Free briefing for preparing for bailouts and bail-ins: https://www.nabers.com/repo (we are working on scheduling another live session, please register to be notified of next session)
Article mentioned in video: https://wolfstreet.com/2019/11/06/whats-behind-the-feds-bailout-of-the-repo-market/
Hey everybody. Jeff Nabers here. Welcome back. We’re talking about the fed repo bailouts. Why? Because they’re still going on and October the news was the fed bailouts and the repo markets will continue until at least November 4th it’s November 12th and I’m recording this and they’re still doing them coming up. We have a serious problem. If you didn’t open your windows and look out in the real world on paper, we’re in an economic depression, but because of all of this financial engineering, we’re sitting here looking at a scoreboard and add the control of that scoreboard is the federal reserve and they’re manipulating the scores through interest rates to juice the stock market up and to juice other measures of financial strength up when behind the scenes there’s a lot of financial weakness. What the repo market bail outs represent is that after a long string of the VAD winning battle after battle in manipulating interest rates to keep the economy propped up, we may be reaching a point where they lose the war, so why are they doing the bailouts?
That was the topic of our last video. In this video we’re going to talk about who is getting the bailout money. Comments were recently made by our fed overlord Jerome. Okay, can’t say that. Okay. Let’s look at some recent comments made by fed chairman Jerome Powell, where he spoke about banks not as borrowers in the repo market but as refusing to lend. So let’s just take this at face value and not assume that it’s misdirection. This brings us to the question, who’s borrowing the money in the repo markets? If it’s not, the banks found an interesting article from wall street.com link in the description below. In this article it brings an example of AGNC investment Corp, which is not a bank. It’s actually a real estate investment trust. So here’s what AGNC has essentially done. They have raised equity money from investors in the amount of about billion, but have been borrowed about 0 billion from largely, you guessed it, the repo markets.
So they’re borrowing from the repo markets that under 3% interest and investing in mortgage back securities at a higher level of interest. This is what’s known as a free money game. Borrow at one interest rate, invest at a higher interest rate and the spread or the difference is your profit. So far so good, right? What’s the problem? The problem lies in the difference in timeframes. The investments they’re making are longterm and they’re making those investments with money that they borrowed short term. The majority of the money they have borrowed is coming from the repo market, some of which is due back the next day, some of which is due back 14 days later, which forces them to have to roll over the debt or renew the debt. So they’re constantly reborrowing from the repo market. And this means that for their scheme to continue to work, the repo market needs to continue to offer cheap money at interest rates lower than what the market wants.
There is a bet that the federal reserve will continue to successfully keep interest rates lower than what a free market would provide, which becomes a bit troubling. When we saw the interest rates spike to over 10% in September. Now it’d be clear, I’m not saying that specifically AGNC needed a bail out or that AGNC is problematic or the agency did get a bailout. What I am saying is that there are many companies like AGNC who game the system and borrow cheap money and invest for a higher interest rate and make that spread. They’re playing that free money game, but it only works when the interest rates stay low.