UNDERSTANDING THE REPO MARKET
What are REPOs? https://en.wikipedia.org/wiki/Repurchase_agreement
"The REPO is an abbreviation for repurchase agreement, and it is nothing more than a 'repurchase agreement'. That is, a short-term money management tool: of the two contracting parties, one sells a security for cash, and at the same time undertakes to buy back that security at the expiry of a short period (from overnight to a few months), upon payment of the original price plus interest.
This market is huge, and used both by individuals and by companies and financial institutions. Central banks use repurchase agreements to add or remove liquidity in the banking system "
In practice, it is the market where banks and financial operators obtain short term liquidity.
July-August 2019: Severe structural problems began to appear when Treasury General Accounts,
the accounts used by the US Treasury to make payments require massive top-ups. To do this, the Treasury, which cannot print the currency directly, must issue an enormous amount of Treasury Bills that the market could never have absorbed given the immensity of the necessary sum. Liquidity problems that had already arisen in previous years. From the link indicated above, it is interesting to note that the current account from which the American Treasury money comes in and out, is on at the Federal Reserve branch in New York, the place where the famous meeting that decided the fate of Lehman Brothers took place. . So I open this brief parenthesis, just to get into the perspective of how bankers' meetings work and what purpose they have. After that, let's get back to talking about REPOs and the present day.
The then US Treasury Secretary is Henry Paulson. Paulson was with Goldman Sachs from 1999 to 2006, the year in which he was called from his position as C.E.O of G.S. to be US Treasury Secretary. In mid-September 2008: AIG, as we recall, received $ 85 billion (the maximum amount ever allocated until then) and was saved thanks to pressure from Paulson. Lehman, on the other hand, was left to fail. All this was decided shortly before at the headquarters of the New York Fed whose head was also a former G.S (Timothy Geithner) who will later become Secretary of the Treasury under the presidency of Barack Obama, from 2009 to 2013.
At the meeting there was another banker present: Blankfein, also from G.S, the bank that before him had been headed by Henry Paulson.
So it must be understood that G.S. was AIG's largest business partner and would have lost 20 billion if AIG went bankrupt (it guaranteed CDS on subprime). In that case, G.S. and with it the stock options of the Secretary of the Treasury, former C.E.O of Goldman Sachs, Henry aka Hank Paulson. It is also said to have been a tantrum from Paulson towards Fuld (C.E.O of Lehman Brothers.) ... for prestige and rivalry. Well might have some truth to it, Paulson is famous for his quick-tempered and resolute character. While the plan was being approved, he threatened the US Congress with total bankruptcy if they did not approve the bailout plan and the allocation of the T.A.R.P. (trouble asset relief program) to him and his friends. Furthermore, some commentators have speculated that the failure of Lehman Brothers was intended to create the situation of fear and panic necessary to get the 700 billion plan approved first, and the subsequent funding plans and to initiate the subsequent large monetary maneuvers. It seems, given the public accounts, that Lehman Brothers was not in such bad financial state.
This backs up my "bogey theory" ... that is, they threw Lehman at the stake to create fear and panic. Kind of like when a kidnapper kills a hostage to show that he is serious.
In this case, however, the hostage only pretended to die, being an integral part of the "banksters" system. Lehman Brothers, which has always been a participating entity in the Federal Reserve! Banks never die, but being a cartel, they are reabsorbed into the structure itself when they have exhausted their role.
The events described above, necessary to enter into the mentality of how decisions are made, lead us straight to the present day, where nothing has been solved, but only postponed, with the hope of keeping the system under control, a system that to be managed, requires constant monitoring and timely interventions, as we have seen, in the event of irreparable criticalities. How do you realize that the moment is critical? You have to watch for certain signs. The most significant signs are the sudden spikes in the REPO market.
Here we are in September 2019. The Bank for International Settlements raises the alarm. Like the siren before the bombing. We couldn't wait a moment longer. The bomb was about to explode. The Federal Reserve began to inject liquidity massively into the money markets using REPOs, declaring that it was not Quantitative Easing because, according to them, they were buying only short-dated securities, while the Q.E. it concerns long-term securities. Where has all this liquidity gone? Nobody knows for sure, but since that time, the stock market has soared, totally disconnected from the business cycle and economic fundamentals. For example, Tesla taking off and Apple adding $ 350 billion in capitalization in two months. When these things happen, you need to know where to look. The protagonists of these movements are: The Federal Reserve, its use of Treasury General Accounts and the REPO market. All that happens after is only the consequences of what is decided in the closed door meetings of the Federal Reserve and which is implemented with the other two instruments. The current operating system of the Federal Reserve has been in operation since 2008. It is the consequence of the events I mentioned above. Like all liquidity maneuvers, we start with temporary measures which then become definitive. This system requires banks to maintain an adequate amount of reserves deposited precisely in the accounts opened at the Central Bank.
In this way, the Central Bank controls interest rates by simply varying the rate it pays by remunerating those reserves. After the 2008 crisis, the banks were recapitalized directly by the Central Banks which exchanged toxic assets (eg subprime etc.) for liquidity fresh from the printing press. The Federal Reserve is effectively transformed into a shadow banking system operating with so-called dark pools:
After all this printing of money, it comes to a point that there is so much liquidity inside the banks that you start wanting to reduce it. Bad idea. It’s like lighting a match to see if there is petrol in the tank. In fact, during 2017-2018 the so-called "tapering" was ordered, that is, the Federal Reserve began to reduce its balance sheet because after all the QE, the reserves had grown too much, but it was a serious mistake, because the banking system, now addicted to daily doses of monetary methadone, began to look for liquidity in the REPO market. In fact, in September 2019 this happened!
The Federal Reserve then opened a channel of immediate liquidity on demand and, as can be seen, the surge in the REPO market was immediately calmed down. But this does not mean that the problem has been solved, because that additional liquidity, of crazy proportions, must absolutely not circulate outside the banking system to avoid overheating of the economy and hyper-inflation risk: this is where the synthetic virus comes into play and the lockdowns that will last until this time bomb is defused.
But let's continue with the narration of the events of those days, which represent the fundamental foundations on which all the "JENGA" of the current world economic equilibrium rests.
If the Treasury needs money to finance public spending, it has two options: 1) raise taxes 2) raise new debt. When you have an accommodating Central Bank, you choose option 2. Why does the state need so much additional money? Because there is a recession, remember? Indeed, the Great Recession that began in 2008. The money was used in abundance for social policies that contrast the negative situation due to the persistence of the economic crisis. The State therefore issues new bonds which are subscribed by primary operators, ie the banks belonging to the so-called Primary Dealers. By doing this, these banks decrease the amount of reserves in their mutual accounts with the Central Bank. In search of profitability, the same banks direct their excess reserves in the risky REPO market, where there is everything, including brokerage firms that provide liquidity to those without it by obtaining it from very risk-prone customers. If such a thing did not happen in a market of institutional operators in suits, the figure of the loan shark would come to mind, who lends money to those who have already ruined themselves in poker but want to continue playing. If something goes wrong, such as a bet on a derivative, the bank is short of the minimum capital reserves necessary to be considered solvent. These dynamics were particularly exacerbated by the impositions of Basel, which establishes very specific parameters of capital solidity in terms of liquidity.
It is understood that this is a very intricate complex structure, where precarious balances can only be re-established with liquidity pads on command, like a hand inserting the bits of JENGA back into the structure to avoid, or delay its systemic collapse. Only the Central Bank has the power to generate these bearings and it does so with Quantitative Easing, or the direct purchase of Government Bonds, intervening directly on the market, thus leaving intact the reserves of the banks called "Primary Dealers", which are therefore more solid to self-sustain in the REPO market. But it does not end there, because in this complicated mechanism, hedge funds also come into play, hungry for returns, because they manage immense amounts of money, including those entrusted to them by pension funds, which join and replace the role of Primary Dealers, further complicating the counterpart's web, throwing into the REPO market all the rottenness they have in their stomachs, like the rotting securitization market all stuffed with leverage, or money borrowed from who knows who and who knows how. The glue that holds it all together is the search for collateral. In a world of clandestine betting and gaming lacking transparency, collateral must be of high quality and purity. No longer a promise or a piece of paper, but cash. And the cash will continue to flow in rivers, from the Federal Reserve tap, provided that it does not come out and that it does not reach the people, who would spend it immediately, creating new risk (if people spend, the economy overheats and companies begin to borrow to invest in the virtuous economic cycle pumped by liquidity. If companies ask for credit, the overall risk increases both at corporate and private level).
People will have money, but the channel through which it will be given will be different. So the so-called aid arrives, given with a dropper, in a climate of psychological depression, so that there is no inflation, at least for now. It is worth noting the sadism with which the cruel repressive measures have eliminated all those parts of people's lives that cause happiness and exuberance, such as travel, concerts, sports and all aggregative situations. The dramatic thing is that there is no real strategy to get out of this situation. Central Banks try out a tool and look at how it behaves before implementing actual programming. A bit like testing the water temperature with your foot, before diving in with the whole body. The territory is unexplored in many ways. You try something and expect to see what happens. Nobody knows what to do. This is a rather scary situation.
In the mechanics of this already extremely abstruse structure, the US dollar also comes into play and the need that all the banks in the world have to finance themselves in dollars because dollars are the currency in which almost all global trade is expressed. . A lot of these dollars are traded outside the borders of the United States. The whole world is flooded with dollars, because the US imports a lot from all countries of the world, having ceased to be a predominantly productive country. And here the thing becomes even more complicated, because the banks of the respective countries cannot directly access the American REPO markets, but only in their respective analogous systems, where the dynamics are complicated with the addition of currency conversion. A shortage of dollars by an operator in these markets triggers systemic risk even outside the dollar area and the problem extends to the whole world. All countries need dollars immediately to hedge each other and not explode. This is why the solution, that is the need for a global lockdown, saw the participation of the entire globalized world.
But what happened on September 17, 2019? In those days there were maturities of Treasury Bonds and new Treasury issues with maturities of 3 and 10 years. In the same period there was the expiration of taxes and other normal cases that in previous years had never yet caused problems of volatility. But not this time. The Treasury's withdrawal maneuver on the reserve account is $ 190 billion during the period between mid-August and mid-September. The reserve account is an aggregate of about fifty banks from various countries and it takes time to allow for new balances after such massive withdrawal operations.
The sudden drop in liquidity due to this sudden withdrawal prevented these systemic banks from participating in the REPO market and panic broke out, with interest rates soaring. Let's try to imagine the scene: the market opens and the biggest investors who are regulars, showing up every day, suddenly, do not show up. "Help! Where have they gone, what's going on ”? The panic extends to the futures market, options, currencies, and everything else where all traders bet by borrowing money from the REPO market. If rates rise, as we have seen, from 2 to 10%, one can easily imagine the enormity of the consequences and repercussions on all markets in the world. If the situation continues for too long, the chain of margin calls arrive and it is the end. The JENGA collapses.
THE REPO MARKET IS WHERE THE LEVERAGE EFFECT BEGINS
Other dynamics are explained as follows: at the beginning, no one was worried, but rates continued to rise from 3 to 4 to 5% up to a peak of 9, ¼%. Rates then normalized. When asked what happened to the rates that then fell, the answer differed greatly according to the point of view of the role played in the world of the REPO market. One of the determining factors is certainly due to the easing of repurchase of securities by the SOMA of the Federal Reserve, which caused a lack of liquidity: "The system's open market account is one of the monetary policy tools used by the Federal Reserve system of the United States which contains assets acquired from open market operations "
Another determining factor in the functioning of REPOs is timing: the market opens at 7am and Hedge Funds pounce on it with trillions to refinance. Cash is not available all together at the same time. Operators connect when they prefer, also due to the time zone of the respective US states. For example, a New York Hedge Fund that needs cash at 7 am has to wait until another trader wakes up in California and provides it to him when he sees fit. Then there is another characteristic of the REPO market, namely the two factors that determine supply and demand.
These two factors are cash and SECURITIES which are mainly government bonds, but also package bonds issued following securitizations. In those packages there is usually a mix of stuff, some good and some not. A bit like the surprise bag, I bought from the newsstands for my daughter when she was little. Inside were some nice toys and a junk of other unsold stuff of little interest and value, all packed together and sold for a single price. If there is a lot of cash on the market, the risk drops and rates fall. If many Securities are offered on the market (which are directly affected by the real world economy), the risk rises and so does the rates. If rates rise, the chain reaction of margin calls is triggered because traders no longer trust others and everything can explode very quickly.
Here is where the Federal Reserve intervenes to balance again the supply of Cash on the REPO market with respect to the quantity of Securities. This maneuver is called Reverse REPO. The effect of lowering rates, however, discourages and drives away all those operators who have healthy liquidity and are looking for returns. In order for rates to rise again, the Federal Reserve must exit the market, but if it exits, rates rise again and risk returns. So the cure is worse than the disease and it is an endless circle that cannot be cured but only dribbled like ping pong.
The visible effect of all that liquidity thrown by the Federal Reserve into the REPO market also had the immediate effect of competing for new stock market records. Imagine super speculative Hedge Funds that are flooded with unlimited cash. Here's how the stock exchanges rose and here's why the new highs. All driven by liquidity creations that flow to investors in the ways described above in this complex system. The Federal Reserve doesn't care much where this money goes, as long as it doesn't end up in people's pockets and rates are kept low.
European banks are directly involved in this vortex because they need to finance themselves in dollars for counterparty games. Basel III has created much tighter constraints on how to operate with clearing accounts opened at the New York branch of the Federal Reserve. Since 2017, every transaction of Euro / U $ D must have a consideration on the books of the Federal Reserve of New York and must be supported by sufficient capital parameters, whereas previously, the leverage effect could dilute even 20: 1 this need has made it difficult for European banks to access dollar credit channels with heavy repercussions also on the REPO market where a dollar in Europe is not the same dollar in the US.
It is therefore understood that the whole world needs only one thing: an immense amount of dollars and the certainty of having them all the time. Dollars that are used only in the global betting casino. Like Las Vegas chips, or Monopoly money that circulates only within the game. A game from which we have been excluded mainly for practical reasons in which we participate only with a form of energetic vampirism that steals our soul and makes us white and gaunt like the victims of vampires in the movies. Perhaps we will return to being relevant, when this immense galaxy of bets made in debt will conveniently deflate. In the meantime, lockdowns, government aids, sofa confinement, masks, vaccines, and beatings from police. From this perverse game, China, which does not need dollars, is the winner. Over the years it has prepared itself for this moment, with immense reserves of gold and supremacy in trade and technology. China sits on a mountain of dollars and immediately backed away from this blackmail. Again, China doesn't need dollars and it doesn't need anyone. China waits and will be like the blowfly, depositing its larva on everyone else's smoking corpses, after we kill each other with our stupid and useless suicidal solutions. From our myiasis sarcophaga the new oriental world will be born. This is the Chinese plan. Great connoisseurs of the Art of War.
I hope I have given an even more in-depth view of what is the very complicated economic-financial system that dominates the real economy every day. The general view that interests people is limited to the money we have in our pockets. Above this, as we have seen, there is a colossal and dynamic structure made of an infinity of small pieces. As shown in the image below,
where a face appears, but it is made up of many micro-tiles of other people's faces. To understand the design, in its complexity, it is necessary to reconstruct it and insert the tiles in the right places. Then, observing it from a distance, the overall picture appears and everything seems to make more sense, just like what happened in this absurd story of a virus apparently responsible for stopping the entire economy of the world, except that of the country from which the virus we were told originated. THE RIGHT VIRUS AT THE RIGHT MOMENT, as I’ve written in my most famous newsletter.