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Pam and Russ Martens: Trump, stocks win in Fed's repo binge; here are the losers
By Pam and Russ Martens
Wall Street on Parade
Monday, December 23, 2019
The S&P 500 Index and the Dow Jones Industrial Average set new record highs every single day last week. This occurred despite the Federal Reserve's justifying its unprecedented hundreds of billions of dollars each week in cheap loans to Wall Street’s trading houses as necessary to stem a "liquidity" crisis.
You can't have a liquidity crisis when the stock market is setting record highs for an entire week. Those two things just don’t correlate.
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The Fed, through its money spigot, the New York Fed, began sluicing these funds to Wall Street on September 17, the day the overnight borrowing rate in the repurchase agreement (repo) loan market spiked from 2 to 10 percent. This was the first such intervention by the Fed since the financial crisis. The repo market is where banks, hedge funds, and money market funds loan each other money overnight on the basis of good collateral like U.S. Treasury securities.
An unprecedented spike to 10 percent in the repo market is a harbinger that one or more of the borrowers in this market is in trouble and lenders don’t want the exposure so they are backing away from lending. This is how free markets are supposed to work. They are supposed to be allowed to send pivotal warning signs from time to time through an efficient pricing mechanism.
But instead of allowing the free market and efficient pricing components to function, the Fed cut this short and drew a dark curtain around this part of the market by flooding cheap, electronically-created money to Wall Street’s trading houses.
On December 12 the New York Fed upped the ante. It announced that over the next month it would shower the trading houses (primary dealers) on Wall Street with a cumulative total of $2.93 trillion in short-term loans.
Now Wall Street has made it clear what the cheap money is being used for. It's not being loaned out to help the general economy -- it's being used to push the stock market to record highs each day. ...
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