What they won't tell you about the Repo Market

Zoltan pozsar came out with an in depth report December 9th outlining how next week could be the financial systems version of Y2K, but why should we listen to Zoltan? Why does his opinion matter so much? Who is this mysterious guy with so much influence in the markets? In 2008 shortly before the collapse of Lehman Brothers, Zoltan went to work for the Federal Reserve Bank of New York where he became known for creating a map of the financial system that included repo and Shadow Banks operating outside of the traditional lending market. Zoltan had such a deep understanding of the financial system that a poster version was pinned up in the New York fed's briefing room. Zoltan encouraged co-workers to stop by and review it, saying otherwise they'd only be looking at 10% of the overall picture. He then went on to work at the US Treasury Department and landed a job at Credit Suisse in 2015 where he began writing research notes about the mechanics of the feds coming interest rate hike. So basically Zoltan was the guy at the New York fed who was in charge of teaching everyone how the financial system actually works. That's why when he speaks the markets LISTEN! Going back to the report that he did on December 9th, Zoltan claim that the financial institutions and the primary dealers that are involved in this financial ecosystem along with the FED would start selling treasuries. They would do this because they wanted generate the cash to take advantage of higher yields in other markets such as the FX swap Market. This would increase the yield on bonds and treasury's because more selling would make the price of those bonds go down. If the price of the bonds go down, then they yields go up because of that inverse relationship. The FED can't have this because they know that would really crash financial markets. They would have to come in with QE4, print money and go into the bond market to buy all those bonds that the primary dealers in the financial institutions are selling. So what did the FED do? Well, they saw Zoltans report and you can put two and two together, they won't admit this but if that's the guy that in 2008 was teaching them about how the financial system works and that guy came out with a report saying they're basically screwed December 9th. It would come as no surprise that the FED came out with their own policy change just three days later out of pure coincidence in which they said that they were going to inject more money into the repo Market at Year's end. At the exact same time that Zoltan predicted they would have big problems at year-end. Keep in mind the FED can't admit that they're doing QE4. Why you might ask? Because the economy is built on asset prices, debt and confidence. Admitting QE4 would destroy confidence. So they have to covertly go into the repo market and inject more liquidity in hopes that the primary dealers in the financial institutions won't sell all of those treasuries. They come up with the cash they need and instead they'll go into the repo Market to borrow that cash, then take that cash and invest it elsewhere and get that big return at the end of the year.

In their policy response change that they came out with on December 12th after zoltan's report on December 9th. They committed to an additional 75 billion dollar repo and upping the overnight repos from 120 billion to 150 billion. The question then becomes is this going to be enough? Will this provide the liquidity? That's why you have to stay tuned and really pay attention to what's going on in the repo Market next week! You may be asking yourself how does that pertain to a dollar collapse? I mean I get it we need to watch out for yield spiking and If the Fed has to come in here with more emergency liquidity to make sure that the whole system doesn't collapse but I don't get how that translates to the dollar going down.

Luke Gromen outlines a brilliant argument for the dollar collapse on the last episode of the macro voices podcast I'll will put a link to that in the description below. It all starts with understanding how governments and financial institutions, have to continue to roll over their debt. "A lack of liquidity kills". How do you not get killed by liquidity? By Rolling it over and over. By saying I can't make the payment today but I'll make it tomorrow.

This is incredibly important.Let's remember that the FED funds rate for their target range right now is between 1.5% and 1.75% But the repo rates spiked in September up to 10%!!!! This tells us that if the FED wasn't intervening into that repo Mark every single night by the tune of 120 plus billion dollars than that's what the rate would still be and the repo rate affects the FED funds rate.The FED funds rate affects the amount of interest paid on corporate debt and that affects the interest rate that the federal government has to pay on all those short-term t-bills that they're rolling over. All of these interest rates apply directly to the stock market and the housing market. Meaning the higher these interest rates go, the lower the stock market goes in the housing market. So if the rates right now are at 1.5% what would that do to the stock market and the housing market if rates went to their natural level, which is 10% in the repo Market. This among many other things is what Luke gromen points out in that macrovoices podcast. If the stock market goes down in the housing market goes down, so do tax receipts. There's a direct correlation not necessarily to the tax rates but more so to the stock market and the housing market. The lower the stock market goes the lower tax receipts go, meaning the money that the government needs to fund itself.

Luke gromen pointed out that in fiscal 2019, the federal government had the issue 11 trillion dollars in new debt. And you may think that seems impossible when we only have 23 trillion in debt, but you've got to remember that a lot of their debt came due and they have to roll it over because of they can't pay it. When you combine that with how much debt they have to issue for the deficit, that's what brings us to this 11 trillion dollars issued.

Of the 11 trillion dollars, 71% was issued in t-bills with a maturity of 6 months or less. What that means is that the government, within the next six months, will have to roll over 7 plus trillion dollars.They they will be at the mercy of whatever the FED funds rate and the repo market rate is at the time when they have to roll over that debt.Are you starting to connect the dots?? this brings us to another Doom Vortex! The Doom Vortex would work like THIS. The FED funds rate goes from 1.5% and it approaches what the real repo market rate should be and that's 10%. That would implode the corporate bond market, which would implode the stock market, which would implode tax receipts.Lower tax receipts, plus higher interest rates would mean that when the government needs to roll over that debt and issue more short-term treasury bills, the issuance would have to go from 7 trillion up to 10 trillion dollars because they have to issue more debt. That means that the people who are lending them money would see more of an inflation risk, which would drive interest rates even higher. What you have is the US government effectively funding itself in short-term funding markets. So if the FED just let the market work the US government would need to roll six trillion dollars or so in the next 6 months at 10% plus and the US government CANNOT CANNOT CANNOT aford to roll six trillion dollars at 10%. Especially since at 10% plus, the highly Financial US economy would collapse, so the financing needs would non-linearly go from 6 trillion to 8, to 10 trillion over the next 6 months has tax receipts collapsed and 12% +. So, you'd have housing collapsing,banking system would follow, corporate debt issuance would grind to a halt with RICO at 10%. They can't afford to roll any of that stuff at 10% +. Corporate debt issuance would begin to defaulting which corporate leverage as high as it is could easily get wipe out.

Now remember as we've noted multiple times, the US Equity market cap to 160% of GDP and net capital gains plus taxable IRA distributions alone around 200% of annual growth and personal consumption expenditures is 2/3 of GDP. So in plain English there's no economy in the US or the world if US Stocks crash that's just six grade math. What you may be thinking now is, but the FED would never allow that to happen. They'll come in and print money to make sure that those rates stay at 1.5% and you would be right and that brings us to the dollar collapse that I will get in to with my next article.