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December 10, 2019 | Why the Banking System’s ‘Cough’ in September Spells Trouble

Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, an online service geared to traders of stocks, options, index futures and commodities. His detailed trading strategies have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders. Barron’s once labeled him an “intrepid trader” in a headline that alluded to his key role in solving a notorious pill-tampering case. He received a $200,000 reward when a conviction resulted, and the story was retold on TV’s FBI: The Untold Story. His professional background includes 12 years as a market maker in the pits of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.

Earlier, I referred to the repo-market flare-up in September as being like the death-foreshadowing cough in the second reel of a melodrama. In a subsequent interview I did with USA Watchdog’s Greg Hunter, I noted that it was especially curious that, two months after a short-squeeze on bank reserves spiked overnight rates to 10%, the supposed experts had yet to figure out what caused it. It was hardly comforting that some of these halfwits attributed the crisis to the banks’ higher-than-usual cash needs at the end of a quarter. This explanation seemed to pass muster at the time, but it was obviously wrong. For in fact, the banks’ cash requirements had been precisely knowable weeks earlier. That’s how the banksters work — how they leverage-to-the-max every dime that falls into their greedy, uncalloused hands. They practice a particularly sophisticated version of just-in-time inventory, calculating duration down-to-the-minute and allocating collateral so that it divides faster than E coli.

Smart guys. The trouble is, such calculations are almost invariably based on business-as-usual. This time, unfortunately, the game changed unexpectedly. In repo transactions, the lender typically holds collateral in the form of cash reserves or Treasurys.  But in September the rentiers held an unusually high proportion of Treasury paper, which created a cash shortage in the banking system. Why did they choose Treasurys over dollars.  The answer is that they were eagerly anticipating front-running the Fed’s purchase of Treasurys from the banks. The logic behind this gambit is spelled out in fascinating detail in a think-piece at ZeroHedge. The very troubling insights contained in the article are those of Zoltan Pozsar, arguably the foremost expert in the world on repo markets. Pozsar says that what I’ve called an ominous cough spells potentially big trouble for the financial system. The article is a difficult slog but well worth your time. You will need to understand perhaps 20% of it to get a foreboding sense of what is coming. But even if you understand nothing, keep in mind that a man who knows everything there is to know about how the repo market works says it’s headed for a crack-up. Still worse is that, for reasons that were too complex to have predicted, the Fed will be powerless to re-liquefy the system when it fails in the not-too-distant future.

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December 10th, 2019

Posted In: Rick's Picks

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