FedEx Warning / Repo Rate Spikes . . . .

[errolanderson]

To put this bluntly, the govt is losing the ability to fund promises worldwide. It isn't as simple as firing up the printing press. Promise's are funded by bonds and the repo is the shortest term bond. Politicians can't figure it out because they are illiterate in how the system functions, they figure they just pass a law or jack taxes or tweet the feds. The bond market is the grand daddy of all. Now more cuts worldwide in rates and no buyers..... when the sharks move in for the short it'll be absolute carnage. You need an ability to generate income in this situation and preferably in $10's and $20's that can't be tracked. The hunt for tax will increase and if you rely on a govt check for survival, it will end. Our biggest impact will likely be less credit available and it'll be at higher rates.

Thanks macdon02 for your comments . . . . This is a problem far beyond just money printing and tweets to fix.

[macdon02]

Macdon this is what shud have happened in 08. Too many loans to people that shouldn’t have had them. Kids with credit cards that didn’t realize u have to pay it back. Grown adults running Romper room into the ground. Now the rest of us that run our businesses in the black and responsibly pay again. Phuck I hate stupid.

Ummm actually i don't agree, due to the mechanics of the bond market. If the fed wouldn't have stepped in, every single loan in the world would have been called when Lehman went up in smoke. See when money is borrowed, the actual security(ie bond) is handed over overnight as the banks rebalance daily. It's like taking delivery on a futures contract. Absolutely anything borrowed against would have been called due to none of the banks trusting who is secure. Those that have excess funds lend to those over lended. This takes about 5 chapters to explain but is why Errol made mention. If the repo stays high there'll be zero incentive for the banks to lend, " emperor has no clothes" moment with rate cuts and Errol can correct me if im wrong but it would result in an entire unwind of the monetary system. In which youd likely see a banning of physical gold and bit. Some of this turns into hypothetical unless you know the next move taken by the central banks and their attempts to reassure the public that the system is secure....... the Fed has a fit but its turned into a global bank not a domestic.

[macdon02]

The exact cause of the squeeze is a matter of some debate, but most market participants agree that two coincidental events on Monday were at least partly to blame. First, corporations had to withdraw funds from money market accounts to pay for quarterly tax bills, and on the same day the banks and investors who bought the $78 billion of U.S. Treasury notes and bonds sold by Uncle Sam last week had to settle up.
On top of that, the reserves that banks park with the Fed and are often made available to other banks on an overnight basis are at their lowest since 2011 thanks to the central bank’s culling of its vast portfolio of bonds over the past few years.
Added together, these factors are testing the limits of the $2.2 trillion repurchase agreement - or repo - market, a gray but essential component of the U.S. financial system.

https://www.reuters.com/article/us-usa-fed-repo-tools-explainer/explainer-the-fed-has-a-repo-problem-whats-that-idUSKBN1W30EJ

Devaluation in the expected value of the securities has the following aggregate consequences:

1) Banks are less able to borrow because the value of their assets has fallen

2) Banks are less willing to lend to each other because, in the aggregate, the banking system cannot increase the sum total of its collateral assets in a single instant

This is known as a loss spiral, which follows as a result of systemic downward shocks in asset prices. If asset prices fall quickly enough, banks won't be able to borrow and lend at previous rates, causing a contracting of liquidity or a liquidity crisis.

3) Banks raise haircut rates, exacerbating the loss spiral. Banks are simultaneously less willing to borrow and less willing to lend.

Haircuts arise from perceived counterparty risk, which is the perceived risk of default.

...a loss spiral can precipitate a haircut/margin spiral.

It should be noted that the speed at which the money is put back into circulation is variable. In liquidity crunches (aka credit crunches), banks have cash but refuse to make any loans due to the perceived risk of the loans. The perceived risk of default is known as counterparty risk.[2] Normally, the collateral offered in exchange for the loan, plus the interest rate, is sufficient to entice banks to make loans. Problems arise, however, when the value of the collateral is unknown, and the banks (or other lending institutions) suspect that the loans might not be repaid. Under these circumstances, banks hoard cash.

https://sites.google.com/site/sociologysystemsresearch/home/economic-crisis/repo-markets

[biglentil]

Things get even sillier wrapping one's head around negative interest rates. What incentive is there to save if you have to pay interest on savings? And what incentive does the bank have to provide a loan to someone if the bank has to pay interest on that loan? Its a truly bizzare financial universe we are currently in.

[errolanderson]

Things get even sillier wrapping one's head around negative interest rates. What incentive is there to save if you have to pay interest on savings? And what incentive does the bank have to provide a loan to someone if the bank has to pay interest on that loan? Its a truly bizzare financial universe we are currently in.

biglentil . . . negative rates make no sense. There are even negative rate mortgages in Denmark now offered.

But unfortunately, this bizarre and reckless economic activity is just the starting gun of a global financial writedown . . . . it may take several years to sort. A changing-of-the-guard ahead (IMO) . . . .

[Marusko]

Things get even sillier wrapping one's head around negative interest rates. What incentive is there to save if you have to pay interest on savings? And what incentive does the bank have to provide a loan to someone if the bank has to pay interest on that loan? Its a truly bizzare financial universe we are currently in.

For the average Joe, it's not like you would pay interest on your savings account. The bank pays a tiny amount of interest, then charges monthly fees.

$5,000 balance, pay 0.1% interest, or $5/year. Charge $10/mo fees.

No idea on the mortgages though. I've read about zero interest rate mortgages offered in the Netherlands and somewhere else in Europe. Pretty crazy to think that a bank believes its money is safer when lent out at 0% mortgage than anywhere else.

[biglentil]

For the average Joe, it's not like you would pay interest on your savings account. The bank pays a tiny amount of interest, then charges monthly fees.

$5,000 balance, pay 0.1% interest, or $5/year. Charge $10/mo fees.

No idea on the mortgages though. I've read about zero interest rate mortgages offered in the Netherlands and somewhere else in Europe. Pretty crazy to think that a bank believes its money is safer when lent out at 0% mortgage than anywhere else.

Of couse the banks pay a nominal amount of interest or it could potentially create a bank run. Everyone would start keeping cash under the matress. Only after they have eliminated physical cash can they do that sort of thing. #WorkingOnIt

[errolanderson]

The dangerous addition to cheap money is now a huge threat to the Eurozone and the U.S. Canada is in the crossfire. The Eurozone is already contracting. Heavy cracks are now seen in the U.S. economy. 4th quarter economic readings will not be good.

Ag strategy . . . Sell the carry in the futures, where attractive. Shop the basis. Milling wheat basis has jumped this week as some buyers in a near term squeeze for quality supplies. Talk to your buyers. If you get a good wheat basis, consider replacing with Minneapolis and KC wheat calls as a blend. This captures a better basis and re-opens your price ceiling.

March/May canola offers excellent carry. If you book the carry, use call options to reopen your price ceiling. Canola calls are dirt cheap due to a lack of volatility in the futures. This reduces your price risk to the cost of the call premium, not the whole value of unpriced product in the bin.

This is where I get yelled at . . . . Don’t scuff at the thought that canola can’t go lower, it can . . . depending on factors. Put options are also dirt cheap to protect unpriced product. Be nimble as best as possible, be creative.

Remember, commodity markets are unforgiving and don’t care about cost of production.

[sawfly1]

Thanks Errol and Macdon, good thread . Informative
I will read it again tomorrow.
When the rye wears off and I might
Have a hope of retaining it.

[JoeVance]

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