite wisdom, are determined to keep the US firmly in the dark ages as the change in depreciation rules will make it more expensive for power plants to switch from coal to renewable energy. That is they key reason why the S&P 500 has gained 18% since the election, while theSolar Energy Index has slumped 13%. The framework the White House proposed Sept. 27 “would disrupt the economics of clean energy projects as a consequence of making profound changes to the U.S. tax code,” according to a research report Monday from Daniel Shurey, an analyst with Bloomberg New Energy Finance.

Lower corporate tax rates would threaten the supply of tax equity, an esoteric type of financing that often accounts for half the cost or more of wind and solar projects. Already developers have scaled back projects this year, from $14.8Bn last year to $12Bn (19%). If similar rules impact the home markets – the US wil have taken a huge step backwards in converting to clean energy.

Meanwhile, the rest of the World is embracing cheap, clean, renewable energy and the IEA is forcasting an additional 1,000 GW over the next 5 years, which is 1/2 of the global coal power capacity. When it comes to power generation, the IEA said that renewable electricity was seen growing by over a third by 2022, hitting more than 8,000 terawatt hours. This figure, the IEA said, was equivalent to the power consumption of China, India and Germany combined. That's right, we are possibly just 10 years away from wiping out the coal industry entirely – except in America, of course – we're like a rogue nation hell-bent on destroying the planet!

Of course, we won't be just destroying the planet, we'll be destroying our economy as other countries, with affordable, clean energy will move ahead of us economically and, ultimately, they will sanction us for failing to follow the global climate accords that EVERY OTHER COUNTRY ON THE PLANET HAS AGREED TO. If Russia wanted to find a way to crush America economically, pushing US outside the G7 and denying US access to cheap, clean energy could not have been more damaging if Putin himself took over the White House and drafted this legislation!

In fact, just two weeks ago the White House took another step to deny access to solar to US homehowners by proposing steep tariffs on imported solar panels. Of course, we don't make solar panels in this country because the Republicans attacked the Obama plan to encourage the manufacture of solar products in the US (remember Solyndra?). Funny how all this is coming right after solar energy became cheaper than coal – the proposed 70% tarrif will buy coal a few more years, at least.

Tesla (TSLA) is building a US plant for Solar City – so this helps them but it's a disaster for the thousands of companies that make a living installing solar panels at low prices around the country so it's a massive net job killer with 260,000 people now making their living that way – 88,000 (1/3) are expected to lose their jobs.

Once again, the winner is Putin.

Just a coincidence…