Promises Of More QE Are No Longer Sufficient: Desperate Banks Demand Reserves, Get First Fed Repo In 4 Years

Tyler Durden's picture

While endless jawboning and threats of more free (and even paid for those close to the discount window) money can do miracles for markets, if only for a day or two, by spooking every new incremental layer of shorts into covering, there is one problem with this strategy: the "flow" pathway is about to run out of purchasing power. Recall that Goldman finally admitted that when it comes to monetary policy, it really is all about the flow, just as we have been claiming for years. What does this mean - simple: the Fed needs to constantly infuse the financial system with new, unsterilized reserves in order to provide bank traders with the dry powder needed to ramp risk higher. Logically, this makes intuitive sense: if talking the market up was all that was needed, Ben would simply say he would like to see the Dow at 36,000 and leave it at that. That's great, but unless the Fed is the one doing the actual buying, those who wish to take advantage of the Fed's jawboning need to have access to reserves, which via Shadow banking conduits, i.e., repos, can be converted to fungible cash, which can then be used to ramp up ES, SPY and other risk aggregates (just like JPM was doing by selling IG9 and becoming the market in that axe). As it turns out, today we may have just hit the limit on how much banks can do without an actual injection of new reserves by the Fed. Read: a new unsterilized QE program.

First, here is a reminder of what has been going on in the secular amount of excess reserves as indicated by the Fed.

The total amount of reserves is dropping rapidly which is to be expected: as the Fed's balance sheet contracts due to maturing FX swaps, and numerous other asset reductions, this means that liability side has to contract in parallel which then means that bank reserve levels are not only flat, they are declining. Obviously, absent "reserves" i.e., electronic fungible money created by the Fed, which courtesy of Shadow Banking can be promptly transformed into cash, banks can not buy. Period.

But not only that: there is some speculation that banks have over the past several years used reserves as a stealthy plug to fill capital shortfall at firms whose asset side is being rapidly depleted by non-performing loans and other detractors from cash flow formation. In other words forget buying assets and generating an ROE: banks need reserves to preserve their viability, or else.

All of this came to a head today.

What happened today? Well, first, here is what happened yesterday. The WSJ explains:

Starting Friday, the Federal Reserve Bank of New York will implement a series of "small value" repo operations to test its capability to temporarily boost bank reserve levels.

And there you have it: following several years of reverse repos, or liquidity extracting exercises by way of temporary reserve sequestation, the Fed has finally launched the opposite: or outright repos, or liquidity providing exercises. Which also means that at least one bank was in dire need of new reserves, all posturing by the Fed to the contrary notwithstanding. Because there simply is no reason for the Fed to launch a repo operation out of the blue following 30 "test" Reverse Repos conducted since December 2009.

The WSJ continues:

In a statement Thursday, the New York Fed said the operations are a "matter of prudent advance planning" and "have been designed to have no material impact on the availability of reserves or on market rates."


What is more, it said, "these operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."


Operations by the Fed involving what are known as repurchase agreements, or repos, act to temporarily add bank reserves to the system by essentially borrowing bonds for a fixed period of time. Once a cornerstone of the day-to-day efforts to achieve the monetary-policy objectives set by the Federal Open Market Committee, the tool has fallen by the wayside as the central bank has moved to pursue massive purchases of bonds. The New York Fed noted that the last time it put in place a repo operation was on Dec. 30, 2008.

December 30, 2008 as a reminder, is when the financial world was collapsing, but was before the March 2009 announcement of the fully expanded QE1, which saw $300 billion in Treasurys and more MBS purchased by the Fed. As the table below shows, in the interim between December 2008 and today, the only operations the Fed conducted were Reverse Repo, which are designed to extract excess liquidity from the system, and telegraph as much.

And today: the first repo since December 2008, for a total of $210 million.

That that the Fed finally broke the mold and did a full blown Repo today speaks volumes about what is going on. Namely that banks are crying uncle and that any additional sustained rise in stocks will need a reserve infusion from either the Fed or the ECB. Everything else is merely noise. However, as the NFP report today indicated, one can kiss expectations for a LSAP-based, or unsterilized, QE in September goodbye. And as Draghi yesterday proved, absent Spain admitting it is fully broke, there will be no new bond buying via SMP or any other mechanism (ignoring for a second that the SMP as a rescue mechanism is completely worthless as the previous two instances of SMP bond buying proved).

The other problem of course is that Spain now will absolutely NOT demand a bailout as its 2 year cost of debt has plunged as the market expects it do just that and demand a rescue, in the process covering its 2 year shorts and pricing itself out of the one conclusion that makes the action logical. But why would Spain demand a bailout now that it can again finance itself at the short-end of the curve cheaply.And so the market is forced to short the 2 year again to push Spain's hand, which leads to more jawboning and repeating the rinse cycle all over again, and so on, in a massively circular argument which shows just how idiotic the conversation between the market and broke politicians is. Yes, welcome to the new normal cause and effect, where attempts to frontrun politicians are always and without exception self-destructive. This is yet another thing the market will realize eventually.

But the biggest issue is that as today's first Repo operation in 4 years proved, at least one bank needs at least $1 in excess reserves. That this is happening with $1.6 trillion in reserves already in circulation shows just how critical and how reliant on flow the US banks are.

And now check to Ben and Draghi to figure out a way to once again refill bank reserves.

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Cognitive Dissonance's picture


We ain't seen nuttin' yet. There is no upper limit to insanity.

NotApplicable's picture

I think the Treasury/Fed needs to outlaw the concept of "maturity" in these financial instruments.

I mean, what's the point of creating them, if they only expire at some point in the future, which causes a whole new demand cycle? Just think of how much less stressful the world would be without this ticking time-bomb.


nope-1004's picture

But, but.... the stress tests showed banks were fine.  Yet, actions by the FED show the opposite.  Hmmmmm.... what to believe in this farcical, fascist, banker-run market.

Everyone knows the big banks are insolvent.  Ben had to show up under the cover of night and plug the bleeding holes in the banks, lol.  Of course, he publicly lies and says the opposite.

The above article proves, WE HAVE A FED CHAIRMAN THAT'S A LIAR.


KMS's picture

I think the Fed just financed (part of) the Knight purchase for whomever.

engineertheeconomy's picture

At no time in history has there existed a Bank that put more money into the economy than it took out, ultimately leaving the economy in a vaccuum.

The Ponzi Criminals are in a feeding frenzy, now that the economy's funeral is officially over, all they have left is printing and stealing.

As the Zombiesheepleslaves willingly submit to their daily regimen of programming, propaganda, diversion tactics, brainwashing and doses of reality denial drugs 

LawsofPhysics's picture

Where is my money Labowski?  Show me the money motherfucker.

Brother Sebastian's picture

This country song title seems to apply:  "How Can You Believe Me When I Say I Love You, When You Know I've Been A Liar All My Life?"  (But when it comes to Benny-boy, I prefer this one:  "Don't Believe My Heart Can Stand Another You.")

Jethro's picture

Ha! NotApplicable, I wonder how you managed to channel MDB so accurately. That was hilarious!!!

So, am I interpreting this correctly? The banks want more, free gambling money?

El Oregonian's picture

"So, am I interpreting this correctly? The banks demand more, free gambling money?"

There, fixed it.

flacon's picture

So when do we see the VXX rise? We are at supreme lows right now. Perhaps a good time to get in?

fonzannoon's picture

flacon do yourself a favor and punch your self in the face. Then take five grand and throw it out your window. It's the same effect.

flacon's picture

If you read ZeroHedge they have been "pounding the table" that 2012 IS 2011. The VXX rose from 20 to 53 in the months of August and September. If you don't believe in this S&P rally, just like last year at this time, then VXX might be a good bet. 


S&P 500 VIX Short Term Futures


fonzannoon's picture

Dude I hear you. I was not trying to insult you. I was looking at the skid marks left on me from the same thought you had a while back.

I politely disagree with the 2012 is 2011 idea. But I won't bore you with what I think. ZH certainly knows their shit.

flacon's picture

Thanks. I have some Sep 22nd calls on VXX... if 2012 is like 2011 then I'll make a shit load of fiat which I'll use to buy more gold. If not, then.... oh well.... it's a gamble - a roll of the dice. 

Everybodys All American's picture

The Vix is broken ... no different than libor. It is manipulated even more than the rest of the market. I would not trade it no matter how good the idea appears from a technical view.

Panafrican Funktron Robot's picture

VIX is heavily manipulated, as has already been reported on ZH.

VXX is dogshit on top of horseshit, as you additionally have contago to deal with.  

Typically, people trade VIX products because they want to be short the market.  If you want to be short the market, SPX or SPY puts or bear verts make way the hell more sense, and respond much better to market action.  

Hype Alert's picture

2011 was NOT, I repeat NOT an election year.

At the rate we are going, the stock racket is insuring BO's re-election.  All other indicators of a slowdown/recession are to be ignored.

ReactionToClosedMinds's picture

fair point .... elections have consequences ... so accordingly ... domestically, internationally & economically.

We can guesstimate what Putin is doing, PRChina ... not so much.  Europe ...... France made its call ..... Germany ?, the Nords ?, the EEuros ?, as crazy as Italy seems ... there is a tremendous survivor instinct/streak  there.

Then there is the Middle East ....... not even the Israelis know for sure .. and their survival is at stake ..... Syria, Egypt, Iran, Iraq, Jordan, Saudia Arabia, Gulf States .....


Liquid Courage's picture

Heh heh ... Stock Racket ... I like that. Has a nice ring to it. Be nice if it went viral and then some bingo caller on some MSM Racket ... I mean Market Report had a Freudian moment with it.

One can only hope.

asteroids's picture

VXX (A) decays , (B) is manipulated. Look at the chart VXX in 2008 was at 450! IF, you can time it CORRECTLY, you can make money. But, I would stay away.

SAT 800's picture

Hey, don't hold back, go ahead and tell him how you feel about it! LOL. Buy some Silver instead; you'll be better off.

HarryM's picture

Try to find something that it not manipulated - good luck

Dr. Richard Head's picture

For some reason that reminded me of the quote from Clerks, "It's important to have a job that matters boys. That's why I manually masturbate caged animals for artificial insemination."


I guess the Fed would say to the public, "It's important to have a job that matters boys.  That's why I manually masturbate sterlized reserves for articifical cash creation."

illyia's picture

There are many reasons to read ZH first thing in the morning.

This article is one of them.

Dr. Richard Head's picture

Alarm goes off, grab smokes and cell phone.  Start coffee.  Sit on back porch with coffee smoke while reading ZH.  If the coffee and smoke doesn't get the bowels moving, a good dose of HOLY SHIT from ZH will do the trick.

mvsjcl's picture

Sentiment good; scatological visualization, ummm, poopie.

Panafrican Funktron Robot's picture

Another fun chart.  Yay for the slow and steady march toward insolvency.

JeffB's picture

Chris Martenson does a nice job of discussing exponential growth in Chapter 3 of his YouTube series The Crash Course.

The Fed is going to need Congress to revoke the mathematical "law" of exponential growth pretty soon.


Though I would interject that because of the rather drastic drop in fertility rates in many countries, population growth is levelling off and is projected to start dropping with a few years or so despite the increasing life expectancy.

Of course, even if true, that doesn't rescind the problem of compounding with respect to the need for perpetual growth in the money supply and the world economy.



adr's picture

It looks like oil is going for the one day percentage record again. Even the stocks that were going down today are all rocketing higher. At 11:30 the selling towel was thrown and Green Mountain, Netflix, and Facebook all shot up 5% or more.


Unbelieveable bullshit.

The I just can't take it anymore bullshit.

slaughterer's picture

Afternoon roomer should take S&P 500 over 1400 for the "happy weekend" with O.

Hype Alert's picture

Hilsenbreath on at 3:50 today.  Tweet away, Merrill. Merrill, tweet away.

Liquid Courage's picture

You're speaking my mind, adr. Time to get away from the monitor for a few deep breaths ... deeeep breaths ... Nothing new here, just a bit more flagrantly corrupt than the last time.

Next on the script is -- of course -- how the Stock Racket ... I mean Market ... Stock Market ... is such a reliable Leading Indicator for the economy and so that elusive recovery must be right around the corner ... et cetera, ad nauseum

They'll stand their ground 'til the ground itself gives way beneath them.

Jlmadyson's picture

Shit is getting real again.

Jawboning to high heaven.

Prime dealers falling.

5 bucks on WTI.

Banks require repo.

The drums beat louder and faster....

Who is the next Dick Fuld?

It's coming.

iDealMeat's picture

And Congress just took off..  Good time to start some shit in the ME.

caimen garou's picture

unsterilized money, sounds so dirty

Possible Impact's picture

Put it through a Carbon trading filter.

Or, you could try reverse IPOsmosis filter.


LMAOLORI's picture



Can someone answer this Felix doesn't seem to know why

Why would Treasury want to issue floaters?

slewie the pi-rat's picture

[Paste}:>  "Namely that banks are crying uncle and that any additional sustained rise in stocks will need a reserve infusion from either the Fed or the ECB. Everything else is merely noise." <:

why not the SNB?   aren't they doing enuf fungible infusing for just abt everybody?

but i agree with the general points here and i have been making the main one right along:  one of the reasons the markets have been so "screwed down tight" is the capitalization and monetization necessary to keep any capital "risk" expansion liquid and expanding

just as declining prices destroy wealth, nominal price increases create capital wealth and the bankster cabal has been satisfied with doing neither, since growth will not supply the capital needed and the FED seems reluctant to print dollars for inflationary benocidal reasons

but for angela, i think they would still be flatlining, along with the econometrics and failures of incoming data to print as expected

however, as i said on FEDWEDnesday:  the bast thing for the banksters would be to drop the dollar to the 82.5 range and try to goose the dow30 to 13100

the EU indices are even more ape-shit today (4%?)!  this means that for angela to say "nein" she is gonna be perceived as pulling the punchbowl from one of the best fiat parties, evah!  so the bankster cabal is isolating her and germany, politically

big time!  i might add...

[... slewie is left wondering if this trial flurry of tiny liquid digits from the repoDepot is yet another chromed-out push-button on brianSack's new "edsel"...]

ReactionToClosedMinds's picture

atta boy ..... apart from Tyler/ZH et al ... you may be outlining the rationale for the 'next phase' ........

But ...... as many have noted .... life spans are growing shorter and shorter ...... the speed is starting to overwhelm the Sorcerer's Apprentice.  So where (who will be/coudl even be) the Sorcerer be to save the Apprentice?  The US election is the best guess ... which means Team 44?<<update/correction> >>> nah .... semi-EU preservation.  The Merkels have it.  SHe is either getting boxed in or the Fed is preparing for the ECB push by laying the necessary liquidity, collateral, risk neuterization.


slewie the pi-rat's picture

probly, unless prez0 puts bilary in as VP just to save a few hundred million lives here & there...

but yes, the risk0n/0ff is just a-flippin awaaaay;  many chartists are seeing the "pennants & headfakes" and discounting the headfakes too much, perhaps?

this shld break eaither way sooner than later, chart-wize, but that in irself may be a head-fake since i still think staahbiiiileeetaaay is the most prized asset in the entire system, still, and from what i can see if TPTB want this in a 4-500 pt range till 2013, they gonna be able2gitit

maybe the oscillations will shake the joystick loose from their hands, but then again...  maybe they won't...  they can withdraw liquidity (and may need to do so looking at oil & wheat) but they want to punish angela politically here on the way back down if she doesn't budge (which she won't, yet)

marioECB and angela:  one black eye each?   he'd take that as a  huige W, imo

LawsofPhysics's picture

Could someone please comment on the Bundesbank TARGET 2 going exponential?  This can't be good, can it?

slewie the pi-rat's picture

no, but it has been happening for a while and isn't "impact news" any more?

but it IS another shape-shift of debt-accounting;  enronesque, to me, in that it is off-BalSheet for the ECB and seems to indicate a "balance of payments" type trade accounting paper-up which can mean anything depending on whether the finiMini is up on one wheel, or completely airborne... ? ...

fiat.bullshit.IOUs. =   unGoodly can-kicking

but:  the checks are in the mail, BiCheZ!

LawsofPhysics's picture

I guess it is fine so long as no-one has a claim on all that "wealth".

slewie the pi-rat's picture

in slewienomics, counterpaties are made to be vaporized

party on, BiCheZ!

Raynja's picture

Once helicopter ben makes trillions the new millions they will need volkner 2.0, who will jack interest rates up. Floaters will protect the wealth of insiders. Will not be surprised if floaters aren't available to everyone.

DavidC's picture

In the meantime, it looks as though Bob Janjuah wasn't far off with his prediction of S&P 1400 before September!