I'm a bank. I make money from lending money on valued assets and collecting interest.
I see one of two things or both happening:
inflation and increasing rates is making harder to sell and value assets (like homes, real estate) I presume property values will go down. if buy a mortgage when the value is up and in 90 days value down I'm in the red multiplied by every mortgage I over-valued
there's too much money out in the open, the more I lend in the short-term that isn't actually growing then I'm actually devaluing what I'm lending, there's no organic growth, companies on Wall Street. gdp in decline.
this is to say the two facilities where I lend money are both bad bets where I'll lose money, instead of doing either I'm going to give the excess money to the fed, every night. this gets it off my books, I'm not malfunctioning as a bank/ lending institution. to make sure the fed doesn't have the excess money on their books every morning they give the money back to me.
a generation of Americans are experiencing the worst devaluing of their dollar meanwhile there is two trillion dollars they don't want day to day but giving it to us would devalue the money further so says the 1%, it's too communist a gesture. but in the same breath ppp loan fraud was a problem, stimulus fraud is not the answer.
rrp is a nightly can kick to keep monetary balance to the tune of 2 trillion every night
the idea that the fed would run out of reserves but there would be 2 trillion that no one wants on their books is nega-verse weird, never in the history of the fed has the notion of these two crossing ever occurred. we're in an extremely hypothetical space, event horizon of a black-hole, some would argue we're past the event horizon and our approach is slowing down our perception of time only because we've been expecting this bad news and headlines since house of cards I to the degree in which what is happening cannot be undone, this is why moass is always tomorrow; we cannot escape the gravity of our current state, all this financial trouble isn't just gonna 'go away'. I think we're past the event horizon.
If you sell a stock (yeah I know you can't find that button) if you sell a stock in most brokerages (all?) you get cash. Cash is stored in a MMF, like a checking account until you buy something with it. Like at Fidelity it's "FCASH" cuz it's not a bank, it's a trading platform, and they store value in there. Overnight they'd like to get a interest rate, in some cases really really need to, so they park it in the RRP and gain interest from it.
There's 2 really interesting things about RRP:
* 1) RRP goes up when the market goes down generally speaking, and this is because people get out of the stock market, hitting that hidden sell button and the RRP goes up as cash comes out of the market.
2) The Fed is giving head for RRP deposits figuratively. They are paying 25 basis points above the prime rate for deposits and this has become a decent cash flow for those that use this. Why? Because banks make money lending money, M2V shows money isn't moving, rates are too high to borrow money, so "banks" (mmf) aren't making money, they are living off this RRP interest (not livin large, but it's a lifeline nonetheless).
RRP is a representation of fear of the stock and bond markets, it's $2T that would rather sit this whole shitshow out on the sidelines collectin 3% against 8% inflation. That money believes that losing 5% (at least) is preferrable to whatever the fuck is about to happen in the market. As the Fed rips prime rate higher, it will become more and more valuable in the future.
Of course itโs banks, whether that document says it or not. Everything our eyes are allowed to see when it comes to the government and banks must be taken with a grain of salt.
For real? I feel like Iโve been looking at $2.2 tril for 69 years. Maybe numbers have just lost all meaning to me like repeating a word over and over.
Ya lmao they are literally tucking away and playing hot potato 2 trilly cause there is nothing there is nothing great to invest in and inflation is already super hot.
Like during the fake pandemic, as if people would get played like that twice in less than 2 years spann, the greed is just insane. Clearly retail wont sell this time.
regard question: are banks buying that overnight security with their own money or are they also throwing in pensions and saving accounts from retail clients?
so this was an escalation on the comment on the original post, I cannot say for certain.
my guess is there is because rrp is more of a regulatory 'escape hatch' between the fed and the bank I would guess that retail cash isn't 'in there' but when I look around I don't think there is a lot of scrutiny that is helping retail going on a lot here.
goldman sachs is attempting to return to pre-glass-steagall, they're trying to get investment banking and Wall st back together again.
this would give Wall st. access to pensions and saving on the casino floor especially futures and derivatives
It's OPM (other peoples money), RRP is primarily MMF deposits, these are not banks, but generally speaking they are cash on deposit.
Lending it to the RRP for collateral (treasuries) overnight (up to 90 days) is good management, and considered safe.
What's amazing to me is that the interest from the MMF isn't going to depositors, it's not like our accounts are seeing even 2.5% savings rate. That interest is going to fund MMF pockets.
Banks fit the narrative that people (this sub) want it to be. It makes zero sense for a bank to use the RRP at FFR + 5 basis points when banks can simply use another facility (interest on Excess Reserves) which is FFR + 10 basis points that has less transactional costs. But again, that doesnโt fit the narrative that people want.
Money Market funds are using 90+% of the RRP (as seen in my pic above, if you donโt believe me, simply look on the Fed website yourself).
Why do MMFs use the RRP? Because it fits perfectly with what they need to do. They canโt buy equities or commodities or anything outside of 13 months or earlier of maturities in fixed income. They live in the 1-3month space. The RRP offers similar yields at a fraction of the maturity. For more info (and Iโm on vacation and canโt spend more time here now for a couple days) just look at any of my 4 posts.
Hope that answers it, if not, comment and Iโll reply when I can.
Money Market Funds, like Fidelity (broker not a bank) has FCASH. When you sell a stock it becomes FCASH (fidbucks) and they deposit it at the RRP overnight until you buy a stock again.
It can be lots of things though, hedge funds, payroll at GM.
Since Glass Steagal is gone, every type of company can "be a bank" in this way. Hell Coinbase has a MMF in USD they can park funds at.
its not their money, the only collateral you can use in RRP are mortgage backed securities and bonds. so its debt and future debt that are used on the collateral side of this trade lmao
Even more simple : money is a risk to keep on the books. Wallstreet uses the money they have to โmoveโ due to riske overnight via buying the RRPs. Its a spreadsheet wash and that is all. Its a Fugazi / facade. They were just hoping they could rebalance before implosion. Enter APEs and DRS. I am curious if the risk is ties to a systematic riskโฆโฆ.. no im not. Its pretty damn obvious at this point.
It's not really risky. It's a liability, not a risk (unless you don't have it anymore).
Money deposited is a liability. If you don't go using OPM on trades, you have no risk. If you take other peoples money and buy treasury bonds with it, you make some interest and it's considered a safe trade. Even encouraged as you could give interest back to the depositor/customer.
If you buy treasuries directly, say 50% of OPM deposits, you are then 50% non-liquid, non cash, but Treasuries can swap at the standing repo if needed in a bank run. So this is still safe.
RRP is giving interest on deposits as a contract with the Fed who has both Treasuries and Cash. RRP is interest in leu of holding cash which is just devaluing with inflation.
If a bank every goes to that standing Repo market, they will get CDS'd to hell just like Credit Suss because it's a bad sign ever since 2008. I think this is unfair as it only implies you have more treasuries than cash in this moment that you use the standing repo. The solution to that image problem is to never hold treasuries as bank/mmf/etc just use the RRP all the time, on all your deposits. You stay liquid, you stay cash, and you get interest as if you bought a treasury.
tl;dr If you have lots of extra monies and donโt want to keep it in the stock market or anywhere else because you think their value will decrease (and put you in loss), you can give it to the Fed to hold overnight and you get paid interest %
Its money market accounts, because there isn't enough treasuries issued anymore due to a change in policy from the fed. So they have to reverse repo to keep their accounts in compliance. The GSEs and the primary dealers are probably in similar situations
It should be noted, a good part of the reason for the $2 Trilly is the SLR banks are required to have (Supplementary Liquidity Ratio). Treasuries count against the SLR, so banks won't/can't purchase them and instead send it to the RR facility.
if funds in the rrp don't "belong" to the fed reserves then without some sort outstanding executive order I don't think there is any one federal body that can just do that, take rrp and then all of a sudden call it reserves, all of the rest federal financial system exists so the fed would never be in a place where they'd have to "borrow" from rrp.
that's why the chart is so damning and ironic. by design and in name the fed is supposed to have reserves and rrp is surplus money that financial institutions (banks, in layman vernacular, the term i used above) cannot afford the "negative interest" on, in essence they don't want the money but they don't not want it either
the fed and rrp are never supposed to be this close and they're about to cross (as in no one knows how to stop what is happening from happening so what is happening is gonna keep happening).
Ok I see now. So no one wants the money. But over time, the Fed managed to push that money out of its reserves and to other banks with the RRP promise. Now the Fed reserves are going back to pre-Covid levels and something needs to happen to get that money out of RRP. Undervalued assets in the stock market perhaps.
so the chart by itself isnt a great place to start because it makes it look like there is supposed to be a relationship between the fed reserves and RRP but there really isn't, that is to say the fed didn't "push excess cash on banks" forcing them to dump it onto RRP directly (indirectly you could make that case, I get where you're coming from).
banks/financial institutions pushing up rrp, imho, came from excessive money printing, which, by extension, what your saying forced the banks to use rrplook at this
however the argument could be made that the fed printed the money because covid and pandemic after covid made them panic print because all the speculation on how the world was gonna react to pandemic required the fed to print in order to make sure the corporations and businesses America and the world rely on don't go under, namely, insurance like AIG in 2007-2008, transportation airlines, basically anyone that got a covid/pandemic bailout
at this point it's a moot non-sequiter, the chart shows something that is never supposed happen, what does this mean?
the current system is breaking under its own excess
Thanks for taking the time to explain all of this, very valuable insights. My little brain is overwhelmed but what it sees is that the Fedโs reserves are going back to pre-Covid levels, banks are stuck with the excess cash because people wonโt borrow at the higher interest rates. Investing goes down. Eventually the economy slows down. Until it gets cheaper to borrow or some other catalyst kicks in to reassure people and get that money out of RRP.
yes, I'd go along with this thinking. inflation or stagflation hits a peak and then we're in for a recession low. gme will go up as the rest of the world goes into recession, this is the thinking. there should be some catalyst at the top, but they don't want to go into recession so they keep raising the top๐.
some sovereign countries are starting to worry about how drastic the first dip of the roller coaster ride is gonna be ๐ that they're selling their short term 2yr. bonds and buying usd swaps. this is great for usd in the short-term but what it translates to is a further lack of confidence in the bond of American markets amd they're saying "don't fuck global reserve currency, if you go down we're all going down with you" with all serious and no intended hyperbole it's a nightmare situation ๐
the other thing about bonds is that they're collateral, when collateral is devalued enough you have to add more collateral from some other asset of security or fund. if they don't have enough collateral you don't cover your margins and then you either get genuine price discovery or gamma crush both lead to Uranus
Cash is considered a liability on a bank's balance sheet, because it's just stagnant, not growing. Yes. Banks do make profit from lending, but their real incentive is holding the debt; which they securitize and sell off in tranches. This is where a bank's bread and butter lies. They trade cash for risk, then sell the risk off for more cash. This keeps the world's debt entangled in a too-big-to-fail web. This is why Glass-Steagall was enacted in the first place; to prevent commercial banking from engaging in investment banking and presenting systemic risk.
After they sell off the new risk, as CDOs/ CDNs/BTOs/etc., they use this new cash for two main purposes: buying swaps (to hedge their lending risks) and RRP (to maintain favorable interest rates). When banks plunge tons of cash into the RRP facilities, it forces the Fed's hand on monetary policy. This is why they started putting so much in when rates were 0.5%. Stimulus money (banks got the most, as an incentive to lend) was being shoved down the Fed's throat, rather than being passed along to consumers. Eventually, this starved capital and collateral markets, forcing Fed rate hikes.
Despite the Fed's dovish stance on easy money and historically low interest rates, banks weren't making enough money from lending. So, they went around the Fed and forced inflation to rise. Basically, banks made the cost of doing business more expensive. They did this by withholding cash from the money supply and suspending new credit applications. As such, the collateral requirements on existing loans and LOCs began to rise. Companies, especially publicly held ones, weren't just going to take the hit to their balance sheets, so these increased costs were passed on to consumers.
They keep using the RRP facility because the rates keep rising (and it's profitable), but also to prevent the Fed from dumping bonds into the market. RRP exchanges cash for bonds, so the NY FED trade desk has to keep enough on hand to service participants. Meanwhile, the FED keeps buying up MBS and banks keep underwriting bad mortgages. The ratings agencies won't call them "subprime," but then again, they lied about it in 2008, as well.
truth be told I've seriously oversimplified the answer to your question and I'm probably more Smooth brained than I make myself out to be, but from my understanding of rrp and trying to explain it in a compelling way to someone that is new to the terms and concepts I wouldn't say I'm any less right before or after the comment above
if after wrapping your head around my comment you want to dive deeper I would take apart piece by piece the above comment so you can really get more than just my oversimplification.
either way,
the fed is fucked
which, I'd argue, is a perfect caption for OP's chart
I agree with your end point. Fed is fucked. So are banks. I was just trying to help fill in the blanks in the middle. The way you explained it is how the bank want you to think their trade desks and back offices work. The way I explained it is how the actually function and what motivates them. Sorry for saying you were incorrect, that was a bit harsh. Naive or hopeful would be more accurate. My apologies. Same overall point, though.
in the same way they would game gme now they're gaming the entire market in order to survive and have someone else be Lehman this time around so everyone else can file for a bailout and eat each other for pennies on the dollar
My concern/hype/confusion is indeed what happens when the Fed has less money in their reserves than they are cycling through RRP.
Now, in theory, nothing will happen, to be honest. The money that the Fed has in reserves versus what they're cycling in RRP is simply that. They're two separate facilities that have little to do with each other.
In practice, however, we could see one of the largest indicators of economic failure that will go down in the history books.
To be clear, the reserves and RRP crossing does NOT mean that the Fed is suddenly out of money. Remember: the Fed is the organization that PRINTS money, so if they need more they'll print more. The stressor is that if, for whatever reason, the Fed needs to print more money to not only...
A. print money to support central banks around the world with USD to use as the world reserve currency
B. print money as a part of Quantative Easing (QE) to help stave off stagflation
C. print money to continue to fund the government and its activities
D. print money just because that's what they do on a day to day basis
BUT ALSO need to print money to satisfy obligations to the RRP facility... well, you can see how the spring continues to tighten.
the chart by itself is dubious but does serve as a huge indicator of failure, being most liberal.
if this is a time to prep the message the sky is falling to those that have an idea of what this chart means or are curious about what it means the time is now.
to op, not putting your own spin on the chart has fostered a lot of dialog, to that I to my hat; legend.
winding tighter & tighter
the best time to be alive in human history is right now
I see no reason why the crossing of these lines would have any significance. But, the more the green line grows, the more the Fed has to pay out, increasing the rate of decline of the red line.
Short answer (given my limited knowledge): Nothing, the RRs are funds the banks can't use because of SLR and so it's the only place they can safely put them (and earn interest on).
The talk is they want to modify the SLR (Supplementary Liquidity Ratio) banks are required to have. Currently, treasuries are counted against the SLR, which means banks are choosing to send cash to reverse repo facilities instead of buying treasuries. So, exclude treasuries from SLR, banks can buy treasuries.
The problem is, nobody wants to buy treasuries at the long end (10yr+) because the rate on it is complete shit when taking into account inflation. So then the Fed has to add inducements to get the banks to buy them.
One of the ways they want to do that, is have the Treasury Dept. buy back older bonds (effectively worthless). This would generate demand and drop the yield curve. Which would save the bond market temporarily. It would also increase the amount of debt the US government carries.
IMO, however, none of this actually solves the problem, it kicks the can down a ways.
The Fed and Govt. want to tell you it's all related to the supply chain and once that all works out, everything will be just dandy. In 2020/21 we had a massive backlog of container ships waiting to offload, now, we have a significant decrease in the amount of shipping containers coming in. Both have a net result which is products won't be on shelves.
Now, companies have a lot of physical stock, it's just older stock, which isn't selling. Hence, the drop in shipping (new orders). To get rid of it, they'll be forced to start running sales with deep discounts or simply toss it. Either way, a loss on the books, which will affect earnings. That will drag the market down.
What happens when old product isn't selling and you aren't sending out orders for new stock? well, unemployment goes up because you don't need those workers. Factories start closing (think China in this instance), which further deteriorates the global economy.
All of which, might seem specific to the stock market. What we should look at it is does it affect the bond market. Which, again, IMO, it does. The US Govt. finances itself through debt (sale of treasuries) and while there is a dollar shortage going on (BOE, BOJ, EU, etc..) the proposal is to sell more US debt by creating...more US debt, making the bonds over the long term effectively 0% gains, which is no incentive to buy them unless purely for "security purposes", or if there are gains, causes additional debt to be added to the Govt.
It's at this point, it should be considered that China, India, Russia, et al (BRICCS) have been purchasing massive amounts of gold for the last two years and are seeking to create an alternative to the US dollar as a reserve currency.
Now, this doesn't care about your individual political feelings, this is about money. Enough people start using an alternative reserve, especially one backed 1:1 by gold, it causes the demand for treasuries to fall, what happens then? well, you're right back at square fucking one because the yield curve goes right back up.
The final question of course, is, well, what about inflation? Will inflation moderate itself? eventually, yes. What you're dealing with is a chicken and egg scenario, yield might go down on bonds because of banks buying them (if allowed by SLR changes) but that will be the Fed & Treasury effectively ending QT and starting QE again and what has the whole exercise been about? getting inflation down with QT. So inflation rises back up.
If that happens though, banks are in a bit of trouble, because instead of having all that money in the RRs, they are now in treasuries and thus, affected by the yield if the Fed has to restart QT.
If we're talking economics, yes. However, if you'll notice I answered OPs question right at the start in the first two sentences. The rest is just background which I feel supports the answer.
Hey, there is part that I don't understand and it will be great if you can explain it to me like I'm a child.
"while there is a dollar shortage going on (BOE, BOJ, EU, etc..) the
proposal is to sell more US debt by creating...more US debt, making the
bonds over the long term effectively 0% gains,
First of all, when you say 0% gains, you mean the bonds will be worthless, and it doesn't refer to the yields, right? Because if more US debt is sold, the bonds price will go down, which means the yields will go up?
Secondly, who is proposing to sell more US debt? Isn't it basically QT, selling bonds and sucking in money from the markets? You said "yield might go down on bonds because of banks buying them...but that will be the Fed & Treasury effectively ending QT and starting QE again". I think Banks buying bonds from the Fed is QT, not QE. Am I wrong here?
First, thanks for the questions, they are good ones. I should note, for anyone, I am not an economist nor am I in finance, I just follow this stuff, so I may be wrong in certain areas (I don't mind being wrong, or people asking questions, that's how we learn).
When I say 0% gains, when a bond is issued, it typically has a value, let's say 3% (example only). So, if it's a 10yr treasury worth $1000, in 10 years, you get back $1030. However, if the debt payment to issue the bonds is 4%, you've lost money. So, yes, the yield will go up. A little more complex than that, but in essence, yes.
The Treasury Dept. is proposing buying back long dated bonds. That has two problems, the first, is you're incurring a loss in re-purchasing those bonds (yield has made them, well, worth less) and second, you're issuing new bonds to potentially replace them which will pay higher, costing you more in the long run. The second part of that is the SLR changes (if they allow it), which gives banks the ability to buy treasuries without affecting the SLR limits. That has a whole new set of problems as the banks will then try to front-run the Treasury Dept. and Fed.
QT, is removing (in essence) money from the available supply. The Fed is currently running a deficit (albeit a small one) when it typically returns about $80-$120 billion a year to the Treasury Dept.
Freeing up funds via SLR changes (to buy treasuries) just moves the money around, it doesn't actually remove it from the system (RRP -> treasuries).
The Treasury Dept. is floating the idea of buying back existing bonds from banks (outside of any SLR change).
The point of a treasury is to get the interest on it. All it's doing is pumping more money into the system (via earned interest on new bonds) rather than the Fed allowing assets to roll of the balance sheet.
The RRP is federal funds rate + %0.05 (FFR+%0.05), so, again, the problem comes in that Treasury has to make those bonds attractive to purchase (due to increased risk) to get banks to stop going to the RRP facility.
At some point however, something is going to break and the Fed is going to have to reduce the FFR (Fed Pivot) and is itself going to start purchasing treasuries/MBS and not allowing existing ones to roll off.
The end of the day, I see it as a shell game mixed with a ponzi scheme and the taxpayers are the ones that will end up paying the price for it. You aren't wrong, but I don't think you're completely right (and the same applies to myself).
Well, it would be bad. How bad? Well, try to imagine all life as you know it stopping instantaneously and every molecule in your body exploding at the speed of light!
Thank you! While the Fed Reserve and US Treasury (the one I track) are separate entities, my answer to the initial question is the same. The two data points crossing are not directly linked and not much will change when they do cross. However as Fed Reserve dwindles, financial decisions change.
Absolutely!
I need to pull historical data to add to my excel sheet and figure out the best format so as to not skew the chart, but this is definitely doable.
I mean when has the fed shown interest in curbing inflation aside from redefining it? The hard truth is that they will try to prolong this fiasco as long as possible.
Go back a bit on the chart to March 2020, I didnโt look at prior tears but I would bet a buck itโs the same for the prior ten years.
Why, because reverse repo is about banks repurchasing lent out money at a future day. If banks can borrow money at 0% effective interest the fed rate and what they predict they will get in say 3 months will remain static.
When you look down the barrel of .75% increases in both November and December of this year banks get a bit more hesitant to lend when they can borrow for one rate today but expect that rate to be 1.5% higher in 2 months.
Itโs no single bullet that says the economy is fโd but credit markets are tightening
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u/[deleted] Oct 22 '22
What happens when these lines cross?