Wednesday, July 21, 2021

My new podcast is here.


Peter Pan said...

I'm 54 and lost in space.

Peter Pan said...

Fauci says you need to wear a mask, one for each vaccination!

Peter Pan said...

Hurricane forecasters need to know what the wind shear will be, whether dry air will infiltrate the circulation, what the sea surface temperatures are, etc.

Just the read the Discussion page for developing storms.

Footsoldier said...

I think Mike nails it in his last video. This is why a lot of the flow followers were screaming when the FED changed O/N RRP facility.

As explained here...

" The potential risk of they keep doing this and deposits at large banks (G-SIBs) being drained, short-term securities (T-Bills) being sold (and bought), money market funding disappearing, and FX-swap facilities again falling to their knees as the cash universe continues to drain towards the super-enhanced O/N RRP.

But it is clear now that the surge in volumes of take-ups in the reverse repo matter is being tolerated by the Fed, as a means of sopping up excess liquidity from the system. They cannot be forthright about wanting to do Quantitative Tightening, but the O/N RRP facility is a perfect ploy to execute that desire.They might have made the O/N RRP so desirable that the system will be bled dry of cash as a consequence.

Changes in the O/N RRP take-ups tend to lead changes in SPX and VIX. But the negative effects materialize only after a long time lag, so investors have to be on the lookout for it. The melt up Mike says might be coming.

The Fed still buys about $120 billion per month in Treasury securities and mortgage-backed securities, thereby adding systemic liquidity. But with the take-ups in the O/N Reverse Repo facility, the O/N RRP undid 6 months of Quantitative Easing. The Fed truly does stealth Quantitative Tightening (QT) with the O/N RRP.

The O/N RPP facility was triggered by the termination of the SLR exemptions on March 31. As consequence, big US banks, the Global Systemically Important Banks (G-SIBs), turned away money market and cash funds so as not to allocate additional capital to meet SLR requirements to keep this business.

Those funds had nowhere else to turn to, but the Fed's O/N RRP facility. The O/N RRP paid out zero percent (0%) interest (pre June 15-16 FOMC), but that was a lot better than funds paying negative rates in the money markets (investors pay interest on funds placed).

Footsoldier said...

How does systemic liquidity tightening happen in this case?

see link in article - how assets and liabilities of the Fed's balance sheet (SOMA) interact the O/N RRP is a General Collateral operation, so lenders to the facility are provided by the Federal Reserve Treasury collateral in the take-ups. Money market and GSE (Government-sponsored Entities) funds are placed into the O/N RRP, and the Fed issues those investors Treasury securities as collateral for those placements.

The Fed provides the O/N RRP lenders Treasury collateral, and that comes from the SOMA holdings. The Fed reduces its securities holdings, and that lowers/expunges Bank Reserves mechanically.

When the Fed does QE, it buys Treasury securities from the market, and issues Bank Reserves, one-to-one, meaning $1 billion of security purchase creates $1 billion of Bank Reserves, which is paid to the previous owners of those securities. Therefore, when the Fed issues Treasury securities to the O/N RRP take-ups as collateral, bank reserves are diminished by the same amount, and the Treasury securities go back into the market.

It is an asset-swap-in reverse (Quantitative Tightening) – the Fed’s QE program is being neutralized every week.

We have empirical evidence that the transmission mechanism of Bank Reserves' positive effect on risk assets goes via the S&P 500 Volatility Index ("VIX"). The VIX is a measure of the SPX's volatility and rises when S&P Index prices fall, and vice versa. The chart below quantifies that inverse relationship via OLS regression analysis: changes in the Fed balance sheet Granger causes VIX changes (0.932, correlation coefficient), and explains 86.9% of (R^2, coefficient of determination), from March 16, 2020, to-date (below).

Put one way: changes in the Fed's Balance Sheet "explains" 86.9% of the changes in the VIX index.

It's more straightforward in the OLS regression analysis of the impact the Fed's Balance Sheet has on the price of the S&P 500 Index (see Chart No. 11, below). Changes in the Fed balance sheet Granger- causes SPX changes (0.938, correlation coefficient), and explains 88.0 % of (R^2, coefficient of determination), from March 16, 2020, to date (chart below). Put another way: changes in the Fed's Balance Sheet "explains" 88% of the changes in the S&P 500 Composite index. See charts in link.

Footsoldier said...

The likely outcome of this tsunami of cash heading for the O/N RRP

The phenomenon of MMFs pouring into the O/N RRP facility will not be a flash in the pan; we stressed that in the June 2 article. There was far too much money chasing fewer and fewer good Treasury collateral, driving GC repo rate to sub-zero (negative) at times; With the bump up in rates from zero to 5 basis points, the O/N RRP is now the best (and risk free) play in the US money market universe.

Therefore, money market funds which cannot find any investments yielding above the ON RRP offering rate of zero had no choice but to park their money in the ON RRP facility, which offers zero interest rate (pre June 15-16 FOMC).

QE will continue into the foreseeable future, and that means $120 billion worth of monthly QE adding to the tsunami of cash heading for the O/N RRP.

The disconcerting part is that all that cash parked at the O/N RRP will likely stay there, effectively impounded. That is Quantitative Tightening on a massive scale. It's true that the O/N RRP take-ups are still dwarfed by the massive Fed Balance Sheet, in nominal amounts. However, we have shownthat what matters for risk asset prices is the change rate of systemic liquidity (the "flows" - change over time), not the change in nominal amounts.

So, if all that liquidity cash is "impounded," that is liquidity "outflow," pure and simple. The markets never like that, and the market response (via the VIX) to episodes of liquidity flows will likely be lower equity prices, and correspondingly, lower bond yields.

We deemed the RRP rate boost as too high, and a factor which will indirectly lead to deposit flight from banks. Money Market funds (MMFs) will rotate out of 3bps bills to 5bps RRP, while bank depositors rotate out of 0bps deposits into bills.

Since the O/N RRP pay take-ups at 5 bps, MM funds have an incentive to trade out of all their Treasury bills, and park cash at the RRP facility. Bills yield less than 5 bps out to 6 months, and money funds have over $2 trillion of bills. All of these bills will be sold and the cash proceeds diverted to the O/N RRP. This has been one reason for the recent yield curve flattening (front-end rates/yields rising, as Bills were sold).

The MM funds now have the incentive to sell bills, but other class of investors also have the incentive to buy those same bills.

On the other hand, institutions (which cannot avail of the O/N RRP) whose deposits have been “tolerated” by banks until now, earning zero interest, have an incentive to harvest the 0-5 bps range the bill curve has to offer. Putting cash at a few basis points in bills is better than deposits at zero at the G-SIBs. These institutions will buy the T-Bills that the MM funds will be selling. This may offset the recent flattening of the yield curve, but the steepening effect will lag the flattening process.

The net effect of this complex fandango is upward pressure in funding markets - higher repo rates – and in fact, repo rate and SOFR have risen (see chart in link). This is symptomatic of liquidity outflows (tightening of liquidity).

Footsoldier said...

The o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that “sucks” the deposits away that banks decided to retain.”

Put another way, there will be an exodus of deposits from Big Banks and G-SIBs, a process which will take a few weeks. Ironically, the super-charged O/N RRP rate will pull away reserves even from cash-rich G-SIBs, which will stop lending to the FX swap-market, as consequence. It may even force the Fed to re-start FX swap lines to offset the dearth of cash in those markets.

Higher funding rates always causes the IOS-Libor spread to widen sharply. That will take away the single factor that has been sustaining the High-Yield sector. If the IOS-Libor spread widens further, the High-Yield-Junk aggrupation will be monkey-hammered.

The key takeaway from these developments.

1. The Fed did an “own goal” by raising the O/N RRP rate too high. It was too generous.

2. Systemic liquidity outflows will accelerate, much faster than we have anticipated. Bank Reserves will be expunged at an accelerated rate.

3. Ultra short-term rates (repo, et al) will continue to rise. If the ascent is pronounced, there is a risk that the OIS-Libor spread will blow out. That kills the High Yield and Junk sectors.

4. Higher ultra short-term funding ("repo", et al.) rates equate to lower equities after a short lag. Higher funding cost for the Shadow Banking mavens to finance their purchases of, and deals for, financial assets always augurs ill for equity prices.

5. All this brouhaha will become a very big deal at some point. We just have no idea when, or at what level of liquidity tightening defines the “breaking point.” Unless, of course, the Fed takes remedial action, like lowering the O/N RRP rate a few notches.

6. The Fed's response will likely lag, as it is difficult to acknowledge that one has just scored an "own goal." In this case, the current equity market sell-off (which we will discuss in another article) may extend to July "

Footsoldier said...

What on earth are these lunatics doing ??

Instead of using this to help reverse QE why not just stop QE ?

Maybe in their minds they are thinking they will stop QE soon but want to reverse the effects of all that QE they have been doing before they do. It's like we are living in the Matrix. Mike is going to have to become Morpheous in his next few videos.

Footsoldier said...

More from Salmo Trutta..

" The bank's have largely stopped buying:

Treasury and Agency Securities: Mortgage-Backed Securities (MBS), All Commercial Banks

2021-01-01 2587.2585
2021-02-01 2641.1822
2021-03-01 2694.4579
2021-04-01 2739.4229
2021-05-01 2786.0177
2021-06-01 2796.1925

But the FED is still purchasing bonds at a rate of $120 billion a month.

The drop in stocks happened exactly like all the others I predicted. You haven't followed me. There was always a FED "put" in these opportunistic moves. I never said there would be a "correction". These drops have only lasted one or two days.

What an investor has to be concerned about is any prediction of a recession. I said sell on Friday when the DJIA was down 90. I watch bonds too. The 10yr rallied sharply on Monday. That was your signal to exit.

Still waiting for the June money supply #s. We're not at the August inflection point yet. What do you think?, markets move in straight lines?
Do you think I'm going to "tell the burglar where all the jewels are hidden"?

I expect that some time in the future, as the Elliott Wave analysis becomes more popular, it will fail like Joe Granville's market letter did. I.e., speculators will recognise and anticipate the seasonal inflection point turn.

We'll have to see after Thursday's figures. It's not yet an actionable trade (5 percentage point move).

MZM has been discontinued. And yes, it mirrored the transactions' velocity of money (the other velocity metrics didn't). Income velocity is a contrived metric.

We don't even have June's money stock #s yet, we get them Thursday which is a disgrace Powell should be fired. "

Footsoldier said...

When you think about it because this is the main reason the $ has strengthened recently.

When allies need help with their exchange rates and need them weakened from time to time, a little manipulation every now and then.

The US have just found the perfect tool for the job.

And FX traders are licking their lips waiting on the next change in the Fed's O/N RRP facility.

Footsoldier said...

Of course you have to be wary of this 10 quarter lag..

Capital Acccount flows call the shots on the US Dollar, way way ahead of time.

Footsoldier said...

I'm still amazed that everyone who said the 21st July for the correction weeks in advance were correct.

Never ever seen that happen before.

The next seasonal inflection point using Elliot wave analysis is October. Doesn't always happen as rates and other things have to align around the date like they did in July.

Pivot ↓ #1 3rd week in Jan.

Pivot ↑ #2 mid March

Pivot ↓ #3 May 5th

Pivot ↑ #4 mid-June

Pivot ↓ #5 July 21st

Pivot ↑ #6 2-3 week in October

Matt Franko said...

“ Instead of using this to help reverse QE why not just stop QE ?”

It MAY not be that simple….

Matt Franko said...

The RRP went up by 40b today because the TGA went down by 40b yesterday….

System reserves transferred from the TGA to Depositories yesterday then from depositories to MMFs that put the balances into the RRP today…

It looks like the plan is to transfer reserves into RRP when debt ceiling hits and TGA is reduced by 100Bs over next couple months under “extraordinary measures”…

Matt Franko said...


To say “quantitative easing” or “quantitative tightening “ is monetarist….

Footsoldier said...

Regarding the latest podcast.......

Gold the Motherfucker nearly put me On the street when the FED was in rate hike mode a few years back. Nearly bankrupted me. Was in the right position but the zombies kept making me hit my margin call. Was a very stressful experience for me.

Started off trading with ridiculous leverage and was also buying too many units on offer.

Chatted with Mike. Mike told me I was crazy and said what are you doing man.

Reduced my leverage big time and never bought more than 7% of units on offer. Even then the swings in the gold price was forcing margin calls on a regular basis.

Eventually, never bought more than 2% of units on offer with low leverage and never got near the margin call once after that. And on top of that even kept cash on the side lines just in case.

Made all the losses back and made profits. Got out way too early and could have made a lot more profit as gold eventually drove out the zombies. Didn't care at that point it was such a horrible experience was just happy to get out of it and learn from it. Take away some very important lessons from that experience.

Changed everything for me that gold/ interest hike trade and the zombies. They were fucking brutal.

Now very happy to make 55 - 60% returns every year. I'm delighted with that. The zombies throw you 2 to 3 trades every year and with the right leverage and % of units bought never get anywhere near a margin call. Still to this day keep cash on the side lines just incase.

As you just never know how crazy the zombies are going to be. They can be radio rental at times.

Footsoldier said...

Cheers Matt,

" It looks like the plan is to transfer reserves into RRP when debt ceiling hits and TGA is reduced by 100Bs over next couple months under “extraordinary measures”…"

They are fooking crazy the way they do things.

Be interesting to see what happens in FX whenever they change that facility moving forward.

Footsoldier said...

"To say “quantitative easing” or “quantitative tightening “ is monetarist…."

They are monetarists. I just post up and summarise what they are saying. So we can all see what they are saying.

Matt Franko said...

“ They are fooking crazy the way they do things.”

Yes … the system needs a full body off restoration…. $10Ms design budget…

“ I just post up and summarise what they are saying.”

Ok good …