Reverse repos on FED’s balance sheet is growing rapidly

[hellwolf]

Reverse repos on FED’s balance sheet is growing rapidly

The FED’s balance sheet liabilities include these major items:

• All Federal Reserve Notes, aka. the US dollar papers, existed around the world
• Deposits, the digital dollars other banks park at the FED in order to earn interests
• Reverse repurchase agreements (reverse repos)

But something odd has been happening for a while. In light of the historical low rates environment since 2008 financial crisis, designed to stimulate the economy, it seems that FED has been trying to increase its Federal funds rate to its target. The evidence is its reverse repos in its liabilities since 2003:


What is going on, and what will happen next?

- Helicopter money?
- QE4?
- Deflationary "hell"?

Or just nothing?

Full article at: http://rothbardiangoldprice.com/2016/12/reverse-repos-on-feds-balance-sheet-is-growing-rapidly/

 

[kfarnan]

Biggest bubble ever. Massive deflation, then hyper inflation.

 

[devil21]

The FED’s balance sheet liabilities include these major items:

• All Federal Reserve Notes, aka. the US dollar papers, existed around the world
• Deposits, the digital dollars other banks park at the FED in order to earn interests
• Reverse repurchase agreements (reverse repos)

But something odd has been happening for a while. In light of the historical low rates environment since 2008 financial crisis, designed to stimulate the economy, it seems that FED has been trying to increase its Federal funds rate to its target. The evidence is its reverse repos in its liabilities since 2003:


What is going on, and what will happen next?

- Helicopter money?
- QE4?
- Deflationary "hell"?

Or just nothing?

Full article at: http://rothbardiangoldprice.com/2016/12/reverse-repos-on-feds-balance-sheet-is-growing-rapidly/

I've written about this a few times here lately. The Fed makes a rate decision and implements the machinery to make it happen without telling the masses. Then they announce the change publicly but by the time they do, the masses are months behind and the markets (rigged by the insiders that know the Fed's secret moves) have already reacted accordingly. This also applies to QE and other Fed operations, not just interest rate decisions. It is why the Fed has fought against FOMC transparency so hard. They lose their edge over the little guy if the little guy can react as quickly (or quicker, probably) to Fed decisions as the banker insiders do. Banks are behemoth bureaucracies that take time to shift directions. A bunch of smart little guys can move much faster and beat the Fed at it's own game.

Sorry for the slight derail, just wanted to offer that tidbit. FWIW and IMO, the Fed has already raised the target rate, as you observe, but also implemented QE4 at the same time. The goal is to suck productive, earned money out of the economy while dumping new cheap money back in. If that makes sense....

 

[presence]

What is going on, and what will happen next?

it means that:

big banks are holding massive derivative positions and counter-party defaults
the positions are looking shadier and shadier; and they're risking margin call without re-collateralization
they need collateral to continue holding their margin positions
treasury notes are good collateral; so fedgov is pawning off cheap treasury notes to major institutions to stabilize their portfolios
unfortunately these deals only last overnight or a few days before the bankers have to buy back at interest
but the rate; approaching zero is causing markets to be sustained by an ever increasing volume of zero fee buy/sell to cover margin
its similar to how chinese bitcoin exchanges trading in zero fee environment can temporarily pump price with "fake volume"
moral of the story here though is banks are approaching margin call and need collateral
the last time there was a major spike in this activity was 2008 when housing imploded
the 2008 spike was nothing in comparison to what has been happening the past 5 months







[FONT=&quot]Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets. We know that in 2008 there was a derivatives counter-party default melt-down. This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).[/FONT]
[FONT=&quot]What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008. This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008.[/FONT]

 

[presence]

http://www.cityam.com/254834/donald-trumps-unhappy-fate-oversee-financial-crisis-far

An earthquake doesn’t care if you’re progressive or populist. It destroys your house all the same. Likewise a financial crisis is indifferent to a politician’s policy mix. Systemic crises proceed according to their own dynamic based on the array of agents in a system, and systemic scale.






The tempo of recent crises in 1994, 1998, and 2008 says a crisis is likely soon. A new global financial panic will be one legacy of the Trump administration. It won’t be Trump’s fault, merely his misfortune.
The equilibrium and value-at-risk models used by banks will not foresee the new panic. Those models are junk science relying as they do on notions of efficient markets, normally distributed risk, continuous liquidity, and a future that resembles the past. None of those hypotheses match reality.
Advances in behavioural psychology have demolished the idea of efficient markets. Data shows the degree distribution of risk is a power curve not a normal bell curve. Liquidity evaporates when most needed. Prices gap down; they do not move continuously. Each of the 1994, 1998, and 2008 crises was worse than the one before, and required more drastic intervention. The future does not resemble the past; it keeps getting worse. The standard models are in ruins.
Recent model improvements that take into account so-called tail risk still fail to come to grips with systemic scale. The most catastrophic event possible in a complex system is an exponential function of scale. In plain language, if you double system size, you do not double risk; you increase it by a factor of five or more.
Since 2008, the largest banks in the world are larger in terms of gross assets, share of total deposits, and notional value of derivatives. Everything that was too-big-to-fail in 2008 is bigger and exponentially more dangerous today.
The living wills and resolution authority of Dodd-Frank are entrances to gated communities. They seem imposing, but are a façade. They will do nothing to stop an angry mob. Increases in regulatory capital will not suffice. When a leveraged financial institution faces a liquidity panic, no amount of capital is enough. As boxing legend Mike Tyson mused, no plan survives the first punch in the face.
If existing models don’t work, what does? A blend of complexity theory, Bayesian statistics, and behavioural psychology can produce models with robust predictive power. Such models are being developed in a few centres of excellence such as the Santa Fe Institute, the LSE, and ETH Zurich. Yet, they are far from mainstream thinking and will not be adopted in time to mitigate the next crisis.


Financial panics are dynamically and mathematically identical to a variety of natural phenomena such as earthquakes and avalanches. As snow accumulates on a mountainside, seasoned observers can spot avalanche danger. Soon one snowflake alights in such a way as to perturb others that begin to slide, form a chute, create momentum, and rip loose the entire snowpack. Timing is uncertain, yet the avalanche is inevitable.
What snowflake could precipitate the next financial panic? Deutsche Bank is an obvious candidate. Less obvious is a failure to deliver physical gold by a London bullion bank. That would expose the hyper-leveraged “paper gold” market for what it is. A natural disaster on the scale of Fukushima would do as well.
Read more: The new sick man of Europe is the continent’s entire banking sector
Looming over these catalysts is a global dollar shortage, which has been limned by economists Claudio Borio and Hyun Song Shin at the Bank for International Settlements. The strong dollar could precipitate a wave of defaults on $9 trillion of dollar-denominated emerging markets corporate debt. Those defaults would make the 1994 Tequila Crisis look tame.
The 2008 crisis was truncated with tens of trillions of dollars of currency swaps, money printing, and rate cuts coordinated by central banks around the world. The next crisis will be beyond the scope of central banks to contain because they have failed to normalise either interest rates or their balance sheets since 2008. Central banks will be unable to pull another rabbit out of the hat; they are out of rabbits.

There are no rabbits left (Source: Getty)
In the next crisis, liquidity will come from the IMF, which has the only clean balance sheet remaining. The IMF will print the equivalent of $10 trillion in world money called special drawing rights. China and Russia will acquiesce in this liquidity injection provided it hastens the demise of the dollar as the benchmark global reserve currency.
Can Trump avoid this fate? Possibly. Ski patrols reduce avalanche danger by using dynamite to descale the snowpack. Likewise the financial system can only be made safer by reducing its scale. Large vessels use watertight holds to achieve the same margin of safety. A hole in the hull floods one hold, but does not sink the ship.
Descaling finance means reinstating the Glass-Steagall and pre-Big Bang separation of deposit taking and securities underwriting. It means breaking up the big banks. JP Morgan, Chase Manhattan, and Chemical Bank should reemerge from the embrace of Jamie Dimon. Derivatives should be banned except for exchange-traded futures tied to specific assets used for commercial hedging. It’s time to close the casino.
Will Trump pursue these policies? It’s unlikely. Such proposals will be lost in a sea of competing priorities. Bank lobbyists rule Washington from the commanding heights; draining the swamp won’t change that.
Sooner than later a new treasury secretary and Fed chair will retrace the 2008 footsteps of Hank Paulson and Ben Bernanke to tell President Trump the system is having a heart attack. They will have no remedy except to suggest a call to Madame Lagarde.
James Rickards is an economist and New York Times bestselling author. His latest book, The Road To Ruin (Penguin Random House), was published in November 2016.

A Liquidity Crisis Hit The Banking System In September

October 6, 2015
Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008:

You can also see from this graph that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.
Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets. We know that in 2008 there was a derivatives counter-party default melt-down. This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).
What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008. This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008.
What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You’ll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.
The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.

Without a doubt, the graphs above are telling us that something “broke” in the banking system which necessitated the biggest injection of Treasury collateral in history into the global banking system by the Fed.

http://investmentresearchdynamics.com/a-liquidity-crisis-hit-the-banking-in-september/

 

[TheTexan]

I think [MENTION=17293]Zippyjuan[/MENTION] is needed here to clarify why there is no cause for concern

 

[Zippyjuan]

The FED’s balance sheet liabilities include these major items:

• All Federal Reserve Notes, aka. the US dollar papers, existed around the world
• Deposits, the digital dollars other banks park at the FED in order to earn interests
• Reverse repurchase agreements (reverse repos)

But something odd has been happening for a while. In light of the historical low rates environment since 2008 financial crisis, designed to stimulate the economy, it seems that FED has been trying to increase its Federal funds rate to its target. The evidence is its reverse repos in its liabilities since 2003:


What is going on, and what will happen next?

- Helicopter money?
- QE4?
- Deflationary "hell"?

Or just nothing?

Full article at: http://rothbardiangoldprice.com/2016/12/reverse-repos-on-feds-balance-sheet-is-growing-rapidly/

What are "reverse repurchase agreements"?

Reverse repurchase agreements are transactions in which securities are sold to primary dealers or foreign central banks under an agreement to buy them back from the same party on a specified date at the same price plus interest. Reverse repurchase agreements absorb reserve balances from the banking system for the length of the agreement. They are typically collateralized using Treasury bills. As with repurchase agreements, the naming convention used here reflects the transaction from the dealers' perspective; the Federal Reserve receives cash in a reverse repurchase agreement and provides collateral to the dealers.

https://fred.stlouisfed.org/series/RREPT

They are short term- usually one to seven days.

 

[hellwolf]

Thanks for the thoughts, can you elaborate what did you mean by "implemented QE4 at the same time.", how exactly?

I've written about this a few times here lately. The Fed makes a rate decision and implements the machinery to make it happen without telling the masses. Then they announce the change publicly but by the time they do, the masses are months behind and the markets (rigged by the insiders that know the Fed's secret moves) have already reacted accordingly. This also applies to QE and other Fed operations, not just interest rate decisions. It is why the Fed has fought against FOMC transparency so hard. They lose their edge over the little guy if the little guy can react as quickly (or quicker, probably) to Fed decisions as the banker insiders do. Banks are behemoth bureaucracies that take time to shift directions. A bunch of smart little guys can move much faster and beat the Fed at it's own game.

Sorry for the slight derail, just wanted to offer that tidbit. FWIW and IMO, the Fed has already raised the target rate, as you observe, but also implemented QE4 at the same time. The goal is to suck productive, earned money out of the economy while dumping new cheap money back in. If that makes sense....

 

[Danke]

I think @Zippyjuan is needed here to clarify why there is no cause for concern

Damn, it took him over 10 hours.

 

[oyarde]

Damn, it took him over 10 hours.

There is nothing good about it .

 

[Zippyjuan]

Thanks for the thoughts, can you elaborate what did you mean by "implemented QE4 at the same time.", how exactly?

There is no QE4.

 

[Zippyjuan]

Thanks for the thoughts, can you elaborate what did you mean by "implemented QE4 at the same time.", how exactly?

There is no QE4.

he Fed makes a rate decision and implements the machinery to make it happen without telling the masses. Then they announce the change publicly but by the time they do, the masses are months behind and the markets (rigged by the insiders that know the Fed's secret moves) have already reacted accordingly. This also applies to QE and other Fed operations, not just interest rate decisions. It is why the Fed has fought against FOMC transparency so hard.

FED always announces actions before they take place- they don't do it in secret (to avoid spooking markets). Nor are their deliberations secret (they are secret at the time they deliberate but minutes of their OMC meetings are posted online for anybody to see on their website- check here if you are curious: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm ).

QE3 for example was announced in September 13, 2012 and started in December of that year. It ended in October, 2014.

 

[devil21]

LOL@"Fed always announces actions before they take place". Oh Zippy, you make it too easy sometimes.

Congressional Mandated Audit Reveals 16 Trillion In Secret Bailouts
https://www.sott.net/article/250592...eserve-Reveals-16-Trillion-in-Secret-Bailouts

$16,000,000,000,000.00 had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world's banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious - the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

and



--------

Thanks for the thoughts, can you elaborate what did you mean by "implemented QE4 at the same time.", how exactly?

Buying up stocks, Treasuries and probably other asset classes. The Fed maintains shell companies and also uses other central banks as proxy buyers.

 

[Zippyjuan]

LOL@"Fed always announces actions before they take place". Oh Zippy, you make it too easy sometimes.

Congressional Mandated Audit Reveals 16 Trillion In Secret Bailouts
https://www.sott.net/article/250592...eserve-Reveals-16-Trillion-in-Secret-Bailouts

There was no $16 trillion in bank bailouts. They did issue overnight loans to banks in the US (not those overseas). Each day they kept a loan, it was counted as a new loan- even if the balance due did not change. A $10 billion loan kept for 30 days would be counted as $300 billion borrowed- even though the actual amount they had out was only the $10 billion. Total in actual loans was closer to $1.2 trillion. It is true that US branches of foreign based banks who are members of the Federal Reserve Banking system were able to borrow funds for that branch but they did not loan any money to France or Scotland. And it was not a secret. It was all paid back and it was not at zero interest- they charged 0.75% (that is the daily interest rate- not the annual rate).

Don't believe it? Read the GAO report yourself. http://www.gao.gov/new.items/d11696.pdf

s. Loans outstanding for the emergency programs
peaked at more than $1 trillion in late 2008

https://www.metabunk.org/debunked-the-fed-gave-away-16-trillion-and-2-5-trillion-to-citigroup.t745/

They were also NOT at zero interest. The PDCF loans were made at the Fed's primary credit rate (0.75%)

Here's what the report says:
Content from external source

Table 8 aggregates total dollar transaction amounts by adding the total dollar amount of all loans but
does not adjust these amounts to reflect differences across programs in
the term over which loans were outstanding. For example, an overnight
PDCF loan of $10 billion that was renewed daily at the same level for 30
business days would result in an aggregate amount borrowed of $300
billion although the institution, in effect, borrowed only $10 billion over 30
days. In contrast, a TAF loan of $10 billion extended over a 1-month
period would appear as $10 billion. As a result, the total transaction
amounts shown in table 8 for PDCF are not directly comparable to the
total transaction amounts shown for TAF and other programs that made
loans for periods longer than overnight

The above paragraph is taken directly from the GAO report.

 

[devil21]

^^^^

 

[devil21]

There is no QE4.

It's so true that Zippy had to say it twice.

 

[Zippyjuan]

Sorry- accidental double post.