This past Friday, Dave Kranzler of Investment Research Dynamics put out a very thoughtful article and chart regarding the spike in “reverse repurchase agreements” RRP’s held at the Fed.
The chart in question shows three very distinctive spikes,
the first was Sept. of 2008, again in 2011 and the current spike. It is Dave’s contention that something behind the scenes has or is blowing up financially.
Let me explain what I believe is happening, I do not disagree with his theory but I think he may have stopped just one step short of the full story. By adding one more chart in a moment, I’ll try to explain. Please read the above article as it is a good explanation of “reverse repurchase agreements” and saves me the need for a long winded rehash.
For years I have described the current financial situation as a “giant margin call” waiting to happen. The derivatives market is a zero sum game where someone wins and someone loses, the danger of course is someone losing so badly they become insolvent and cannot make payment to the “winner” …which would make all parties a loser in the game. This is the fear, the derivatives chain breaks somewhere along the way and creates a domino effect both upstream and downstream causing the entire credit system to lock up.
Think about what has happened over just the last six months alone. We have seen unprecedented FOREX movements. The dollar has strengthened close to 30% over this timeframe while oil has dropped about 50%. The cross between the euro and the Swiss franc saw an almost 30% move in less than 10 minutes one Monday morning in January. There have been some very big gains AND some very big losses which would explain the need for “more collateral” which is exactly what these reverse repo’s provide.
Please look at the following chart:
I believe this is “the rest of the story” as I mentioned above. You can clearly see the spikes in 2008, 2011 and again currently but “this time is different”. It is different because of both size and the long lasting duration! The first chart that Dave put out on Friday was of RRP’s with “Foreign Official and Institutional Accounts” whereas the chart you just looked at are “ALL” RRP’s.
It is my belief the first chart’s movements are a function primarily of international FOREX movements and represents “collateral demand” from the likes of Deutshebank, SocGen, Barclays etc. …AND from The Bank of England, the ECB and other central banks. The second chart is of ALL players, not just foreign. This chart in my opinion is “how” the Fed has aided and abetted the system as a whole in “hiding” the losses from derivatives! The Fed places collateral into the system which gets lent out over and over (rehypothecated) many times and “pledged” as collateral by the loser in derivatives trades… thus the system continues “unbroken” because the collateral is put up to meet the margin calls.
Do you see? For well over a year I have wondered and even written in disbelief and amazement that no one ever admits to any large losses when in fact there had to be losses well into the multiple $ trillions! Think about it, there are almost $10 trillion worth of “dollar derivatives” outstanding, a 30% move means someone won and someone else lost about $3 trillion. I don’t know of any firms that could lose even 5% of this and remain solvent, do you? And this is just “dollars”, not oil, not interest rates, not equities, not iron ore, copper, gold or anything else!
If you see the buildup of RRP’s over the last year+, this I believe is how the margin calls have been met and the losses hidden …but is it even legal? In a technical and practical sense, no it is not. However, from a practical sense, if this is what is being done then we now know how no one has been declared a loser and no one has had to “book” their losses. The margin calls have been met, the positions stay open and no one is the wiser right? I do want to point out that under the rule of law, if the Fed “knows” this, it is without a doubt a criminal act. If they are doing business with bankrupt institutions, one which they know or should have knowledge of as being bankrupt, the Fed is flat out fraudulently and blatantly breaking all banking laws on the planet.
Going just a step further, if this is the case, what does it say about the Fed’s own balance sheet? If they are doing swaps or RRP’s with bankrupt institutions, will the Fed ever get their collateral back? As Dave Kranzler so aptly tied together, this is why the “failures to deliver” have spiked. The collateral which was originally lent out has been re lent 10 times more, or even 100 times more, who knows?
Please walk away from reading this piece with one understanding, the chart above is telling you something very big has changed and been changing for over a year. I believe it shows the system is in and has been fraudulently meeting a systemic margin call. Maybe I am wrong but I wouldn’t bet on it. The chart does however give you proof beyond any doubt that “stress” of some sort has been and is building up “somewhere”. The stress is now multiples of what we saw in late 2008 …when we were only hours from the system seizing up in a giant meltdown.
I bounced this theory off of Jim Sinclair over the weekend and received a short but very enlightening reply. He said “The concept is correct. We have another OTC derivative explosion at hand but no practical way to expand liquidity. Bad derivatives never die, they just get larger”. Think about what Jim is saying here, we again have an Autumn of 2008 event triggering …only bigger! And no way to actually meet the margin calls. Each episode of QE was used to meet the margin calls and hide the losses. Each one expanded the risk while pulling more and more collateral out of the system until we reached a tipping point, NOW!
Let me finish with this one point, when this era is looked at in hindsight, “it will all be about counterparty risk”. Do you know of anything without counterparty risk? Can you say G O L D?
Bill a few weeks ago I posted a comment that my gut feeling was that something BIG was about to break.
Your article today eludes to something that is about to break.
My thoughts this morning in a note to self.
(It is easy to get lost in the day to day struggle of living.
While keeping ones head down has its place, it’s equally critical to look up and reflect on the big picture and how we fit within that larger scope of the world.
That is what many of us have managed to accomplish. We opened our eyes, considered alternative conclusions to the lies we were told and rose above the strategies being used to sedate us into a deep sleep.
Now that we recognize the situation we need to figure out how we live within the New World Order that is being put into place slowly.
Yes, this wall of debt was created by design in order to sell us on the changes that are coming.)
Bill your piece today makes a very clear argument for the thought that SOMETHING BIG IS ABOUT TO BREAK.
Are you ready…
Thanks to Bill, Andy,Eric King, Greg Hunter, Jim Sinclair, Eric Sprott and a few others I think I am ready.
There must be clues about when this will break. They left a specific date prediction in The Matrix about 9/11/2001 (Neo’s passport in the interview scene, which has lots of metaphorical significance), and it appears Back to the Future is littered with clues as well. If only we knew where to look… or maybe they have lost a lot of control and it isn’t up to them anymore, it’s up to the Chinese and Russians who don’t want to play these silly banker games.
the OTC derivatives explosion is happening now.
I agree that the Fed is doing the RRPs to save the system at all cost……if the Fed can’t save the system with massive OTC derivative defaults, then where is this implosion? When is it going to happen? Why can’t the Fed plug that dike? They do whatever they want to do – only in America.
I am not just as ready as I could wish for …
Timeframe for the impact …. ?!?
who knows but the dam is bursting now, you can see it in their reaction.
Excellent article Bill. I’m hung up on an issue that could use a little more explanation. If the reverse repo’s (RRP) are selling a security to a qualified entity with the agreement to buy it back at a predetermined date for a predetermined price, doesn’t this just create a larger and larger feedback loop? If the FED is injecting the Treasuries under agreements to buy them back, that is only a short term solution to the liquidity problem. Is that the point Jim was making with his comment? Perhaps the FED agrees to buy back the treasuries at a severe loss as a hidden way to move losses from the bankrupt banks and hide them on the FEDs balance sheet. Either way, the FED must buy back the treasuries and therefore must continue to issue more and more. Am I off the tracks?
yes, as Jim Sinclair said “bad derivatives never die, they just get bigger”.
This is probably your best one yet in terms of insightful analysis.
I would add two points:
(1) The RRP payoffs to the winners are increases in the supply of money and credit and that is by definition inflationary. It usually takes a little time for this type of increase to result in soaring prices, but with the ground already soaked with rain, you can expect to see massive and dramatic run-off. Of course, you know what that means for precious metals prices.
(2) The old GAAP accounting rules require that the institution receiving payoffs count them as revenue; the institutions paying off the RRP contracts count them as expenses — in both cases, impacting profits and losses — in the accounting period received (i.e. month). I haven’t yet seen any reports reflecting earnings of anywhere near that magnitude. That means only one thing — the Feds have injected themselves into the accounting process and they are making up NEW rules on the fly. Eventually (I have no idea when), the truth will come out and with it a massive storm of restatements, scandal (think anybody is paying tax on their ill-gotten gains), and lawsuits.
Life keeps getting more interesting by the moment. This makes me more and more glad that I am short fiat and long on physical.
Stack on friends, stack on.
GAAP is out the window.
One more thought, this one in response to your statement that, “[W]hat does it [secret RRP agreements] say about the Fed’s own balance sheet? If they are doing swaps or RRP’s with bankrupt institutions, will the Fed ever get their collateral back?”
Actually, the Fed’s balance sheet is already garbage. It consists of low interest rate short term bonds from an insolvent lender (the U.S. Government) and a ton of trash real estate loans from the all but insolvent TBTF banks (purchased not only to give the banks cash, but to keep market prices up in order to prevent more write-off’s). The balance sheet will be in even worst shape due to massive losses if they ever meaningfully raise interest rates, as they have repeatedly talked about doing.
So, what’s the harm if the worthless collateral is not returned? Will this actually change the situation? And what does this say about the value of the “Federal Reserve Notes” you are carrying around in your wallet?
yes, ZH did an article on this yesterday, the insolvency of the Fed.
Bill a brilliant article. This is all leading to the Global Reset (dollar down/PM up). BroJohnF put out an audio the other day where he states the IMF statement last week telling regulators to brace for a Global Liquidity shock is because they (IMF & Central Banks) are about to shut off the monetary spigot – and They know it. Putting all this together means the fireworks will start popping soon. Also, another writer shared how JP Morgan has stood for delivery of 8.3 million ounces of silver from April 7th to April 16th. Hmmmm, Do you think mr. dimon knows something is coming soon? All the best Bill
fantastic summary bill, you hit the nail right on the head
and hopefully put a “dent” in it?
Ha, I see what you did there. 🙂
‘Currencies’ are just ‘Brand Labels’ pasted on the exact same poison sold globally … the banknote scheme. All the different languages, art-work and type-fonts are a ruse hiding a ‘One World Currency’ in fact. I believe this is what Jeff Nielson means by his term ‘One-Bank’.
Because all currency is a singular system of automatic co-generating inflation and debt, the only possible means of control is through rate of interest held within ‘macro-economic’ conditions extant at any one time, thus the global network of ‘Central Banks’.
However, because continuous borrowing is imperative to create Interest Service Funds … somewhere, anywhere … the onset of Terminal Debt Saturation ushers in the final collapse, if rejection of further indebtedness is unshakably resolute.
The final determination of that question is what’s playing out on the platform of finance-economics right now. Nevertheless, ‘TDS’ is inevitable because the banknote scheme is exponential, so ‘the bigger it gets, the bigger it gets and the faster it grows, the faster it grows.’
…and the faster it reaches terminal debt saturation.
Maybe they can time the Iranian vessels delivering weapons to Yemen with the economic blowup, gotta have some cover ready.
yes, wars cover financial fraud.
The FED and all global CB Governors should be very fearful. I suspect that all (including the TBTF’s) are Bankrupt and have been for some time (noting their derivatives exposures to net assets/capital). IN my summation they have been holding this thing we call the financial system together for the better part of this century. Every single one of them including the Central Banks’ Central Banker (BIS) is culpable and complicit. They were the ones who were charged with being the guardians of a fair, equitable and legitimate system. As we have grown to witness….this is nothing short of a nightmarish episode in debauchery of a monetary system.
Of more concern is that they will have some say in what transpires in terms of a RESET and a new monetary system. To HELL and back.
Mother Nature will have the biggest say.
Bill you are like the great Sherlock Holmes trying to deductively figure out what the hell is going on and how it might happen. Keep up your great analysis.
I think the cabal was putting it off and quite successfully in doing so but also reckless and making it so much worse.
The Cabal i believe still controls this chaos.
THEY had their G20 in Bisbane, and the Dodd Frank ruling allowing for bail-ins putting the bank solvency protection in place and an ideal way to steal from depositors,
THEY have Obama implenting executive order after executive order,
THEY are sending gold to China and giving away this country at an alarming rate,
THEY have Jade Helm starting June 15th,
THEY have classified tea partiers, gun rights owners, alternative media figures, constitutionalists, heck even Texans, Utahans and Mormons as potential hostiles or potential terrorists,
THE borders are entirely open and left nearly un-checked,
Thousands of brass in the military who answered a litmus test saying they would NOT fire on our own citizens are “retired” and replaced with those who answered they would. THEY tested out potential black swans with the Obola scare, THEY are picking fights anywhere they can to start a major war.
So I would ask what else might they need to get in place for when the whole thing goes and the Cabal can steal the remaining wealth and destroy the middle class. I have often thought they would not allow the ~$4T in depositors monies to slip out of their greedy paws before they crash it. I tend to think the raid itself will be a very result of the crash with bank holidays and capital controls quickly implemented. It seems they now have it all in place where they can orchestrate it or allow a collapse and be able to grab what they want. So, it seems to me, they have everything in place and ready. One black swan event (which could be a “something going wrong” in their Jade Helm exercize) and/or the escalation of any of the wars for it to happen immediately or in short order. IMHO, it really does explain how they have kept it going on for so long and why…. Its because THEY were not ready yet. One of your last words was NOW…. Are they NOW ready to start their final maurandering. I say it sure the hell sounds like it to me. They may not wait for the forced tipping point via natural economic law (which they have already defied).
One forced law they cannot escape though is the nice piece of eternal real estate awaiting for them in hell.
Yes, thanks Rich.
I seriously doubt if Greek citizens have $100 billion in their bank accounts. They read newspapers and watch tv. The stuff the EU might confiscate is probably assets, not cash. So they get Deeds of Trust which the Greek Legislature can make non enforceable in one day.
last I heard, Greek banks held 130 billion euros in deposits.
Reverse Repurchase Agreements,,,,,,,,,sounds like a double negative to me. Passing the hot potato at the lighting speed of computer technology.
Great article Bill. I listened to Greg Hunter’s 2013 interview with Jim Sinclair. What struck me the most is that China executes people who trade derivatives. Correct me if I heard wrong. If I’m right and America were to pass similar laws, maybe we should invest in ‘triple cocktail’ inventories. But I guess someone would come up with a black market derivative for that also.
thanks Ron, you would get rich making pine boxes.