This little monster that feeds beneath the surface of global banking at its core briefly raised one ugly eye out of the water as 2018 turned into 2019. I wrote back then that the interest spike we saw in the kind of overnight interbank lending known as repurchase agreements (repos) was just the foreshock of a financial crisis being created by the Fed’s monetary tightening. I said the Fed’s continued tightening would eventually result in a full-blown recession that would emerge, likely out of the repo market, sometime in the summer. In the final two weeks of the summer, the Repo Crisis raised its head fully out of the water and roared.
When I first wrote of these things at the start of 2019, the Fed had only been up to full-speed tightening for three months, and already it was blowing out the financial system at its core. The stock market had just crashed with the onset of full-speed tightening just as I had said it would. It fell hard enough to where the only index holding just one nostril above the icy water was the S&P 500 at a 19.8% plunge. Even that holdout briefly dipped its last air-hole under water in the middle of the day (i.e., below 20%), but didn’t stay below for the count. All other major indices and most minor ones took the full polar-bear plunge into the deep, dark water by this day in December.
If not for the obvious bullish bias in all reportage everywhere (except alternative media), the market would have been declared a new bear market at that time (based on the market’s own historic standards where a 20% fall is a bear market), and any bull market after that would be a new bull market, not what is now called “the longest bull market on record.” (I mean, with even the S&P going below the surface intraday, why should the S&P tip the balance against the declaration of all other indices, including the Nasdaq that had driven the market for years and the Dow, which has the longest history?) That kind of reportage, however, doesn’t exist any longer.
The Fed, immediately after this long, dark day last December, slammed the brakes on its interest-rate increases and promised it would stop tightening sooner than it had originally said it would. That was also something I had said for years would quickly become the case when the Fed finally did go into its long-announced tightening regime.
What developed into the worst December in US stock-market history culminated in an extraordinary repo interest spike at the end of the year, which I claimed happened because the Fed’s tightening had already pulled bank reserves down more than their new fake recovery, as fragile as a Christmas ornament, could withstand. I showed with graphs how the Fed’s tightening was resulting in bank reserves depleting everywhere to a degree that proportionately matched the Fed’s tightening. That depletion was causing banks to stop loaning to each other, leaving a shortage in overnight funding on the biggest reconciling day of the year.
Now we are coming up on that same day of the year for 2019 when all bank accounts and market funds, etc. are brought to their legally mandated balances at year’s end. As we near that critical date again, the man who wrote the Fed’s own Bible on repos has predicted the likelihood of the greatest repo crisis in history at the turn of the year.
Read the rest here: http://thegreatrecession.info/blog/repocalypse-the-second-coming/
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