the strong usd

[thriftyandboringinohio]

Re: the strong usd

Is that what's going on, that banks that need cash are unwilling to exchange their Treasuries for cash? That doesn't make any sense at all. If a bank needs cash and is unwilling to exchange Treasuries for cash, the bank is in serious trouble as it will not be able to remit what it owes to its creditors unless the creditors are willing to accept Treasuries or cowry shells in lieu of USD payment.

The bank that needs cash and is holding Treasuries has essentially zero risk entering in a repo agreement. The counterparty gives the bank cash and the bank gives the counterparty Treasuries. If the bank is somehow unable to repurchase the Treasuries, the counterparty has the Treasuries and only potentially suffers loss due to rate risk. For Treasury bills, the loss due to rate risk is practically zero especially in a ZIRP environment. Likewise, if the counterparty somehow loses the Treasuries, the bank's only problem is that it sold its Treasuries and, if it still wants Treasuries, must buy replacements on the market. In this case, it is the bank that is exposed to potential loss through rate risk. But outside of what should be minimal losses so long as Treasury duration is short and interest rates don't fall drastically, the bank doesn't lose anything because it has already been paid for the Treasuries it put up in the repo.

My impression of the problem is that there is not enough cash in the system for some reason which I do not know. Even with the pledge of high-quality collateral, Treasuries, cash-starved parties have to offer fairly high annualized rates to get a cash-rich counterparty to enter into a repo agreement.

Thanks Milton, that's the way I see it too.
Repo agreements operate almost exactly like a pawn shop loan. You bring your tv, the pawn broker give you cash and holds your TV. If you bring back the cash plus the interest, he is obligated to give you back your TV. The lender holds the television as collateral in case you never come back up with the cash. The lender is fully protected.

So the conclusion you and jk make, that the system is generally short of cash, is the only explanation making sense.
Counterparty risk does not seem plausible when banks are offering treasuries as collateral. A repo failure just gives the lender your Tbills at a discount; that's not a bad outcome for the lender.

As an aside, the explanation we usually hear for why institutions accept negative interest on sovereign bonds is exactly this situation. We hear that bonds are fabulously useful to a big bank as repo collateral for overnight lending which makes them well worth the slight cost to own them.

[Milton Kuo]

Re: the strong usd

repo fails have increased. and banks would rather just hold their t-paper than lend it even overnight for a virtually guaranteed profit.

Is that what's going on, that banks that need cash are unwilling to exchange their Treasuries for cash? That doesn't make any sense at all. If a bank needs cash and is unwilling to exchange Treasuries for cash, the bank is in serious trouble as it will not be able to remit what it owes to its creditors unless the creditors are willing to accept Treasuries or cowry shells in lieu of USD payment.

The bank that needs cash and is holding Treasuries has essentially zero risk entering in a repo agreement. The counterparty gives the bank cash and the bank gives the counterparty Treasuries. If the bank is somehow unable to repurchase the Treasuries, the counterparty has the Treasuries and only potentially suffers loss due to rate risk. For Treasury bills, the loss due to rate risk is practically zero especially in a ZIRP environment. Likewise, if the counterparty somehow loses the Treasuries, the bank's only problem is that it sold its Treasuries and, if it still wants Treasuries, must buy replacements on the market. In this case, it is the bank that is exposed to potential loss through rate risk. But outside of what should be minimal losses so long as Treasury duration is short and interest rates don't fall drastically, the bank doesn't lose anything because it has already been paid for the Treasuries it put up in the repo.

My impression of the problem is that there is not enough cash in the system for some reason which I do not know. Even with the pledge of high-quality collateral, Treasuries, cash-starved parties have to offer fairly high annualized rates to get a cash-rich counterparty to enter into a repo agreement.

[jk]

Re: the strong usd

just came across the theory that it's all deutsche bank, no one trusts them at all, and now there's the money laundering issue via danske bank to add to all their woes.

[jk]

Re: the strong usd

Thanks jk. I too find this stuff "rather dense". The best understanding I can glean stands on two ideas.

First, September had some large and important and unusual calendar coincidences for tax payments and bond issuance that aggravated and amplified the overnight cash shortages. If that's true, we can expect the system to return to more normal operation now that these dates no longer pile up the same week by coincidence.

Second is a question. Just what is this thing that was amplified by the calendar coincident? To me that's more interesting question. Just what is going regularly now, that when it gets amplified a bit, it breaks the system?

Best I can understand, the major banks are having a tough time meeting the requirements for overnight reserves. The levels of reserves they must have on hand was bumped up after 2008 to prevent a repeat of the Great Financial Crisis, and banks are now struggling to keep their reserves high enough. That sounds bad to me.

It sounds like the banks are back doing the same sort of things they did in 2006 and 2007, getting out over their skis and struggling to maintain adequate reserves.
We might be glad we've imposed those higher reserve levels upon them, since they seem to be having a hard time behaving as prudent and responsible financial institutions and maintaining adequate reserves.

snider, at least, says it's not reserves which are the problem. apparently, in the wild west days prior to 2008 all the junk fake-labelled aaa was acceptable for repo. afterwards, it's been more and more restrictive until it's only treasury paper. my interpretation of what he's been describing is that there is an ever-decreasing level of trust in the system. repo fails have increased. and banks would rather just hold their t-paper than lend it even overnight for a virtually guaranteed profit.

meanwhile u.s supply of dollars to the world has been markedly reduced as the u.s. has become energy self-sufficient. as the reserve currency, we're supposed to run deficits to supply the world with liquidity. if our deficit is diminished, so is global liquidity.

meanwhile, rising federal deficits, well over $1trillion/yr if you count what the official budget doesn't count, even with supposedly record low unemployment and a "wonderful" economy, is crowding out any other domestic funding.

so global squeeze and domestic squeeze

[thriftyandboringinohio]

Re: the strong usd

Thanks jk. I too find this stuff "rather dense". The best understanding I can glean stands on two ideas.

First, September had some large and important and unusual calendar coincidences for tax payments and bond issuance that aggravated and amplified the overnight cash shortages. If that's true, we can expect the system to return to more normal operation now that these dates no longer pile up the same week by coincidence.

Second is a question. Just what is this thing that was amplified by the calendar coincidence? To me that's more interesting question. Just what is going regularly now, that when it gets amplified a bit, it breaks the system?

Best I can understand, the major banks are having a tough time meeting the requirements for overnight reserves. The levels of reserves they must have on hand was bumped up after 2008 to prevent a repeat of the Great Financial Crisis, and banks are now struggling to keep their reserves high enough. That sounds bad to me.

It sounds like the banks are back doing the same sort of things they did in 2006 and 2007, getting out over their skis and struggling to maintain adequate reserves.
We might be glad we've imposed those higher reserve levels upon them, since they seem to be having a hard time behaving as prudent and responsible financial institutions and maintaining adequate reserves.
.
.
.
.
.

[jk]

Re: the strong usd

I'm surprised nobody has made mention of the Fed's increasing repo actions.

i brought it up in the fomc thread, but no outright discussion.

how many days of repo in a row does it take before you start calling it "qe"? latest repo offerings have been heavily oversubscribed, so there's no end in sight.

i've been reading jeff snider's rather dense, if brief, research notes every day for many weeks now. i can't say i fully follow his discussion, but what i glean is that there have been problems, periodic contractions, in the global eurodollar system dating back to 2009- the crisis of a decade ago has never truly ended. it's just been papered over while it continues to manifest in the shadowy eurodollar world. what the repo problems are revealing are the decade old deflationary processes, still unresolved.

draghi said it loudly and many times in his recent presser- time for fiscal. the squeeze in the u.s. says fiscal is already here. foreign cb's stopped buying treasuries in 2014, and last year the cost of currency hedging made treasuries risky for foreign private buyers. snider thinks the primary dealers have built inventory in order to have good collateral on hand in a pinch, as the definition of good collateral has become progressively more restrictive. luke gromen is saying that the primary dealers are stuffed with paper because there's just too much paper, and the fed has to restart qe in some form, or offer a standing repo facility that allows the dealers to finance that paper.

either way, there are rumblings in the monetary plumbing, and they don't augur anything good. when the plumbing backs up what you're covered in is not glory.

[Chris Coles]

Re: the strong usd

I'm surprised nobody has made mention of the Fed's increasing repo actions.



https://www.wsj.com/articles/fed-add...on-11569416576

New York Fed Boosts Size of Repurchase Operations

Overnight loans rise to $100 billion from $75 billion

The Federal Reserve Bank of New York said Wednesday it would increase the size of scheduled operations to provide short-term cash loans to financial firms.

The Fed said it would increase the size of overnight cash loans offered Thursday through the market for repurchase agreements, or repos, to $100 billion from $75 billion, while doubling the size of a two-week offering Thursday to $60 billion.

Banks asked the Fed for about $92 billion in overnight reserves Wednesday, offering collateral in the form of Treasury and mortgage securities, compared with the $75 billion provided by the central bank.

The decision to increase the size of the loans in the repo market, where borrowers offer collateral such as Treasury bonds in exchange for cash over very short periods, follows recent operations where banks have bid for more cash than the Fed had offered. This was most notable Monday after banks submitted bids for more than twice the $30 billion of two-week loans offered by the Fed...

Exactly the opposite response to any normal business in need of short term funds; we all picked the wrong careers!

[GRG55]

Re: the strong usd

I'm surprised nobody has made mention of the Fed's increasing repo actions.



https://www.wsj.com/articles/fed-add...on-11569416576

New York Fed Boosts Size of Repurchase Operations

Overnight loans rise to $100 billion from $75 billion

The Federal Reserve Bank of New York said Wednesday it would increase the size of scheduled operations to provide short-term cash loans to financial firms.

The Fed said it would increase the size of overnight cash loans offered Thursday through the market for repurchase agreements, or repos, to $100 billion from $75 billion, while doubling the size of a two-week offering Thursday to $60 billion.

Banks asked the Fed for about $92 billion in overnight reserves Wednesday, offering collateral in the form of Treasury and mortgage securities, compared with the $75 billion provided by the central bank.

The decision to increase the size of the loans in the repo market, where borrowers offer collateral such as Treasury bonds in exchange for cash over very short periods, follows recent operations where banks have bid for more cash than the Fed had offered. This was most notable Monday after banks submitted bids for more than twice the $30 billion of two-week loans offered by the Fed...

[jk]

Re: the strong usd

hey ecb,
smell the sushi?

[GRG55]

Re: the strong usd

David Hunter has made a lot of good calls recently. He reckons a melt up in equities is starting
with the dollar dropping to 88 before a massive deflationary bust next year.
Take a look at David Hunter (@DaveHcontrarian): https://twitter.com/DaveHcontrarian?s=09

What should we call that? Poom-ka?

More seriously, a case can be made that capital flows seeking US$ and $proxies may drive asset classes towards a 1.0 correlation. Rising $, precious metals, Treasuries and stocks in US centered enterprises (e.g. not the big multi-nationals).

(I will admit I agree with Hunter's assessment of Larry Summers, LOL).

[Mega]

Re: the strong usd

"IF" & its a big if there is no MASSIVE recession than, I think Trump is home free..........if there is than the DNC might have a chance.

Given how badly broke (woke) the DNC is, on a level playing field Trump would walk it. "Amtrack Joe" is coming off the rails & Warren has spoken proven lies ref her DNA

Mike

[touchring]

Re: the strong usd

slowly people and markets are realizing that it's not about tariffs and it's not a trade war - it's a world historic struggle between an established and a rising power. if we're lucky it will take decades to play out ["lucky" because that would mean no war.]

If Trump has a second term, there will be no war because China will need to reform itself. Americans will decide next year whether they want war or peace.

[touchring]

Re: the strong usd

David Hunter has made a lot of good calls recently. He reckons a melt up in equities is starting
with the dollar dropping to 88 before a massive deflationary bust next year.
Take a look at David Hunter (@DaveHcontrarian): https://twitter.com/DaveHcontrarian?s=09

He looks to be wrong on call on $1550-$1600 gold by labor day.

[GRG55]

Re: the strong usd

Thank you! That was interesting, and amusing! And perhaps in some respects prescient, given the number of nationals and foreigners being newly detained by the Chinese mainland authorities in recent months.

As an aside, I see the € is now down to ~1.10 to the US$. "Currency manipulator" status coming next, LOL?

[jk]

Re: the strong usd

great talk by andy xie focused on chinese overinvestment [especially in real estate, but elsewhere too], capital flight and lack of structural reform as a global deflationary force. informative and [occasionally] amusing.

https://funny-video-online.com/watch...3t483u4l5.html