The Repo Spike - September 19, 2019

"There are decades where nothing happens, and there are weeks where decades happen" - Vladimir Lenin (1870-1924)

Below are excerpts from an interview by Rick Santelli with James Grant as it appeared in Grant's Interest Rate Observer - November 13, 2019

Rick Santelli CNBC: How much are we spending on the REPO operations?

James Grant: As of now, (from Sept 17-Nov 13), we tallied up on a gross basis line, upwards of $3 trillion, which is a lot, even when you say it fast.

Rick Santelli CNBC: By year end it should be multiples of that, is this a de facto nationalization of the REPO market?

James Grant: The REPO market is completely dominated by the Federal Reserve, to that extent, yes, it is the property of the U.S. government, there is no more price discovery and we are dealing with administered rates.

https://www.cnbc.com/video/2019/11/13/santelli-exchange-the-feds-quiet-about-face.html

What caused the REPO spike on September 17, 2019? For those that want to dig deeper. Here is the lin

Massive deficits and debt "crowd-out" private spending.

The Fed is suppressing interest rates, and they effectively nationalized the REPO market to defend low interest rates. Real supply and demand drove the REPO market to 10%. How could the US finance over $26 Trillion in national debt at 10% interest rates, with total tax revenue of $3.5 Trillion? They would be forced to cut social security, medicare, defense to zero. They have no options, except to print money and use the printed money to buy bonds. The Fed is trapped. We expect them to hold interest rates low while inflation begins to increase. We view bonds and cash as certificates on confiscation.

For the traders that ask: What is your timeframe? Ask yourself, if interest rates actually went to 10% and stayed there, would you have been able to sell your assets in time? In this "real life" scenario, our simple annuity would have fallen from $142 to $10. Hedging is more important today than ever.

What caused the REPO spike on September 17, 2019? For those who want to dig deeper. Here is the link to a great article about the REPO spike in the the Financial Times. https://ig.ft.com/repo-rate/.