Jim Bianco biancoresearch.eth

Jim Bianco biancoresearch.eth

08-10-2022

21:05

1/12 Lots of confusion about the Fed's Reverse Repurchase Program (RRP). What is it? What does it mean? Waller's comments from a few days ago are important and will be addressed later in this thread. No pivot ... EVER! h/t @FedGuy12 @NickTimiraos

2/12 RRP is simply, it is an overnight loan from the NY Fed (lender), or a Reverse Repurchase. For the financial institution (borrower) it is a Repurchase agreement, known as a repo. As the chart shows, there is currently $2.2 trillion of these loans, up from ~$0 in Jan 2021.

3/13 Why so popular? Simply they offer a competitive rate (blue line at 3.05%, 20 bps below the top of the FF range) and the safest counter-party in the world (NY Fed). Why not park your money with the NY Fed with little hassle, zero counter-party risk, and good rates?

4/13 Who does this, AND THIS IS REALLY IMPORTANT THAT SO MANY MISS ... It is NOT the banks! $0 RRP is in banks. Why? RRP is 3.05%, and Interest on the reserves (IOR) is 3.15%. Banks get a better deal parking their reserves with the Fed at IOR 3.15% than RRP at 3.05%.

5/13 So, as these SEC filings show, 92% of RRP is held by Money Market funds (left), and 8% by Home Loan Banks. In fact, 44% of all the assets in money market funds is RRP, $2.2T of $5.1T of all assets (right). Yes, about half the assets in a typical Money Market Fund are RRP.

6/13 Finally, it is also important to note these are "non-bank assets" These funds are NOT held by banks, but just outside the banking system in money market funds.

7/13 This gets to Waller's comment from last week, in the first thread. Waller - "the markets are handing us $2.2 trillion of liquidity they do not need" This is a reference to the $2.2 trillion in RRP.

8/13 Waller is saying if liquidity is bad, and it is, these RRP in money market funds can flow back into the banks and re-liquify them. So, don't whine to the Fed to pivot. THEY DO NOT NEED TO! Liquidity exists within the financial system, just not in banks.

9/13 How does the RRP flow back into banks? Raise deposit rates to compete with RRP. But as this chart shows, they are not. The avg bank deposit rate is still just 0.20%. The avg money market fund is 2.28% (thanks to nearly half its assets in RRP).

10/13 What Waller is saying is the bank deposit rate of 0.20% says to him the banks have plenty of liquidity. If they did not, they would be jacking rates up ... a lot. So, shut up about a pivot!

11/13 Should the Fed restrict RRP, or limit it (currently limited to $160B per firm, remember Money Market Funds are HUGE!) This would cause ST rates to fall. They don't want that, they want to, they want the banks to jack up deposit rates. They want to cool inflation!

12/13 Bottom line, what Waller told you is the Fed will pivot after our portfolios are rekted, we lost our jobs, and we all lost hope. If you think something abstract that doesn't impact you, like British pensions, will cause a pivot, and a monster stock rally ... think again.

13/3 They will pivot when we are all so screwed and ruined that it will not matter anymore. Not before

Bonus If you are really good on Wall Street, you're a general fighting the last war. That is fretting about a credit event and deflation. That was last cycle. This cycle is about higher rates, lower multiples, and inflation. @LynAldenContact gets it!

Bonus 2 See Waller's pumpkin metaphor in the first tweet, about pumpkins on Nov 1. He said to lower the price. He is saying the banks should cut prices (raise interest rates) and money will flow back and fix any liquidity issue. No pivot is ever needed. Stop asking for it!



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