TSP Charts: Running on Repos

I know, “What’s a Repo?” 

It’s a bank’s bank – short-term lending to each other.  Often overnight or up to 2 weeks.  It’s what froze up in the financial crisis where banks did not trust other bank’s balance sheets.  Why?  Cause they all knew how bad their own balance sheets were.

So last September when the repo market failed (overnight repo rates jumped to 10%), our fearless money-printing Federal Reserve stepped in and loaned the repo borrowers whatever they wanted.  And they kept on. And they STILL are

Who gets the special privilege of borrowing money cheap (1.6%) at the repo rates.  Student loan borrowers?  Of course not, they have to pay the banks the consumer rate.  No, it is hedge funds leveraging up on Treasuries and Broker-Dealers who buy stocks. 

So if the Fed was not constantly bailing out the repo market and let the free markets work, interest rates would be going up and the stock market would NOT be rallying. 

Enter Repo Tapper

The Fed announced they would be scaling back on the repo lending next week, but they had to add extra repo ops this week and the demand for repo funds has been over-subscribed this week.

So we will see.

Repo tapper might have been the reason both JP Morgan and Goldman Sachs said they expect a market correction real soon.  And screaming Jim Cramer on TV has been asking where all the sellers are.

So is Thursday the front-running of repo tapper? 

And when will the Fed buckle to the speculative financial markets once again. See, Chairman Powell, promised to keep the expansion going until the election.  But he did not expect a global economic meltdown due to a virus.

Virus alert:  It is exploding in South Korean now and they are beginning rolling lock downs.  And the US military is evacuating military families out of S Korea.  Meanwhile, Japan just nuked itself by allowing hundred of infected cruise line passengers to walk off the ship without further quarantining.

The latter may be why the “safe haven” Yen is tanking and the US dollar is running up.  Which will further tighten the overseas financial markets at the worst possible time. 

It is not so much that the US stock market is in “La La” Land – it has been for awhile.  It is that it has been the tsunami of funds flowing its way (that will one day reverse) that has driven it well above 1929 and 2000 levels in terms of valuations.  And the Fed knows this so I don’t expect their efforts to end.  I expect their efforts to fail.

Money printing only pushes financial asset prices up or props them up. It has not been transmitting to the economy. The economy is plodding along near its structural rate of growth for the last seven plus years. The abundance of easy money has therefore been spilling over into the financial markets driving them ridiculously high.

Money printing will NOT help stop a global recession and possible depression from the shutdown of the global supply-chain and consumers who don’t get paid. Unless they direct the money to the demand-side of the economy (consumers) so they can keep paying their bills and buying essentials.

Not a one-off bad quarter

But this is not how our elected geniuses and monetary policy makers think. They will just keep lowering interest rates and handing money out to the banks and maybe corporations who will hoard the money since low tax rates provide NO incentive to re-invest, pay workers, fund pensions when demand is collapsing.

And if anyone thinks you can fund your retirement on zero interest rates or worse negative interest rates, you might want to think about that awhile.

It’s getting serious.

Lucky our financial markets are not over-valued and pricing in some sort of miracle economy to provide the cash flow needed to pay all the debt they loaded up on buying back their own corporate stocks on the open markets. [note: sarcasm]

If you want to know more about how all of this news affects your TSP funds, please read my free Best TSP Allocation Strategy (I don’t require emails or advertise on my site). It is a starting point.

My subscribers will see how current events are changing my advice, but the link provides a good baseline understanding of the TSP funds to understand where my advice is coming from.

Invest safe, invest smart.

Michael Bond

TSP & Vangaurd Smart Investor for serious and reluctant investors

Note: I do not provide a trading service and I do not provide mainstream advice. I provide perspectives for long-term investors and recommended allocation settings based on my opinions. I also developed a trading-day seasonal almanac for serious investors which informs my recommendations for all levels of service.

Categories: Perspectives, TSP Charts

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