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  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    Lawrence

    Per Wikipedia:

    "In the UK, there is no limit on the amount of a clients assets that can be rehypothecated,[2] except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance."

    Here's the link.

    http://bit.ly/s8Sxl2

    Here is another comment from the same article on the degree of shadow bank churn:

    "In 2007, rehypothecation accounted for half the activity in the shadow banking system. Because the collateral is not cash it does not show up on conventional balance sheet accounting. Before the Lehman collapse, the International Monetary Fund (IMF) calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statutory limits governing the reuse of a client's collateral. It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated several times over, with an estimated churn factor of 4."

    Think about what happens to highly leveraged carry trades if they lose the positive metrics for the carry trade in another situation where the amount borrowed to buy stocks is leveraged at 4 times the value of the collateral. And and that is not necessarily where the rehypothecation stops. My guess is this time is much larger than 2007-2008.

    JS
    Mar 17 08:53 PM | 2 Likes Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    Mercy

    Wow. Thanks so much for these comments.

    I do recognize my hastily written article left a lot to be desired and only served to bring some attention to this issue. That said, the comments have pushed me to carefully consider the Fed's stated reason for engaging in the reverse repo program.

    I've come around to the idea that the strategy does in fact make sense as it relates to what the Fed suggests is their reasoning. Your comments above only move me further in that direction.

    One thing seems certain to me - the Fed is legitimately concerned about the dollar's weakness, they are taking steps to protect the dollar and they are not really being very open in terms of their public statements as it relates to their concerns.

    Thanks again.

    JS
    Mar 17 08:38 AM | 2 Likes Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    Steve

    Not so much the stronger dollar that dampens GDP - it is the measures they must take to create a stronger dollar. Eliminating QE and withdrawing liquidity for instance. The Fed is effectively withdrawing their support for deficit spending and that is supplying roughly 6% of domestic GDP.

    JS
    Mar 16 09:46 PM | 1 Like Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    avolossov

    Nobody seems to be able to connect the dots here. Looking at the micro and one must see the big picture macro to discern what is going on. It is all about the global shift away from the dollar brought on by China and the BRICS.

    Perhaps a little esoteric for some maybe. It is no longer about the Fed and the Fed is not omnipotent. It is about the global paradigm shift brought on by the move away from the dollar and if you don't understand these shifts that are destabilizing the system then you will continue to assume the Fed is in control but they aren't in control.

    There is simply nothing they can do with policy that doesn't create an undesirable consequence on some front. Strengthen the dollar and they crush the net import economies such as the Fragile 5. Additionally, they severely dampen GDP domestically and any slowdown anywhere around the globe impacts all economies. If they don't move to strengthen the dollar then it just exacerbates the flight away from dollars and additionally shifts the metrics of the yen carry trade.

    They are withdrawing QE for one reason - the global shift away from dollars that is pressing the dollar down by creating a dollar glut. They are also doing reverse repos to prop the dollar and will follow with rate increases to prop the dollar. Those moves upset the fragile balance and that spells trouble for the reasons I have explained.

    Way to many looking at the Fed's action from a domestic economy perspective and not seeing that the Fed actions relative to the dollar also have very significant global implications. Just saying - nobody seems to be seeing the whole picture here.

    JS
    Mar 16 04:50 PM | 1 Like Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    On further reflection - even if the Fed's public statement to test the effectiveness of reverse repos is right it still has the same impact as withdrawing liquidity in that they would push the short end higher. That would produce a strong positive move in the dollar and that is at the heart of the problem in the first place.

    In other words I think maybe my knee jerk response needs a little more thought as the whole issue is still what they are doing to prop the dollar and withdrawing liquidity has the same general effect as raising rates.

    No doubt they can attract a lot of short term money if they move rates high enough and that will bolster the dollar but what does it do to carry trades who depend on the low rates?

    I think the Fed must eventually sacrifice the stock market or the bond market here as it doesn't seem likely they can keep both elevated much longer.

    JS
    Mar 16 01:23 PM | 1 Like Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    L

    In the US the cap is 140% of collateral.

    JS
    Mar 16 12:31 PM | 1 Like Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    A

    I of course don't for a second assume the Fed's published reason is the real reason. I also don't think the move to end QE is for the reason reported. Do you really think the Fed is going to say "well, the dollar is about to crash and that is going to unhinge markets and there is little we can do about it but we are going to take a stab at it anyway with massive and unprecedented levels of reverse repos while we move to rapidly terminate QE."

    You don't need to rapidly ramp reverse repo volume to test a strategy. They already know what they can do here if they choose. They can compete on the short end with higher rate offers that will push the short end higher and if they do they assume the risk of distorting the metrics of the carry trade that have supported the market to date.

    They are really stuck here in that whatever they do ends up being wrong. If they support the dollar they do damage to countries like the fragile 5. If they don't support the dollar they lose the carry trade.

    Kind of like one of those martial arts movies where the hero is surrounded by 10 bad guys and the hero keeps on knocking the bad guys down but finally one of them sneaks up behind him and hits him on the head with a bat.

    JS
    Mar 16 12:01 PM | Likes Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    L

    Not sure this is a good response to your comment but I think the collateral issue is overstated. All one need due is move the collateral to the UK where no limit exists in terms of the number of times one can rehypothecate. In other words the same collateral could be used to fund credit to maybe 4 or 5 times its value.

    All major players have UK subsidiaries and all risk fiasco's occur in the UK as in the London whale, Lehman, etc. The reason is the leverage allowed.

    JS
    Mar 16 11:51 AM | 2 Likes Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    a

    Thanks for the work here. Pretty telling in my view. Whatever the Fed's reason there is a reason and your data shows the stark contrast in Fed policy. This just isn't something one should view as insignificant and one must wonder why there is virtually no public commentary on this policy - either from the Fed or journalists. Again, I couldn't even find where ZH wrote on the matter.

    JS
    Mar 16 10:39 AM | 2 Likes Like |Link to Comment
  • The Fed's Reverse Repo Actions In 2014 Means QE Effectively Ended In December But They Forgot To Tell Us [View article]
    jahhou

    Your point is a valid one and that could certainly be a reason. It also speaks to the point of the catch - 22 the Fed is in if your premise is correct. To feed collateral to the carry traders they need to do reverse repos and to support the economy and the bond market they need to do the opposite.

    Great point.

    JS
    Mar 16 09:48 AM | Likes Like |Link to Comment
  • The Nuclear Option: Russia's Threat To Dump Treasuries [View article]
    James

    I am bowing out as well but not before making this final point on your comment here:

    "You are confusing the unit of account function of the USD and its reserve function. These are two different things. You don't need substantial dollar reserves to conduct international trade between two countries when their trade accounts are balanced (or a particular portion of their trade accounts are balanced) -- even if the products are priced in USD."

    I am not confusing anything and again resent the implication. You are correct that you don't need substantial dollar reserves if your trade balance runs a surplus. That said you end up with them anyway and for the very reason that you do run a surplus. It is that situation as it pertains to China in particular that puts them in the unique position of having to deal with large levels of US dollars and also the reason they have - in the past - chosen to spend those dollars on US Treasuries. (And as a side note China - didn't run a trade surplus on their last print and in fact had a huge miss not that it matters that much in the big picture).

    It creates a nice feedback loop when they do that as we are more than willing to run deficits to support GDP and they have been more than willing to send our money back to us so we can turn around and send it back to them. It has worked to our mutual benefit for some time now but they are no longer willing to play that game and whether you think that makes sense or not is simply not relevant as it is still what they are doing.

    You do have a way of talking down to those who are at least on an equal footing with you in regard to understanding these matters. I am not at a disadvantage here in terms of comprehension of the subject matter.
    That said, the unfortunate truth is that I doubt many of your readers are gaining much from this discussion anyway so it seems useless to continue.

    I stand by my position and as far as I am concerned the markets will establish who is right and who is wrong. Once again, I expect the dollar to remain under pressure and also the yen and I attribute that substantially to what China and the BRICS are doing. The Russia/Ukraine situation is likely to be the catalyst that tips the scale on the dollar and pushes it below support. The same applies to the yen.

    When that happens I expect the metrics of the carry trade to deteriorate and result in those trades unwinding very rapidly. The magnitude and speed of the sell off in stocks will be shocking to most and I am not talking about a 10% correction.

    And this is, after all, an investment website and I am not straying far off point on this as it relates to the subject matter of your article so it doesn't fly with me that you simply say these comments don't relate to the subject matter.

    As far as I am concerned the winner of this debate will be determined by the markets action over the course of the next few weeks and no longer than a couple of months. I expect to see stocks fall sharply and that will produce a short term safe haven bid in bonds. At some point bonds will come under a lot of pressure and we will see a sharp spike higher in rates and much lower bond prices. Gold will move sharply higher as well and test or take out the all time highs.

    All of this will be largely attributable to the China led BRICS move away from the dollar. I think the Fed, the BOJ and maybe the ECB will do all they can to support the status quo but the natural forces of the market that are in play will mean they fail in this effort.

    That is what I think and that is decidedly different than what you think so as far as I am concerned that is where the winner and the loser of this debate is decided. If I am wrong I will concede to you and admit I was wrong.

    Thanks for the lively exchange.

    JS

    Mar 16 03:53 AM | 4 Likes Like |Link to Comment
  • The Nuclear Option: Russia's Threat To Dump Treasuries [View article]
    James

    "So, please understand that I do not think, nor has it been my intention to imply in any way, that you are irrational or that your work is irrational. To the contrary I think your work evinces the fact that you are very interested in rationality, that you are a rational person and that your say many rational and convincing things. To the extent that I have left any impression otherwise, I wish to disavow this impression and to apologize."

    I obviously had that feeling and those feelings formed my responses. We can get caught up in making rather harsh comments and once the process starts those comments can induce the other party to respond in kind. That process is not useful nor informative for those who observe the exchange so I accept your apology and will offer my own if I have offended.

    That said, we both are obviously qualified and have an understanding of that which we speak but we are arriving at different conclusions. I would like to think I am open to having my views changed if one offers a compelling reason for me to do so and I have absolutely no issue with needing to be right just to protect my ego. My ego was deflated years ago so I am more than willing to buy into your arguments and abandon mine if I find yours compelling. I would hope you feel the same way.

    I offered my own view of what is going on at the present in response to your comment above with regard to China, the Fed, etc. I think the points I make accurately articulate what I think is going on today and I think the Fed is stuck for the reasons I explained.

    I would only ask that you consider the points I made with as much objectivity as possible. I kind of doubt that we will agree on this but I do think some readers are engaged in our discussion and I also suspect that it is over the heads of many and yet it is possible they will make investment decisions based on this exchange.

    My view suggests caution and a move to protect gains. Your view seems to suggest that all is well and nothing to worry about. Forgive me for presuming to know what you think but that is the take away I get based on this exchange.



    JS
    Mar 16 01:57 AM | 1 Like Like |Link to Comment
  • The Nuclear Option: Russia's Threat To Dump Treasuries [View article]
    James

    "In the case of the Fed selling bonds, liquidity is simultaneously withdrawn from the system and so we would expect interest rates to rise. When China sells, by contrast, no liquidity is withdrawn from the system and so there is little reason to assume that interest rates should rise, due to the global arbitrage effect which I described earlier."

    That is true. When the Fed sells bonds they are withdrawing liquidity and that is indeed what they would want to do to protect the dollar against an assault by China. And when China sells bonds they end up with dollars which they could and probably would use to buy yuan to defend their own currency or even gold. That puts more downside pressure on the dollar and forces the Fed to counter.

    And, in fact, that is what they are doing or at least they are moving in that direction by first stopping the injection of liquidity by ending QE. They are also engaged in unprecedented levels of short term reverse repos which is also withdrawing liquidity. And I mean unprecedented - like $4 trillion in one day reverese repos since the first of the year.

    You can dismiss this unprecedented action as insignificant if you want but I don't. There is a reason why they are ending QE and engaged in massive levels of reverse repos. How do you manage to spin that?

    In my opinion the Fed has been maneuvered into a corner where they are defending the fall in the dollar in general and in particular against the yen. They can't just end QE cold turkey as the shock would be too much of a psychological impact for investors so they are set on a path of $10 billion a month but it can be argued that they are effectively doing what they can through their reverse repo actions to partially sterilize their QE purchases as they continue the unwind.

    Even more troubling is that if they manage to push the dollar higher they are hurting the already fragile currencies of countries like the fragile five who are seeing major instability at the moment. And those countries are not without relevance as they do represent a portion of global GDP. You can't just say they don't matter. Also, they are withdrawing their support for the fiscal stimulus that has been pumping about 6% into GDP in the US.

    On the other hand if they don't succeed in holding up the dollar - and again - in particular against the yen, they lose the yen carry trade that has propped the market and when that comes undone then what?

    My point is they have backed themselves into a corner where no matter what they do it ends up being wrong. They aren't omnipotent and they really are in a mess here.

    JS
    Mar 16 01:22 AM | Likes Like |Link to Comment
  • The Nuclear Option: Russia's Threat To Dump Treasuries [View article]
    James

    Russia's selling might be argued as politically motivated but China's selling is not. China's selling is based on the decision to bypass dollars in international trade to the degree possible resulting in less dollars to invest in the first place. Additionally, China has a reason to sell dollars and buy yuan to strengthen the yuan against the dollar. So, if they do sell treasuries they get dollars which they sell to buy yuan and that works to produce the desired effect of strengthening the yuan against the dollar.

    JS
    Mar 16 12:46 AM | Likes Like |Link to Comment
  • The Nuclear Option: Russia's Threat To Dump Treasuries [View article]
    James

    This is just opinion as I don't want to be attacked for irrational statements but my guess is bonds are catching a strong safe haven bid.

    In my simplistic view of things, with the Fed stepping aside on QE, talking of raising rates shortly after they end QE and China not on the buy side any longer and in fact slowly disposing of their holdings, it seems to me that bonds would be falling if it weren't for the fear of things coming unhinged in Ukraine.

    Just an opinion.

    JS
    Mar 15 08:45 PM | Likes Like |Link to Comment
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