Editorials

Credit Suisse Warns of Year-end Repo Spike and Stock Market Crash

Credit manger Zoltan Pozsar with Credit Suisse predicts a bank liquidity crisis caused by a year-end scramble for reserves will cause the Fed to start a fourth round quantitative easing before year's end.

Pozsar believes the Fed will shift from purchasing short-term Treasury debt and expand into longer duration and more aggressive balance sheet expansion. The Fed's liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn.  "If carry makes the world go around, and reserves makes carry possible, the day we run out of reserves would be the day when the world would stop spinning" Pozsar states.  He believes a year-end spike in repo rates will cause hedge funds to dump treasury coupon bonds and draw money from the equities market.  He believes this will force the Fed to implement QE4 by year end. 

However, the Fed just announced it will dramatically increase intervention in the market in an attempt to avoid a repeat of September's alarming rise in short-term borrowing costs.  The Federal Reserve will pump almost half a trillion dollars into the financial system over the end of the dear. The new plan includes overnight lending across New Year totaling $225 billion and $190 billion in longer term repo loans, starting next week.  That is expected to provide cash to borrowers into 2020. Together with $75 billion of cash already provided to the market, the Fed will have $490 billion in lending outstanding over December 31.

The problem is the deficit is projected to exceed $1 trillion again in 2020.  The Treasury will need to issue a wall of new treasuries when hedge funds and treasury dealers will be repaying $500 billion in repo loans.  Many believe the Fed will be forced to monetize the growing national debt and start QE4 in 2020.  E.B. Tucker, director of Metallic Royalty and Streaming says as long as the monetary base keeps growing, gold prices will keep rising. . Tucker is calling for gold to exceed $1,900 in 2020.   Dutch bank analyst Georgette Boele believes easy monetary policy and low interest rates are here to stay and they will support gold prices in the long term.   I am long Gold Resource Corp. (GORO)
 

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