Dear Friends,
It seems to me, there is a philosophical theory floating around lately, that our perception is like the desktop of a computer, we understand how to manipulate the icons to a high degree… but know nothing really of the underlying process. The theory basically postulates that our perceptions evolved to keep us alive… not to see reality. This appears to be the case when we look at the news. Today, the news distracts us with a hoax impeachment, yet there are very significant things going on that we are missing as a result. One of those things is the REPO market crisis. The Federal Reserve has had to open it’s overnight window, printing hundreds of billions of dollars recently, to keep the banks afloat. Normally this would be big news, but with the hoax impeachment going on and all…
The REPO market is the system of overnight loans that banks do to balance their books at the end of the day. Banks flush will loan money to banks that are short. It is an overnight loan and so the interest is not very high… but the amounts of money can be enormous. Lately, banks either haven’t been flush at the end of the day, else they refuse to loan to other banks. This has pushed up the REPO rate higher than the Federal Reserve believes is helpful, so the Federal Reserve has opened their overnight window, to loan to banks that need overnight loans to drive down the REPO rate. This has resulted in hundreds of billions of dollars being printed to cover those loans. The plan has worked, the REPO rate is lower, but it still requires the printing of hundreds of billions of dollars a week.
What I find very curious is… why would they need to print money if the loans are overnight? Presumably, they would be paid back the next morning, and be available for loaning out that night to other banks that need it? The Federal Reserve has just announced it will make available (print) 120 billion a day, to “help” the financial system weather this crisis… that no one is talking about. Because, well, the democrats are impeaching Trump, and why would anyone care about anything else? Back to that money though… 120 billion is an unimaginable pile of cash. It is enough that if people were randomly picked from the population, and given a check for a million dollars each, 120 thousand people a day would become millionaires! Where is all that largess going?
An unrelated story, that is also not being reported, is the slow motion bankruptcy of our largest cities. California is facing trillions in unfunded liabilities due to the open corruption in it’s public service. Many cities in California are functionally bankrupt as are others across the country. Despite the overly high bond ratings, rating agencies have placed on municipal bonds, any city that is functionally bankrupt is not a good prospect for more debt. As cities have to issue billions more in bonds, to cover their burgeoning debt obligations, while trying to cover some basic services… they will crowd out other investments, else the banks will float the atrocity by printing money. As the old adage goes, owe the bank a hundred dollars and the bank owns you, owe the bank a billion… and you own the bank.
Leading us back to the REPO crisis. If the demand for debt exceeds the banks ability to loan then one of several things must happen. Either the interest rate rises, (and we all know that is unacceptable), or the banks have to take hidden loans from the federal Reserve to cover that demand for debt. The crowding out of other people and institutions looking for loans, as the result of all that increased demand for debt from our cities and States, in the form of municipal bonds, may have resulted in the REPO crisis. Add to this, the fact that there are Municipal bond collateralized debt obligations, the evil twin of Mortgage backed securities, both derivatives… and that should send shivers down your back! It may be true, perhaps we don’t see reality, but only what jumps and shines… like a hoax impeachment.
Sincerely,
John Pepin
