Spike in Repo Rates [Fed Overnight Repurchase agreement]

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Oicuryy
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Oicuryy » Thu Oct 24, 2019 1:08 pm

Here is a link to a speech last week by John Williams, president and CEO of the New York Federal Reserve Bank.
https://www.newyorkfed.org/newsevents/s ... /wil191017
But one telling observation is that when increases in the Fed’s non-reserve liabilities caused the level of reserves to fall well below those prevailing during summer and early September, strains in money markets emerged.

Ron
Money is fungible | Abbreviations and Acronyms

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Random Musings » Thu Oct 24, 2019 9:38 pm

Once the Feds balance sheet leveled off after the big QE programs, they did reduce their BS a bit, but it still remained high. With the BS expanding again at a solid ramp rate, it is another round of QE.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by GORE » Fri Oct 25, 2019 12:44 am

Hi,

I have followed Norinchukin Bank activities for weeks now because I also suspect the Japanese banks and most expecially this one to have a link with the recent repo rate hike.

I have just found your post by performing my daily homework on this bank and I am surprised to find some similar thoughts.

The Japanese banks hold one third of the highly illiquid US leveraged loans (CLOs) (we speak about $ 1 Trillion dollars), while the top-3 s Japanese banks release double digits net profit fall (Mitsubishi : 12% slide in annual net profit, Mizuho : 83% dive in annual profit)…

Half of the newly issued leveraged loans are used to refinance existing debt. If CLO investors did take flight, those companies (getting the funds) would be starved of credit, causing the default rate to spiral further, possibly beyond historic levels & Japan bank would fall. Very recently the CLO fund market started a selloff and this 4rt quarter is said to be on another net sell off, whereas it is a highly illiquid market...

The fact that the CLO bond market was almost the only bond market not going into negative interest recently, combined with the fact that this market is not supposed to be backed by a QE purchasing program anywhere makes it an ideal candidate to be at risk at the begining of the next economic downturn (that has already started).

bye

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Sat Oct 26, 2019 11:36 am

Phineas J. Whoopee wrote:
Thu Oct 24, 2019 12:40 pm
Hi Chicken Little.

The Fed is not the gubmint. It's legally barred, by Congress, from lending to the gubmint.

PJW
OK.

But what is that a reply to?

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Phineas J. Whoopee » Sat Oct 26, 2019 12:46 pm

Chicken Little wrote:
Sat Oct 26, 2019 11:36 am
Phineas J. Whoopee wrote:
Thu Oct 24, 2019 12:40 pm
Hi Chicken Little.

The Fed is not the gubmint. It's legally barred, by Congress, from lending to the gubmint.

PJW
OK.

But what is that a reply to?
My apologies, Chicken Little. I should have addressed my post to glorat.

PJW

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by TaxingAccount » Sat Oct 26, 2019 1:06 pm

10 year up almost 30 bp in one month. The FED is fighting a running battle. They try to maintain the short end, but with each bp higher, the leaking happens on the long end as more and more debt becomes non performing. It cannot stop the avalanche of non performing debt with the downturn on the way. "Not QE" is 60 billion per month + overnight repo 120 billion a day = cost to prevent US market collapse. A new record in monthly debt monetization. This will be fun to watch.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Sat Oct 26, 2019 1:46 pm

In case anyone is wondering, I am in freakout mode.

I cruised through 2000 and 2008. I haven't even noticed anything since then except the December dip, which I was fine with as it just seemed like an equity event (I budget a minimum 50% down move in equities at any time for any reason).

This is starting to feel different. This feels like waiting for a "systemic" crisis. Who even cares what the "cause" winds up being (but thank you for Norinchukin Bank). In 2008 the Fed Funds rate was around 5.0% and the balance sheet was < 1 trillion. Now we're at < 2.5% on the rate and > 4 trillion on the balance sheet...and the thing hasn't even started yet? A large part of rest of the developed world already has negative interest rates?

My spidey-sense is going off. Whatever is going to happen is now animate for me, I can feel it and taste it. 2008 was simple in retrospect. This will be too. I am considering;

1) Increasing equity - I bought long-term treasuries a couple years ago as crisis protection. Whatever happens this time around will start with equities, but has to quickly turn into a bond problem, right? I could flip the LTT into equity right now, but it's tempting to try and milk it past the initial shock to the system.

2) Decreasing corporate debt - Maybe go all treasuries and get out of total bond? Shorten up duration and increase TIPs?

3) Consider a commodities position if I can find a no K-1 ETF that tracks without high fees.

4) Investment Property - I can't do the work, so I'd have to go in with my brother-in-law. His hobby is renovating his house, just goes room-to-room relentlessly. He brought up the idea a couple years ago, but I suspect he just wants more projects. If the tenant asked for a light bulb, the place would have all new light fixtures by the time they got back from work. Doesn't seem like a money making proposition.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by TomCat96 » Sat Oct 26, 2019 2:06 pm

Chicken Little wrote:
Sat Oct 26, 2019 1:46 pm
In case anyone is wondering, I am in freakout mode.

I cruised through 2000 and 2008. I haven't even noticed anything since then except the December dip, which I was fine with as it just seemed like an equity event (I budget a minimum 50% down move in equities at any time for any reason).

This is starting to feel different. This feels like waiting for a "systemic" crisis. Who even cares what the "cause" winds up being (but thank you for Norinchukin Bank). In 2008 the Fed Funds rate was around 5.0% and the balance sheet was < 1 trillion. Now we're at < 2.5% on the rate and > 4 trillion on the balance sheet...and the thing hasn't even started yet? A large part of rest of the developed world already has negative interest rates?

My spidey-sense is going off. Whatever is going to happen is now animate for me, I can feel it and taste it. 2008 was simple in retrospect. This will be too. I am considering;

1) Increasing equity - I bought long-term treasuries a couple years ago as crisis protection. Whatever happens this time around will start with equities, but has to quickly turn into a bond problem, right? I could flip the LTT into equity right now, but it's tempting to try and milk it past the initial shock to the system.

2) Decreasing corporate debt - Maybe go all treasuries and get out of total bond? Shorten up duration and increase TIPs?

3) Consider a commodities position if I can find a no K-1 ETF that tracks without high fees.

4) Investment Property - I can't do the work, so I'd have to go in with my brother-in-law. His hobby is renovating his house, just goes room-to-room relentlessly. He brought up the idea a couple years ago, but I suspect he just wants more projects. If the tenant asked for a light bulb, the place would have all new light fixtures by the time they got back from work. Doesn't seem like a money making proposition.

Stop. Relax. Breathe.

your arguments are the following

1) you are in freakout mode
2) it "feels" like waiting for a systemic crisis.
3) Your spidey sense is going off.
4) You're so not freakout-able that you cruised through 2000-2008, but now you're freaking out, so we should trust the emotional credibility of your stability. ergo we should REALLY panic.

I honestly want to know how the repo rate is connected to the broader stock market and economy, academically, factually, intellectually.

But I have yet to see one person make the actual chain of causation. Right now what I'm getting is

1) Spike in Repo Rates
2) ????
3) Global economic meltdown.

Stop and do the leg work. If you do the legwork you'll probably freak out less and inform yourself in the process. Fill in the ????

Chicken Little
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Sat Oct 26, 2019 2:16 pm

TomCat96 wrote:
Sat Oct 26, 2019 2:06 pm
Fill in the ????
For me, the story goes like this...

An "innocuous" spike in the repo rate causes the FED to change direction. Instead of raising rates and decreasing the balance sheet, they continue lowering rates and increasing the balance sheet. Once the "spike" is beaten back, they announce that they're going to continue operations for an extended period of time.

So...things are going relatively well for the economy right now, and we've restarted operations?

Isn't this exactly the time to be doing the opposite? Weren't they doing the opposite not long before the "spike"?

Isn't there little room to maneuver if they want to ease?

I'm not telling you to panic, I'm telling you that I'm about to panic (I don't really see any point in panicking "after").

I'll add this...

There's certainly an idea that operations can smooth the business cycle. It's even been wondered whether recessions can not only be mitigated, but potentially even avoided with operations. I'm just looking at it from the other side. If operations can't prevent a recession, in this environment, can you even have a recession that doesn't develop into a systemic crisis?

(that's three "evens" in there, was going to edit but too slow on the draw, already quoted)

There's a lot of debt out there.
Last edited by Chicken Little on Sat Oct 26, 2019 3:25 pm, edited 1 time in total.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Bluce » Sat Oct 26, 2019 3:21 pm

Chicken Little wrote:
Sat Oct 26, 2019 2:16 pm
TomCat96 wrote:
Sat Oct 26, 2019 2:06 pm
Fill in the ????
For me, the story goes like this...

An "innocuous" spike in the repo rate causes the FED to change direction. Instead of raising rates and decreasing the balance sheet, they continue lowering rates and increasing the balance sheet. Once the "spike" is beaten back, they announce that they're going to continue operations for an extended period of time.

So...things are going relatively well for the economy right now, and we've restarted operations?

Isn't this exactly the time to be doing the opposite? Weren't they doing the opposite not long before the "spike"?

Isn't there little room to maneuver if they want to ease?

I'm not telling you to panic, I'm telling you that I'm about to panic (I don't really see any point in panicking "after").

I'll add this...

There's certainly an idea that operations can smooth the business cycle. It's even been wondered whether recessions can not only be mitigated, but potentially even avoided with operations. I'm just looking at it from the other side. If operations can't prevent a recession, in this environment, can you even have a recession that doesn't develop into a systemic crisis?

There's a lot of debt out there.
Chicken, getting out of the weeds and back to fundamentals: Central planners, which is what we're talking about, never get it right other than the stopped clock syndrome. It's impossible for a bunch of pointy-heads to manipulate prices accurately forever. The global pointy-heads have manipulated a lot of debt into negative interest rates -- a silly idea if there ever was one.

Only the push-pull of supply and demand (pricing signals) of the free market can do that. Left unfettered, it always works better than central planning.

Debt: Heck yes, there is a lot, government, corporate, and private. In a downturn, only the free market can clear the debt and allow resources to go where they will best be used. Only people, left to their own devices, can determine that -- not the government. That didn't happen in 2008.

What to do now with asset allocation? As I noted earlier in this thread: I have no clue.

GORE
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by GORE » Sat Oct 26, 2019 8:21 pm

The ??? should the very first thing of your list.

This thing has triggered the repo rate hike.

The economic downturn is a circumstance.

It is more and more evident in my opinion that the problem is coming from non US banks this time and the Japanese banks are the best candidates.

They have suffered an earlier 0 interest rate (and thus a longer period of net profit fall), they have desperately looked everywhere to find a better yield (and it is surely riskier opportunities) and the top 3 s Japanese banks have just released a double digit annual profit fall (minus 83% for Mizuho, minus 13%) that gives you a perspective about the smaller ones.

Half of the CLO bonds finance existing debts and the market has been on a net selloff for almost 2 quarters now. This wonderful US leveraged loan market, guess what, is hold by Japanese banks.

If new funds don t come to fuel into this CLO bond market, it is highly probable that the remaining Will fall with itu.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by TomCat96 » Sun Oct 27, 2019 4:36 pm

Chicken Little wrote:
Sat Oct 26, 2019 2:16 pm
TomCat96 wrote:
Sat Oct 26, 2019 2:06 pm
Fill in the ????
For me, the story goes like this...

An "innocuous" spike in the repo rate causes the FED to change direction. Instead of raising rates and decreasing the balance sheet, they continue lowering rates and increasing the balance sheet. Once the "spike" is beaten back, they announce that they're going to continue operations for an extended period of time.

So...things are going relatively well for the economy right now, and we've restarted operations?

Isn't this exactly the time to be doing the opposite? Weren't they doing the opposite not long before the "spike"?

Isn't there little room to maneuver if they want to ease?

I'm not telling you to panic, I'm telling you that I'm about to panic (I don't really see any point in panicking "after").

I'll add this...

There's certainly an idea that operations can smooth the business cycle. It's even been wondered whether recessions can not only be mitigated, but potentially even avoided with operations. I'm just looking at it from the other side. If operations can't prevent a recession, in this environment, can you even have a recession that doesn't develop into a systemic crisis?

(that's three "evens" in there, was going to edit but too slow on the draw, already quoted)

There's a lot of debt out there.

Take a look at what you wrote. Let's look at things factually.

The goal was this

Spike in overnight repo rates => ???? => Global Economic Meltdown.

This is what I have for you
Spike in overnight Repo rates => FED to change direction, increasing balance sheet, continuing operations => Global economic meltdown.

Right now, I would argue you have not made the case. You're still bridging the gap with a lot of panic. The fed increasing balance sheet does not lead to contagion, meltdown, or anything. Let's stay fact driven.


Let me fill in the blank as I understood for the 2008 crash.

1. Spike in Repo Rate, overnight lenders unwilling to accept mortgage backed securities as collateral.

2. Financial institutions dependent on overnight lending, i.e. Lehman Bros. underable to secure funding.

3. As a result of immense leveraging, Lehman is unable to maintain sufficient cash on hand, and goes bankrupt as they are unable to maintain their leveraged position.

4. Lehman Collapses. Other financial institutions follow.

5. The collapse of some financial institutions, creates a panic causes losses to other institutions in excess of their stock exposure. Example, Reserve Primary Fund had some of the money market invested in Lehman. Panic caused a run, causing money market to break the buck.

Let's look at #2.

First, there has to be some kind of mania. In 2007, it was housing. ok. but what does a bubble in housing have to do with financial collapse. Nothing direct.

Mortgages were securitized. These securities formed the basis of bonds. These bonds were sold globally, to pension funds, investment banks. Systemically they were riskier than then appeared, even when tranched, meaning the entire market got it wrong for years. Some were insured. Example AIG, Fannie Mae, Freddie Mac.

The safety of these bonds caused institutions to invest in them with leverage, which drove the need for overnight lending via the repo markets.


The point I'm making here to you, is that in the absence of dependency on the repo markets, repo spikes really don't mean much.

A question you should ask yourself is why a spike in the repo market would cause a financial meltdown as opposed to say, a quarterly loss on some financial institution's balance sheet? Fill the blank as to why this would occur.

In order for the repo spike to cause a single financial institution to even crash, the financial institution would have to depend critically on the repo market for funding. Ask yourself, why would a single financial institution be so dependent on the repo market that they would go under if the rates were to change (especially when theres been such clear recent precedent) Fill the blank as to why this would occur.

Then ask yourself this, in order for a meltdown to occur, other institutions would have to have so much exposure to the financial institution that just went bankrupt, that they themselves would go bankrupt in the event of bankruptcy of the former. Fill the blank as to why this would occur.

In other words.
Scenario #1, spike in repo rate causes quarterly loss to one firm overly dependent on repo market funding.
Scenario #2, spike in repo rate causes not only quarterly loss but firm to collapse.
Scenario #3, spike in repo rate causes not only one firm to collapse, but several to collapse.
Scenario #4, spike in repo rate causes not only several firms to collapse, but a widespread financial panic.


Do you notice the chain of causation? Nowhere did I say Repo rate => Fed doing something dumb => Global Meltdown.
That's not how finance works. Make it concrete, or you will get prone to "feelings that something aint right", "spider senses", and "i didnt panic last time, but this...this scares me"

In the case of 2008, all of that was set in motion because of mortgage backed securities, the systemic mispricing, the spreading of such risk globally through the securitization of such bonds, and the over leveraging based on that.

I'm not saying it can't happen again in the future. But you should at least be able to identify why or how the market is systemically wrong this time. Where's the mania?
What is everyone so wrongly invested in that every financial institution screwed up?

Without that, a repo spike is just that and nothing more. It's better to keep yourself informed than cast large ambiguous characterizations of the fed screwing everything up. The latter is nothing but rank speculation and will make you prone to your emotions.

Search for facts to keep yourself informed, and keep your emotions grounded.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Mon Oct 28, 2019 5:53 am

Can there be a "significant" recession today that doesn't turn into a systemic crisis?

Let's not entertain something that requires carefully scrutiny two years later just to identify. Is it still possible to have a "real" recession without a systemic crisis?

In a "real" recession, won't there be debt not paid on a significant scale? Doesn't that, by itself, sound like "contagion"?

I don't need to know the story. We'll all reassemble and chit-chat about it after, as if it were all elementary. The Fed is easing right now. The Fed is trying to prevent/mitigate a recession right now.

You promising the whole thing doesn't blow up if they fail?

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by TomCat96 » Mon Oct 28, 2019 6:32 am

Chicken Little wrote:
Mon Oct 28, 2019 5:53 am
Can there be a "significant" recession today that doesn't turn into a systemic crisis?

Let's not entertain something that requires carefully scrutiny two years later just to identify. Is it still possible to have a "real" recession without a systemic crisis?

In a "real" recession, won't there be debt not paid on a significant scale? Doesn't that, by itself, sound like "contagion"?

I don't need to know the story. We'll all reassemble and chit-chat about it after, as if it were all elementary. The Fed is easing right now. The Fed is trying to prevent/mitigate a recession right now.

You promising the whole thing doesn't blow up if they fail?

No I can't promise the whole thing won't blow up if they fail.

So where does that leave you? Are you saying that I can't promise, therefore it will happen?

what about you? You said "I don't need to know the story"
Think about what you're saying.

Suppose I jump on board with your message. So I agree and go off and panic that it's all going to come crashing down now.
What am I supposed to do?

You haven't explained how the repo rate spike is going to cause it. So all I have is panic because I can see you're panicked.
I don't know what the repo rate spike means. I don't know how it leads to the crash. I don't know how it leads to anything.

How is that supposed to work? How do I convey my information to others? I have no information. Just panic.
Do I tell my neighbor Bob that we don't have to know the story? Just that it's bad. Real bad?

At this point I have so little information, I can't even articulate your case to anyone else.
Do I tell others the Fed is trying hard, but they might fail? Is that the information being relayed?

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Mon Oct 28, 2019 7:31 am

My case is the Fed has started easing. By definition, I then conclude that the economy is not "OK".

The only association with the Repo rate is that the Fed changed tack after that "spike". If you'd prefer to call it a coincidence, I'm fine with that.

Now...The Fed is easing in relatively benign, albeit not great - or "OK" - , conditions. There is objectively less room to maneuver than in 2008. The financial sector has been under protracted stress from low interest rates for years.

What you will eventually identify as "the cause" is irrelevant to me. The cause in 2000 and 2008 could not have been more identifiable. In fact, most of us were derelict ahead of those events. Most of us had the wrong "asset allocation" had we even the slightest comprehension of the current conditions - not a knowledge of what was going to transpire, or how - but simply the reality of the day. Plenty of people went to "Plan B" in 2008, so all the protestations that they won't now is statistically wrong.

I have more than a cursory understanding of conditions "right now". The Fed is easing, growth is slowing, employment is slowing, stocks have been propped with buybacks, and there are arguably bubbles in every kind of debt. There is an enormous amount of negative yielding debt out there, and the US isn't far from turning the corner.

My thesis is that any recession in this environment results in financial contagion.

I would very much welcome explanations on why that is wrong.

As an addendum: all the "celebration" that would accompany a significant drop is an outright joke. The rebounds after 2000 and 2008 have had tremendous conditioning power, to the point that goes way past conscious acknowledgement. Most of the 100% equity retail investors have that allocation because they expect - without fail - a new high in at worst a decade (I know, I know...not "you").

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Oicuryy
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Oicuryy » Tue Oct 29, 2019 3:21 pm

This blog post presents data to back its claim that the Fed caused the spike in repo rates. The Fed is now in the process of correcting its mistake.

https://www.moneyandbanking.com/comment ... ions-redux

Ron
Money is fungible | Abbreviations and Acronyms

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Wed Oct 30, 2019 4:52 am

Oicuryy wrote:
Tue Oct 29, 2019 3:21 pm
This blog post presents data to back its claim that the Fed caused the spike in repo rates. The Fed is now in the process of correcting its mistake.

https://www.moneyandbanking.com/comment ... ions-redux

Ron
OK. I'll accept that explanation.

If our diagnosis of the cause is correct, then recent actions should help put the issue to rest. Yet, given the inevitability of the event―that the day would come when reserve supply hit the inelastic part of the reserve demand curve―the Fed could (and should) have been prepared. If so, it could have avoided even a temporary dent in its well-deserved reputation for operational prowess.

However, since nobody else will agree that a blogger diagnosed an inevitability that the FED was incapable of discerning, that leaves a conversation between you and me.

I'll start.

Importantly, our analysis supports the Fed’s argument that the current balance sheet expansion involves virtually no monetary policy stimulus (see the opening citation from Fed Chairman Powell). To be sure, we define quantitative easing (QE) as an increase in the supply of reserves beyond the minimum needed to meet the interest rate target. So far, however, the expansion of the balance sheet has merely stabilized the supply of reserves, while accommodating increased demand for non-reserve Fed liabilities. And, since the Fed plans to invest the proceeds from its balance sheet expansion in Treasury bills, even if it increases the supply of reserves to restore a healthy buffer, it is engaging in virtually no transformation of liquidity, maturity or credit. Viewing the federal government’s balance sheet on a consolidated basis, all the Fed is doing is swapping one very short-term government liability for another.

Goobly, goobly, goobly...

The balance sheet is expanding in a time of record low unemployment.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Wed Oct 30, 2019 5:03 am

Today's Installment: Here's the way around payday loans...

https://finance.yahoo.com/news/america- ... 01049.html

Please explain how all of the current debt is OK. Is there never going to be another recession? Please explain how it's OK to be lowering rates in a time of record low unemployment? How do these recent activities fall within the dual mandate?

Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" — what is now commonly referred to as the Fed's "dual mandate."
Last edited by Chicken Little on Wed Oct 30, 2019 5:16 am, edited 1 time in total.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Wed Oct 30, 2019 5:14 am

duplicate
Last edited by Chicken Little on Wed Oct 30, 2019 5:15 am, edited 1 time in total.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Wed Oct 30, 2019 5:15 am

duplicate

smectym
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by smectym » Wed Oct 30, 2019 5:30 am

Look, the interesting thing about the repo anomalies is that no one—and I mean no one—has been able to fully explain it.

If the root problem is that banks with reserves are, for whatever reason, reluctant to part with those reserves overnight in exchange for collateral, then that’s concerning; it suggests that somewhere there is a stinking corpse or some other problem—but no one has been able to identify that problem.

If it’s some other issue, some hyper-technical thing to do with the “plumbing,” that none of us non-PhD’s in Fedonomics need concern ourselves with, OK: but nowhere has that case been convincingly made.

The conclusion I draw is that we’re getting into the zone of Rumsfieldian “known unknowns,” and therefore caution is advised: it’s an orange light scenario. Continue to monitor. In the meantime, no portfolio adjustment is indicated—even beyond the inert Bogleheadian mass who wouldn’t adjust the portfolio anyway, because on principle they don’t check the portfolio, and they tune out any news that might affect the portfolio.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by JBeck » Wed Oct 30, 2019 9:28 am

smectym wrote:
Wed Oct 30, 2019 5:30 am
Look, the interesting thing about the repo anomalies is that no one—and I mean no one—has been able to fully explain it.
This is the best explanation that I've come across

https://www.cato.org/blog/reflections-r ... -imbroglio

"So there you have it: a host of developments adding to banks' demand for excess reserves, while others gradually chipped away at the stock of such reserves. Add a spike in primary dealers' demand for short-term funding, a coinciding round of tax payments that transferred as many reserves to the TGA, and binding intraday liquidity requirements at the banks holding a large share of total system excess reserves, and you have the makings of last month's perfect repo-market storm."

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Wed Oct 30, 2019 10:46 am

JBeck wrote:
Wed Oct 30, 2019 9:28 am
This is the best explanation that I've come across
I’ll sign on to that explanation, but I don’t have a problem with the two main tenants;

1. The system is broken.
2. The FED does not know what it’s doing.

How many Bogleheads are going to join us on those?

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by JBeck » Wed Oct 30, 2019 11:06 am

Chicken Little wrote:
Wed Oct 30, 2019 10:46 am
JBeck wrote:
Wed Oct 30, 2019 9:28 am
This is the best explanation that I've come across
I’ll sign on to that explanation, but I don’t have a problem with the two main tenants;

1. The system is broken.
2. The FED does not know what it’s doing.

How many Bogleheads are going to join us on those?
Whether there is any truth in those two points or not, does it make sense to fight the Fed; is there a better option than stocks/treasuries?

Chicken Little
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Wed Oct 30, 2019 11:27 am

JBeck wrote:
Wed Oct 30, 2019 11:06 am
Whether there is any truth in those two points or not, does it make sense to fight the Fed; is there a better option than stocks/treasuries?
In the half of our portfolio where I can do damage (other half sensibly invested in target date) I allow myself to do whatever I want between 40/60 and 60/40 at any time for any reason. Currently 40/60.

About a 4th is “managed” more actively. On the bond side I have equal TBM/Int/VIPSX/LTT (added a couple years ago). I’m considering moving to all STT/VIPSX and moving to 60/40 if there’s a substantial decline.

I am all STT/MM/CD in taxable. I may take an equity position in a decline, and am considering commodities (depending on what vehicles are available).

I suspect that we’ll eventually see inflation in things besides housing, health care, college tuition, and smaller food containers at the grocery. People have been saying that rates have to go up for many years, and I’m finally convinced (they’ll go up after they’re done going down/negative)

All that will ultimately be pretty inconsequential, but at least I’ll get to think I’m clever if it works out.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Bluce » Wed Oct 30, 2019 4:57 pm

Chicken Little wrote:
Wed Oct 30, 2019 10:46 am
JBeck wrote:
Wed Oct 30, 2019 9:28 am
This is the best explanation that I've come across
I’ll sign on to that explanation, but I don’t have a problem with the two main tenants;

1. The system is broken.
2. The FED does not know what it’s doing.

How many Bogleheads are going to join us on those?
"1. The system is broken."

IMO, the system is flawed, and has been from the start. These kinds of fundamental flaws -- while they may ebb and flow -- never go away.

"2. The FED does not know what it's doing."

IMO, the idea that a handful of academics can possibly know what the price of money should be for 330 million people is a pipe dream. Central planning always fails sooner or later.

Having said that the 70% of my PF that is fixed, 35% of that is CDs, Treasurys, and "Agencies." Aside from SS, my PF will be my sole retirement income so I take it pretty seriously.

I have no better ideas and am not too worried about any huge catastrophe in my lifetime (I'm 69). But if it hits me it will hit everybody.

RubyTuesday
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by RubyTuesday » Wed Oct 30, 2019 5:26 pm

This speech by John Williams, President and CEO of NY Fed is interesting.

https://www.newyorkfed.org/newsevents/s ... /wil191017

It discusses the Fed’s operating framework, recent money market turmoil, and the Fed’s open market operations to stabilize short term interest rates. Also interesting commentary on SOFR and the replacement of LIBOR.
A confluence of events contributed to the volatility in money markets a month ago. But one telling observation is that when increases in the Fed’s non-reserve liabilities caused the level of reserves to fall well below those prevailing during summer and early September, strains in money markets emerged. And when the prior level of reserves was quickly restored through temporary open market operations, normal interest rates and market functioning returned.
In light of these events, we have learned that the ample reserves framework has worked smoothly with a level of reserves at least as large as we saw during summer and into early September. Although temporary open market operations are doing the trick for the time being, anticipated increases in non-reserve liabilities would cause reserves to decline in coming months without further actions.
Based on these considerations, last Friday the FOMC announced that the Fed will be purchasing U.S. Treasury bills at least into the second quarter of next year.7 Specifically, the Desk announced an initial monthly pace of purchases of $60 billion. These permanent purchases will, over time, bring the underlying level of reserves—by which I mean absent temporary open market operations—to a level consistent with the ample reserves framework on a sustained basis.
In concert with these purchases, the FOMC announced that the Desk will continue temporary overnight and term open market operations at least through January of next year.8 This combination of permanent Treasury bill purchases and ongoing temporary open market operations is designed to provide effective control of the federal funds rate over the next several months.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by thatwhichisgood » Sat Nov 02, 2019 11:16 am

I need help understanding the cost to taxpayers. the money the government's putting in ... does that turn around and ALL costs come back to us or is that a subsidy of the markets to keep them stable etc. Will these dollars become part of our deficit? I'm also looking for a resource for dummies on this issues that include taxpayer costs. Thank you dear brain trusts!

skepticalobserver wrote:
Tue Sep 17, 2019 12:11 pm
Thoughts on the recent spike in overnight Repo rates? How may this effect (or not) hypothecation of retail investor securities, particularly treasury holdings?

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Valuethinker » Sat Nov 02, 2019 12:54 pm

thatwhichisgood wrote:
Sat Nov 02, 2019 11:16 am
I need help understanding the cost to taxpayers. the money the government's putting in ... does that turn around and ALL costs come back to us or is that a subsidy of the markets to keep them stable etc. Will these dollars become part of our deficit? I'm also looking for a resource for dummies on this issues that include taxpayer costs. Thank you dear brain trusts!

skepticalobserver wrote:
Tue Sep 17, 2019 12:11 pm
Thoughts on the recent spike in overnight Repo rates? How may this effect (or not) hypothecation of retail investor securities, particularly treasury holdings?
Generally the Fed makes a profit. The US financial bailout was exited at a profit.

AFAIK the liabilities do not fall on the US taxpayer.

frank5
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by frank5 » Sat Nov 02, 2019 2:17 pm

A below market loan results in less income for the gov't and is a reallocation of resources from services to banks. A below market loan may also occur between people:
https://www.marketwatch.com/story/the-t ... 2019-05-20

"Regardless of the interest rate you intend to charge (if any), you want to be able to prove that you intended the transaction to be a loan rather than an outright gift."

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by whodidntante » Sat Nov 02, 2019 2:48 pm

thatwhichisgood wrote:
Sat Nov 02, 2019 11:16 am
I need help understanding the cost to taxpayers. the money the government's putting in ... does that turn around and ALL costs come back to us or is that a subsidy of the markets to keep them stable etc. Will these dollars become part of our deficit?
The Fed has the ability to create money and to intervene in capital markets. So it's not deficit spending so much as exploiting the power of the dollar. Now if exploiting becomes abuse, or we try to fund too much of our obligations with created money, it could mean that the viability of the dollar as a reserve currency comes into question. But as for now, the USA is one of the best houses in a so-so neighborhood.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Oicuryy » Sat Nov 02, 2019 4:03 pm

thatwhichisgood wrote:
Sat Nov 02, 2019 11:16 am
I need help understanding the cost to taxpayers.
The Federal Reserve's operations are a net positive for taxpayers.

The Fed creates money and loans it out. It earns interest on those loans. When loans are paid back the principal is uncreated. But some of the interest is used to pay the Fed's operating costs and the rest is given to the U.S. Treasury. The amount the Treasury gets would otherwise have had to come from taxpayers.

Sometimes politicians and others argue that the Fed should be giving more to the Treasury. But it is against the rules of this forum to discuss those arguments here.

Ron
Money is fungible | Abbreviations and Acronyms

Chicken Little
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Sat Nov 02, 2019 5:24 pm

thatwhichisgood wrote:
Sat Nov 02, 2019 11:16 am
I need help understanding the cost to taxpayers.
Me too.

Two things happened in response to the spike, an increase in temporary open market operations (Repo), and also resumption of permanent open market operations (purchase of securities). The balance sheet was < $1 Trillion before 2008, and it's currently around $4 Trillion. The balance sheet was decreasing before the spike, and now it's increasing.

https://www.federalreserve.gov/monetary ... trends.htm

The balance sheet includes around $1.4 Trillion in mortgage-backed securities (MBS).

https://www.federalreserve.gov/releases ... nt/h41.htm

It didn't seem to hold any MBS before 2008.

https://www.investopedia.com/articles/e ... -sheet.asp

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by batrleby » Sun Nov 03, 2019 11:28 am

Chicken Little wrote:
Wed Oct 30, 2019 5:03 am

Please explain how it's OK to be lowering rates in a time of record low unemployment?[/i]
The world economy has not yet recovered from the GFC.

If the US interest rates are allowed to remain so far above the natural rate of Interest, which collapsed worldwide in 2008
(https://www.newyorkfed.org/research/policy/rstar)
it will reduce potential GDP, which means unused productive capacity and reduced competitiveness).

So, a reduction of the FFR to 1.5-1.75% is still potentially deflationary (as the USD continues to strengthen relative to other world currencies).

Welcome to Wonderland.

Chicken Little
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Fri Nov 08, 2019 7:18 am

Ongoing...

https://www.wsj.com/articles/new-york-f ... 1573141440

The Fed is also buying Treasury bills to increase the size of its balance sheet and to add permanent liquidity to the financial system, and it hopes that effort will reduce the need for large temporary interventions.

My problem with discussing all of this on here is that outside of bunker-builders, it seems like a race to see who can declare everything "fine" first. Is the fact that the balance sheet is expanding when it should be contracting (the FED was decreasing balance sheet right before this "spike") disturbing? The FED was trying to decrease their balance sheet and they were thwarted. If you take their gobbly-gook and turn it into "everything is fine", isn't that a rationalization?

I am not saying that disaster is around the corner, but I don't see any value in ruling out that possibility. If there is another recession, something beyond a "technical recession" that takes a couple years of research to identify, I have a hard time believing that wouldn't mature into a "financial crisis" of some magnitude. That's where the system is today. I also think the macro picture will be elementary in retrospect ("negative yields, I should have seen it...").

I don't push money around. I have a real job that takes up all my time. My concern isn't equity, it's debt. I don't see how the next crisis can't be a bond crisis. My guess is that any negative event would start with an initial drop in stocks, and then flip as it unfolds, turning certain segments of the stock market into the "quality" people are trying to flee to. I'd try to form a more cogent argument, but I have to go to work.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Tue Nov 12, 2019 7:54 am

I'll let it go after this...

Here's what I've been saying, packaged up nicely...

https://www.investopedia.com/blackstone ... yptr=yahoo

There seems to be a sentiment that all of the "negatives" are going to queue up nicely, and wait patiently to be addressed one-by-one. The spike in Repo isn't one thing, it's a part of the larger thing.

"The failures in the repo market, negative-yielding debt, a deeply negative term premium, trade conflicts around the world and a collapse in manufacturing all seem unrelated right now, but I don't think they are random," Zidle wrote in a recent note to clients. His biggest concern is negative yields on sovereign debt worth $13 trillion, what he believes may be "the mother of all bubbles."

I could throw in stressed Chinese shadow banking, actual Chinese bank failure, high consumer debt (student, auto - including underwater loans being rolled over, housing), a poor employment picture (little wage growth until recently, little increase in employment for "eligible workers not currently looking for work", increases in low-wage service jobs - including "driver" and "food delivery"), lack of growth throughout the developed world, leveraged corporate debt (CLOs), slowing IPO market, largely unprofitable companies (Uber, WeWorks, Netflix ramping up borrowing after the lid is popped on streaming, with a half-dozen competitors on the way).

I'm actually looking for encouragement. It would seem to come in two flavors;

1. the train will just keep rolling (I'd take that, but it jumped the track in 2008)
2. a China trade deal and successful Brexit resolution will propel worldwide growth

In retrospect, the contention is that 2000 and 2008 were easy to see if you bothered to look. My takeaway from those two events was that I would start paying attention. I am paying attention. This is what I see. The only positives that I see are US stock market performance (which I interpret as negative in when put in context) and the fact that we're not in a calamitous recession right now.

You know negative yielding debt is insane, you said you wouldn't buy it, you know it's coming here if we have a recession. I am asking for a positive spin on all this - not an incorrect interpretation of the significance of the Repo spike. It's all "one conversation".

Let's have at it...why are things good? I'll go first;

1. it's exceedingly unlikely there will be thermonuclear war today

Chicken Little
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Chicken Little » Tue Nov 12, 2019 8:12 am

To clarify, what makes this actionable is that I do not believe anyone's "appropriate asset allocation" includes holding negative yielding debt. That's mostly because...that's what they told me.

They say they will not stay the course, should we ever be faced with that.

Heady stuff?

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Bluce
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Bluce » Tue Nov 12, 2019 9:03 am

Chicken Little wrote:
Tue Nov 12, 2019 8:12 am
To clarify, what makes this actionable is that I do not believe anyone's "appropriate asset allocation" includes holding negative yielding debt. That's mostly because...that's what they told me.

They say they will not stay the course, should we ever be faced with that.

Heady stuff?
There are numerous Youtube clips on this subject. I've viewed a some of them, and few are in favor of negative rates and most say it will mess everything up.

IMO, the pointy-headed central planners have painted themselves into a corner, and don't know what else to do.

"If some is good, more has to be better."

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