Tag Archives: repo

The Fed Is Going All-In To Keep The System From Collapsing

Gresham’s Law in action: The diminishing availability of physical gold from the market (per several different accounts in London) corresponds to the proliferation of fiat currency printing and paper gold derivatives.

Since September the Fed has increased the size of its balance sheet by $414 billion or 11% in less than four months. It’s the fastest rate at which the Fed has printed money in its history.  The Fed insists that this “repo” program is not the reinstatement of “Quantitative Easing.”  In one sense the Fed is correct. This money printing program is a direct bailout of the big banks. And now the Fed is proposing to start bailing out hedge funds:

Federal Reserve officials are considering lending cash directly to hedge funds through clearinghouses to ease stress in the repo market. But that could be a tough sell for policy makers  (WSJ).

Yes, liquidity in the inte-rbank overnight collateralized lending system dried up in September.  But it’s not because of a shortage of cash to lend. The reason is two-fold.  First, banks needed cash/Tier 1 collateral to shore up their own reserves. Why?  Because bank assets – especially subprime loans – are starting to melt-down – i.e.  rising delinquencies and defaults. This is provable just by looking at the footnotes in quarterly bank 10-Q’s.  Second,  hedge fund assets – primarily the bottom half of CLO’s, credit default swaps, leveraged loans – are melting down.

The banks know this because these are the same deteriorating assets held by banks. In order to induce overnight repo lending, it would require a repo rate many multiples of the artificially low repo rate in order to reflect the risk of holding compromised collateral  overnight. This is why the repo rate spiked up briefly to 10% in September. That rate reflected the overnight interest rate desperate borrowers were willing to pay for an overnight collateralized loan.  Banks pulled away from lending in the repo market because they no longer trusted the collateral – even on an overnight basis. This is why the Fed was “forced” to start printing $10’s of billions and make it available to the repo market.

The Fed created the problem in the first place by holding interest rates artificially low and leaving several trillion of its first series of QE operations in the banking system. This in turn fostered  a catastrophic level of morally hazardous investing by banks and hedge funds. Now the Fed will try to monetize this – it has already hinted that the “repo” bailout will be extended now to April.  Absence this Fed intervention, 2008 x 10 will ensue – which will happen eventually anyway.

Ultimately, it will be a tragedy if the Fed bails out the the banks and the hedge funds – especially the hedge funds. Who benefits from this?  Bank and hedge fund operators should be penalized for making reckless investment decisions – not bailed out by  what will end up to be taxpayer money.  We already saw in 2008 that banks take the bailout funds and continued to pay themselves huge bonuses despite making lending decisions for which they should be penalized.

And a bailout of the hedge funds would reward hedge fund managers for investments that would never have been made had the Fed let a free market determine the true cost of making those investments.

I said back in 2003 that the Fed would print money and monetize debt until the elitists had swept every last crumb of middle class wealth off the table and into their own pockets before letting the system collapse. The bank bailout in 2008 and now the bank/hedge fund bailout is an example of this wealth transfer process.  The only question that remains in my mind is whether or not the current bailout operation will be the last “sweep.”

Time To Buy Gold And Silver On Every Pullback

The soaring paper gold open interest on the Comex is just one indication of a shortages developing in the physical gold bullion market. It’s no coincidence that just prior and accompanying the sell-off in gold this week that Exchange for “Physical” and Privately Negotiated Transactions (EFPs and PNT) volume spiked up on the Comex. EFPs and PNTs are “derviative” transactions which enable the bullion banks to settle futures with cash or some other form of gold derivatives like shares of GLD.

There are other indications as well, which Chris Marcus and I discuss this week on his Arcadia Economics podcast:


I recently found another “golden nugget” large mining stock contrarian play the December 12th issue of my Mining Stock Journal. This stock should be an easy double over the next 6-12 months.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

QE Madness: Is It Worse Now Than In 2008?

Unequivocally, the “repo” operations by the Fed is “QE.” Well, let’s just call it what it is because “QE” was coined in place of “money printing.”  The socially correct posture to assume on Wall Street and in DC at the Fed is to label the current bout of money printing “repo operations.”  In fact, based on all of the underlying data I scour daily, let’s just cut to the chase and call this a de facto banking system bailout.

The technical details on why the “plumbing” in the banking system is getting “clogged” is mere surface analysis.  The underlying systemic problems are similar to the problems that pulled the rug out from under the financial system in 2008.  Bank assets, specifically subprime lending assets, are melting down again.

We’ve seen this movie before and the “regulators” were supposed to have blocked the banks from engaging in financial pornography. But, of course, just like teenagers who discover Pornhub, the greedy bankers undeterred by superficial legislation and an absence of independent regulatory oversight (every senior regulatory official has either worked on Wall Street or worked a law firms who get paid to keep Wall Street bankers out of jail) couldn’t help themselves.  CLO’s, 100% LTV lending, non-income verification consumer loans and OTC derivatives with orgasmic fees have re-emerged in full force.

As an example, Citibank is now sitting on top of nearly $1 trillion in credit default swaps – see this, which has the appropriate links:  Citibank CDS.   The article notes that:  “the New York Fed secretly hid from the public’s view that it had funneled $2.5 trillion (yes, trillion) to Citigroup and its trading units from December 2007 to at least July 21, 2010. That last information only became public after more than two years of court battles with the Fed.”

In the minutes released from the last FOMC meeting, the Fed is now discussing extending the money printing operations to April. Imagine that, what started as giving corporations a little help to pay quarterly taxes in September has morphed into and is on its way to half a trillion dollars of printed money handed over to the banks. Doesn’t seem strange that all the money created for corporate tax payments has not  found its way into the Treasury Department’s bank account? How do we know?  Because  a large portion of the money printed has financed new Treasury debt issuance.

Wall Street on Parade is making a motivated, if not valiant, effort to dredge up the truth with regard to to re-start of the Fed’s massive money printing operation. But I hope the Martens are not holding their breath on getting a response without an expensive legal battle:

On October 2, 2019 we filed a Freedom of Information Act (FOIA) request with the New York Fed. We requested “emails or any other forms of written correspondence from the Federal Reserve Bank of New York to JPMorgan Chase or any of its subsidiaries or affiliates containing any of the following words or phrases: ‘repo,’ ‘repurchase agreements,’ ‘overnight lending,’ or ‘reserves'”…

Our FOIA request was acknowledged by the New York Fed as received on October 2. We should have had a meaningful response on November 1. Instead, we received an email advising that we would not hear further from the New York Fed until December 5, 2019…Instead of the mandated 10-day extension that is allowed under law, we were given more than a month-long extension. On December 5, the New York Fed emailed us to say it was extending the time to respond to January 9. – Fed Balance Sheet Explosion

Make no mistake, the melt-up in the stock market, the majority of which is confined to just a handful of stocks – AAPL, MSFT plus a few insanely overvalued unicorn-type stocks (TSLA, SHOP, etc) – does not reflect a “booming economy.” Rather, it’s evidence that the financial and economic system is melting down beneath the propaganda.  With its bailout policies, the Fed has made a complete mess of the financial markets. And it’s worse this time  than it was in 2008.

Aside from some select shorts in stocks like TSLA and AAPL, buying gold and silver (physical bullion not paper derivatives – yes, GLD is a derivative) and mining stocks is the no-brainer trade of 2020.

The Truth Behind The “Repo” Non-QE QE Money Printing

“The Fed first tried to justify the loans by saying they were a short-term measure to stem a liquidity crisis. But the so-called “liquidity crisis” has not prevented the stock market from setting new highs since the loan operations began on September 17. And the short-term operation has been running every business day since that time and is currently scheduled to reach into next year or last permanently. A cumulative total of approximately $3 trillion in overnight and longer-term loans has been funneled to unnamed trading houses on Wall Street without either the Senate or House calling a hearing to examine what’s really going on.”Wall St On Parade

The analysis below is an excerpt from my November 24th issue of the Short Seller’s Journal

“Credit deterioration is a typical symptom of the end of a cycle — and that is exactly what Credit Benchmark is finding, particularly in the industrial sector.” – Bloomberg News in reference to a report from Credit Benchmark on the deterioration in credit quality of the industrial sector globally.

Credit Benchmark offers data/analytic services which provide forward-looking insights into the credit quality and liquidity of companies and sectors globally.  Credit deterioration is a typical symptom of the end of an economic cycle. Credit Benchmark also noted last week that U.S. high-yield corporate credit quality has been crumbling since early 2019.

High yield debt sits below and props up leveraged loans held by banks, pension funds and CLO (collateralized loan obligations) Trusts. Leveraged loan credit quality is also declining, with many loan issues trading well below par and a not insignificant portion trading at distressed levels. Banks have been stuck with a lot of leveraged loans that were underwritten with the hope of sticking them in CLO investment structures. But big investors have been pulling away from CLO’s since mid-summer.

A CLO is a type of collateralized debt obligation. An investment trust is set-up and structured into tranches in order of “safeness,” with credit ratings assigned to each tranche ranging from AAA down to the “residual” or mezzanine/equity layer. Each tranche is sliced into bonds which are sold to investors, primarily institutional and wealthy investors, who invest in the various tranches of the CLO based on relative appetite for risk. Typically hedge funds and/or the underwriter of the CLO will provide funding for the mezzanine/equity layer.

Leveraged loans underwritten by Wall Street are pooled together and the interest and amortization payments are used to fund the interest and amortization payments of each layer of the trust. Each tranche receives successively higher rates of return to compensate for the level of risk. In addition each tranche is amortized based on seniority. If and when enough loans in the trust default and cash collected by the CLO trust is insufficient to pay off all of the tranches, the losses are assigned in reverse order from bottom to top. During the financial crisis, losses spread into the highest-rated tranches.

Invariably, as yield-starved investors grab for anything with a higher yield than is available from relatively riskless fixed income investments like Treasuries, agency debt (FNM/FRE) and high-grade corporate bonds, the underwriting standards of leveraged loans deteriorate. Wall Street requires loan product to feed the beast in order to continue raking in fat fees connected to this business. And, as you might have guessed, Wall Street opportunistically offers credit default derivative “insurance” products structured around the CLO trusts.

As I’ve detailed previously, credit rating downgrades in leveraged loans are mounting as the level of distress in the asset class rises. CLO’s purchase roughly 75% of all leveraged loans underwritten. In theory, CLO trusts are “over-collateralized” to account for a certain level of loan default and to ensure the top tranche receives the highest credit rating possible. But it would appear that many of these CLO trusts are starting to incur losses at the lowest tranches. This fact is reflected in the rececent performance of CLO bonds since June. As an example, through June, double-BB rated CLO bonds threw off a 10% ROR (interest payments and bond price appreciation). But by the end of October, this 10% ROR was wiped out, meaning the value of the bonds has fallen 10% since June including 5% alone in October.

The chart above plots the SPX vs an index of “generic” CLO triple-B rated bonds. The negative divergence of the CLO bonds reflects the escalating degree of distress in leveraged loans, which are underlying collateral funding the CLO trusts.

I am certain that part of the reason the Fed has had to start bailing out the banking system with its not-QE QE repo operations is connected to the rapid deterioration in the CLO/leveraged loan market. Chunks of thes CLO’s and leveraged loans are sitting on bank balance sheets.

The 2008 financial crisis was primarily triggered by the collapse of collateralized subprime mortgage CDO’s (these were the securities featured in “The Big Short”). I believe – and I’m not alone in this view – that CLO’s will cause the same type of systemic damage . The CLO market is roughly $680 billion just in the U.S. That was about the same size as the subprime mortgage market by 2008. Including the offshore market, the global leveraged loan market is now $1 trillion, doubling in size since 2010.

Most people think of the Fed when they hear the term “repo.” But the repo market primarily is funded by banks and money market funds. CLO bonds have been used as repo collateral for several years. As the credit quality of this asset class declines, banks are less interested in participating in repo market funding transactions to avoid the rising probability of suffering a counterparty default from use of CLO collateral, thereby reducing liquidity in the repo market.

In addition, many banks have been stuck with leveraged loans that could not be offloaded onto investors or CLO trusts. This inability to off-load loans into CLO’s started this past summer when the largest investor in CLO’s, a large Japanese bank, began to pull away from the CLO market. As the value of these loans declines, banks are forced to increase the amount of capital required to maintain reserve ratios – another reason for the Fed repo market intervention.

As the global economy, including the U.S. economy notwithstanding the insistence to the contrary by the Fed and Trump, continues to contract it’s quite probable that CLOs/leveraged loans will begin to melt-down Chernobyl-style. Referring back to the SPX/CLO bond price chart above, in my view there’s no coincidence that the Fed’s intervention in the repo market commenced at about the same time the triple-B CLO bonds began to take a dive. That price decline is even more pronounced for the tranches with ratings below triple-BBB.

To be sure, CLO’s are not the only financial wildfire outbreak targeted by the Fed’s money printing, but I would wager a healthy amount of gold coins that distress in the CLO market is one of the primary troubles right now. And the problem is magnified when you take into account the credit default swap transactions “wrapped around” these CLO trusts. These derivative trades also require an increasing amount of collateral as CLO tranche distress escalates.

To accompany the above analysis in my Short Seller’s Journal, I presented some ideas for expressing a bearish view based on the the eventual collapse in the CLO/leveraged loan market. You can learn more about this newsletter here:  Short Seller’s Journal information.

Sleepwalking Toward A Crisis – Got Gold?

“By sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis.” – Mervyn King, former head of the Bank of England in a lecture at the IMF’s recent annual meeting

The market levitates higher on phony economic data from the Government, Trump tweets, Fed money printing and hedge fund algorithms chasing headline and twitter sound bites. Currently the stock market, dulled by money printing and official interventions, could care less about economic reality and rising global systemic geopolitical and financial risk. Corporate headline earnings “beats” are considered bullish even if the earnings declined YoY or sequentially.

But for those who don’t have their head in the sand, clinging desperately to the “hope” offered by the misdirecting Orwellian propaganda, it’s difficult to ignore the message signaled by the legendary levels of insider selling.

Someone is not telling the truth – The Fed once again last week increased the size of both the overnight and “term” repo operations. Starting Thursday (Oct 24th) the overnight repos were increased from $75 billion to “at least” $120 billion and the term repos (2 week term) of “at least” $35 billion were extended to the end of November, with two “at least $45 billion” term repos thrown in for good measure. The Fed is also outright printing helicopter money for the banks at a rate of $60 billion per month (via “T-bill POMOs).

At the height of the last QE/money printing cycle, the Fed was doing $75 billion per month. So whatever the problem is behind the curtain, it’s already as large or larger than the 2008 crisis.

That escalated quickly – When the repo operations started in September, the Fed attributed the need to “relieve funding pressures.” At the time the public was fed the fairytale that corporations were pulling funds from money market funds to pay quarter-end taxes. Well, we’re over five weeks past that event and the repo operations have escalated in size and duration three times. Someone is not telling the truth…

The rapid increase in Fed money printing in just five weeks reflects serious problems developing in the global financial system. Actually, the problem is easy to identify:   At every level – government, corporate and household – the level of debt has become unsustainable, with not insignificant portions of that debt in non-performing status (seriously delinquent or in default). Thus, the Central Banks have had to resort to money printing to help the banks manage the rising level of distress on their balance sheet and to monetize the escalating rate of Treasury debt issuance.

The quote at the beginning is from the former head of the Bank of England, Mervyn King. King is warning that the global financial system is headed toward a crisis and that money printing ultimately won’t save it.  While it’s pretty obvious that a disaster waits on the horizon, when the former head of a big Central Bank delivers a message like that instead of Orwellian gobbledygook, the world should pay heed.  I would suggest that the Fed’s money printing signals that the risk of a crisis intensifies weekly.  Got Gold?

The Fed Cranks Up Its Printing Press

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Helicopter Ben Bernanke’s address to the National Economic Club, 2002

It took the Fed more than 4 1/2 years to remove from the banking system just $750 billion of the $4.5 trillion in money it printed. The Fed stopped the removal process (“Quantitative Tightening”) at the beginning of September. But just 13 days later the Fed began adding liquidity back into the banking system via its repo operations. 42 days later, the Fed’s balance sheet has spiked up by $253 billion and is back over $4 trillion:

41% of that $253 billion ($104 billion) was put into the banking system in the last three days of this past week.

Apparently the repo/term repo operations were not enough.  On October 11th, the Fed announced that it was going to purchase at least $60 billion T-bills per month through at least the 2nd quarter of 2020.  The rationale was “in light of recent and expected increases in the Federal Reserves non-reserve liabilities” (link).  “Non-reserve liabilities” refers specifically to “currency in circulation.” The only way to increase currency in circulation is to create it. Thus, the above rationale is a decorative phrase for “money printing.”

The problems in the banking system targeted by the Fed’s money printing are likely getting worse by the day.  The Fed has now conducted three outright money printing operations since October 11th. Each operations has been progressively more over-subscribed. Today’s operation of $7.5 billion had nearly $6 of demand for every $1 printed and offered.

As I have asserted since the Fed’s repo operations commenced, the problem is significantly more profound than the “quarter-end liquidity” needs of corporations and banks. I suggested that the liquidity injection program would quickly increase in size and duration, ultimately morphing into permanent QE/balance sheet growth/money printing.

While some of the money being printed will be used absorb the massive amount of new Treasury issuance, the nexus of the problem is seeded in the big bank balance sheets and business operations. The problems leading up to the 2008 crisis were never fixed – just papered over. Furthermore, the legislation that was promoted to prevent a repeat of 2008 and protect the taxpayers was nothing more than window dressing which enabled the banks to hide their massive fee-generating recklessness (Dodd-Frank, Consumer Financial Protection Bureau).

The “Too Big To Fail” bank balance sheets collectively are close to double their size in 2008. A frighteningly large portion of these assets are sub-prime or near-sub-prime loans plus OTC derivatives that have been well-hidden off-balance-sheet. One of the regulatory initiatives put into effect in 2010 enabled banks to hide their total derivatives holdings behind a nebulous concept called “net derivatives exposure.” The “net” metric supposedly measures a bank’s unhedged net economic risk exposure, netting out off-setting hedges with counterparties.

But counterparty defaults were one of the key detonators of the 2008 financial melt-down. Unfortunately, Congress and the Fed have enabled the banks, after monetizing their catastrophic business decisions in 2008, to create a financial Frankenstein that is now financially apocalyptic in scale. The rapid escalation of the repo operations is evidence that the fuses on the various financial bombs have been lit.

Fed Delivers More QE “Light” And Gold Responds

On October 4th, as I expected would happen, the Fed announced that it was extending its overnight and term repo operations out to November 26th (the November 12th two-week term repo matures on the 26th).

The Fed added 7 more 2-week  “term repos, ” plus a 6-day “term repo,” with the next three operations upped to $45 billion. It extended the overnight repos until at least November 4th.  Well then, I guess the “end of quarter” temporary liquidity issue with corporate tax payments was not the problem.

Follow the money -The Fed’s repo operation extension further validates the analysis in my last post in which I made the case that an escalation in the non-performance of bank assets (loan delinquencies and defaults and derivatives), caused by contracting economic activity, has created a liquidity void in the banking system that is being “plugged” by the Fed. The Fed’s balance sheet has increased $186 billion since August 28th.

Not only did the Fed end “QT” (balance sheet reduction) two months earlier than originally planned in January, the Fed has effectively reversed in the last 5 weeks all of the QT that occurred since March 28th.

The evolution of Orwellian propaganda terminology for “money printing” has been quite amusing. It seems that the Fed has subtly inserted the phrase “balance sheet growth” into its lexicon. While Jerome Powell referenced “organic balance sheet growth” in his press circus after the last FOMC meeting,  expect that it will be considered politically/socially incorrect to use “QE” or “money printing” instead of “balance sheet growth” in reference to this de facto banking system bailout.

Meanwhile,  thank the Fed for providing the amount of money printing/currency devaluation needed to offset China’s absence from the physical gold market for the last week:

Given the technical set-up in gold plus the enormity of the Comex bank/commercial short position in paper gold, many gold market participants, including me, expected a much bigger price-attack on gold during Golden Week than has occurred. In fact, gold has held up well, with the December future testing and holding $1500 three times in the last week. Business activity in China, including gold and silver trading, resumes tonight.

The Fed’s QE Light program will likely transition into outright permanent money printing before the end of 2019. The November meeting is scheduled for the end of this month (Oct 29-30). But I doubt the Fed will turn its repo money printing into permanent money printing – aka “POMO” or “balance sheet growth” – until the December FOMC meeting (Dec 10-11).