Wednesday, September 18th 2019 - Issue #572

Signs of a liquidity crunch

This week started off with a bang after a weekend of worry following the "attack" on Saudi Arabia's oil fields. The markets took the baton on Monday morning as the Effective Fed Funds Rate, or the rate at which banks trade their excess reserves at the Fed with each other, spiked way out of range. This forced the Fed's hand as it had to intervene immediately with an emergency liquidity injection via a repo operation which resulted in $53.2B being injected into the banking system. 

In short, it seems that we are seeing cracks in the system as liquidity dries up. You never want to see the Fed have to unexpectedly step in WITHIN HOURS to prop markets up. A day before the Fed is set to meet and set interest rates. If yesterday's repo operation wasn't startling enough, don't worry, there will be another operation today during which banks will have the opportunity to unload $75B of debt. All eyes will be on Chairman Powell and the Fed tea leaves this morning as markets wait with bated breath to see how low the Fed Funds Rate goes. Markets are signaling and expecting a 0.25% drop in the rate, but after yesterday's events and today's expected repo operation, I wouldn't be surprised to see Powell make a deeper cut. 

If the Fed feels compelled to intervene within hours to a market hiccup and continue that accommodation into a second day. Essentially conducting QE without officially conducting QE. Given this, one has to wonder; when are they going to start officially conducting QE again. It seems as though liquidity is drying up. How much longer can the Fed remain tepid with their actions? Are we close to the moment at which their hand is forced? A 2008-like moment. I'm sure we'll find out in the coming weeks because rate spasms like this are generally strong warning signs of trouble on the horizon.

If any this seemed a bit confusing and crazy to you, don't worry, it kind of is.

This is why we bitcoin, freaks. 
Final thought...

Realizing you're ten years away from high school is a hard pill to swallow. 
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