Observations On Reverse Repos Coupled With A Record Excess Bank Reserve Balance

Tyler Durden's picture

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Cistercian's picture

 The horror...the horror......

 

Anonymous's picture

Mm fund 3 trillion not 3 billion. Right?

SilverIsKing's picture

<screaming at the top of my lungs>

BUY GOLD!

BUY SILVER!

<my indoor voice>

comex default...

Anonymous's picture

"NY Fed ...actually used the stocks of numerous bankrupt companies as collateral for the $40 billion triparty repo"

"money market investors are now collateralized by precisely the same toxic MBS garbage"

"Fed’s potential reliance on triparty reverse repos to drain excess reserves is that large quantities of collateral will be made available"

"the Fed's reverse repo test conducted this Monday was a failure... in a test attempt to raise $200 billion in liquidity, the Fed was forced to approach money market funds instead."

In order to raise $200 billion in liquidity, $2 trillion in collateral would need to be offered if priced at .10 cents on the dollar.

In a reverse repo, they are asking the very banks that sold them the junk in the first place to now buy it back!

If it was junk then, it is less than junk now and the best used car salesman in the world will not be able to sell back a car to the same customer that filled the transmission with sawdust before the initial sale!

Anonymous's picture

A U.K. court has ruled that RAB Capital should receive money from Lehman Brothers’ collapse, The Wall Street Journal reports. The court ruled in favor of RAB’s Market Cycles fund, which had assets caught up in the bankruptcy of Lehman.

The court found that cash Lehman Brothers International Europe made after its bankruptcy on assets it was custodian to, belongs to its clients and not to its estate. The hedge fund has a total of $3.3 billion at stake related to the case. RAB’s flagship Special Situations fund gained 4.4% in September, and has risen 7% this year.

max2205's picture

3 trillion mmf not 3 b. Right?

Anonymous's picture

Tyler,

I have been a small Midwestern RIA for 30 years…a professional paranoid devoted to the art of critical thought. I find that 98% of the people in this field are either a modified form of prostitutes, or candidates for protective custody. You stand at the top of the remaining 2%. So I would sincerely like to submit a genuine question.

You say, in essence, that the Fed will find themselves squarely in the same position as Madoff, with a commensurate effect on the US capital markets, and that the event is a certainty with timing as the only varible. I too believe this is the prime probability. Specifically, how should a simple RIA with simple technical and trading resources, but responsible for the the life savings of about 100 good people, protect them when the inevitable unfolds.

Thank you,
Tim

long-shorty's picture

either start making some "global macro" sorts of allocations for your clients, or else find a global macro manager you trust who can help you or who you can refer clients to.

I run a long-short equity fund, but I have a macroeconomist/RIA friend I trust who I try to talk with frequently. I've found myself making all sorts of trades as a "just in-case." long vix calls, long call spreads on the GLD. you get the idea. try to do things for your clients that won't cost a lot but that can give them insurance against a sudden shock.

Econophile's picture

One of the best ever posts on ZH. Great work, Tylers.

_Biggs_'s picture

Hear Hear.

 

Kleptocracy...I love it.

Anonymous's picture

Tyler,

I have been a small Midwestern RIA for 30 years…a professional paranoid devoted to the art of critical thought. I find that 98% of the people in this field are either a modified form of prostitutes, or candidates for protective custody. You stand at the top of the remaining 2%. So I would sincerely like to submit a genuine question.

You say, in essence, that the Fed will find themselves squarely in the same position as Madoff, with a commensurate effect on the US capital markets, and that the event is a certainty with timing as the only varible. I too believe this is the prime probability. Specifically, how should a simple RIA with simple technical and trading resources, but responsible for the the life savings of about 100 good people, protect them when the inevitable unfolds.

Thank you,
Tim

Anonymous's picture

Physical GOLD and SILVER dude, and NOTHING ELSE!

It IS THAT FUCKING SIMPLE.

(This is what I did for my mom, dad, grandparents, wife's parents, etc.)

IT'S the only honest thing left AND when the SYSTEMS blow's up and goes to kingdom come, it WILL be the only thing left standing.

agrotera's picture

in case you don't get an answer from Tyler, here is one for you anony:

Hope all your people have zero debt, land to depend on if they need to have a garden and with larger portfolios, land for trees or other productive assets, gold, silver, platinum and cash even though we don't know how it is going to maintain any purchasing power.  If they can, they might also want an account outside of the us for non us cash.  And, if you are willing to trade, maybe you can help them with currencies, and sovereign bonds from non-US governments that you decide may be stronger financial positions than the US, and a few stocks from non-US companies that you think have strength.  But ultimately, everything but cash and hard assets will get crushed if the PPT cant keep up their game.  So, that is why having land, and no debt seems to be essential.

long-shorty's picture

I think that's horrible advice. People should stop putting excess equity in their homes now, esp. if they have 5% fixed rate mortgages.

 

Having a fairly significant amount of fixed rate debt as part of one's portfolio is the BEST hedge against hyperinflation.

Marvin T Martian's picture

what is it that they put in the water that makes midwesterners so earnest? and would it be possible to supply said water to wall st and DC?

 

you're the polar opposite of my local small-town bank RIA. i pop into his office when i'm in the bank on other business once in a blue moon, acting like a fool, just to pick his brain to guage the party line. i was in there about a month ago, and he basically told me 'television says recession over!'. but he also has that cornered, desperate, mousy look that reveals he's starting to suspect he's been hung out to dry. dunno if they're about to close the branch or what.

starting in 2003, when i dumped all of his parent company's stock and bought commodities, he'd call to warn me that i'm too 'concentrated'. 500% later those calls stopped. now i just confuse him.

 

how to allocate the salt of the earth's hard-earned nest eggs? whatever you do, hedge. i think options are good for this- far enough OTM to be cheap yet protect against a drastic move (most people would accept a 10-20% drop and would like even more to profit from anything more than that). but it's pretty tricky to go all commodities, least of all 100% gold/silver. few people would understand that and it would look imprudent- you could get sued/banned if things move against you. plus, lately EVERYTHING is moving together, which it'll likely do going down as well (at least initially).

 

oil companies offer dividends. agricultural investments would likely appeal to earthy midwesterners- again either options on staples like wheat, corn, soy, or an etf like DBA. my personal feeling is that food will not go down in the foreseeable future and should track broad measures of inflation fairly well. when oil was $140 DBA was almost double where it is today. furthermore, a food crisis would dwarf the oil crisis.

 

if some of your clients are interested in commodities then i would explain to them that companies are subject to the vagaries of mgm't, cash-flow, the mkts, etc and in times of stress the pure commodity (or etf) usually outperforms.

 

base metals don't do well during depression/deflation. but they do very well during inflation, much better than gold (which hedges not inflation but fiat currency and CB scheme failure risk). but if we get WWIII, and it's something like a traditional large ground war then base metals (iron especially) will do very well and pay nice dividends. every war is a war over resources, and looking at headlines over the past 15 years shows an increasing scramble for resources.  furthermore, my theory is that commodities were kept artificially low during the cold war so they're quite possibly still undervalued.

 

regarding countries, canada, australia, and brazil are all very good places to do business. canada and australia are well-regulated and well-capitalized. brazil is stunningly rich, yet still very poor. but in nearly every commodity category (incl water and energy independence) brazil is in the top percentile. and their fiscal policy has been relatively (for lat amer) prudent for 100's of years. in my experience brazilian banks are very impressive. but there's not a currency in the world i believe in long-term. or at least until one becomes fractionally backed by metal (most likely silver i think), but don't hold your breath.

 

if you get them into a gold fund then you're not trying to be a gold stock picker, which is a tough gig. and if it crashes you can point the finger to other the mgm't (i don't say this to skirt responsibility, merely to insulate against the perception that gold is a fringe investment). that said, TRADITIONAL, PRUDENT portfolio theory includes 10-30% in physical metal, and i think that 25% would seem reasonable to anyone with half a brain considering the times we're in. hedge the physical position (at least until prices are well above their cost basis with short-term options or whatever).

 

if their houses are paid for then you could consider buying put options on SRS or something. and consider hedging mkt positions with dow/s&p puts. i personally like long-dated options very much right now while the VIX is low.

 

but it's also important to remember that etf's and options  carry varying levels of counterparty risk. and many etf's have hidden expenses and slippage. furthermore, if commodity prices rise to the point of dragging on the economy i expect 'speculators' to be blamed and somewhat restricted, although it's unlikely your clients would be large enough to brush up against possible position limits.

 

during the real estate bubble it was often said "they ain't makin' any more of it" so prices can't go down. the same is true about commodities. and unlike companies, commodities will never go to zero- and if they fall you can bet the mkt's fell more. just take a look at how they performed as individuals and as a group during the height of the crisis, and more importantly how they popped first and the most coming out of the crash (far before the broad liquidity rally). it's possible that the dow/s&p are in a secular bear and that commodities are in a cyclical bull that has years left. and if we do have a real, full-blown financial crisis and currency problems/possible collapse then gold is the only thing that stands a chance of carrying you through.

 

i say all this because with each passing day i think that risk is greatly increasing. but risk is invisible until it's too late. if you can get your clients through this mess intact (inflation/deflation adjusted) they'll name their children after you.

 

most people, when asked about investments, assume that they're idiots. so don't ask your clients about specifics but generalities. EVERYONE has a sort of hunter-gatherer survival instinct and everyone has broad ideas about what would be a good investment idea and what to avoid. so ask them- they might surprise you. and with your input and experience you can give them confidence to do what they're comfortable with. but i think the most important thing of all is to NOT prepare them for last fall's crash- that already happened and the future by definition will be new. but a good, honest (even folksy) meeting with your clients would likely give you both insight and ideas. most of all they will appreciate your concerns- EVERYONE know's we're teetering on the edge, but not everyone knows that there are opportunities to take prudent and potentially lucrative steps NOW.

 

all of this is the opinion of someone decidedly not an FIA, so the decisions are yours and yours alone. i'm just sharing thoughts here...

 

thanks for asking sensible questions (why isn't your co already answering them?) and making a small step in restoring my faith in (FIA) humanity.

 

best of luck...

jm's picture

What better place to stir it up than zero hedge.  Caveat emptor...

Why not buy preferred shares of big financials, with an offsetting put on the common stock?

Short term treasury paper paired with gold as a hedge on currency risk.

Anonymous's picture

Can you provide more detail of the failed reverse repo?

Were they actually draining reserves?

What constitutes a failure of a reverse repo?

agrotera's picture

Dear Tyler,

Thank you for noting:

"After all why take risks when you can make risk free money courtesy of the US taxpayer (the interest the Fed pays on the reserves comes straight out of the taxes Americans pay."

Would you please consider posting an article (or a series) detailing exactly how much money the Fed and it's member monopolists have made over the last 10 (or 96) years so that people could really understand the power of the Fed and once and for all DEBUNK THE MYTH OF THE FED'S INDEPENDENCE--and rather, help put a spotlight on the FED cartel's  full sponsorship of all campaigns so indeed NO LEGISLATORS ARE INDEPENDENT OF THE FED.

It made me sick at my soul to read that Sen.'s Corker and Merkley turned traitor and are sponsoring a bill that discredits Rep. Ron Pauls efforts for auditing the fed, and indeed ENDING THE FED.  If the public has details of the real workings of the fed, the game will be over, because at that point, more and more and more citizens will become watchdogs and not allow the criminality that is now currently legalized by the fed brothers's (cartel members) lobby.

Thank you and very best always!

Agrotera

Pondmaster's picture

reverse repo failure ? Same as bond sale failure ? No takers !!

Don't worry  the fed squid will suck all the good cash out of our MM's and sooner than believed - distract detract - leaving us with nothing . Then the Fed will be ended . Last great robbery in progress as we ponder its terms and beginnings . REALLY NEED TO WATCH EXACTLY WHAT AND WHEN THEY START THE REpos

Lionhead's picture

Excellent work; thank you. While the markets short term expectations may not be effected, the long end may not go along for the ride as the never ending, and out of control spending by the government goes on. The bond vigilantes may be saddling up soon...

Anonymous's picture

Has there ever been a failed bond auction?

And what precisely does that mean?

It would seem to imply default.

Lionhead's picture

Not so far, although some have been less than stellar. The Treasurys' response was to get more "primary dealers" mainly large money center banks, signed up to artificially keep bid to cover ratios high, then later the FED buys back the bonds from them, aka, quantitative easing. A failed auction doesn't mean default; it shows lack of interest from buyers either by interest rates that the bidders deem too low, or lack of bidders altogether as shown by a low bid to cover ratio. The Treasury & FED are very clever in managing the auctions so far, especially after long rates began to climb last summer.

The best example of failed auctions was in the muni auction rate securities market, where the banks stepped away from the auctions in their role as primary bidders and liquidity providers which left the auction devoid of bidders for the amount of sellers who wanted to sell their securities leaving thousands of folks screwed.