Marc Cuniberti: Keeping an eye on the market
Covered before in Money Matters, the overnight repurchase agreement mechanism (REPO) is an arrangement between the Federal Reserve and member banking institutions.
From my previous article:
“The REPO market is the plumbing of the financial system. The banks and market participants of all types rely on this REPO market to finance their day to day operations. Billions of dollars flow into and out of this market daily. It’s where business and investment firms of all types draw on funds to operate, while others deposit excess funds for safekeeping and possible income. The market operates funding for as short as overnight to longer terms”.
How it operates is explained by CNBC:
“In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often overnight, to finance their trading and lending activities. The next day, borrowers repay their loans plus what is typically a nominal rate of interest and get their bonds back”.
The REPO market seldom needs cash infusions from the Fed as the inflows and outflows of the mechanism usually furnish enough funds for the markets and businesses they serve to operate. In fact, up until about nine weeks back, the last time the Fed injected money into this mechanism was 2008/09.
Those dates ring a bell?
The global financial institutions literally imploded from the real estate bust. But that was then and this is now. Since then the REPO market has been operating just fine on its own. That was up until about early September when the mechanism suddenly found itself short of liquid cash. Two weeks later and after a whopping 70 billion was injected, I penned the article (Link to article: https://moneymanagementradio.com/node/1073).
Turns out the injections by the Fed are intensifying according to the financial newspaper “The 5 MIN FORECAST.” David Gonigam, managing editor of the “5” as it’s called, says close to a third of trillion has now been injected by the Federal Reserve. Rumor has it that mega-bank JP Morgan spent 77 billion “propping their shares up” AKA stock buybacks, and that stock buyback money would have gone into the huge bucket that the REPO market is. Alas it didn’t go there, hence that was the problem.
Or was it?
The REPO market has been around a long time and it’s seen a whole bunch of financial “stuff” happen in the world, stock buybacks being one of the least of them. And no such Fed injections have been needed.
The JP Morgan stock buyback used up 77 billion, true, but 77 billion is not generally thought to be a large enough amount to cause a jam in the REPO system.
Since it has required ongoing cash injections in recent months and such injections have not been necessary since 2008, it may mean all is not well in the money plumbing of the financial system, this mysterious and complicated REPO mechanism.
Whatever the case may be, this analyst is losing some sleep over the whole thing and carefully watching the financial markets with a bit more scrutiny lately.
If more funds are shuttled from the Fed into the REPO market, bigger things than a stock buyback may be afoot. This market rarely springs a leak for little or no reason, but like a slow leak on a cruise ship below decks, it’s not something those in the pilot house want to advertise. Instead only when it’s time to abandon ship will the calls over the public intercom be heard.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. California Insurance License # OL34249
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