“Wait…What?”

Sunday I wrote about what has been the norm of late regarding my fielding of questions from friends and colleagues. Then, almost as soon as it was posted, I received a note in what can only be regarded as a “Wait…what?” type of questioning in regards to a point I made ending with “You heard it here, first.”

The topic was the Money Markets and what could be happening within.

The now ~$Trillion reverse-repo operation I have been arguing for months now seems to be in a far more precarious position than what the Fed has been stating, which sounds a lot like “What is this ‘reverse-repo’ thing you speak of, and why should we care?” Or said differently “We got this! Next question.”

Remember when it was nearing $500Billion a month or so ago when there was “No reason for concern.” we were told? Now it’s looking like well over a $Trillion in the coming weeks.

I could explain why there’s real concern, but I’m not a banker, and far too many would just love to use that as an excuse to reason why I should not be listened to.

Fair enough, I’ll give that cohort their due, for it is accurate.

Yet, doing so simply for that reason, they do at their own peril. For here (posted below) is a true banking analyst in both the classic term, as well as a no nonsense one, whom not only do I respect but, have been fortunate to have a few of my own articles appear in the same publications as his years back. (e.g., ZeroHedge, MarketWatch™, etc., etc.)

(Note: He is also one of those I include when referring to “You no longer see them on TV because they won’t tout the ‘Everything is just awesome!’ lockstep mantra.” which has become all encompassing.)

So, with that all said. Again, don’t take my word for it. To wit:

… the Fed’s reverse repurchase agreements have matched almost precisely the flow of funds out of the Treasury General Account (TGA) and into US banks. Bingo. 
The fellow wearing the lioncostume working the buttons and leavers behind the big curtain is not Bert Lahr, but FedChairman Jay Powell. He is trying to fine tune global dollar liquidity.

Some observers see RRPs as a means of preventing rates from rising, but we disagree. The increase in interest paid on bank reserves (IOR) and the RRPs are about defending 
the lower bound and, indirectly, protect banks and MMFs from the disaster of negative interest rates. Yes, the Federal Reserve Board did direct an increase in rates several weeks ago, but only as an expedient to prevent rates trading further into negative territory.

Back in June, when there was talk of the reflation trade ending, our friend Ralph Delguidice reminded us that there was indeed basis expansion. This was only a short-lived promise, however, just a teaser really. The Treasury and agency market promptly tightened in the past several weeks along with secondary market spreads for agency securities. But please don’t confuse that movement with the continued downward pressure on short-term interest rates.

[Then, there’s this humdinger, again, to wit]

MMFs, don’t forget, keep their cash in a large commercial bank. But when Vanguard does a RRP with the FRBNY, the MMF gets a risk-free asset and the cash leaves the markets entirely. Managing this liquidity juggling act is the next challenge facing Jay Powell and his colleagues on the Federal Reserve Board. As former Chairman BenBernanke told his colleagues years earlier, once you startQE you cannot stop.

“Jay Powel Defunds the Lower Bound” R. Christopher Whalen July 6, 2021

I’ll leave it there and conclude with a line now being sung in chorus throughout the mainstream business/financial media originating from the great, Alfred E. Neuman

“What, me worry?”

© 2021 Mark St.Cyr