Mon Mar 11, 2019, 09:24 PM

Bigger Balance Sheet Bullish? Really?

February 3, 2019

But riddle us this: When is easing really tightening? First the Fed backed off further rate hikes, now we are talking about resuming asset purchases for the system open market account or SOMA. Sadly, the impact of renewed “quantitative easing” will be a further tightening of private credit as the FOMC does what is does best, namely caters to the debt issuance needs of the US Treasury.

Chairman Jerome Powell suggested a near term equilibrium where reserves are “plentiful,” and that may indeed mean soon; but on closer examination it may surprise many and turn out to imply TIGHTER credit in the hard money markets where real companies fund and leverage on a secured basis.

With more bank assets tied up in Fed reserves—and more “sponsored REPO” giving Money Market Funds and CCPs direct access to the Fed as a counter-party to REPO sellers-- the supply of credit that can flow into private REPO markets will fall all else equal.

Chris Whalen wrote recently in The IRA that the Fed wanted to “nationalize” the money markets once and for all as a way to ensure financial stability. This rings increasingly true as we get visibility into the eventual size, tenor and composition of the SOMA account, and buyers of financial stocks would do well to remember that structural changes to the money markets that involve a permanent Fed presence may change the REPO alchemy (Hey!! it’s a loan AND a sale!!) that they have taken for granted for all these many years.

If repo rates, some of which jumped above 5 percent that day, were to experience such sharp spikes more frequently, they could disrupt financial markets and cause other money rates to break above the top end of the Fed’s target range.

“Treasury (repo) volatility has raised questions as to how and when the Fed steps into money markets to intervene in order to cap or smooth volatile repo markets,” strategists Mark Cabana and Olivia Lima wrote in a research note released on Friday.

This suggests the repo market “has become increasingly fragile and sensitive to shifting behavior of key market participants, especially banks and dealers,” the strategists wrote.

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Reply Bigger Balance Sheet Bullish? Really? (Original post)
uncledad Mar 11 OP
nolidad Mar 12 #1
uncledad Mar 12 #2
nolidad Mar 13 #3

Response to uncledad (Original post)

Tue Mar 12, 2019, 06:40 AM

1. Watching America fall-one dollar of debt at a time!

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Response to nolidad (Reply #1)

Tue Mar 12, 2019, 10:10 AM

2. That's part of what's happening.

I posted this because events that cascaded into the Great Recession, the REPO markets were a big one.

There were many reasons that caused the GR, the accumulation of those met up in the REPO market.

The guys who watch the banks/markets are saying there's more going on behind scenes.

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Response to uncledad (Reply #2)

Wed Mar 13, 2019, 04:40 PM

3. From what I have been watching

Because the Eu is teetering, China is $35 trillion in debt and we are so deep in debt, the recession will probably hit next year and will make 2008-2010 look like a prosperous time!

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