RRP’s: Wall Street Newcomers Need a Monetary Education!
By Victor Sperandeo with the Curmudgeon
While not attempting to be condescending, I’m astonished at the lack of a basic understanding of Federal Reserve Board monetary activities, by those that are assumed to be knowledgeable conservative bloggers or commentators.
Very few of them can define “Reverse Repurchase Agreement (RRP)” accurately. Even if they can define it, they rarely know what its effects on the financial system really mean.
Let me mention a specific example without trying to be antagonistic to a young retired real estate success story, who turned into a financial commentator...George Gammon aka “The Rebal Capitalist.”
In this YouTube video, he tries to explain Reverse Repos and their effects, but is only about 25% correct! Gammon believes in some gobbledygook conspiracy type balance sheet fantasies and bank reserve movements that mean nothing. He states ridiculous reasons why the Fed is doing RRP’s.
To Gammon’s credit, he does correctly state that RRPs are “dis-inflationary,” which is exactly the point! But it’s like a side show in his verbose commentary.
In reality, a repurchase agreement is a (soft or temporary) Fed easing. The Fed uses repurchase agreements, also "repos," to make collateralized loans to its primary dealers. The Fed buys T-Bills with “money created out of thin air,” which increases bank reserves. They agree to re-sell the T-Bills back to their dealers on a short maturity date (one to 65 days). The Fed usually rolls over this trade if it’s only one day.
Repos are bullish for stocks, real estate, real assets, and the economy as newly created fiat money is added to the banking system.
A Reverse Repo is exactly the opposite. The Fed borrows money from its primary dealers, which temporarily drains reserve balances from the banking system. The typical term of these operations is overnight, but the Fed can conduct these operations with terms out to 65 business days.
Repos and reverse repos are conducted with the Fed’s primary dealers via auction. In a repo, dealers bid on borrowing money versus various types of general collateral. In a reverse repo, dealers offer interest rates at which they would lend money to the Fed versus the Fed's Treasury general collateral, typically Treasury bills.
Implications of RRP’s:
Now what is not generally understood, is that RRPs have one main outcome and effect - a soft tightening. That’s because they take money out of the banking system/economy. It’s “soft” because the maturity date is short term.
The Fed is signaling that “we are draining cash from the economy, but we can put it back easily.” Its message is “we care about inflation.” However, RRPs are viewed as temporary, and thereby don’t panic the markets.
Current RRP Campaign:
This time around, the Fed’s RRP’s began at the end of March with $134 Billion and have accelerated ever since to a new record of $1.1 trillion. This is far more than a drain of cash; it is an aggressive tightening of credit.
Here are the monthly RRP’s increases: March $134 B, April $183 B, May $479B, June $991 B, July $1039 T, August 20 $1,111 T. Those RRP numbers are clearly depicted in this graph from the St. Louis Fed (FRED):
On April 30th, when the dollar amount of RRP’s went above the March highs, it was a confirmation of a dramatic change in Fed Policy.
As of the end of July, the Fed (via QE) bought $840 billion of notes, bonds, and mortgages for the year 2021, but took back $1.1 trillion. That amounts to a net subtraction of -$271 billion of bank reserves in over just over five months. That negates the whole year of QE, and it does not seem to be temporary?
This is a masked, underhanded way of tightening credit. With all eyes looking for “tapering” or higher short term interest rates, the Fed is using RRP’s instead.
The effects have caused commodities to decline in a hefty way, and the fixed income markets to rally in a subordinate manner. The perception is that the Fed is slowing the economy and inflation by its RRP actions.
Bonds bottomed in March, and continue with lower yields, as the economy and inflation will exhibit slower growth. My educated guess is the CPI will be 3-4% in the 4th quarter of this year.
Effect on Commodity Markets:
Copper topped on May 10th, after the April 30th RRP numbers. It declined -15% on Friday. The DJ UBS Commodity index was briefly above its highs and made a false breakout on July 29th, but then declined -8%.
The commodity market highs were across the board.... Gold May 28, Silver May 18, Platinum May 10, Palladium May 10, Soybeans May 12, Corn May 7, Wheat May, Rice May 7, Lumber May 10, Sugar May 11, Cocoa May 17 Cattle May 12.
Similar topping action was seen in currencies heavily weighted to commodities…. the Canadian dollar May 18 and Aussie dollar May 20. Could this be a coincidence? I doubt it!
Some commodity markets sold off, and retested the highs, some lagged like energy/oil because OPEC would not increase production, but now they’ve all virtually topped out.
The RRP chart above clearly shows that “temporary” is a misnomer as the acceleration of RRP’s is now five months old!
Savvy investors know this RRP acceleration is intended to slow down inflation, which it will do. Thereby, Jerome Powell will be right in saying inflation is “transitory,” likely adding at some point “I told you so.”
However, Powell did not hint that the quantity the RRP’s being done would be above the total of QE for the year or for so long. Thereby, the RRP’s are in effect a “tightening.” This was understood by professionals by viewing the chart above when RRP’s made new highs in April.
The Fed has become a marketing organization. In the 1960’s and 1970’s, the Fed was called “The System,” while “Quantitative Easing (QE)” used to be called “System Purchases.” The word “System” is taken from “The Federal Reserve SYSTEM.”
How much of the general public understands what that means?
Here is an example of how the Fed used to talk (Federal Reserve Open Market Operations in 1962):
“SYSTEM INCREASED ITS HOLDINGS of securities by $2 billion. System avoided as much as possible the maturity area closely surrounding the three-month bill because of the particular importance of three-month rates as a focal point in the short-term rate structure……….
Use was also made of transactions directly with official foreign accounts maintained with the Federal Reserve. The System made sizable purchases of securities, mostly Treasury bills, from such accounts as a means of supplying reserves without injecting System buying directly into the market. On an even larger scale, the System sometimes sold bills to foreign accounts in order to reduce the volume of foreign account buying in the market. Even so, only about 20 to 30 per cent of the volume of transactions executed for foreign accounts at the Trading Desk was arranged directly with the System; the greater share was executed in the market.”
Fed Member Comment:
Here’s a rare comment by a Fed member, who admits QE is only to raise asset prices and NOT to create jobs:
Eric Rosengren, President of the Federal Reserve Bank of Boston, said in an interview with The Associated Press that the central bank should announce in September that it will begin reducing its $120 billion in purchases of Treasury and mortgage bonds “this fall.”
Rosengren also echoed some of the Fed’s recent critics by arguing that the bond purchases are -no longer helping to create jobs -but are instead mostly helping -drive up the prices of interest-rate sensitive goods such as homes and cars. Home prices are rising at the fastest pace in nearly 20 years, which are not included in the CPI.
The U.S. Bank Cartel (aka “The Fed”), with government license and blessings, counterfeits unlimited amounts of fiat money by buying their government debt and mortgages. It effectively gives that money to major asset holders, who then buys stocks, real estate, etc. while the bulk of the people get inflation!
Genghis Khan, who created the largest contiguous empire in history, would be extremely jealous of this con game!
1. Regarding the Fed’s magic act:
“Give a man a gun and he can rob a bank, but give a man a bank, and he can rob the world.” Tyrell Wellick
2. This quote is appropriate to the U.S. government:
“A society whose citizens refuse to see and investigate the facts, who refuse to believe that their government and their media will routinely lie to them and fabricate a reality contrary to verifiable facts, is a society that chooses and deserves the Police State Dictatorship it's going to get.” Ian W. Goddard
Be healthy, success, good luck and till next time…………………
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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