What the "Repo Market" is... and why it's important

Quick rule of international finance and central banking.  If you have to put $211 BILLION dollars, into ANYTHING, in TWO DAYS... that thing is pretty much FUCKED.  The Fed (the Federal Reserve, those people that aren't a U.S. government agency, but print our money) pumped $211 billion into the Repo Market a couple of weeks ago, in two days. It didn't go into our everyday economy, but straight into the financial markets.

Uh...OK... you're thinking, so what the hell is the Repo Market?  The Repo Market plays a role kind of like a pawn shop for the financial markets.  If you had $67 in your checking account, and you needed $100 minimum the next morning to avoid a fee, you'd need to come up with some money to put in your account.  One solution would be to take your X-Box to a pawn shop, get a $100 loan for it, then put the $100 into your bank account to avoid the fee.  When you could got your next paycheck, you would go back to the pawn shop, pay the $100, plus some interest, and get your Xbox back.  Everything's cool.

In the world of huge investment banks, and major banking, banks need to make certain numbers every night.  Your money doesn't just sit in a bank's vault.  We know most money moves as computer blips these days anyhow.  Banks have a very tiny fraction of the money people deposit in banks, and to keep them from going bankrupt, they have certain numbers to hit every day, to keep regulators happy, and to make a huge collapse like 2008, less likely.  So the Repo Market is kind of like a pawn shop for banks.  They go into a site, and the banks that need money to make their numbers, borrow money overnight, or for a few days, from banks that have extra money.

It's called the "Repo" market not because something gets repossessed, but because the banks sell something (like government bonds) to another bank, and they have a contact to buy it back in a day or two.  "Repo" is short for "repurchase," because those contracts are called "repurchase agreements." So every night, banks borrow billions from each other, and then pay it back in a day, or a few days.

The Fed tries to keep the interest rate for these Repo loans at a certain level.  But on September 23rd, 2019, the market went crazy, banks didn't want to loan to each other for some reason, and that interest rate shot from around 2% up to near 10%.  This meant banks with money didn't trust some of the other banks to pay the money back.  The video at the top of this page explains how The Fed created money, then shoved it into this market.  It's kind of like your car engine seizing because it needs a lot of oil, and the mechanic pours 4 quarts of oil into it, to keep it running.  But the engine is leaking so bad, it STILL doesn't want to keep running, so the mechanic (The Fed), just keeps pouring oil into it, instead of manning up and saying, "We need to rebuild this engine, it's toast."  The Fed doesn't want to admit they fucked up.  BIG TIME.  That's the basic, underlying problem. 

When I wrote this blog post on October 1st, I didn't know what the Repo Market was either.  In that post, I predicted that the biggest economic collapse, of our lifetimes, would begin in October 2019.  I have seen major trends converging, and the economic system deteriorating, for a long time.  October looked like it would be the flashpoint.  I predicted we would see a "Lehman Brothers" type moment.  In September 2008, after the earlier collapse of investment bank Bear Stearns, another investment bank, Lehman Brothers, went bust.  Nobody expected that, and the financial world FREAKED.  While we had actually been in a recession for a year at that point, it wasn't obvious to most people.  Things were happening behind the scenes, but looked pretty good on the surface.  The U.S. stock markets had still been going up, and that's the indicator of "the economy" in most people's thinking.

But when Lehman Brothers collapsed, the already very shaky economy, collapsed in a way that everyone could see.  The stock market dropped dramatically, everything went into turmoil, and President George W. Bush oversaw a shot of $600 billion into the economy from The Fed.  Coming into office in the middle of the worst financial crisis since the Great Depression of the 1930's, President Obama oversaw two more big injections of money into our financial system, to try and keep things afloat.  Those influxes of money into the economy were called "Quantitative Easing."  Why?  Because that's confusing term, and doesn't sound scary.  Basically, The Fed creates money out of thin air, and buys government bonds, or other things.  It also owns most of the massive $1.6 trillion in student debt, too.  But that's another mess.

The stock markets began to turn upward in early 2008, and have trended up until January 2018, a month after President Trump signed the huge tax cuts bill into law.  Since that time, the stock markets have risen, but they've gone to about, or just above the January 26, 2018 peak, and then dropped quite a bit.  Then they go back up, due to super cheap money available to the financial markets.  But they barely move above that January 2018 high mark.

Right now after hundreds of billions of dollars have been pumped into the financial markets in the last 6 weeks, the stock market is at a new high.  But it's only up about 4% in 21 months.  That's pathetic.  The stock market, at its peak right now, is up 2% a year for nearly the last two years.  It keeps beginning to drop, and The Fed and major banks do something, ANYTHING, to prop it back up for a while longer.  But the the things they do are getting less and less effective.  So the Repo Market, which never made news before, seized up on September 23rd, 2019.

What I didn't realize when I wrote that blog post on October 1st, was that the "Lehman Brothers Moment," had already happened.  The Spetember 23rd seizing of the Repi Markets was our "Lehman Brothers moment."  It just happened in a place so obscure, it made news for two days, was swept under the rug, and life went on.  But to keep life going on, The Fed pumped an average of $190 BILLION A DAY into the economy in October, and is still pumping tens and hundreds of billions of dollars in, nearly every day.

If we imagine that old car with the engine seizing because of an oil leak, The Fed didn't say, "It's fucked, let's take the time to pull the engine, and completely rebuild it."   Instead they put a 5 gallon oil tank on the hood, pouring oil straight into the engine, to keep it driving.  But THAT wasn't enough.  So basically, in this metaphor, our old car with the oil leak, now has a super tanker ship full of oil, sitting on top of the car, pouring oil into the engine, that they don't want to admit needs fixed.  That won't last forever.  This is by no means a perfect metaphor, but it captures the absurdity of the solution to the problem that the economy worldwide is facing. 

This is why we get billionaire investors like Ray Dalio writing essays like this one, "The World Has Gone Mad," and a lot of people actually read it.

 The reality is, WE ARE IN the "next" economic downturn.  It has already begun.

In 2008, we had a major bank collapse, Bear Stearns, and then a second, Lehman Brothers, and that freaked everyone out, and policy makers and The Fed went into war room mode to try and keep the economy going.  Now, The Fed and other economic leaders are taking massive actions, already comparable to 2008 in size, to keep one or more (likely several) MAJOR banks and businesses from collapsing like Lehman Brothers, AND they're pretending it's not happening.  We're getting the massive bailout, BEFORE the collapse.

That's not good.  As I have said for a couple of years, the serious recession we should have had in 2017 (and should now be working our way out of), has been held off by massive manipulation at levels unheard of in world history.  So now shit's just gonna get stupid at some point, more major businesses will fail, and A LOT of average people will really take a big hit, and it will get much uglier.  This is the kind of scenario that can implode an empire. 

Hopefully, instead, we take the hard hit financially, and rebuild a system in a way that's viable in today's hyper connected, high tech enabled world.  What we are seeing right now is THE BEGINNING of the disruption of our world economic system, which was built in and upon, the Industrial Age.  Remember when Napster went live, and completely changed the music industry... ONVERNIGHT?  That's happening to our economic system worldwide now.  Hang on.