Pam and Russ Martens: The Fed has a dangerous repo problem, as the charts show


By Pam and Russ Martens
Wall Street on Parade
Friday, February 7, 2020

On both days this week that the New York Fed offered its $30 billion in 14-day repo loans to 24 trading houses on Wall Street, there was far more demand than the New York Fed had preannounced it would provide.

On Tuesday, the demand was for $59.05 billion while the New York Fed provided only $30 billion. On Thursday the demand was for $57.25 billion while the New York Fed provided $30 billion. In short, there is a growing demand for long-term loans at affordable rates on Wall Street -- meaning one or more trading houses has a borrowing problem. The Fed's loans this week were made at a below-market interest rate of 1.60 percent.

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The demand for the 14-day loans came on the same days that the New York Fed also funneled huge amounts of money in one-day loans to Wall Street's trading houses: $64.45 billion on Tuesday and $46.75 billion on Thursday. Cumulatively, since the Fed began making these unprecedented repo loans to Wall Street's trading houses on September 17 of last year, it has pumped over $6.6 trillion into Wall Street.

That money has found a home in the stock market, most likely via stock index futures which deliver a big bang for the buck through high leverage via margin loans. Some of these Wall Street trading houses that are borrowing from the Fed at 1.60 percent are likely loaning that money out to hedge funds (at a much higher interest rate) and the hedge funds are then plowing the money into stock index futures.

The stock market has set repeated new highs since the New York Fed turned on this multi-trillion-dollar money spigot that has been operating every business day since September 17.

The dangerous problems for the New York Fed are the following: It is creating an unsustainable bubble in the stock market; the larger that bubble grows, the more economic damage it does when it explodes; the New York Fed clearly had no exit plan when it began this dangerous experiment with no approval from an elected Congress. ...

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