~ ~ Promises Of More QE Are No Longer Sufficient
Submitted by Tyler Durden on 08/03/2012 12:03 -0400While endless jawboning and threats of more free (and even paid for those close to the discount window) money can do miracles for markets, if only for a day or two, by spooking every new incremental layer of shorts into covering, there is one problem with this strategy: the "flow" pathway is about to run out of purchasing power.
|Boo-Hoo this little piggy can't go to the market|
Recall that Goldman finally admitted that when it comes to monetary policy, it really is all about the flow, just as we have been claiming for years. What does this mean - simple: the Fed needs to constantly infuse the financial system with new, unsterilized reserves in order to provide bank traders with the dry powder needed to ramp risk higher. Logically, this makes intuitive sense: if talking the market up was all that was needed, Ben would simply say he would like to see the Dow at 36,000 and leave it at that.
That's great, but unless the Fed is the one doing the actual buying, those who wish to take advantage of the Fed's jawboning need to have access to reserves, which via Shadow banking conduits, i.e., repos, can be converted to fungible cash, which can then be used to ramp up ES, SPY and other risk aggregates (just like JPM was doing by selling IG9 and becoming the market in that axe). As it turns out, today we may have just hit the limit on how much banks can do without an actual injection of new reserves by the Fed. Read: a new unsterilized QE program.
First, here is a reminder of what has been going on in the secular amount of excess reserves as indicated by the Fed.
The total amount of reserves is dropping rapidly which is to be expected: as the Fed's balance sheet contracts due to maturing FX swaps, and numerous other asset reductions, this means that liability side has to contract in parallel which then means that bank reserve levels are not only flat, they are declining. Obviously, absent "reserves" i.e., electronic fungible money created by the Fed, which courtesy of Shadow Banking can be promptly transformed into cash, banks can not buy. Period.
But not only that: there is some speculation that banks have over the past several years used reserves as a stealthy plug to fill capital shortfall at firms whose asset side is being rapidly depleted by non-performing loans and other detractors from cash flow formation. In other words forget buying assets and generating an ROE: banks need reserves to preserve their viability, or else.
All of this came to a head today.
What happened today? Well, first, here is what happened yesterday. The WSJ explains:
And there you have it: following several years of reverse repos, or liquidity extracting exercises by way of temporary reserve sequestation, the Fed has finally launched the opposite: or outright repos, or liquidity providing exercises. Which also means that at least one bank was in dire need of new reserves, all posturing by the Fed to the contrary notwithstanding. Because there simply is no reason for the Fed to launch a repo operation out of the blue following 30 "test" Reverse Repos conducted since December 2009...The WSJ continues: Read more @SourceStarting Friday, the Federal Reserve Bank of New York will implement a series of "small value" repo operations to test its capability to temporarily boost bank reserve levels.