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Why the Banking System’s ‘Cough’ in September Spells Trouble


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 more than a few of them 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 un-simple 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 banking 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 may be powerless to re-liquefy system the next time repo borrowers are urgently pressed for cash.  Beware, since an unintended stress test could occur before the year ends as banks attempt to square up their books.

Please do not ask trading questions!

  • John Jay December 11, 2019, 4:17 pm

    As an Old Timer I have come to always see any “Scary Problem” given non stop MSM coverage as just another “Skirmish Line” sent out to determine the depth of any resistance to any particular “Narrative.”
    The “Narrative” is simply the latest plan of the 1% to strip the 99% of the last of their wealth and liberties.

    Case in point: Time Magazine’s Person of the Year Great Greta Thunberg!
    Great Greta is the replacement for old “Man-Bear-Pig” of South Park fame, Al Gore!
    People visiting here are smart enough to have no need for me to write a wall of text on the insanity of this particular “Global Warming Skirmish Line!”

    Next, the two MSM big finance threats, 22 trillion Dollars of US Federal debt, and 400 trillion US Dollars of scary derivatives!
    The “Narrative” tells us we are all responsible for it, and sooner or later we will be stripped of all our wealth and worldly goods to pay for it!
    In other words, that is the plan of the 1% to finish us all off, the “Narrative” is presented to see if they might be subject to the 3Rs, Romanoved, RICOed, or Replaced! When the feel they can pull it off, they pull the trigger!

    In reality, show me a consolidated spread sheet of who owns all the 22 trillion Dollars of the National Debt, and I can suggest a few plans to make most of it disappear, and give the 99% a fresh start.

    In reality, if some Hedge Fund demands that options they bought for 1 cent, and become worth $5,000 each, due to an orchestrated “Crash” must be bailed out by you and I………………
    Well, if their counter party did not establish a reserve to cover for that event, then, they declare bankruptcy, and the Hedge Fund gets in line to perhaps recover the 1 cent they paid for that option.
    Or, just have a Federal Court rule the entire transaction illegal gambling and an unenforceable contract.

    However, to see the future, look to the past.
    Tens of millions did not have to die in WWI, but the “Narrative” of “Over the Top Lads” subsumed the Christmas Truce Reality of 1914!
    Sadly, the ultimate reality, as always will be that the 1% get away with it!

  • patrick December 11, 2019, 12:05 am

    Thanks for the heads-up.. What are you recommending to mitigate the damage?


    T-Bonds and some leveraged exposure to gold. RA