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?
