Let's start with something tangential. One week ago, we quoted Curvature's repo guru Scott Skyrm who pointed out that the recent "upward rate pressure on large settlement days and month-end seems to be starting again", which means just one thing: reserve scarcity - the catalyst that ultimately culminated in the repo market breaking in Sept 2019, sending repo rates soaring to double digits and forcing the Fed to launch "NOT QE" - is slowly but surely coming back.
reserve scarcity is baaaaaack:— zerohedge (@zerohedge) November 29, 2022
"Upward rate pressure on large settlement days and month-end seems to be starting again." pic.twitter.com/BtJDwxBvBB
Or maybe not: according to that other repo guru, former NY Fed staffer and current Credit Suisse strategist, Zoltan Pozsar, who correctly called the acute reserve scarcity in 2019 and also the monetary debacle in March 2020, the last thing investors should be worried about today is the level of Fed reserves as he explains in his latest must-read note published overnight titled "Oil, Gold, and LCLo(SP)R" (and available to pro subs) after several months of silence. The reason: there is $2 trillion in inert funds in the reverse repo facility which can be used to plug any reserve gap. While we think this is an oversimplification - and if that was the case, there would be no drain of reserves as all the liquidity since the start of QT would have come from the O/N RRP facility which has clearly not happened...