REPO REROLL PROPELS ASSETS HIGHER AND MORE
We hope everyone has had a great start to the new year and that all the resolutions one has subjected themselves too are still well intact. One thing is certain, the NY Fed has certainly kept their promise as we continue to see nearly $100 billion in Repo's continue to get re-rolled every two weeks. As we have stated, prior, when do temporary liquidity measures become, not so temporary? When you merely reroll a position over and over again, this certainly seems to be evidence enough as you can see here with the latest 14-day repo a whopping $90 Billion:
Total Repo value minus Reverse Repos is $987 Billion, how's that for liquidity provisions. We hate to think that this isn't as lucrative as its face value seems, yet we know the truth and this next chart paints a very real picture of who and why so much is needed. Ahh for the good old days of LTCM and a mere $3 Billion fund going to take down the world, this picture displays three very prominent funds whom today push the levered Repo pedal to the medal:
To keep this simple and yea we may get some naysayers saying it’s not that bad, but for us, well let's just divide the Reg. Assets from the AUM shall we, and for us simpletons, we will just consider this their leverage ratio. Millennium leverage is 5.25x, Citadel is 7.55x and Point72 is 5.48x. So, in order to play this game, you need access to liquidity, you need coordination, you need financial markets that are played by zero sum players so you can continue to play with the non-zero-sum player money, i.e. Fed Injected Money. Money by which is merely created at will to support such shenanigans. So, with all this how are we not going to assume the system is rigged and all of the above are in on it. Perhaps even the exchanges themselves. Just think everyone clamors for transparency and yet the mere act of buying and selling is hidden? Ask the question of, why do they hide such things? Back in my bond arbing days I would gladly buy and sell just for the mere purpose of obtaining the other side of the bid or offer. I have talked about this before. The CME and the CBOT both offered in real time, the actual trader ID (Acronym) and the clearing firm ID (House #) on every single transaction in real time. Now ask why no more? Well the answer is obvious isn't it? Anyway, here is how the exchanges used to present real time information:
Now why would I do this? Because if I were going to buy up some cash treasuries, I wanted to know who was on the offer of the futures side, if it was house #350 I would most likely not buy up any treasury cash, why? Because house 350 is Goldman Sachs and if they are first in line, they most likely know more than me and they certainly have more size than I could possibly handle...thus, this would provide me some very important real time information. More than likely I would be more inclined to hit the 30-year cash bid and get ready to buy the bid in the futures when it goes down.
Fast forward to today, well, they want you knowing as little as possible of all the games that are being played. Are the exchanges complicit? Yes, and the fact that they do not offer this anymore is the only evidence I need to say that. For today's traders can for all intents and purposes be both bid and offered simultaneously on a single price and if you aren't black box, well then you are way behind...and your data feed is residual information, so good luck with that. However, not everyone plays the speed game, not everyone's trade window is short term. In fact, I would bet the majority of passive funds out there don't even get involved in the HFT game or gaming. So that is some real trading insight from a long-time treasury bond trader.
Anyway, the overall market’s tone here has seen equities rise, bond yields rise, dollar rise and metals and energy fall. We don't think this is going to be a macro theme for 2020 rather we posit this is just a matter of position adjusting into an uncertain future. Yes, we have liquidity we can check that box, yes, we have ample supply of willing and able buyers in the equities despite lofty fundamental valuations, but the real test is how well the bond market responds to a FED that may be on hold here in this election year. We suspect a defensive tone at first but we also suspect the real money knows the devil in the underlying details and the whole asset price house of cards requires lower and lower rates in perpetuity. We are sure that the Gold Bugs will be clamoring that all this printing will lead to Gold and Silver shining and we would agree, but history has shown this to be a slow grind not an all-out panic. The fundamental back drop of increasing debt, increasing leverage and a stagnating economy all might lead to higher metal prices, but we also know if the global economies hit stall speed and some of the liquidity gets pulled and asset prices start to fall. Well then, we suspect everything can go south and in a hurry as prices go full mean reversion and some creative destruction takes place. Personally we feel that the mother of all death outcomes for global levered players would be if stocks and bonds both fell in price, this would lead to a massive drubbing of RV Funds and their games, not to mention with nowhere to hide and everyone has gone full zero fee passive, retail will get torched as NAV mismatches from an overnight drubbing would lead to a vortex of sell orders into zero HFT bids who know better and are built to not provide liquidity in times of stress as the programs go full control Z and remove all if not most bids. So, hope savings in all those zero fee structures was worth it because when the time comes slippage will magnify things and passive is always last guy to through the door.
Ok let's go to our LinkedIn feed over the past week and see what we posted there:
How fast will The Walt Disney Company catch up??? #videostreaming #digitalcontent #netflix, thanks for an excellent graphic provided by Statista
Finally are last post had to do with President Trump and his speech at Davos this week. He had a powerful speech and I think the world is on notice that America is no longer for sale. If he hasn't made it obvious by now, the globalist agenda has been upended and the rest of the world is going to have to start paying its share and we are quite sure the America first policy is leaving a bad taste in many global leaders mouth.
That's it we hope you have a great week and as always thanks for reading and supporting our week, subscribe, like and share, cheers!