Its Over

Originally posted by kacy ↑

ronnie, thanks for all the interesting posts. Its hard to keep up - a bit like the market! The white elephant in the room is the broken repo-market and the fed who seems bent on turning the federal reserve bank into a pawn shop lender for addicted stockmarket junkies. Lets go back to what the repo-market actually is:

Financial institutions borrow or lend money in the overnight money markets as need dictates.
This short-term borrowing and lending activity takes the form of “repos”… or repurchase agreements.
If a firm wishes to borrow monies, it goes before the “repo” market with an open hat.
It holds up high-grade securities such as Treasury bonds as collateral.
Another financial institution accepts the collateral. It then agrees to loan the overnight money.
The next day the borrower “repurchases” the collateral it originally put up… and returns the borrowed money (with some slight interest into the bargain).

That is what the repo-market is supposed to be, but most of the repo-market loans now are for a 2 week term and you can roll it over by paying the money back and borrowing it again on the same day. (Two weeks is a long time in this market!) Also, only the big banks are supposed to lend and borrow to/from the repo-market. Hedge funds and companies (who buy-back their own shares) get that money from the big banks, who act as a middle man.

Lending to the repo-market exposes the banks to the stockmarket who see that as a risk because it is pumped up and overvalued. So they have stopped lending money to the repo-market. They have also stopped lending money to smaller banks and hedge funds because that might expose them to the market indirectly.

Hey! wasn't the GFC caused by banks no longer trusting each other? Yep, only this time its not loans on sub-prime mortgages, its loans to (sub-prime) stockmarket gamblers. If you were a bank, would you loan billions to a hedge fund who wants to bet it all on the stockmarket?

To fix the broken repo-market, the fed want to change the rules governing the repo-market by allowing hedge funds and companies (who ramp up their own share price using share buy-backs) borrow the money directly from the repo-market using printed QE money.

The problem with that is, many republicans believe the public wont like it, because it looks like a money printing machine for the 1% rich (who already own 99% of the country's wealth) while ordinary people can't afford to pay the mortgage or rent.

The democrats have said that if Trump allows the Fed to change the repo-market rules, they will make a big fuss over it at the coming election. The democrats (and republicans) believe most people are sick to death of seeing the rich getting richer and the poor getting poorer, and they could be right. Many economists believe that if the democrats look like winning, the stockmarket will crash before the next election.

If all this does cause another GFC, there is another problem. In the end houses are only worth what people can afford to pay to live in them and shares are only worth what they earn (both now or in the future). So asset prices just cant keep going up by 20-30 percent per year while everybody's wages go up by 1-2% per year at best.

So how effective will QE 4, 5 6 & 7 be if asset prices don't go up and don't add to anyone's wealth? The only mechanism left that will stop the riots and chaos in the next downturn will be printing money like confetti and throwing it at the people to spend like there is no tomorrow!

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Thanks for your post to further elucidate.

I think the problem is that the Fed has created its own problem - once this QE4 continues unabated, it becomes a drug necessary to keep the rally up. Deprive the markets of that drug, and the market gets withdrawal symptoms so the Fed has no choice but to continue. The market gamble will continue until such time market participants feel nervous about market heights then it would just take an event (could be an ordinary one too that earlier would have limited negative effect) as a catalyst that could start the exodus and stampede. When that moment comes, it would be fast and our ASX opens many hours later.

If QE becomes necessary not to boost the economy effectively but to prop up the stock market, then clearly we have a problem. Like I said who wouldn't want to borrow next to nothing to make quick money - except remember that is only available to US market participants. So like the Donald, create all the problems stemming from US, the rest of the world don't get the benefits but all the risks.