Note: If you've followed my work at all, and you don't have the time to read every line of my highly entertaining banter, you'll recall that the really important concepts are highlighted in RED for emphasis. Good Luck!

The Repo-Acalypse





FED's brand spanking new overnight ($75 Billion) and 14 day ($45 Billion) Repo program If you aren't aware of this expanding/accelerating ($75+ Billion of Overnight plus another "up to" $205+ Billion, if fully subscribed, since the multiple 14 Day $35 Billion and $45 Billion Funding rounds will overlap) Monetary Policy announcement you should be. To put this figure in perspective, this figure ($280 Billion) is roughly equivalent of the combined Shareholder Equity of Goldman Sachs (GS) ($90 Billion) and JP Morgan ($220 Billion) for YE 2018.....and the US Financial system seems to need this emergency funding to function effectively over the next few weeks. Ouch!... In all probability, if you are reading this post and follow my work, you are also probably well aware of the recent implementation of thewhich they've announced October 4th, to continue (at this time) through November 4th.













At the risk of oversimplification, I'll try to put today's material in a format that even technocratic, myopic, closed minded, "data driven" Central Bankers can understand. The reason the FED needs to make "overnight/short-term money" available to the financial system is that there is suddenly some sort of mysterious hiccup in the financial plumbing where a systemic player (or close to it) suddenly needs money (liquidity). Hopefully, the FED folks know exactly who it is and how/why it happened. Here are the specifics as to why this player (or players) must indeed be a "systemic" player/players:





1.) The cost of "Overnight money" spiked to 10% on Sept 17th , indicating that Banks (with spare money/reserves) were unwilling to lend to a particular Entity or Entities under current conditions, so the FED (Through Dealers they are implicitly guaranteeing) are instructed to step in as the lender of last resort.





2.) The Bank(s)/Entity/Entities in question are likely systemic otherwise the FED/FDIC would have simply "done their thing", as they often do, on a Friday night, at close of business, showed up at the problem Bank/Entity's door step and closed it down, only to open, recapitalized, the following Monday under a new banner. There would be no Repo Facility needed.





3.) The expansion of this Repo facility is likely just buying time for the FED to come up with a game plan on how to resolve/unwind this particular, presumably systemic problem.





4.)

The identity of this Bank/Banks/Entity/Entities is always a closely guarded secret since the disclosure of same would most likely make matters worse, causing a "run" and/or involved counter-parties to make decisions not to play in the sandbox (e.g. Bear Sterns/Lehman/etc.)





5.) There are insiders and government bankers/officials who know exactly who the suspected culprit(s) is/are and there are (hopefully) meetings taking place as I type, to come up with a resolution plan to deal with it. At least we all hope so.





To continue my "oversimplification theme" there are only two (2) reasons a bank gets into trouble and suddenly needs significant infusions of "overnight money". The first is a a macro dislocation of some type, i.e.) a bank dedicated/over-weighted in a specific market niche, e.g.) significant lending to an industry or customer base that suddenly experiences severe headwinds or disruptions (Oil,





US Dollars "Owned" by Foreign Entities

The Bank of International Settlements -

US Dollars "Owned" by Foreign Entities Outside of the US Banking System

https://stats.bis.org/statx/srs/table/A5?c=5A&p=

Blue Highlighted Figures





5.) Most importantly, again for emphasis, the Global USD increase over the last two years was primarily attributable to domiciles outside the United States (88%), with only 12% of the USD increase attributable to US Cross-Border Bank Liabilities/Deposits. In other words, the Global inventory of "newly printed" USDs is rapidly being absorbed by foreign ownership.

Treasury International Capital "TIC" Data -

US Dollars "Owned" by Foreign Entities In the US Banking System

The second largest economy in the world has a closed, inflated currency which nobody uses. Yup....that's a fantastic idea. As you historians might recall, the Reichsbank tried the same thing in 1920. But they didn't have computers/wires/SWIFT so it was easier to spot. The reason the Mark failed was that they actually tried to use this currency to pay their international bills (WWI Reparations) and the Allies caught on.









1.) The first thing we notice is that Total Global US Dollar Deposits has more than doubled, to $29.571 Trillion since 2003.

2.) Domestic US Dollar deposits, used to support America's "main street" economy

(Dollar Deposits held by US Depositors in the US)

are 32% of total Global US Dollars in circulation.

3.) As the issuer of the World's Reserve Currency, America has assumed the role of currency purveyor to the rest of the world. (As of June 2019, 69% of US Dollars in circulation were held by foreign entities either in US Banks or Cross-Border in foreign Banks).

1.) Roughly half of all US Dollar Deposits in circulation are held by foreign entities in foreign Banks.





2.) Roughly 20% of all US Domestic US Bank Deposits reside in accounts owned by foreign entities and individuals.

3.) Only 32% of all US Dollar deposits in circulation, roughly $9.4 Trillion, are owned by US Entities and individuals and held in Domestic US Banks. (The "Green" area on the above chart)

The point of the above is that the US dollar, through the FED's relentless, forced, monetary expansion, has somehow morphed from a secure, reliable currency, desperately needed to transact international trade, to a ubiquitous repository for the world's financial asset inflation.

In short, as we will see in the next section, there's a real chance that the FED has lost what used to be de facto control of the dollar. They just don't know it yet. They (presumably) have no idea why so many dollars ($29 Trillion+) have made their way into places that, to be blunt, constitute a national security risk, when less than a third of that amount is required to run the US domestic economy. They are following the CPC "pump and dump" game plan right into the abyss.

拉屎.

Where's the Money Lebowski?





After decades of $500 Billion (plus/minus) annual global trade surpluses you'd suspect that the Chinese must own not only a significant amount of US Dollar deposits scattered all over the world, but significant financial assets (Stocks, Bonds, Real Estate, etc.) as well, and you'd be correct. Over the last two decades the West has transferred roughly $11.266 Trillion (in Dollars, Euros, Yen, Sterling, etc.) as a result of these trade surpluses.





Through the miracle of compounding interest, we can estimate that the value of Western Assets (including the Chinese portion of the above described bank deposits) controlled and direct-able by Chinese Communist Party, members and agents is roughly $27.321 Trillion (give or take) if invested at the S&P Total Return as described in the table below. Again, we know this with certainty, since there are no material RMB deposits or RMB denominated financial assets in any non-Chinese Banking systems anywhere in the world. This $27.321 Trillion can move freely around the globe between US Dollars, Euros, Sterling, Yen, Hong Kong Dollars, Canadian & Aussie Dollars, Rupees, Pesos, etc. etc. etc., but it's never been converted to RMB.





This approximately $27.321 Trillion, Chinese money/assets









Westerners believe that the right to own private property is inviolate, separate and immune from state interference in all but specific, predefined circumstances. Authoritarian Chinese Communism, on the other hand operates under a pseudo-privatization model, where the 90 million party members believe and fully understand that they own property only at the party's behest.

Using this management style, it wouldn't be far fetched to believe that the Chinese Communist Party would be fully capable of orchestrating and directing a symphony of 90 million people, investing and managing money exactly the way they are told to. Under the direction of the CPC this giant hive, comprised of 90 million individual worker bees, has been buzzing away for decades, redeploying their $27.321 Trillion, slave-labor trade surplus to Western bank deposits, financial assets, stocks, bonds, Real Estate and businesses, etc.

Where the West has failed, is that we have blindly (or not) chosen to take all of these transactions at face value, naively treating these individual deals as "Westernized" free-market transactions, believing that the preservation of Western-style property rights and Tax Haven anonymity would prevail and that the rights of the individual Chinese banking customer must therefore also prevail. In reality we should be treating all of these transactions as if they are all consummated by one, and only one, gigantic bad actor, the Chinese Communist Party.





I've written, in a bit more detail in a previous post entitled " A Modest Proposal ", on our need to prevent the inevitable capital flight in order to have any chance of surviving this as a nation. The point of the exercise is that we need to quickly figure out and take measures to freeze CPC controlled bank accounts and financial assets. We need to take a page out of the People's Bank of China play book. We need put an iron-clad wall around US Banks and prevent US Dollars from fleeing. We need to implement emergency "Hotel California Monetary Policy" for identifiable Chinese Communist Party agents/operatives/entities/assets....in simple terms "they can check out anytime they like....but their money can never leave".





As an alternative, again, taking a page out of the PBOC playbook, we might consider an overnight "split" our currency, similar to the mechanism deployed for CNY vs. the CNH. (Except the values would remain market driven...both the Offshore Dollar and the On-Shore dollar would float independently) We would define the US Dollar as the "USDO" or USD residing in US Banks "On-Shore" and "USDF" or USD residing in Off-Shore Banks, controlled by Non-US depositors or in Foreign Banks On-Shore in the States. The framework would require a separate exchange rate, locking all of these dollars off-shore, making them relatively worthless/frozen until a market rate can be determined/established. FED policy would obviously focus on the supply of USDO, with the USDF as an afterthought.





Desperate

desperate









High Value Targets

RWA: “Risk-weighted assets”

:

Basel III establishes two comprehensive approaches for calculating RWA (a Standardized approach and an Advanced approach) which include capital requirements for credit risk, market risk, and in the case of Basel III Advanced, also operational risk. Key differences in the calculation of credit risk RWA between the Standardized and Advanced approaches are that for Basel III Advanced, credit risk RWA is based on risk-sensitive approaches which largely rely on the use of internal credit models and parameters, whereas for Basel III Standardized, credit risk RWA is generally based on supervisory risk-weightings which vary primarily by counterparty type and asset class. Market risk RWA is calculated on a generally consistent basis between Basel III Standardized and Basel III Advanced.

So What Does All of This Have to Do with Repos? What does it all mean?





I wrote the following prophetic paragraphs in a blog post eight months ago in February of this year.







































































































Most of what I'd described in the post (Dalio's "The Big Debt Crisis"....the FSB Report and Financial War Games) seems to be coming to fruition. Deposits are leaving the US Banking System, there's apparent, sudden confusion at the FED, with a rush to replace liquidity, yet as of the other day we continued our commitment to keep selling soy beans and other agricultural products to the Chinese and we delayed tariffs once again. It looks like the CPC efforts remain "on plan".



As a diversion we are apparently following CPC/Russian foreign policy advice, chosing to screw around with Turkey, Syria and the Kurds in yet another "Wag the Dog" distraction.



There's a good chance that what we're seeing at the New York FED's Open Market/Repo Desk is the beginning of the inevitable liquidity crisis and asset valuation reset many of us have been expecting for quite a while. The numbers make it obvious, yet our central bankers seem much more amenable to taking the easy path, continuing to print money until investors decide that perhaps, the US Dollar is no longer the safest of safe havens that they once thought it was. Everything will become relative once again.



As of this writing, the FED's emergency Repo facility is the first, yet soon to prove inadequate solution to a problem they don't yet understand. The FED's ad hoc remedy generally dumps money into the system without targeting the specific problem. Again, rather than pouring money down the toilet, I'd suggest a more surgical approach, figuring out exactly where the money is going, why it's going there and make a relentless effort to stop it from going there.



Again, the below described " Inevitable Monetary Journey " chart describes that at some point soon the Chinese Communist Party will be accelerating their "Pump and Dump" and increasing liquidity pressure on US Banks, who will continue to look the FED for short term financing. The FED will continue to provide funds, failing to understand that they are dealing with a long term structural problem.



There is no question, at least in my mind, that the Chinese Communist Party has accumulated more than enough US Dollar and Forex resources to accomplish their dollar devaluation exercise. I'd discussed the evolution of the nominal composition of US Money and Financial Assets a while ago. Note that under my model, the FED Balance Sheet will expand from the current $3.9 Trillion to $16.4 Trillion, and US Domestic M3 will increase by nearly $4 Trillion by 2023 (God only knows what off-shore dollar deposits will look like, but God doesn't do interviews either) if we stay on this path, attempting to both support nominal asset values and the current, unquenchable global thirst for US Dollars.



The table below describes (in comparison to last decades self induced Great Financial Crisis) the movement of major Asset Class Valuations. We see that US M3 increases $2.2T (15%), The FED Balance Sheet increases by $8.5T (216%) as they go "Tarping", US Equities Decline $10T (33%) US Residential Real Estate declines $6.3T (18%), As in most estimates/models the timing and adjustment amounts can be questioned, but I would imagine that these valuation adjustments are at least directionally correct, and probably optimistic depending on the rapidity of the "dump".







Given the above, the optimal time frame for the Chinese to begin releasing the RMB into the global financial system, will be bottom of the "NGFC" (The Next Great Financial Crisis). Obviously, since they caused the carnage, they will be able to call the bottom.



Generally, here's how this will go down. Chinese "investors" will come riding in on a white horse, offering to loan money, buy property, stocks, bonds and financial assets. Only this time, the offers will be made in RMB rather than US Dollars. With every other currency on the planet weakening, with the only notable exception being the RMB (because nobody uses it), the CPC will be offering the RMB at an exchange rate of probably somewhere around a managed/fake exchange rate of 6:1. This awesome plan will be pitched by our friendly US Investment Bankers, presumably coming up with all sorts of exotic RMB products which will finally integrate the RMB into the global financial system. They will opine that this "opening up of the RMB" plan will be the only way to save the global financial system from ruin (for some hefty fees). Once again, the arsonists will have transitioned to the role of fire fighter. From my point of view, this is not the "only" plan. From my point of view, rather than selling off America a piece at a time for a fake ponzi-scheme currency, we should seize every Chinese held, USD denominated asset, close and revoke the charters of any Chinese Banks and CPC controlled ShellCos doing business in the US, cancel any suspect SWIFT numbers and immediately stop any off shore wire transfers where the final recipient can't be verified in anticipation of the above "splitting" of the USD.



As an aside, I would see nothing wrong with firing every US Banker with the term "International" on his or her business card with a title above "VP" as well as some relentless prosecution and multi-decade jail time for the arsonists, as opposed to relying on them to fix the problem (for hefty fees). We didn't do this after the GFC and look where it got us.





Demand for the Almighty Dollar



Nevertheless, today, the US Dollar is the place to be. Even though we're expanding the money supply at an unprecedented rate, the exchange rate is indeed solid as a rock and in fact, recently appreciating. Everyone wants dollars......"Dollars, dollars everywhere and all the banks did shrink, dollars dollars everywhere and nor drop to spend" (Plagiarized/adapted and butchered from Samuel Taylor Coleridge "The Rime of the Ancient Mariner ")







The FED has, apparently unbeknownst to them, abandoned their mandate to use monetary policy to 1.) Provide full employment, and 2.) Maintain price stability. I'd also argue that we are long past the point where any additional stimulus has any impact whatsoever on the "real", domestic, US economy. The domestic economy apparently only needs 32% of the US Dollars in circulation to keep chugging along, yet, the FED keeps printing. The balance of whatever level of stimulus the FED chooses to provide, and it has become overwhelmingly substantial, has been, and will continue to be siphoned off as a store of value for global banks, foreign investors and the Chinese Communist Party, hopeful that the dollar will, for the time being, continue to be a safe alternative to the dog-turd stocks, bonds and currencies of their respective floundering economies.



As the FED continues to provide "Nominal Asset Value Supporting Dollars" at a pace heretofore unprecedented, at least since the post WWI Wiemar Republic, these dollars will eventually have to go somewhere (and rapidly devalue). We've already established that there's no mechanism, and 20.2 Trillion (and growing) reasons, which prevents these dollars from moving into the main street economy where they could actually get "spent". Foreign investors will be forced to look for safer, better alternatives than US Financial Assets as they continue to hoard deposits. The previously obvious choice between the rest of the world's financial dog-turds and those slightly less malodorous doggie-doo assets sitting in US Markets will become a bit cloudy. Once the world loses its appetite for US Dollars, it must begin investing, storing and converting it to "other stuff". What that "stuff" might be is up for debate, but it's clear that whatever it is will be deeply discounted, as will the assets currently denominated in US Dollars. Of course, the ultimate end game is that the Chinese Communist Party is betting that RMB assets will finally be a viable global alternative to US Financial and European Financial Assets . Based on the above, the idea that the RMB could become globally viable at an exchange rate that would not destroy the current/fake value of Chinese Assets is not not nearly as far fetched as I might have thought just a few years ago. If and when that conversion actually starts to happen, it will also become painfully obvious for America and the rest of the free world.



Let's just hope it doesn't start next week, since it's clear to me that the FED isn't ready for it.



Bonus Footage: The New York FED Open Market Ops Desk



As an added bonus in today's post, I'm adding some behind the scenes footage from the New York FED Open Market Operations Desk. It's gotta be hell over there. "I love the smell of SOFR guidance in the morning.....smells like....victory....... Someday this war's gonna end son...." Most of what I'd described in the post (seems to be coming to fruition. Deposits are leaving the US Banking System, there's apparent, sudden confusion at the FED, with a rush to replace liquidity, yet as of the other day we continued our commitment to keep selling soy beans and other agricultural products to the Chinese and we delayed tariffs once again. It looks like the CPC efforts remain "on plan".As a diversion we are apparently following CPC/Russian foreign policy advice, chosing to screw around with Turkey, Syria and the Kurds in yet another "Wag the Dog" distraction.There's a good chance that what we're seeing at the New York FED's Open Market/Repo Desk is the beginning of the inevitable liquidity crisis and asset valuation reset many of us have been expecting for quite a while. The numbers make it obvious, yet our central bankers seem much more amenable to taking the easy path, continuing to print money until investors decide that perhaps, the US Dollar is no longer the safest of safe havens that they once thought it was. Everything will become relative once again.As of this writing, the FED's emergency Repo facility is the first, yet soon to prove inadequate solution to a problem they don't yet understand. The FED's ad hoc remedy generally dumps money into the system without targeting the specific problem. Again, rather than pouring money down the toilet, I'd suggest a more surgical approach, figuring out exactly where the money is going, why it's going there and make a relentless effort to stop it from going there.Again, the below described "" chart describes that at some point soon the Chinese Communist Party will be accelerating their "Pump and Dump" and increasing liquidity pressure on US Banks, who will continue to look the FED for short term financing. The FED will continue to provide funds, failing to understand that they are dealing with a long term structural problem.There is no question, at least in my mind, that the Chinese Communist Party has accumulated more than enough US Dollar and Forex resources to accomplish their dollar devaluation exercise. I'd discussed the evolution of the nominal composition of US Money and Financial Assets a while ago. Note that under my model, the FED Balance Sheet will expand from the current $3.9 Trillion to $16.4 Trillion, and US Domestic M3 will increase by nearly $4 Trillion by 2023 (God only knows what off-shore dollar deposits will look like, but God doesn't do interviews either) if we stay on this path, attempting to both support nominal asset values and the current, unquenchable global thirst for US Dollars.The table below describes (in comparison to last decades self induced Great Financial Crisis) the movement of major Asset Class Valuations. We see that US M3 increases $2.2T (15%), The FED Balance Sheet increases by $8.5T (216%) as they go "Tarping", US Equities Decline $10T (33%) US Residential Real Estate declines $6.3T (18%), As in most estimates/models the timing and adjustment amounts can be questioned, but I would imagine that these valuation adjustments are at least directionally correct, and probably optimistic depending on the rapidity of the "dump".Nevertheless, today, the US Dollar is the place to be. Even though we're expanding the money supply at an unprecedented rate, the exchange rate is indeed solid as a rock and in fact, recently appreciating. Everyone wants dollars......"Dollars, dollars everywhere and all the banks did shrink, dollars dollars everywhere and nor drop to spend"You'd think it would be unlikely that the dollar might strengthen in the face of declining interest rates, an inverting yield curve and increasingly accommodative, mid-cycle Quantitative Easing (which no one at the FED seems to confirm as QE), but the explanation that the dollar has become the newly designated WMD of the Chinese Communist Party and the resulting demand for same will continue until sufficient damage is done, would seem to be a rational explanation for the strength. The dollar will keep appreciating until the Chinese no longer want it to, and they decide that they will no longer be hording dollars. The dollar will stop appreciating when the CPC finally convinces the rest of the world to accept RMB in exchange for the rest of the world's rapidly depreciating, readily available currencies,with the dollar finally succumbing to gravity.The FED has, apparently unbeknownst to them, abandoned their mandate to use monetary policy to 1.) Provide full employment, and 2.) Maintain price stability. I'd also argue that we are long past the point where any additional stimulus has any impact whatsoever on the "real", domestic, US economy. The domestic economy apparently only needs 32% of the US Dollars in circulation to keep chugging along, yet, the FED keeps printing. The balance of whatever level of stimulus the FED chooses to provide, and it has become overwhelmingly substantial, has been, and will continue to be siphoned off as a store of value for global banks, foreign investors and the Chinese Communist Party, hopeful that the dollar will, for the time being, continue to be a safe alternative to the dog-turd stocks, bonds and currencies of their respective floundering economies.As the FED continues to provide "Nominal Asset Value Supporting Dollars" at a pace heretofore unprecedented, at least since the post WWI Wiemar Republic, these dollars will eventually have to go somewhere (and rapidly devalue). We've already established that there's no mechanism, and 20.2 Trillion (and growing) reasons, which prevents these dollars from moving into the main street economy where they could actually get "spent". Foreign investors will be forced to look for safer, better alternatives than US Financial Assets as they continue to hoard deposits. The previously obvious choice between the rest of the world's financial dog-turds and those slightly less malodorous doggie-doo assets sitting in US Markets will become a bit cloudy. Once the world loses its appetite for US Dollars, it must begin investing, storing and converting it to "other stuff". What that "stuff" might be is up for debate, but it's clear that whatever it is will be deeply discounted, as will the assets currently denominated in US Dollars. Of course, the ultimate end game is that the Chinese Communist Party is betting that RMB assets will finally be a viable global alternative to US Financial and European Financial Assets . Based on the above, the idea that the RMB could become globally viable at an exchange rate that would not destroy the current/fake value of Chinese Assets is not not nearly as far fetched as I might have thought just a few years ago. If and when that conversion actually starts to happen, it will also become painfully obvious for America and the rest of the free world.Let's just hope it doesn't start next week, since it's clear to me that the FED isn't ready for it.As an added bonus in today's post, I'm adding some behind the scenes footage from the New York FED Open Market Operations Desk. It's gotta be hell over there. "I love the smell of SOFR guidance in the morning.....smells like....victory....... Someday this war's gonna end son...."









Additional Reading