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Morning JAVA: The REPO Market Is Winding Down - Why You Should Care!

Morning JAVA: The REPO Market Is Winding Down - Why You Should Care!


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Is The REPO Market Signalling A Liquidity Crisis?

 

According to Gregory Mannarino in a recent article published on February 15th on King World News, the Federal Reserve REPO or Repurchase Program is winding down. While it's a little complicated to explain, the program involves the 'overnight' movement of massive amounts of cash between the FED and major financial institutions. Basically, when banks have too much cash, they park it at the FED and the FED in turn pays them interest. Mannarino states this 'tricks the system into believing it is more liquid than it is'.

He points to a graph from the FED itself that shows on December 29, 2023, the REPO topped at just over $1 trillion but since then, has dropped to just $441 billion. Mannarino explains that the debt based central banking system requires unrelenting creation of cash / debt or else it cannot survive.

Federal Reserve REPO Chart - March 4, 2024

Instead, we're seeing the REPO's available cash dwindle. In just two months, more than half the available cash has been removed from the program. Could it be related to the wars in Eastern Europe and the Middle East? Could it be related to the commercial real estate crisis? Could it be related to higher for longer interest rates? All of the above? Mannarino suggests further that rate cuts may be on the horizon by May or June in order to inflate / create debt.

What happens when all that cash is gone? They can still borrow from the 'discount window', basically the FED's 'lender of last resort'. When it gets to that point, you know it's really serious!

 

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Yet, there's another situation developing that has economists biting their nails. Almost exactly one year ago, On March 10, Silicon Valley Bank collapsed when it was stuck with bonds that could be sold at a loss (due to the FED's rapid interest rate increases). One day later, the FED stepped in with the Bank Term Funding Program (BTFP). This program stopped the panic by allowing US banks to use their bonds as collateral in exchange for liquidity.

Well, guess what? On March 11, the BTFP is ending. Borrowing costs will increase for these institutions lacking liquidity. We could expect higher lending rates and much tighter lending standards, adversely affecting profitability. Tighter lending standards could seriously affect the economy in a negative way.

This is where quantitative easing or quantitative tightening comes into the picture. Beginning in March, 2020 and ending in 2022 when the FED started raising rates, trillions of new money was created as the world shut down to face off with an invisible enemy. Since 2022 though, the FED has been removing cash from the system. As of early January, 2024 some $2.2 trillion in cash has been removed from the system via quantitative tightening.

See where all this is going yet?

Q.T., should have been a drag on the economy, yet it sputtered along, avoiding a recession. As it turns out, we can thank the REPO program for that. During the Q.E. years, banks, flush with new cash, parked it into REPO to earn interest at very low risk, which in turn injected more money into the system.

Now, banks are suffering through the commercial real estate crisis and many regional banks are in a state of panic. These financial institutions are withdrawing their excess cash from REPO and using it up while at the same time, the FED pushes on with Q.T., and higher for longer interest rates.

A massive liquidity crisis is brewing and it should hit us very, very soon. There are signs it has already started. Last week, the Canada Pension Plan (Investment Board) which I contributed to all my adult life, was forced to sell its 29% stake in 360 Park Avenue South in New York City for just $1. It also sold a 45% stake in Santa Monica Business Park for $38 million, a 75% discount to what it actually paid for it in 2018.

Maybe this is why Bitcoin is above $65,000 this morning. Maybe this is why WTI and Brent Crude oil are both above $80 this morning. Maybe this is why gold closed at a record weekly high last Friday at $2,082. As of this morning, gold appears poised to surpass $2,100.

Gold - March 4, 2024

The dollar's value is suffering lately as well. While the dollar climbed more than two full points between January and February, peaking at 104.96 on February 13, it's begun a decline amounting to more than a full point to 103.844 at time of writing. A lower dollar means everything will get more expensive and that's exactly what we're seeing.

Now, you have some kind of an idea as to what's really going on behind the scenes. The REPO market should run out of cash sometime in the next two months or less if the draw down continues at this pace. Expect some kind of panic to ensue in mid-to-late Spring. Actually, expect panic to ensue any time now.

Got cash. Got gold? Got silver? Got Bitcoin? Got food? Now's the time to prepare. We're all in this together and the more we're in the know, the better off we'll be.

Comments are welcome. See reference section for more information.

 

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SweptOverNiagara
SweptOverNiagara

Name's Joe and I live in Ontario, Canada. I like writing on a wide variety of topics. I enjoy keeping track of markets, investing and commodities and the crypto sector. Also do some coding for web browsers.


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