{"id":19573,"date":"2019-12-14T03:04:47","date_gmt":"2019-12-14T03:04:47","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=19573"},"modified":"2019-12-14T03:04:47","modified_gmt":"2019-12-14T03:04:47","slug":"serious-plumbing-problems-at-the-fed","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/12\/14\/serious-plumbing-problems-at-the-fed\/","title":{"rendered":"Serious plumbing problems at the Fed"},"content":{"rendered":"

Fed activities in repo markets are growing. They have already expanded their balance sheet by $335 billion since the beginning of September and the party is just getting started. Former Fed repo expert Zoltan Pozsar, now at Credit Suisse, warns that major banks are heavily overweight in US Treasuries and underweight in excess reserve deposits at the Fed. The result is likely to be a major liquidity squeeze over the December year-end, with the Fed balance sheet expected to expand to more than $4.5 trillion by mid-January – a total injection of close to $750 billion in little more than 3 months!<\/p>\n

\"S&P<\/p>\n

Pozsar<\/a> is critical of the Fed’s strategy, warning that purchases of short-term T-bills (done to avoid flattening the yield curve) will not solve the problem as the banks need to sell longer-term Treasuries in order to improve liquidity. Current operations have failed to lift excess reserves on deposit at the Fed.<\/p>\n

\"Excess<\/p>\n

The result, according to Pozsar, is that the Fed may be forced to commence QE4 \u2014 purchasing longer-term Treasuries despite its reluctance to do so. The alternative could be far worse:<\/p>\n

“….the dismal liquidity situation within the US commercial bank sector is so dire, that the shortage of reserves will start a cascade of liquidations beginning in the FX swap market, progressing to Treasurys, and culminating in stocks… and a full-blown market crash.”<\/p><\/blockquote>\n

Underlying the repo crisis are the usual suspects, according to Zero Hedge<\/a>:<\/p>\n

….massively levered hedge funds engaging in Treasury relative value trades (think of these as a modern twist on the LTCM trade)<\/p>\n

“High demand for secured (repo) funding from non-financial institutions, such as hedge funds heavily engaged in leveraging up relative value trades,” was a key factor behind the chaos according to Claudio Borio at the BIS.<\/p>\n

The BIS’s finding was novel, and surprising, as it highlighted the “growing clout of hedge funds in the repo market” echoing something we pointed out one year ago: hedge funds such as Millennium, Citadel and Point 72 are not only active in the repo market, they are also the most heavily leveraged multi-strat funds in the world, taking something like $20-$30 billion and levering it up to $200 billion. They achieve said leverage using repo.<\/p><\/blockquote>\n

As baseball icon Yogi Berra said:<\/p>\n

“It’s like deja-vu, all over again.”<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

Fed activities in repo markets are growing. They have already expanded their balance sheet by $335 billion since the beginning of September and the party is just getting started. Former Fed repo expert Zoltan Pozsar, now at Credit Suisse, warns that major banks are heavily overweight in US Treasuries and underweight in excess reserve deposits … <\/p>\n

Continue reading “Serious plumbing problems at the Fed”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,34],"tags":[3763,1314,1352,4171,4170],"class_list":["post-19573","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-us-canada-countries-regions","tag-balance-sheet","tag-excess-reserves-on-deposit","tag-fed","tag-fx-swap-market","tag-relative-value-trades"],"yoast_head":"\nSerious plumbing problems at the Fed - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Serious plumbing problems at the Fed - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Fed activities in repo markets are growing. They have already expanded their balance sheet by $335 billion since the beginning of September and the party is just getting started. 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He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-55H","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":25928,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/21\/rrp-a-fed-taper-by-stealth\/","url_meta":{"origin":19573,"position":0},"title":"RRP: A Fed taper by stealth","author":"Colin Twiggs","date":"May 21, 2021","format":false,"excerpt":"We will try to keep the jargon to a minimum, so that we do not get lost in the maze of financial markets. On May 20th, Tyler Durden published an article headed \"Fed Alert: Overnight Reverse Repo Usage Soars Above Covid Crisis Highs\" What is Overnight Reverse Repo? Overnight Reverse\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":20003,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/03\/16\/fed-brings-out-the-big-bazooka\/","url_meta":{"origin":19573,"position":1},"title":"Fed brings out the big bazooka","author":"Colin Twiggs","date":"March 16, 2020","format":false,"excerpt":"The Fed is on a war footing. The FOMC announced that it will cut the funds rate to zero. Timing of the announcement \u2014 Sunday, March 15th at 5:00 p.m. \u2014 signals the level of urgency. \"Consistent with its statutory mandate, the [FOMC] Committee seeks to foster maximum employment and\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":19882,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/03\/07\/global-financial-markets-are-sinking\/","url_meta":{"origin":19573,"position":2},"title":"Global financial markets are sinking","author":"Colin Twiggs","date":"March 7, 2020","format":false,"excerpt":"The current crisis is not caused by the coronavirus. Global financial markets have been at sea in a leaky boat for some time. Central bankers managed to plug the leaks, so far, but it is questionable whether they will be able to weather the approaching COVID-19 storm without sustaining long-term\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":16261,"url":"https:\/\/thepatientinvestor.com\/index.php\/2018\/05\/12\/no-fed-squeeze-in-sight\/","url_meta":{"origin":19573,"position":3},"title":"No Fed Squeeze in Sight","author":"Colin Twiggs","date":"May 12, 2018","format":false,"excerpt":"In January I warned that the Fed's normalization plan, which will shrink its balance sheet at the rate of $100 billion in 2018 and $200 billion a year thereafter, would cause Treasury yields to rise and the Dollar to weaken. 10-Year Treasury yields are now testing resistance at 3.0 percent.\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":19322,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/10\/23\/fed-losing-control\/","url_meta":{"origin":19573,"position":4},"title":"S&P 500 bearish as Fed forced to expand","author":"Colin Twiggs","date":"October 23, 2019","format":false,"excerpt":"Juliet Declercq at JDI Research maintains that the normal business cycle has been replaced by a liquidity cycle, where market conditions are dictated by the ebb and flow of money from central banks. Risk will remain elevated for as long as natural price discovery is suppressed and risk-reward decisions are\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":1375,"url":"https:\/\/thepatientinvestor.com\/index.php\/2011\/10\/17\/feds-kocherlakota-on-why-balance-sheet-expansion-need-not-be-inflationary-real-time-economics-wsj\/","url_meta":{"origin":19573,"position":5},"title":"Fed\u2019s Kocherlakota on Why Balance Sheet Expansion Need Not Be Inflationary – Real Time Economics – WSJ","author":"ColinTwiggs","date":"October 17, 2011","format":false,"excerpt":"I\u2019ve mentioned how the Federal Reserve has bought over $2 trillion of government securities. It has funded that purchase by tripling the amount of deposits held by banks with the Fed \u2014 what are called bank reserves. ....... Banks have few good lending opportunities, and so they\u2019re not trying to\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19573","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=19573"}],"version-history":[{"count":1,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19573\/revisions"}],"predecessor-version":[{"id":19576,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19573\/revisions\/19576"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=19573"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=19573"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=19573"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}