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Lurking Beneath The Taper: More Trouble In Repo Land
Submitted by Alhambra's Jeffrey Snider via Contra Corner blog,
Since we are now in the middle of the final month of a quarter, checking repo stats shows what we have come to expect of a fragile liquidity system. Once again, repo fails spiked sharply in the latest weekly statistics from FRBNY as primary dealers and the Fed’s own repo “fix” fail to affect the “resiliency” that FOMC members appear desperate to attach. However, since the repo market is far, far away from the everyday nobody pays much attention.
The problem with liquidity is always that it’s not what you see today when all seems well and abundance is seemingly effective, it is actually what to expect when you need it most. From the standpoint of central banks, that has been their operating assumption (at least as portrayed publicly) since the nineteenth century. The Federal Reserve itself was dedicated on the principle of currency elasticity, which is exactly this point – to be that liquidity when it is most needed as private markets shy away.
Unfortunately, modern incarnations of these central banks still mostly apply nineteenth century rules, policies and even understanding to a 21st century banking system that does not so easily follow generic incantations of simplistic theory. The “money supply” right now is no such thing, as money has vanished from banking. Liquidity itself is not dependent on “money supply” so much as the means and channels for flow. That was a lesson learned the hard way by those that assured everyone in 2007 that all was “contained.”
The message of resiliency is then a main part about incorporating those shortcomings into the current framework. When Janet Yellen proclaims that markets are so “resilient” that she would prefer they not even bother about such negativity she means to say that the Fed is more than aware of flow and liquidity and has taken that to heart. Indeed, they instituted the reverse repo program (actually it was just an expansion of existing lines) last year to live up to elasticity doctrine in the real “currency” of the modern bank: collateral.
There has been a noticeable uptick in reverse repo usage in the past few months, but nothing that would suggest anything awry.
Outside of the surge in May, there is a seeming straight line upward trend that was established all the way back when the Fed first tapered in December. In that important respect, there does seem to be some correlation with reverse repo usage and the repo market. That includes the very important changes that have taken hold of repo volumes in US$ terms.
While focus is often placed on UST collateral, MBS repo was at least astride UST in terms of size and volume. That changed quite a bit after QE3 began as you would expect given how QE strips the “market” of needed and usable securities. However, we can also see this same imprint in the UST repo market as well.
Again, that makes sense given that QE4 was instituted to take UST collateral, a topic that has gained actual attention in the past eighteen months (including a very needed adjustment to the Open Market Desk policy almost from the start). From these figures we can reasonably assume that where QE was impactful in turning repo volumes lower, its taper has accomplished the opposite.
In addition to the very real concerns of secular stagnation and asset bubbles, rather than how the economy actually exists right now, these repo “costs” are a major factor in the impetus toward the monetary exit. However, like everything else with monetary intrusion, simply ending the manipulation is not the same as never having undertaken it. In another example erasing the figment of monetary neutrality, there is a clear diminishment in repo capacity and thus “resiliency” on this side of the QE taper.
The change in repo volume since the middle of 2014 has been significant, but only just now approaching levels that would be considered “normal” last year (and before). Yet, for all that additional volume there has been a repeated signal of distress through fails. There was the major episode in June just as repo volume had turned upward, and then again in July as the same occurred. And, as I noted at the beginning, we are now in the third major instance of a fails problem (without any corresponding surge in reverse repo usage that was “supposed” to occur if the Fed’s “fix” were anything like one).
What we are left with is much worse than when this all started. The problem of QE in repo terms was that it not only stripped usable collateral from dealer inventories and from other holders where it might be used as supply, it has seemingly diminished the entire repo market’s capacity to withstand even a relatively minor increase in volume. What was normal in 2013 seems to create something of a stir in function in 2014. That these are mostly clustered around quarter ends continues the systemic weakness that has been apparent in every major market “event” of this period, adding to the judgment that “resilience” is nothing but PR and wishful thinking.
The problem for “markets” is that this is a primary liquidity conduit indicating significant and persistent degradation under, again, very benign conditions. In my analysis, there is no doubt that QE is the primary culprit here and that its removal is not “allowing” a healing process to begin but instead revealing the damage. With the Fed’s reverse repo program having no input whatsoever, it just adds to the weight of evidence that policymakers don’t really know what they are doing and are just making it up as they go.
With compliant media that gives total deference to orthodox economics, the speeches and soundbites are enough reassurance to stave off much needed inquisition. For now.
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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: jhudak@alhambrapartners.com
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More worthless nonsense... Dow might hit 18K today.
Fractured Reserve System
Feral Reserve System
Listen. Fuckthe Reserve System.
Nope.
In USSA Feral Reserve System fucks you!
When the Fed has to buy all the 30 year bonds just to keep the rate below 4% you know they have lost control
More like: 'Fractured Fairy Tales'...
Feudal Reserve System
Rodger Goodell of the NFL made it up as he went along for a long time. And when the turn came it was'nt pretty.
Water water fiat fiat everywhere but not a drop to drink of liquidity.
5 yr UST overnight REPO was trading at -2.80 today. The fail rate is -3.0.
Nothing to see here - move along.
this happens all the time when there is a large short base in any of the active issues...product of this ridiculous ZIRP QE-4-EVA environment...not dismissing your concerns, but this is 'new normal'
Bullish!
it's good to be tbtf
What a sham system.
This is making cat burglar sound better and better.
Where would one unload the art taken from the Detroit Institute of Arts – I heard the building doesn’t even have an alarm.
This isn't trouble!! This tells me moar money is going into the market for free!! BTFD!! SPX target is 2041!!
Print, print, print. That will solve all our problems according to these ivy-league PhDs.
Hasn't worked so far. More jobs going off to India and boomers retiring. More debt soaked young folks.
LOL, wasn't this tried in the past? Way before these PhDs were on this earth?
It's obscene that the FED buys MBS's, obscene.
On a good note, I pooped again today! It's a dirty job, but somebody has to do it.
Taper!!? ROFL! No taper evah! This is print to infinity!
they'll taper (for now) ... have no choice ... running out long end supply
but once we enter another recession ... and racking up trillion+ deficits again ... the supply will be there
Will they even wait for recession - i.e., risk a 'cascading' event before resumption of bond purchases? At this stage, would waiting for a recession even be politically tenable...?
if history is judge ... we'll be DEEP into a recession before one is acknowledged ... Kudlow was one of the last bullz to throw in towel last go round ... september 2008 ... recession started december 2007.
Again, it is more a matter of supply ... just not enough to buy at current rate ... and many private institutions need long dated safe assets (to match liabilities)
Don't disagree.... but
1.) We never left the recession
2.) We have been and continue to rack up trillion+ deficits.
I am with CrazyCooter on all of this nonsense: "...there comes a moment when the clever elites change sides (to survive), ensure the creditors take dirt naps, and attempt to zero out obligations (while holding onto their assets). That is the real game; zero out obligations but hold onto real productive assets (farms, factories, resources). The elite of the world need a war to reposition and sustain them."
In other words, the FED, repo markets, equity markets, etc. are just downstream processing. The real asset grabs are going on behind the scenes with debt swaps, proxy wars, banker "suicides", mysterious car / plane crashes, false flag gold heists, etc. and will ultimately be decided between the Rothschild clan and the Rockefeller clan.
Moar popcorn!
FY2014 deficit will "only" be a little over $500 billion (and, yes i know debt has grown more over the interim) ... and if you follow TBAC (Treasury committee that forecasts upcoming treasury auction needs) ... much of the debt issued is on the short end ... FR buying avg maturity of 9yrs.
Of course, FR could change parameters of what is buys ... but will need political cover of crash/recession to do it.
" it just adds to the weight of evidence that policymakers don’t really know what they are doing and are just making it up as they go."
briar patch comes to mind
easy to get into ...
the dopes are rewriting history books ... and they won't be kind
The thing of it is, we are mentally conditioned to believe we will work ‘til we drop.
Since this is the case. Our future has been written.
Anyone remember that wrestler in the wwf named repo man?..
Making it up as they go! Thank God
There is no master plan then, just a bunch fucktards turning dials and pating each other on the back.
I remember Ben saying dont worry we will reverse repo later and all will be good
-Collateral-Leverage-Liquidity-Losses.....gonna be hearing those words a lot when these mkts wake up from their current state of anesthesia....