I’m a Federal Reserve Repo Man.
Do doodoo do. Do doodoo do do.
I’m a Federal Reserve Repo Man!
Yes I am.
Alright, so I’m losing it. What else is new?
I’m exhausted from all the useless, foaming-at-the-mouth, ranting and raving I’ve been doing lately about the Fed’s return to its criminal QE scheme. I really should stop.
Federal Reserve Repo – It’s the Same Old Same Old
It’s just the same old “rescue the dealers and bankers, enrich the hedgies, and screw the little guy,” all the time. Bernanke said, “Monetary policy has winners and losers. And you poor schnook, little people retirees, who worked hard, saved your money, did the right thing, and don’t take risk, are the losers! Nyah, nyah, nyah, nyah. Too bad. Eff you! Buy stocks!”
So why do I bother? Insanity I guess.
Anyway, here’s today’s slop. The dealers took “only” $49.85 billion in TOMO repos. That’s Temporary Open Market Operations repurchase agreements, for those of you who may just be joining us. These are overenight loans that the Fed makes to the Primary Dealers so that they aren’t forced to sell any of their under water fixed income holdings that they’ve bought on 90% margin or more.
Fed Also Adding Permanent Money
The Fed is also doing POMO- Permanent Open Market Operations, where they purchase Treasuries from the Primary Dealers outright. Today they bought $7.5 billion of T-bills. This cashes out the dealers and takes some of their bloated, festering inventories off their hands, while they lose money from falling bond prices.
Falling bond prices are, of course, the inverse of rising yields. While the Fed has been stuffing cash into the dealer accounts, that has helped bring Treasury bill interest rates and other short term rates down. But bond yields have not cooperated. They’ve risen 25 basis points since October 8.
And You Bet There Will Be More
If the Fed doesn’t find a way to stop that, it’s game over. And they know it. So watch for the next round of QE New to include additional outright bond purchases. That will be on top of the $20 billion per month in bond purchases and the $60 billion in T-bill purchases that the Fed has already committed to.
They’re doing the bond purchases because their MBS holdings are being paid down in the normal course of business. Mortgage borrowers pay off their loans when they sell or refinance their mortgages. Therefore MBS pools gradually shrink over time. So the Fed’s MBS holdings are always declining.
The Fed decided when it stopped “normalizing” (shrinking) its balance sheet in August (a month ahead of schedule) that it would buy Treasuries instead of MBS to replace the lost MBS. The amount of mortgage prepayments fluctuates depending on mortgage rates. Right now that replacement rate is around $20 billion per month. So that’s how much the Fed is buying in Treasury notes and bonds this month.
That hasn’t been enough to stem the rise in yields lately. If this keeps up, it will force the Fed to buy even more coupon paper. If you think that the current intervention is massive, just wait.
Federal Reserve Repo Man Powell, In the Meyer Lansky Tradition
In addition to the $20 billion in Treasury coupon purchases, the Meyer Lansky Fed is also buying $60 billion in T-bills from the dealers in increments of $7.5 billion every other day or so. Today was one of those days.
For you young ‘uns, Lansky was the mobster banker who financed the Mafia’s gambling operations in Vegas and Havana in the forties and fifties. In other words, the Jerome Powell of his day. The only difference today is that hub of this mob’s far flung gaming operations is in Lower Manhattan.
Here’s how the new Lansky-Powell financing looks on the chart. While that blue line (cumulative TOMO outstanding) has been stable, the orange line (cumulative POMO) will rise inexorably. At some point they’ll cross. The orange line will head into the stratosphere permanently.
That’s because there’s not enough cash in the system to absorb the $80-100 billion per month in new Treasury supply that the US government will be dumping on the market from now until time immemorial.
Or at least until voters elect a few more Democrats to raise taxes on the rich in a vain and useless attempt to try to shrink the massive monthly budget defecation. OK. That won’t happen.
Fed’s Capacity to Imagine Money Is Limitless
And remember, this new money that the Fed is paying the dealers is money that the Fed hocus pocuses and deposits directly into Primary Dealer checking and trading accounts at the Fed. It’s direct monetization of the Federal Debt. It’s direct injection of cash into the banking system.
Money, money, money, money! MONEY! Gone yesterday. Here today. Tomorrow? That’s up to the market. But the Fed’s magical powers to create more of it are infinite. If the bond market does’t cooperate, the Fed will just bring forth more manna.
Here’s Why The Markets are Stuck
So with all this new money, why are the financial markets stuck in the mud? They’re pretty much exactly where they were when the Fed started this massive rescue.
There can only be one answer. The system is so massively overleveraged that it is on the brink of collapse. All this new money ($230 billion since September 17) that the Fed is pumping into the markets is merely keeping Humpty Dumpty sitting on the wall. Because if he falls, you know what happens. So the King’s horses and men are propping him up. Weekend at Bernies.
Dealers Don’t Need The Money Today, But Tomorrow, Look Out!
The dealers don’t need as much cash on days when no new Treasury issuance is settling. Today is one of those days.
Tomorrow isn’t. The Treasury will issue $10 billion in new bills. So TOMO outstanding should uptick on Thursday.
And just wait till the end of the month! In addition to the regular weekly Tuesday and Thursday bill settlements, the market will also need to pay for the big end of month coupon issuance. That will be the true test of whether these permanent rescue operations are working or not.
Oh, I said I wouldn’t rant? I lied.
Want a little history? Follow the entire sordid money printing, attempted asset inflation saga at Federal Reserve QE New. Bookmark it for future reference.
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