And the liquidity crunch keeps rolling on....
The Fed decided to increase (again) the amounts it offers into the repo market: the O/N goes from $75 to $100 billion per day and the 14-day term repo doubles from $30 to $60 billion three times a week.
If you do the arithmetic, the Fed is adding $460 billion of cash into the system on a rolling two week basis (2weeks x 3 x 60 + 100). The O/N is only counted once since it expires daily.
That's A LOT of liquidity... like ... "A billion here, a billion there, and pretty soon you're talking about real money", as Senator Dirksen supposedly said many years ago.
Now, I know that repo is not nearly as sexy as the S&P 500, oil prices, or even gold. BUT, here's something to sober you up a bit:
In the 4th Quarter of 2018 equity trading in the entire world came to some $26 Trillion - that's the total for three months, some 60 trading days, or around $430 billion per day. That's the global total: NYSE, NASDAQ, London, Tokyo, Frankfurt, Paris, Toronto, Milan, etc etc etc
Compare this to the repo market in the US alone: $2.0-2.5 Trillion per day.
In other words, if the US repo market gums up, the world stands still - as it nearly did in 2008. Thus, the Fed's understandable anxiety.
The Fed decided to increase (again) the amounts it offers into the repo market: the O/N goes from $75 to $100 billion per day and the 14-day term repo doubles from $30 to $60 billion three times a week.
If you do the arithmetic, the Fed is adding $460 billion of cash into the system on a rolling two week basis (2weeks x 3 x 60 + 100). The O/N is only counted once since it expires daily.
That's A LOT of liquidity... like ... "A billion here, a billion there, and pretty soon you're talking about real money", as Senator Dirksen supposedly said many years ago.
Now, I know that repo is not nearly as sexy as the S&P 500, oil prices, or even gold. BUT, here's something to sober you up a bit:
In the 4th Quarter of 2018 equity trading in the entire world came to some $26 Trillion - that's the total for three months, some 60 trading days, or around $430 billion per day. That's the global total: NYSE, NASDAQ, London, Tokyo, Frankfurt, Paris, Toronto, Milan, etc etc etc
Compare this to the repo market in the US alone: $2.0-2.5 Trillion per day.
In other words, if the US repo market gums up, the world stands still - as it nearly did in 2008. Thus, the Fed's understandable anxiety.
WOW! And, amazing insight as usual!
ReplyDeleteHell, any insight as to the entities or type (banks, MM Funds...) that removed their assets from the Repo market or their geographic location?
ReplyDeleteThat’s an excellent question. Unfortunately it is not easy to answer because trading has now become largely electronic and direct I.e. voice brokers who once dominated the interbank market have lost market share - they would (privately) talk...
DeleteStill, I’ll investigate.
Thanks Hell, again, you are a highly appreciated resource in an essential arena that remains nebulous to most people.
Deleteok.... according to a couple of bank dealers two major US banks have pulled back from providing liquidity to the repo market. Don't know the extend of the pullback or the reason.
DeleteAnother friend highlighted the fact that the global market is facing a shortage of US Dollars, mostly due to the Fed's shrinking of its balance sheet in the last few years. For example, look at the appreciation of USD in the forex market..
Thanks Hells! Does the Fed shrinking it's balance sheet mean the Fed is selling (getting rid of) Treasuries and Mortgage-backed securities?
DeleteFed selling bonds, yes.
Delete