Part 2: Something is Seriously Wrong with the Financial System
Over the last week, we’ve outlined how the Fed has introduced NUCLEAR levels of money printing.
This is coming in the form of QE 4, a program through which the Fed will print $60 billion per month in new money and use it to buy Treasury debt from the large banks.
But the Fed is simultaneously running two other operations, called repos, through which it is providing $75 billion in liquidity in overnight operations… as well as $35 billion twice a week via a different repo program.
Regarding those last two items, repo programs are actually complicated things that require a great deal of knowledge concerning banking regulations. So for simplicity’s sake, you need to know the following:
- Banks are required to maintain certain levels of liquidity (meaning liquid, cash-like assets they can easily sell).
- Those banks that do not have the required levels of liquidity can “park” some of their less liquid assets with the Fed overnight in exchange for cash, thereby increasingly their liquidity.
The Fed first introduced these repo programs on September 17th. At that time, the Fed claimed it would perform overnight repos of $75 billion for just two days.
Two days later, the Fed announced it was extending the repos to October 10th and introducing term liquidity pumps to $30 billion.
Then on October 4th, the Fed announced it was extending both repo programs from October 10th to November 4th.
A week later, the Fed announced it was extending both repos through January 2020.
And then yesterday, the Fed announced it was expanding its overnight repos from $75 billion to an incredible $120 billion and its term repos from $35 billion to $45 billion.
So to summarize, in just a little over a month, the Fed went from claiming it would be performing overnight repos of $75 billion for just two days to running both an overnight repo program of $120 billion and a term repo program of $45 billion for THREE MONTHS.
Something is SERIOUSLY wrong here.
A Severe Lack of Liquidity Spells Bad News
When the Fed first launched its overnight repo program in September, it claimed that this was just a temporary program to help the banks maintain liquidity at a time when quarter-end taxes were coming due (taxes are paid in cash, which reduces liquidity temporarily).
However, it is now clear that this was a lie. We’re well into a new quarter and the Fed is INCREASING both repo programs dramatically.
This tells us that the Fed is in fact extremely worried about something. Specifically, that there is a SEVERE lack of liquidity in the financial system.
Banks and large investment funds are required to maintain a certain percentage of their assets in either cash or liquid (cash-like) items. What does it say about these firms that they need the Fed to lend them $120 billion in cash every single night in order to hit their numbers?
It says that there is WAY too much leverage in the system. Far too many entities are using massive amounts of borrowed money to invest. None of them want to have to sell these positions to meet their liquidity requirements so they are instead FORCED to borrow tens of billions of dollars from the Fed.
Regardless of the economy or the fundamentals, this is BAD NEWS.
If financial firms are so leveraged that they cannot hit their liquidity numbers without the Fed’s help… it means that if these positions ever move against them seriously, we’re at risk of a crash.
I continue to believe the market is set for a blow off top. And a big reason for this is that investors NEED stocks to roar higher or they risk blowing up their entire firms.
I’ll explain more about this tomorrow. Until then…
Editor, Money & Crisis