In today’s Fed POMO (Permanent Open Market Operations), the Fed bought $1.6 billion in long term paper. That’s part of its regular program to replace the MBS in the Fed’s SOMA (System Open Market Account) that are regularly prepaid in the normal course of business.
The purpose of the regularly scheduled program of Today’s Fed POMO was first announced in August. It was ostensibly to keep the Fed’s balance sheet from shrinking. But the practical effect is to take inventory out of the bloated, overloaded, overleveraged, explosive, radioactive accounts of the Primary Dealers, and VOILA! CASH THEM OUT!
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Of course, with the addition of the QE New programs, this is just vestigial part of the big picture QE. But at a current rate of $20 billion per month, it’s not inconsequential. Add $60 billion a month in T-bill purchases, and $200 billion or so of de facto Standing Repo Facility TOMO (Temporary Open Market Operations), and pretty soon you’re talking real money.
Today’s Fed POMO Was Small But TOMO Was Massive
While today’s Fed POMO was small, things got yooge in TOMO. The Fed added a net of $41.7 billion to the total of outstanding repos. For some undoubtledly scary reason, the dealers demanded, and were granted, an additional $39 billion in overnight repo money. And they took another $2.4 billion in 14 day term repo money.
Here’s what it all looks like since the “one-off” emergency of mid September brought forth QE New.
And the Dealers sang, “Yay though we walk through the valley of the shadow of death, we will fear no evil. For the Fed art with me!”
Massive TOMO Expansion Belies the Fed’s Big Lie
In case you missed it, yesterday the Fed announced a massive expansion of the emergency TOMO program. Remember, they lied out their asses when they said it was due to a “one-off” of the conjoining of corporations paying quarterly taxes at the same time as the Treasury had a big new issuance.
Yeah, it’s a one off all right. Once off per quarter, every effing quarter, every effing year. That’s right, it happens every quarter when estimated corporate taxes are due. That always coincides with the big mid month settlement of new Treasury paper.
So, if it’s a regular occurence, why didn’t the money market freeze before September?
Easy. Because it wasn’t out of money before. In mid September the Primary Dealers hit the wall. They cried out in pain, “No more moolah for you, Mr. Market. We, the dealers are all margined up with repo, and our bond inventories are maxed out. If yields rise and bond prices fall, we are toast. TOAST I SAY!”
The Fed Brought Forth Manna From Heaven, and the Dealers Saw That It Was Good
And the Fed stepped in, waved its magic wand, pronounced, “Abracadabra, let there be moolah!” And billions and billions of dollars, soon to be trillions, rained down into the checking accounts of the Primary Dealers. It was a miracle. The immaculate conception of one-off emergency funding!
Only it quickly became daily, weekly, monthly, 6 months, and ever expanding. Some one-off!
So this is permanent and growing.
Like metastatic cancer. Eating away at whatever healthy, unobstructed functions of the financial markets remain, if any.
Yesterday, former NY Fedhead Bill Dudley Doodooright lied out his butt when he repeated that “one-off” nonsense, and other absurdities. He wrote an oped at Bloomberg titled The Longer-Term Lessons of the Repo Turmoil. I won’t link to it. It’s absolute bullshit, and I hate to send readers offsite for any reason, let alone to ingest sickening garbage Wall Street propaganda.
But that is the “Nothing to see here, move along” BS that they are trying to convince us it real. They will keep repeating it, and the Wall Street captured media will keep dishing it out to you. Bullshit on a silver platter.
Meanwhile, the Fed magically imagines this previously non existent money into existence. The first place it goes is into the Primary Dealer checking accounts at the Fed. At that point, they can use it to trade.
So what didn’t exist a moment before suddenly is real enough for the markets. The dealers can use it to prop up their balance sheet and, if they are able, to accumulate, mark up, and distribute securities inventories at ever higher prices.
With All That New Cash, Why Aren’t They Accumulating and Marking Up?
Apparently, at the moment, they’re not able to do that. If they were able, the stock and bond markets would be flying. But the dealers can’t manage that. They need the cash to just keep from having to liquidate their inventories to answer margin calls. Because their trading accounts are… bloated, overloaded, overleveraged, explosive, radioactive… and whatever other adjectives you might care to add.
No doubt the Fed will keep expanding the program enough to keep the 10 year yield below 1.80. That looks like the magic number above which the self feeding liquidation frenzy might ignite.
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