The Trillion Dollar Fed Secret Explained | Reverse Repo
In this video, we break down what exactly the reverse repo market is, how it works as the “plumbing” of the financial system, and why changes to it ultimately impact your savings and cash.
CHAPTERS:
0:00 What is the Repo Market?
3:04 Reverse Repo
6:31 Government Spending
9:13 Federal Reserve
TRANSCRIPT FROM VIDEO:
Money is rapidly draining from the Federal Reserve’s, multi-trillion dollar reverse repo facility, which will have a direct impact on banks, bonds, interest rates, and your money. If you’re confused how it’s going to impact you because you’ve never even heard of it, you might be shocked to find out that your money could be parked there right now. But what exactly is it? Where is this money going and how is it going to have such a dramatic impact on the US dollar and the global economy? And most importantly, how can you protect yourself?
Hi everyone. I’m Taylor Kenney with ITM Trading, breaking down complex financial topics so we can all learn and grow together and today we are going to be digging into the trillion dollar repo market, why the Federal Reserve is behind big changes that are happening and how you might be shocked to discover the impact that these changes can have on you.
And don’t worry, as part of this, we are going to go over how we can look at what’s happening today, know what’s gonna happen in the future, and make sure that you have a strategy in place before anything happens. But before we talk about that, what exactly is the repo market?
Well, depending on who you ask, it’s often referred to as the plumbing of the financial system. When things are going right and running smoothly, you don’t even notice it’s there. But when things start to get backed up or break, you are very aware that there is a problem. So it’s not surprising that many people have never heard of it or don’t understand how it works, even though it is a critical part of the financial system that handles trillions of dollars of transactions each and every single day. It is the grease that keeps the wheels turning.
Repo is short for repurchase agreement. When we’re talking about the repo market, we’re referring to short-term agreements, often as short as overnight, sometimes up to a couple of days where two parties agree to the sale and future repurchase of securities. The easiest way to picture the repo market is like one big pawn shop. So imagine someone comes into a pawn shop, they have a ton of bonds, but they need cash now to pay their employees. They’re going to strike a deal where they’re going to sell their bonds to the pawn shop in exchange for immediate cash, but as part of that agreement, they will come back in 24 hours and purchase back the securities they just sold at the same cost plus a little bit more. You could view it kind of like interest. Some people call it a collateralized loan, but ultimately it is a true transfer of ownership from one party to the other and back again. The only difference is that instead of the local pawn shop owner, and you and I, you could picture it being a hedge fund and a bank or two different banks who are making these deals. These deals allow for banks and institutions to have access to quick cash when they need it, and then be able to retain or hold onto their securities for long-term purposes.
But I wanna focus on a reverse repo, which is essentially the same thing. It’s just the seller’s perspective instead of the buyers or two sides of the same coin. So instead of getting cash for securities, you’re getting securities for cash and then getting your cash back with interest or at a higher price. Now this brings us to our friends at the Federal Reserve. In 2013, the Federal Reserve started experimenting with different ways that it could create new tools to control the money, supply and interest rates. One of these was by getting into the reverse repo market. Essentially how it would work is let’s say a bank or a money market mutual fund has too much excess cash, too much liquidity, and they’re not making any money on that cash. Well, they have a couple of options of where they could put it with the Federal Reserve entering the game. They would be able to take their money, put it into the Federal Reserve reverse repo facility, and receive an interest rate on that cash questionable at best, the Federal Reserve reverse repo facility was created so that they would have another tool to manipulate the economy. It was something though that they didn’t really start to utilize until a couple of years ago, and it was a tool that they dusted off and have been using consistently since. As we know in 2020, the US government needed a ton of extra cash to cover its spending. So all of this cash was injected into the system and went to you and I, then to businesses, then to banks. And the banks had to do something with all of this cash, and that’s where the Federal Reserve comes in.
In the spring of 2021, the facility started offering something interesting, a higher than market rate, interest rate on any cash that was coming in. This was obviously to encourage money to come into the facility, which is exactly what happened. The money started pouring in. Why would they pay over market rate? It doesn’t make sense. Well, the reason that they are doing it is because they need to control interest rates. With all of the extra cash that was now floating around, banks naturally wanted to put it somewhere and the first option they were going to choose was going to be government backed securities. And if all of the money was going to that, it could cause interest rates to actually go negative. They created a fake floor by offering higher than market rate interest. It actually propped up other interest rates and didn’t allow them to drop down too low or into the negative. Now, some might argue that this was a necessity, necessity born out of their own mistakes and in responses to their own wrongdoings. But what the real concern here is, is that it’s never been done before like this. So no one even knows the true impact that it’s going to have on the US financial system and greater economy. We are talking big time government manipulation, experimenting. They don’t even know they’re making it up as they’re going. And on top of that, you have to think about the fact that all this money, it used to be traded directly in the repo market between banks, between banks and money market mutual funds directly without the central bank’s interference. But now that they’ve inserted themselves and they can make their interest rates whatever they want, it tightens the control that they have over everything.
But let’s bring it back to what’s going on today, because this is where it gets intense. Over the last two years, if you’ve been tracking with me, interest rates have been really favorable at the Fed’s reverse repo facility. So that’s where all the money’s been going. But all of that started to change in June of this year. If you remember, the debt ceiling was raced, which has since resulted in a mass issuance of new treasury bills. You flood the market with more treasury bills that are paying a higher rate. And what are these entities going to choose? They fled from the overnight reverse repo and ran straight to treasuries. Although that might not still be the case, but I’m jumping ahead. First, I wanna make sure that everyone understands that this facility is not just critical for controlling interest rates, but it also plays an important part for the government to have cash on hand as needed. At its peak, this facility had two and a half trillion dollars that was readily accessible, and in the last four months, we have seen that number drop close to just a trillion dollars. That is a huge amount of money that is leaving this facility. Now, let me ask you this. Do you think that the government is going to slow down or stop spending anytime soon? I think we both know that the answer is no. And even if in some alternate universe they did, the interest rate on all of this debt, the payments that are due are just going to continue to compound the problem. Why this matters to you is that as these funds continue to drain out of the reverse repo facility, there is going to be a tightening of available cash and liquidity within the system. These entities are gonna look elsewhere to put their money, and in fact, it’s already happening. What I was talking about earlier, just because the money’s draining this facility does not mean that it’s all going back into treasuries. I don’t know exactly what’s going to happen, but what I can tell you is that these big players are losing faith. We’re seeing it today in the way that people are not secure anymore in the bond market. It is not something that it used to be even a year ago or five years ago. People are realizing that this system is broken and the writing is on the wall, that it’s only a matter of time before there’s a lack of cash, a lack of funding, a lack of borrowing available, which means that the government is going to have to step in and print more money. Call it whatever you want, quantitative easing, but the end result is still the same. You are going to be left with a fiat currency that has less value. So maybe you have the same amount of dollars, but what are those dollars actually worth?
Like Lynette said in yesterday’s video, all of this meddling has created a damned if you do, damned if you don’t situation for the Fed at this point. They are way too involved to not step in and do something, but the more they try and control it, the more that they can’t. Ultimately, you can’t stop what’s already been put in motion, but regardless of whatever the Fed does next, that’s not what I’m most concerned about. What I care about is making sure that you are protected because there’s a reason that banks aren’t concerned there’s a reason the government’s not concerned. And it’s because ultimately it is the everyday person. You and I, we are the ones who are left to deal with the fallout. And this is why it’s so important to look at the system as a whole and really make sure that you understand what’s going on with your money. ’cause you might have cash right now in a bank or have it in a money market mutual fund and not realize that it’s being loaned out as we speak at the Federal Reserve’s overnight reverse repo facility. This is why I am such a big believer in gold and silver, because if I don’t physically hold it, I don’t own it. In theory, you own it. But ultimately, if you take anything away from this video, understand that there are circumstances that are completely outside of your control when we’re talking about manipulation of money. That is why I trust tangible, gold and silver. And if you are interested in learning anything about getting a strategy in place or you wanna learn more, I highly, highly recommend that you click on the link below, get a Calendly meeting set up so that you can get a strategy in place.
Everyone is different in what they need and what their strategy looks like for them, but we’re all the same in fighting the systems that are in place. So no matter where you are in your journey, take that first step today. I promise you’ll be glad you did. These are wild times that we’re living in, so I really appreciate all of you liking, commenting, giving me feedback and subscribing to make sure that we are getting the word out. As always, I am Taylor Kenney with ITM Trading, breaking down complex financial topics so we can learn and grow together. Until next time.
SOURCES:
https://www.bankrate.com/banking/federal-reserve/why-the-fed-pumps-billions-into-repo-market/
https://www.axios.com/2023/03/31/fed-repo-banks
https://www.newyorkfed.org/newsevents/speeches/2013/dud130923.html
https://www.richmondfed.org/publications/research/economic_brief/2021/eb_21-31
https://www.businessinsider.com/personal-finance/what-is-reverse-repo
https://www.nasdaq.com/articles/feds-reverse-repos-fall-below-$2-trln-for-first-time-since-june-2022
https://fred.stlouisfed.org/series/RRPONTSYD
VIDEO SOURCES:
https://www.youtube.com/watch?v=H_wwzyAGPZw
https://twitter.com/concodanomics/status/1637769450815365120
