Awesome analysis! The correlation pointed out is between cash decrease and repo risk increase. How does the Fed not understand this correlation? Most likely is that they fully understand but are penned in.
Great piece on RRP and how they trapped themselves, drowning in liquidity. It is appalling to see Waller's ineptitude in misinterpretation of RRP inflow - how can you not see that the MMFs and others are taking a risk-free ride from the Treasury?
What's your take on the TGA now running into deeply negative (deficit monetary policy) territory since all the QT liquidity drainage? I think that will break something in the mid-to-long term.
Afaik they almost never dipped into that vast crevice of negative income in the TGA before 2008/9 and then it recovered thanks to massive QE... which is now ending (rather: being ended).
This is going to be (no) fun since I still see a drop in S&P on 2008/9 levels highly possible with all this.
Great takes Bear, as always! Thank you for continuing to put this great content out!
Some questions I'm pondering:
* Wonder what effect, if any, if Fed reinstitutes reserve requirements (off since March 2020)?
* MMF and Money Market Accounts. Different? Kind of? Co-Mingled? A money market account (at a bank) is a demand deposit, right? And is insured (primarily) by FDIC? But a MMF (bought thru broker) is SIPC domain? But then do MMA's end up deploying in MMF's, or skip straight to RRP? WTF, that's a lot of acronyms.
* Ultimately, demand for deposit redemption is what really is "cause" of a run (without digressing into judgement about the bank's asset (mis)management). No bank can service all of those at the same time, b/c no bank has 100% reserve ratio (never-mind mark-to-market effects of HQLA or accounting "nuances"). But unless depositors are demanding physical cash to stash in a mattress/safety deposit box/etc, those dollars are going to end up back in the system elsewhere. The Fed's new facility seems to provide a temporary buffer against the time it takes for those dollars to land elsewhere. But.... how many of those dollars may be ending up in the SIPC's domain (at least as the primary insurer)? Or - right at the US Treasury in a treasury direct account (once the average Joe figures THAT out)?
* Big question is if Fed chooses money destruction or persistent inflation. I cannot see how all that direct delivered money can stay sloshing around otherwise? Is there a formula to calculate how much inflation would be necessary to keep all that stimulus in the system and find an equilibrium?
Excellent article. Its hard for me to be bullish with the Federal Reserve "trapped" while there are bank failures, bailouts, and liquidity injections worldwide. IMO these market rallies need to be used as exit liquidity. I can't figure out how this ends well without a major 20-30% correction worldwide in risk assets.
Great article! Your articles are the first thing I read every Friday morning.
Sorry for the basic question, but why wouldn't the Fed just lower the RRP rate to make moving funds back to bank deposits more attractive and keep QT going?
What a read!! Is incredibly how you wrap things up so easy to understand. Again, thank you so much TLBS for these articles, it helps us to better understand the financial theater that we live in!
A sub cohort of financial pundits talk about Sovereign Debt. There are claims the US has borrowed WAY too much (no argument) and that we are finally running out of room to kick the can further (arguable).
If it comes right down to it, would you expect reneging on debts or allowing inflation to rip?
Or is the situation well within bounds such that there's no need to think about it?
I remember Waller talked about the FED could cut rate while doing QT one or two months ago. Do you think it’s possible this time around since the last week BS expansion is not QE?
And btw, i remember you talked about the liquidity in the market = Fed BS - TGA - RRP. We just saw BS increased. But if this expansion turns into bank deposits, and depositors take this money to MFFs. Then the increase in liquidity we saw will be offset?
I have a fundamental question about short term T-bill interest rates and RRP interest rate. On Friday, RRP was 4.55% whereas 1-month T-bill offered 4% interest. The spread is larger than what can be explained by the possibility of a rate cut this week. Is it because the RRP deposits are held by the FED which is considered for some reason to have higher risk than lending to the US government through T-bills?
After disclosing I know nothing and am an idiot to boot, I'd like to ask a question. Based on what you've explained, it sounds to me like there is no shortage of liquidity, only a shortage of cheap liquidity. The banks could attract plenty of capital by raising their deposit rates or offering MMFs a rate higher than the RRP. Why is that the wrong take?
Excellent piece. But I was wondering about this: "The entities that are losing liquidity are the former borrowers of MMFs who have been boxed out by the Fed, and those borrowers’ banks who would have held that money. The liquidity needs of these entities (and their banks) have not changed, but they have no say in the matter. " Isn't the primary borrower from MMFs the US Government (to the extent they still mainly hold Treasuries)? I realize they also hold commercial paper, so maybe that's what you're referring to? Plus if the MMFs aren't buying Treasuries then someone else has to, which will have ripple effects.
I was also (like the other commenter) wondering to what extent the Fed can decouple QT and interest rate policy, though I was thinking more that they could still raise rates while embarking on QE. I just don't know how sustainable that is, or the reverse: Eventually continuing QT without raising rates.
Awesome analysis! The correlation pointed out is between cash decrease and repo risk increase. How does the Fed not understand this correlation? Most likely is that they fully understand but are penned in.
Watch out for Sept 2019 redux.
Great piece on RRP and how they trapped themselves, drowning in liquidity. It is appalling to see Waller's ineptitude in misinterpretation of RRP inflow - how can you not see that the MMFs and others are taking a risk-free ride from the Treasury?
What's your take on the TGA now running into deeply negative (deficit monetary policy) territory since all the QT liquidity drainage? I think that will break something in the mid-to-long term.
Afaik they almost never dipped into that vast crevice of negative income in the TGA before 2008/9 and then it recovered thanks to massive QE... which is now ending (rather: being ended).
This is going to be (no) fun since I still see a drop in S&P on 2008/9 levels highly possible with all this.
Great takes Bear, as always! Thank you for continuing to put this great content out!
Some questions I'm pondering:
* Wonder what effect, if any, if Fed reinstitutes reserve requirements (off since March 2020)?
* MMF and Money Market Accounts. Different? Kind of? Co-Mingled? A money market account (at a bank) is a demand deposit, right? And is insured (primarily) by FDIC? But a MMF (bought thru broker) is SIPC domain? But then do MMA's end up deploying in MMF's, or skip straight to RRP? WTF, that's a lot of acronyms.
* Ultimately, demand for deposit redemption is what really is "cause" of a run (without digressing into judgement about the bank's asset (mis)management). No bank can service all of those at the same time, b/c no bank has 100% reserve ratio (never-mind mark-to-market effects of HQLA or accounting "nuances"). But unless depositors are demanding physical cash to stash in a mattress/safety deposit box/etc, those dollars are going to end up back in the system elsewhere. The Fed's new facility seems to provide a temporary buffer against the time it takes for those dollars to land elsewhere. But.... how many of those dollars may be ending up in the SIPC's domain (at least as the primary insurer)? Or - right at the US Treasury in a treasury direct account (once the average Joe figures THAT out)?
* Big question is if Fed chooses money destruction or persistent inflation. I cannot see how all that direct delivered money can stay sloshing around otherwise? Is there a formula to calculate how much inflation would be necessary to keep all that stimulus in the system and find an equilibrium?
Excellent article. Its hard for me to be bullish with the Federal Reserve "trapped" while there are bank failures, bailouts, and liquidity injections worldwide. IMO these market rallies need to be used as exit liquidity. I can't figure out how this ends well without a major 20-30% correction worldwide in risk assets.
Great article! Your articles are the first thing I read every Friday morning.
Sorry for the basic question, but why wouldn't the Fed just lower the RRP rate to make moving funds back to bank deposits more attractive and keep QT going?
Good stuff. You might enjoy my latest piece: “Risk management shines as markets unravel.”
https://finiche.substack.com/p/risk-management-shines-as-markets
What a read!! Is incredibly how you wrap things up so easy to understand. Again, thank you so much TLBS for these articles, it helps us to better understand the financial theater that we live in!
Always with a coffe in hand ;)
One of the best explanations of the RRP that I have heard. And your visual was excellent! 👍🏽
A sub cohort of financial pundits talk about Sovereign Debt. There are claims the US has borrowed WAY too much (no argument) and that we are finally running out of room to kick the can further (arguable).
If it comes right down to it, would you expect reneging on debts or allowing inflation to rip?
Or is the situation well within bounds such that there's no need to think about it?
I remember Waller talked about the FED could cut rate while doing QT one or two months ago. Do you think it’s possible this time around since the last week BS expansion is not QE?
And btw, i remember you talked about the liquidity in the market = Fed BS - TGA - RRP. We just saw BS increased. But if this expansion turns into bank deposits, and depositors take this money to MFFs. Then the increase in liquidity we saw will be offset?
I have a fundamental question about short term T-bill interest rates and RRP interest rate. On Friday, RRP was 4.55% whereas 1-month T-bill offered 4% interest. The spread is larger than what can be explained by the possibility of a rate cut this week. Is it because the RRP deposits are held by the FED which is considered for some reason to have higher risk than lending to the US government through T-bills?
Insightful as always. Would like to hear your thoughts on AT1 bonds in a future piece.
Thanks for the excellent piece.
After disclosing I know nothing and am an idiot to boot, I'd like to ask a question. Based on what you've explained, it sounds to me like there is no shortage of liquidity, only a shortage of cheap liquidity. The banks could attract plenty of capital by raising their deposit rates or offering MMFs a rate higher than the RRP. Why is that the wrong take?
Enlightening. Thank you.
Excellent piece. But I was wondering about this: "The entities that are losing liquidity are the former borrowers of MMFs who have been boxed out by the Fed, and those borrowers’ banks who would have held that money. The liquidity needs of these entities (and their banks) have not changed, but they have no say in the matter. " Isn't the primary borrower from MMFs the US Government (to the extent they still mainly hold Treasuries)? I realize they also hold commercial paper, so maybe that's what you're referring to? Plus if the MMFs aren't buying Treasuries then someone else has to, which will have ripple effects.
I was also (like the other commenter) wondering to what extent the Fed can decouple QT and interest rate policy, though I was thinking more that they could still raise rates while embarking on QE. I just don't know how sustainable that is, or the reverse: Eventually continuing QT without raising rates.
Great report! Thank you!