In this video, we look at the connection between what has been going on in the repo market and the upcoming debt ceiling suspension ending. Banks are currently experiencing a severe shortage of collateral, and the problem looks like it is only going to get worse as Congress delays the inevitable - raising the debt ceiling and starting to borrow again.
Related Articles:
My Options Courses
Beginners https://gum.co/yvRjw
Advanced https://gum.co/CIqDW
Previous Videos on Repo Market & Debt Ceiling
May 25 https://youtu.be/3dTfxZtp3ag
June 21 https://youtu.be/orET-_WdPEQ
July 9 https://youtu.be/iKuHPtYOsfs
Chapters:
0:00 Intro
0:48 Repo Market Recap
4:46 Federal Spending and Borrowing
6:41 Banks and Collateral Shortage
8:35 Debt Ceiling Connection
9:56 Summary of Consequences
12:24 Conclusion
My Courses and Guides
My Options Course (Beginners) https://gum.co/yvRjw
My Options Course (Advanced) https://gum.co/CIqDW
My Ultimate Guide on How to Buy Gold https://gum.co/DUkCt
My Weekly Newsletter https://heresyfinancial.curated.co
Gold and Silver
Gold/Silver IRA (Get 1st Month Free) https://bit.ly/gldbtc
Buy & Store Gold/Silver (Get $5) https://bit.ly/3mS6dNo
Bitcoin 
Best Bitcoin IRA (Get 1st Month Free) https://bit.ly/gldbtc
Best Place to Buy Bitcoin (Get $10 BTC) http://bit.ly/swnhrsy
Best Bitcoin Exchange https://r.kraken.com/e3aej
Best Bitcoin Wallet http://bit.ly/ldgrwlt
Stocks
Best charts (Get $30) http://bit.ly/tvchrts
Best all-around https://bit.ly/3zFGSO2
Best auto investing https://m1finance.8bxp97.net/QOKA3P
Best margin rates https://m1finance.8bxp97.net/QOKA3P
Startups (not publicly traded)
Republic https://republic.co
SeedInvest https://www.seedinvest.com
Angel List https://angel.co/invest/start
Real Estate 
Single-Family Rentals https://roofstock.3k3q.net/XJX24
Borrow for RE Development https://groundfloor-finance.sjv.io/mg...
Invest in High-Yield RE Debt https://groundfloor-finance.sjv.io/mg...
RE Portfolio Investing https://fundrise.sjv.io/Ygg2NO
Misc 
Life Insurance https://bit.ly/3qccFBB
Short-Term Health Insurance https://bit.ly/3vFfgVZ
College Savings Plan https://bit.ly/3iRaCRL
Book Insights and Summaries https://blinkist.o6eiov.net/b3azYg
Learn to Code https://lambda-school.sjv.io/kjOPAz
Skillshare https://skillshare.eqcm.net/0JY1WM
My Trading/Investing Gear
Thunderbolt Monitor https://amzn.to/3xwbqji
M1 MacBook Pro https://amzn.to/3iR3gxB
Best WiFi Router https://amzn.to/3gIIoG9
Speakers https://amzn.to/35vEM58
M1 iPad Pro 12.9inch https://amzn.to/2TGb1w7
iPad Magic Keyboard https://amzn.to/3zAIN6f
Apple Pencil https://amzn.to/3zyHu7S
Support the Channel
Patreon https://www.patreon.com/heresyfinancial
Merch https://heresy-financial.creator-spri...
Join as Member http://bit.ly/joinhrsy
I am not a CPA, attorney, or licensed financial advisor and the information in these videos shall not be construed as tax, legal, or financial advice from a qualified perspective. Linked items may create a financial benefit for Heresy Financial.
See Full Video Transcript Below
What's up everybody my name is Joe Brown and this is Heresy Financial if you've been following along you know that for a while now we've had some shenanigans going on in the repo market well now today we are going to look at how the repo market is actually going to be affected by what's happening in congress right now namely the debt ceiling issue not being resolved in a potential government shutdown and how that will make collateral in the financial system extremely scarce there's a lot of information and we're gonna move quick ready let's dive in if at this point you've already watched all of my videos on the repo market and what's going on with the debt ceiling issue go ahead and skip ahead I've got chapter markers linked on the video and if you haven't seen the videos I will have them linked as well first up is a recap of the repo market the repo market is basically where banks go to get their overnight funding banks don't usually keep enough cash on hand for their daily operations so overnight they'll go to the repo market and they'll say hey does anybody out there have enough cash you need to borrow some cash to fund my expenses tomorrow other banks will say yeah we've got plenty of cash so they'll swap they'll get cash for collateral usually the collateral is treasuries and the bank that needs the cash will pay an interest rate on that now a little known fact is that the repo market is the initial place where problems showed up in the financial system that led to Lehman Brothers failing because just like all the other banks Lehman Brothers had a ton of collateral and once somebody stopped taking that collateral everybody stopped taking that collateral and Lehman Brothers went to the repo market they said we've got all these mortgage-backed securities please somebody take them we'll pay a high interest rate on the cash we need cash take my mortgage-backed securities give me cash and I'll pay you a high interest rate so interest rates in the repo market spiked because Lehman Brothers needed that cash well nobody wanted to accept those toxic mortgage-backed securities anymore which led to Lehman Brothers failing that repo crisis was an issue of bad collateral in the system the potential for this to cascade out of the control caused the Federal Reserve to step in bail out the repo market and start providing funding and sucking all that toxic collateral out of the system fast forward to September of 2019 we saw the repo market blow up again interest rates spiked only this time their interest rates weren't spiking because of bad collateral it wasn't like all the banks were saying hey take my bad collateral I need cash there just wasn't enough cash in the system everybody needed cash this was partially due to the fact that liquidity had been drained from the system by quantitative tightening this led the Federal Reserve to step in again because precedent had already been set so they can step in again engage in the repo market and start bailing it out and this is when the Federal Reserve started not QE fast forward to the beginning of 2020 when the repo market and the financial system started to face potential problems due to covet and the Federal Reserve is ready to go and notice the frequency and severity at which these things start taking place requiring more intervention and bailing out and rescuing by the Federal Reserve have been increasing in frequency and severity because as you intervene you cause more consequences that necessitate more intervention and more frequent intervention in the future because you cannot remove risk from a system you can only transfer and so when you transfer risk from individual nodes in a system you basically just transfer that risk to the entire system okay so at the beginning of Covid what the Federal Reserve basically did was they said hey banks we don't want you to have any issues here so we're going to suspend the requirement on how much collateral you need to hold for the amount of liabilities remember for banks deposits are liabilities they're your asset it's the bank's liability the collateral is their assets they have to have a certain amount of assets for the amount of liabilities that they have in order to stay within the Federal Reserve's ranges when Covid hit the Federal Reserve just said all bets are off you don't have to hold any amount of collateral for the amount of liabilities that you have this was partly so that the government could start handing out a bunch of cash to the economy to the financial system and it wouldn't overload the banks because every person and government and entity that receives cash they it's going to be in the banking system and it's going to be a liability on the balance sheets of the banks well it was all finding dandy until march of this year when that suspension of the amount of collateral that their banks were required to hold was set to expire banks didn't want this to expire they wanted the Federal Reserve to extend it Federal Reserve said no we're not going to extend the suspension we're just going to let it expire and banks you're going to be required to hold a certain amount of collateral now for your liabilities well right on cue this is when banks started using the reverse repo facility now keep in mind this is Reverse Repo this is not repo so this is the opposite of banks needing cash which is what happened in September 2019 because of not enough cash liquidity in the system and it's the opposite of what happened to Lehman Brothers where they had bad collateral this is where banks and financial institutions are all saying we need more collateral we've got plenty of cash we need more collateral to offset our liabilities all right let's pause here on the repo market we're going to take a little bit of a detour and we have to look at what's been going on with the Federal government and their spending and borrowing because since the beginning of this year the Federal government has been spending a lot but this is the key they have not been borrowing a lot when the government borrows they create a treasury they create a new bond so the Federal government can only spend what it has brought in from taxes or brought in from borrowing during 2020 they borrowed a lot of extra money that they didn't spend and that money went into their account at the Federal Reserve called the treasury general account blew this account up to record highs so this year the treasury basically said we're going to draw this account back down to the normal 400 billion dollar mark we're going to spend from this account we're not going to take on any new debt so that's been the primary place where they've been spending money from the other place where they've been spending money from is record tax inflows you probably haven't heard this anywhere else but the Federal government has had a massive raise this year to the tune of over 1.3 trillion dollars in just the past three months alone if you look at this chart of Federal tax receipts you see that normally there's a big spike during tax month when taxes are due and it goes right back down the Federal government has never received the amount of money they're receiving on a monthly basis right now ever before in history and it's hidden because it's spread out over three months but it is way more than any other year prior to this the government this is why they need inflation to help erode their debt even though there's a catch 22 there but this is the goal to increase tax receipts even without increasing tax rates because the prices of everything go up so they've got a ton of money in the treasury general account that they've been spending they've got a ton of money in Federal tax receipts that they've been bringing in they've been spending that so they haven't been increasing their borrowing this means that every dollar the government is spending in the financial system is not being offset by introducing additional collateral into the financial system it's just new cash entering the financial system so now we've finished our detour from government spending and borrowing let's go back to what's happening with the banks we just said that the Federal government has been injecting a lot of cash into the economy without injecting additional collateral creating all the new treasuries to help banks offset all those liabilities so when in march when the suspension of bank collateral requirements ended there was a scramble for collateral and this is precisely the moment at which the reverse repo facility at the Federal Reserve started being used obviously because if you can't get collateral anywhere you got to go to the repo market to get it and the Federal Reserve is the one who has the collateral to give and not surprisingly the usage of this facility has climbed pretty much every day now my guess was when this all started happening when the reverse repo facility started exploding in usage was that the Federal Reserve was basically just using this as a stop gap temporary measure to provide the collateral to the financial system that it needed until the Federal government started spending more uh had they had drained down the TGA the treasury general account back down to that 400 billion mark and they started issuing new debt again and providing new collateral into the system but then something strange happened at the last FOMC meeting the Federal Reserve increased the amount of interest they're paying for the reverse repo facility to five basis points now that doesn't sound like a lot but when you're dealing with trillions of dollars it's a lot of money this effectively made the Federal Reserves uh reverse repo facility it transitioned it from a place where anybody could go get their collateral to free money risk-free money better than T-Bills and this is when the reverse repo facility really started to explode in usage because it started sucking in a lot of the liquidity from the financial system and yes this is temporary but it can be rolled over and the level that it's being used has been sustained and is still growing it can be rolled over in perpetuity these can be overnight they can be for a couple of months but just because it's temporary doesn't mean it's not right now providing collateral and sucking liquidity out of the system now again this should all be solved and go back to normal as soon as the Federal government starts borrowing again but that's the key what has happened over the last couple of days the Federal government is at their debt ceiling and the debt ceiling is currently under suspension but that expires July 31st we're nine days away from that and by all measures it looks like this will not be resolved before congress goes on recess which means that the Federal government is going to treasury is going to have to start relying on emergency funding to fund the government and all of its expenses like maturing debt and interest payments on debt until the Federal debt ceiling is raised again or suspended again which is all just new cash continuing to enter the system again no new treasuries no due debt they're at their debt ceiling and it won't have been resolved in the next nine days by the looks of it and on Wednesday the congressional budget office presented to congress they said the ex-date or the date at which we think we'll run out of emergency funding will be sometime in October or November which means that potentially until October or maybe even November the Federal government will continue having to spend cash into the economy without being able to create any new collateral any new treasuries to offset that into the financial system now what are these emergency funds that they're gonna be drawing on number one it'll be the treasury general account their initial plan was to draw that down to 400 billion if they have to draw on it they'll take it all the way down to zero there are some other honey pots they can access too and then refund later once the debt ceiling has been raised so just so you grasp the entire picture Federal Reserve right now they're buying 120 billion dollars worth of assets out of the financial system every single month the Federal government is spending new cash into the financial system after July 31st they will not be issuing new treasury they're not rolling over their debt just paying off maturing debt and interest payments which means that the amount of collateral in the system namely treasuries is actively dwindling there's a point about by Stephen van Meter recently that this uh government shutdown and the debt ceiling being hit and not being resolved until even potentially even October or November is going to make the collateral issue even more intense collaterals could be going to become even more scarce now burger king hat guy and I don't always agree on everything but on this this is true the collateral shortage is bad it's getting worse and will likely continue to get even worse and worse and the Federal Reserve will continue to deal with it through the reverse repo facility which is providing collateral into the system by taking cash this will continue to keep interest rates suppressed because there's a scramble for collateral which is great timing for the Federal Reserve as the bond market doesn't have the ability right now to price in inflation expectations as it's looking more and more like the Federal Reserve is losing control of inflation and not going to be able to do what they need to do to reign back in inflation they don't have to worry about the bond market pricing in that risk and starting to show inflation fears it's also good news for the Federal government because you don't want rates spiking if you're trying to use inflation to erode your debt burden because you need negative real rates in order to do so the second thing is that this is draining liquidity from the financial system even if temporarily meaning that we could see even temporary massive liquidity shocks spikes in volatility which fits with my market expectations just looking at some of the other fundamental things going on with the stock market I'm expecting a time a period over the next couple of weeks couple of months of heightened volatility third long term what this will do is it will increase the need for regular repo usage in the future because once liquidity is done being sucked out it's like the pendulum is swung all the way to this extreme it's going to reach a peak and it's going to swing back hard the other direction and then there's not going to be enough cash and everybody's going to have to rely on the regular repo market to get their cash which I think is the reason why the Federal Reserve recently announced that they are planning on setting up a standing repo facility that all financial institutions have access to instead of just like the main banks the primary dealers have access to the Federal Reserve's repo market right now so how to play this well one idea is long volatility as George Gammon recently pointed out pretty much the entire market is short volatility so that's a small bet that has the potential to pay off big and not just in the stock market but in the bond markets as well because this collateral shortage will likely continue to push interest rates down but we could see shocks in the other direction especially once the debt ceiling issue gets finished gets resolved gets worked out and the Federal government starts borrowing like crack addicts again now at this point if you don't know how to use options to hedge your positions effectively or to construct positions that give you limited downside risk and unlimited upside potential take my options course I've got a beginner's course and an advanced course both linked in the description below and at this point if you can't tell already the Federal Reserve is absorbing basically the entire financial system this is the road to serfdom, intervention necessitates further centralization until the entire system is under centralized totalitarian control and yes CBDC's are the next piece of that puzzle but that is a topic for another time as always I really appreciate you guys thank you so much for watching have a great day
Disclaimer:
This article is solely for informational purposes only and it should not be construed as a solicitation or offer to buy or sell on any financial securities/instruments, etc. nor anyone should take the content as an investment advise, any opinion expressed in this article are subject to change without prior notice, eurymanthus.wordpress.com and its author is under no obligation to keep current of the information herein and accepts no liabilities for any gains, losses of any kind arising from any of the material presented on any post/s and/or article/s published.
Trade At Your Own Risks
Archive posts
WordPress.com
No comments:
Post a Comment