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Repos Matter!

|Includes: SPDR Gold Trust ETF (GLD), OIL, SPY

Zero Hedge had a great post today discussing the ongoing removal of quality collateral from the market by global central banks. Despite their enormous size repos, short for repurchase agreements, are almost completely overlooked by the retail investment community. In fact I'd say that many institutional investors fail to understand how repos work as well.

While a full explanation of repos is not the goal of this post in a nut shell it easiest to think of repos as short term collateralized loans. Repos are the most significant source of short term funding for primary dealers as well as many other broker dealers.

If the collateral for repos is sucked up by the Feds, ECB, and other central banks then there is less available financing in what is ordinarily the most liquid parts of our markets. Those that have been expecting gold to skyrocket, and full disclosure we are long term bullish gold but currently own zero, could find themselves disappointed. Gold works best when the monetary base and credit expand simultaneously. Once upon a time it was easy to monitor base and credit expansion but over the last decade with the growth in shadow banking savvy investors need to reconstruct measure to track shadow credit.

Our own proprietary data suggests shadow credit is contracting globally and paradoxically while the Fed is trying to stimulate through its quantitative easing efforts it is actually removing the key instruments of liquidity from circulating. This does not bode well for gold or other commodities for that matter. Equities which have been trading for over a year in their own reality also will be impacted by this credit contraction. Interest rates spiking up sharply we believe are an early indicator that things are not well.