I disagree that RRPs drain liquidity. They’re overnight money, just like bank deposits. They can be withdrawn and used to purchase securities at any time. It’s a matter of will, not way.
The second thing I disagree with is Fed operating losses. The Fed funds its interest payments by crediting the banks accounts at the Fed with newly imagined money. The $20 billion or so it is paying out per month is a reduction of QT. While total QT is $90 billion per month, after interest payments, it is $70 billion per month.
He fails to give credit to the debt ceiling for being the cause of the increase in what he calls Fed liquidity. It caused a drawdown of the “TGA” from $600 billion to zero. As this money gets spent, it goes into bank deposits which, the banks in turn hold at the Fed is what these folks erroneously call “reserves.” They are simply bank deposits held at the Fed. There are no reserves because the reserve requirement is zero. The term “reserves” is a misnomer that results in everyone running around like chickens with their heads cut off trying to explain “reserves.”
It’s all money. Liquidity is money. “Reserves” are money, and what line item money is held in on the Fed’s balance sheet has no impact on the markets. If the will is there, so is the money.
But it is not “money on the sidelines.” It’s just money. Anyone holding an MMF account can use that cash to buy stocks any time they want. Again, it’s the “will” that matters. The way is available.
China holds is 3% of US Treasury debt. It has already cut from 1.25 trillion in 2016 to 869 billion now.
He gives China far too much weight in his analysis. Money does not flow freely between China and US. It’s virtually a non-factor in the big picture. What happens in Europe and Japan however, are far more important.
There’s just so much confusion about liquidity. A lot of it stems from the institutional misunderstanding and misnomer of the money that banks hold in their deposit accounts at the Fed. These large deposits were created when the Fed bought Treasuries and MBS under QE. Prior to QE, this line item was close to zero most of the time. The Fed would add or subtract a few billion a day mostly via repos, is its primary tool to control the Fed Funds rate, when there actually was a minimal reserve requirement.
The money in the banks’ accounts at the Fed can move around to different line items on the Liability side of the Fed’s balance sheet, like the RRPs, or the US Treasury’s account at the Fed which the cognoscenti call the “TGA,” or the no longer used Term Deposits, or the Other Deposits, which are almost entirely the accounts of the Primary Dealers.
The only one of these that actually drains liquidity Temporarily is the TGA, and only then after it is being refilled to its usual $600 billion target, such as now. All of the other amounts are pure overnight money that can be withdrawn at any time to buy stocks or bonds, or whathaveyou. It’s the will, not the way, that matters. The money is there.
Even when the TGA is being rebuilt, if that’s done by issuing Treasury bills, that creates instant good collateral for repo borrowing. Therefore the drawdown of systemic liquidity is offset to some degree by the collateralization and borrowing that occurs as this fund is being rebuilt.
We’re talking a short term effect here. That fund will stop being built in a matter of weeks. The draining will stop and the T-bills will still be out there, available to be used as collateral.
I’m happy to answer your questions. I’m not an expert, just an observer who has been closely watching this stuff for a very long time. As Professor Berra said, “You can observe a lot by watching.”
Let’s do a Q&A in the Comments. I invite your questions and comments.
Over to the daily trading patterns, the ES 24 hour S&P futures have been downtrending for 2 weeks now. Impressive. The market is now 3 days completed in its 5 day cycle. The low is due on Thursday morning. Yesteday’s blip may have been the 2-3 day cycle up phase. I’m unable to make any projections on either basis because there’s not enough fluctuation and the centered moving averages are moving more or less parallel in close proximity to one another.
I’d look for sport in the 4322-4319 area today. If that breaks, then only a little lower. Resistance is trending down by about 10 points between the 7 AM hour and the NY close, starting from 4340-50. If cleared, the first target would be 4358.
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There’s just so much confusion about liquidity. A lot of it stems from the institutional misunderstanding and misnomer of the money that banks hold in their deposit accounts at the Fed. These large deposits were created when the Fed bought Treasuries and MBS under QE. Prior to QE, this line item was close to zero most of the time. The Fed would add or subtract a few billion a day mostly via repos, is its primary tool to control the Fed Funds rate, when there actually was a minimal reserve requirement.
The money in the banks’ accounts at the Fed can move around to different line items on the Liability side of the Fed’s balance sheet, like the RRPs, or the US Treasury’s account at the Fed which the cognoscenti call the “TGA,” or the no longer used Term Deposits, or the Other Deposits, which are almost entirely the accounts of the Primary Dealers.
The only one of these that actually drains liquidity Temporarily is the TGA, and only then after it is being refilled to its usual $600 billion target, such as now. All of the other amounts are pure overnight money that can be withdrawn at any time to buy stocks or bonds, or whathaveyou. It’s the will, not the way, that matters. The money is there.
Even when the TGA is being rebuilt, if that’s done by issuing Treasury bills, that creates instant good collateral for repo borrowing. Therefore the drawdown of systemic liquidity is offset to some degree by the collateralization and borrowing that occurs as this fund is being rebuilt.
We’re talking a short term effect here. That fund will stop being built in a matter of weeks. The draining will stop and the T-bills will still be out there, available to be used as collateral.
I’m happy to answer your questions. I’m not an expert, just an observer who has been closely watching this stuff for a very long time. As Professor Berra said, “You can observe a lot by watching.”
Let’s do a Q&A in the Comments. I invite your questions and comments.
Over to the daily trading patterns, the ES 24 hour S&P futures have been downtrending for 2 weeks now. Impressive. The market is now 3 days completed in its 5 day cycle. The low is due on Thursday morning. Yesteday’s blip may have been the 2-3 day cycle up phase. I’m unable to make any projections on either basis because there’s not enough fluctuation and the centered moving averages are moving more or less parallel in close proximity to one another.
I’d look for sport in the 4322-4319 area today. If that breaks, then only a little lower. Resistance is trending down by about 10 points between the 7 AM hour and the NY close, starting from 4340-50. If cleared, the first target would be 4358.
Yawn.
For moron the markets, see:
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