Original subtitles

So, one week ago today, uh, information

came out that US banks had tapped the

Fed's repo facility for $25 billion of

liquidity overnight. Uh, and that

followed another massive uh, draw down

from the end of October. I should have

done a story on it back in early

November, but this is even more

important. I'm going to draw uh this

together today with three concepts,

distinct concepts I think interrelate.

I'm not see anybody else doing this

right now uh out there on social media

or mainstream media. So I do want to get

your thoughts and comments. The first

concept is the banks, okay, having to

access liquidity and what does this

mean? Number two, how's this coincide

with the Fed's announcement of the end

of its quantitative tightening program,

right? It's going to end its balance

sheet runoff, right? And what impact

should that have on liquidity? And

lastly, the private credit

stress in the markets and how these

three from my perspective interrelate.

Okay, before I jump into uh today's

story, I share one story from Daily

Huddle. I saw over the weekend. Uh

before I jump into it, as I always

humbly ask, if you're not subscribed,

please subscribe so we keep growing the

community. If you enjoy the content,

leave me a like and share this stuff,

please, with people so uh we they

understand what's happening. Uh this

could be uh the beginning of a a massive

downturn. Cracks are really starting to

form. And uh it's important that

everybody understand this because the

broader markets, okay, the stock market,

the bond market, the metals market, the

cryptocurrency market, it all is going

to get drawn into this. So, Daily

Huddle, uh story I saw over the weekend,

US banks just tapped billions of dollars

from a Federal Reserve program designed

to ease and prevent stress in the

system. New data from the Federal

Reserve Bank of New York shows banks

borrowed $25 billion from the Fed's

standing repo facility, the SRF,

on December 1st. Okay. It marks the

second highest daily usage since the

SRF's launch in July of 2021. The first

highest draw down was just about a month

ago

um when the banks tapped $50.35

billion

on October 31st.

Okay, so we've had the two largest draw

downs or banks accessing the repo

facility in the last 60 days since that

facility was put in place in July of

2021.

Do you think this is not a huge deal?

And let me explain. I'm going to dig in

a little bit deeper. So, let's geek out

on this for a few minutes. Please bear

with me.

The SRF is a Fedrun facility created in

2021 to let banks, okay, and other

eligible institutions borrow cash

overnight, okay, against high quality,

supposedly high quality collateral,

okay, treasuries when private cash or

liquidity markets are drying up,

becoming scarce, okay, in a well

functioning system, banks get cash and

liquidity by how? by borrowing from

other banks, okay, institutions in the

repo market. The SRF is kind of like a

backs stop. It's used uh when market

funding dries up or becomes too

expensive for banks to access safely or

as I'm going to share with you when

banks start to lose confidence in other

banks. Okay. So, when what does the uh

repo facility usage signal? It signals

that uh banks are borrowing cash against

treasuries. Number one, to meet

short-term funding needs. Okay. What are

those funding needs? Uh we don't know.

It's also not published. Uh you get the

aggregate data, okay, of of the total

amount of draw down by the banks

cumulatively. you are unable to access a

uh breakout of what banks are drawing

down how much off the repo facility. So,

you know, because the ones that are

using it, let's say uh the most could

trigger some panic inside that bank,

right? And triggers people going in

pulling their deposits. So, you can't

get which banks really are needing this

liquidity the most. Okay. What it

signals, what it means, cash is tight in

the system. Lenders are hoarding

liquidity and banks, this is the really

one I want you to focus on, banks don't

want to lend to each other because of

why? Because of counterparty fear

rising. Okay. So what this could okay

signal it seems to me when you got the

two largest draw downs uh in the history

of this thing being in existence the

repo facility in the last let's say 45

days at a time was I'm going to share

with you exactly coincident exactly uh

the same time that the Fed has announced

the end of quantitative tightening this

is a big deal okay now I do want to hear

from some some bigger brains in this

space if you can weigh in um because I

think it's uh not getting enough

coverage. So, uh what also signals is

these banks are preferring to deal with

the Fed over one another. Okay? Which

means a declining uh bank uh bank

confidence in the system. Okay. Uh, and

let me explain the counterparty risk

issue before I jump into how the Fed

relates to all this and private credit.

Been discussing for weeks on this show

how the private credit meltdown is real.

Okay? How these private credit funds,

intermediaries, and more importantly,

the zombie companies below them that

can't make their debt obligations are

starting to blow up. I posted something

this morning from Kobesi letter on my

post in the community page about the

number of business bankruptcies already

this year and how high they are compared

to in the last decade. Okay. And it's

going to get keep getting worse. So

counterparty risk is basically means

fear that the other guy cannot pay you

back tomorrow. Okay. Um under normal

conditions

uh banks lend to each other and that's

deemed safe. But you know what? What if

the banks start asking themselves the

question, hey, what happens if the

borrower blows up tonight, okay, and the

collateral drops in value, the

collateral discussing collateral or lack

thereof in shows for the last month and

a half on the channel, okay? And then

what happens is the lender bank gets

stuck. Okay? So when banks start to fear

uh each other scenarios, a concern about

hidden losses,

private credit exposure. Okay. Now, I'm

not seeing anything directly linking the

use of the repo facility to the bank

specifically having private credit

stress fears u but that's because you

know it always comes out after the fact

oh this was apparent everyone saw this

coming right because they don't want

this to be put out there they don't want

to create panic okay but from my

perspective get I'd love to get your

thoughts and comments there is a

distinct reason why this is happening

now the use of the the repo facility by

these banks banks in mass billions of

dollars right in the last 45 days what

$75 billion almost $80 billion of uses

of the repo facility when the Fed's

announcing the end of QT okay so lenders

are uh potentially I mean let me explain

well I pulled up three examples by the

way of when this was a big deal and why

2008 uh Bear Stern's layman collapsed

the repo counterparty suddenly became it

says radioactive

2019 hedge funds unwound basis trades

lenders panicked about balance sheet

exposure but we have today today again

speculation but we know what's happening

in private credit um we have a lot of

those underlying asset problems and

collateral problems lurking in the

shadows so is that what's causing this

now uh let me explain that the Fed on

October 31st first. Okay. The same day

that the banks made the $50 billion uh

usage of the repo facility, the Fed

announced the end of its balance sheet

runoff. Actually, October 29th, 3 days

before that big uh run uh draw down. And

then December 1st, right, was when the

actual runoff stopped. Okay, the Fed

stopped um you know basically uh rolling

with phys the Fed will begin rolling

over maturing treasuries instead of

letting them expire. Okay, so curtailing

or stopping quantitative tightening.

What does this do? Why am I bringing

this to your attention now? Okay, when

the Fed slows the runoff of treasuries

from its balance sheet, here's two

things that should be happening.

reserves drain more slowly and that in a

normal functioning system should be good

for banks. Okay, it should it should

decrease the liquidity stress in the

system not increase liquid liquidity

stress. Okay, slower QT you know equals

okay more reserves less need for usage

by the banks of the standing repo

facility. Okay, so

this scenario if we keep seeing this

develop, if we see the repo facility

usage uh keep climbing while the

quantitative tightening has already come

to an end, it means number one reserves

are already too low. Banks may be

marking collateral down, okay? Kind of

behind closed doors in secrecy. Private

credit exposures maybe I would say they

are stressing balance sheets. Okay. And

you have this behind the scenes

quiet for now until it's not contagion

risk. Okay. Where the funding markets

get nervous. All right. So, um, guys,

give me your thoughts on what you see

here. And so, this t the tying is

private credit blowing up the, uh,

access by banks of the repo facility

most recently $25 billion just a few

days ago, and the Fed's end of QT. All

right, thanks for watching. Sorry bit

long today. Uh if you enjoy the content,

leave me a like, please subscribe,

please share thoughts uh and comments.

And with that being said, I will talk to

all of you soon. Bye.