Repo Chaos , QE4Ever & Squeeze on The Dollar : Make Recessions Great Again

Remember just a few years ago, the Fed was in Quantitative Easing mode and buying Treasury and agency MBS securities, thus removing them from the market. At the time, I called it a back-door method to finance the budget deficit; but it worked. OK, translation: This activity saved the banks but did not support the core economy, so there was no lending as the Federal Reserve scrambled to save the banks. In effect, making the Federal Reserve a zombie bank for all the toxic waste in the system. History repeats. Debase the currency to keep the illusion going until that stops working and the empire collapses. Welcome to The Atlantis Report . The Repo market opens at 7:00 AM EST and closes at 3:00 PM. Repo transactions generally settle for “cash” settlement; meaning the cash and securities are exchange on the same day the trade is executed. The settlement mechanism is called the “Fed Wire,” which is the electronic payments system that moves cash and securities from one counterparty to another. The Fed Wire opens at 8:30 AM. Cash comes in the Repo market throughout the day. Some cash investors are there when the market opens, some enter the market around 8:00 AM, some around 9:00 AM, and Westcoast funds might arrive in the early afternoon. Most sellers of collateral (hedge funds, REITs, broker-dealers, etc.) – the borrowers of cash - are rushing to sell by 8:30 AM when the Fed Wire opens. Due to recent market infrastructure changes like Triparty reform and increased Daylight Overdraft (DOD) charges, most collateral sellers have a deadline to finance their positions by 8:30 AM. Many Prime Brokers require their hedge fund clients to have their trades booked by then. The key point is that the cash investors enter the market throughout the morning and even in the afternoon and the bulk of the cash borrowers need to finance their positions by 8:30 AM. As an example, picture someone commuting into New York City each morning by car. Suppose that the George Washington Bridge charged no toll before 8:30 AM and the toll was jacked-up to $50.00 after 8:30 AM. Most people would make damn sure they crossed the bridge before 8:30 AM! It’s the same in the Repo market. Charges increase at 8:30 AM, so there is a big rush to get securities processed and delivered by then. The Cracks in the system started to appear on December 31, 2018 year-end. GC Repo rates opened at 2.93% and a panic ensued. Rates backed-up all the way to 7.25% before finally closing at 4.00% at 3:00 PM. It was a real eye opener. The Repo market had not seen such rate volatility in years. It was a shock. And, it was even more of a shock that the Fed did not intervene to pump cash into the market with rates so high on a year-end. Over the next several months, the market continued to experience increased rate volatility and small rate spikes on January month-end, March quarter-end and June quarter-end. During this time, the Fed talked about a permanent RP Program, but nothing happened. The market was waving the white flag, but there was no response from the Fed. That brings us to September and the collapse of the Repo market. Monday, September 16 was supposed to be a normal day. The market was expecting some funding pressure due to $19 billion in net new Treasury issuance (more securities in the market) Tax date (cash leaving the market for the Treasury) Money Market Fund cash decreased the previous week by about $20 billion (less cash in the Repo market) Bond market sell-off the previous week (generally adds collateral to the Repo market) A holiday in Japan ! All of these factors are a normal part of the Repo market. Cash comes in and out of the market. Securities come in and out of the market. The market finds a clearing price. In fact, on September 16, the Repo GC rate opened at 2.33%. The market was expecting a little funding pressure.During the week of September 16, bids were thin. That is, when a bid was hit, the sellers had much more collateral to sell than the buyers (who were long cash) wanted to buy. Bids were hit and the market backed-up immediately. 3.00% traded, 3.50% traded, then 4.00%, then 4.50%, etc. The amount of securities hitting the market kept overwhelming the buyers. Everyone who was long collateral was in a rush to sell because rates were going higher. Everyone who was long cash didn’t want to buy because rates were going higher. The market peaked at 9.25%. During the morning, as cash came into the market, rates recovered slightly. Behind the scenes it meant a cash investor had just locked-in their cash investment at a bank. The Repo trader at the bank now had actual cash to invest and they rushed to lock-in their profit. However, once that cash investment was all filled, the bids were thin again until another chunk of cash came into the market. Look at it this way. Suppose you are a Repo trader at a large bank and your cash client calls you at 8:00 AM every day to invest their cash and set a rate. Before 8:00 AM, why lock-in a Repo rate of 3.00% at 7:30 AM when rates are gaping higher. Between 7:30 AM and 8:00 AM, there are a whole 30 more minutes for rates to keep moving higher. And 30 minutes are a long time in the Repo market at 7:30 AM! And that’s exactly what happened. On Tuesday, September 17 at 9:15 AM, during the depth of the market panic, the Fed realized they needed to inject cash into the market and announced an overnight RP operation. This was the first time the Fed used this operation in years. The operation was successful. They pumped $53.15 billion into the market and Repo GC rates closed at 2.30%; within the realm of normal. Over the next two days the Fed continued overnight operations entering the market at 8:15 AM each day and rates stabilized. On Friday, September 20, the Fed announced a schedule for overnight and term operations that went through quarterend and into October. The three term operations eventually pumped $139 billion in the market over quarter-end. On the day of quarter-end, the Fed executed a $63.5 billion overnight operation in addition to the term operations. The timing of that operation was moved up to 7:45 AM on quarter-end. Overall, the Fed got it right. They pumped a total of $202.5 billion into the Repo market through quarter-end and progressively moved the timing of the operations from 9:15 AM to 7:45 AM. The Repo market is now functioning smoothly. So the banks/cash bundlers colluded to raise rates by keeping cash out of the repo churn. They sucked at least $150 million out of the borrowers, then the Fed stepped in. This means there is no repo "market" but rather a churn and burn manipulated screw palace. The only thing preventing this collusion from happening again is the Fed shoveling cash into the repo market. Which means that the Fed is permanently a daily interventionist now in the repo "market" as it is in the stock market, as it is in the bond market - and wherever the next crack in the dam appears. The Fed will (obviously) continue to use it's magic dollar wand to plug the forming holes in the financial infrastructure. That is clear. But the Fed doesn't realize that they are zombifying the markets. No reasonable venture with good connections will go without a cash market from which to borrow at low rates. But the Fed is now on subconscious autopilot to blanket the world with ZIRP. And, contrary to their published intentions, lower and lower interest rates don't lead to inflation anymore. Ultra easy money has unleashed hyper competition where the growing number of respective segment participants are all driving down the price of their goods to gain marketshare. Watch the price of oil as a indicator of these deflation pressures that the Central Bankers are slowing unleashing as the pall of ZIRP spreads. The markets are dead. No downside risks because the Fed will bail you out. Soon they will be limiting the upside. The financial system is speed surfing down the slippery slope of government controlled everything, ie, socialism has taken over the commanding heights of the financial system. This repo is nothing more than $100 billion each night printed to crush gold otherwise gold would hit $10,000 and the US Dollar would crash 50%. Why the repo short term loans have to be at night, it can be in broad day light, because the futures worldwide happen at night .












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