Even before ‘rona emerged in early 2019, the doorknobs over at the Federal Reserve had no choice but to put on their tinfoil hats and intervene in public markets by creating a special repurchasing agreement affectionately known as the “repo market”.
This semi-shady speakeasy is where big hedgies and wall street firms trade trillions of dollars’ debt for cash in order to stimulate buying and keep the economy afloat. this first came about when a technical glitch caused a sharp short-term interest rate incline surpassing the fed’s expectation. to make matters worse, the virus was becoming an existential threat to society and left the US central banks with no other choice but to “unload their bazooka” in short term loans totaling in a very modest $1.5 trillion.
Between the the Fed’s bazooka, the virus, and the general overuse of the word “unprecedented” in mainstream media, we as normies don’t really get the concise breakdown on how the repo market works. like, how do trillions of dollars get shuffled around while we’re asleep and when we wake up the market is still chugging along amidst the biggest crisis in 100 years?
The repo market is a two-way intersection, with cash on one side of the street and treasury securities on the other. they’re both trying to get to the other side, so what happens? one big-whig firm steps in and sells securities to another institution, then agrees to purchase back those assets at a higher price after hours (usually whilst we’re asleep). thus, the contract between the two firms is known as a “repo”.
It’s basically a “short-term collateralized loan” for you big brains out there. just as loans come with interest, you can think of the difference between the original price and the second price at a higher premium as the “interest” paid toward the loan. that’s the part known as the “repo rate”.
Now why the hell would these two smart, rich, market savvy institutions want to participate in the repo market? it allows all their cash reserves to move around and collect vig (tony soprano style) instead of sitting in a vault losing value. there’s also pretty much no risk to borrow cheaply and on a short term basis. the overarching question is; where do i sign up?
The smart people in media estimate that between 2-4 trillion bucks is financed in the repo market every day, meaning once the overnight repo came into vogue, the new york fed got to pumping, in fact, the lumping got so aggressive it grew to a whopping $53 billy worth of cash in exchange for short-term treasury bills. this injection shows up on the Fed’s balance sheet until they’re paid back.
The overnight repo is essentially our stock market’s hyperbaric chamber. the market needs its oxygen tank pumping through the night to artificially perform the following morning. I’m seeing a corollary between our government politicians and the equity market dysfunction.
You’re probably asking yourself; is this a byproduct of the virus? or were things just so super f*cked before that and the virus only exacerbated the symptoms? don’t be foolish, this pig still has a lot of flatulence to deposit upon us normies— the virus is just forcing us to guzzle some over-the-counter medicine in the short term until the real economic chemotherapy starts.