Almost 80% of the borrowing to carry leveraged amounts of treasury securities by dealers, banks, and hedge funds comes from repurchase agreements (the two trillion dollar repo market), which requires nominal equity. However, if repo rates spike, the carry costs become too high and leveraged investors have to dump treasuries. This can cause a domino effect which can result in an existential market crash.
The September spike in overnight lending rates revealed the economy had become dependent upon QE 1,2 and 3. Fed tightening in 2018 and 2019 caused a lack of liquidity in the banking system. From September until the turn of the New Year, the Federal Reserve came to the rescue and injected over $500 billion into the repo market in the form of short term repo loans and the purchase of short term treasury notes.
Lowered interest rates and an expansion of the Fed's balanced sheet has caused a surge in stock market equities. The Dow has climbed approximately 1,300 points. The Dow, S & P 500 and NASDAQ are making new highs. A Powell put resulted in a risk on investment sentiment, and gold prices slumped and consolidated, as risk fears have declined. Some analysts believe stocks have become overbought, and gold has become oversold.
One problem is that $280 billion in temporary repayment agreements are set to be repaid in January, 2020. In addition treasury bills purchased by the Fed must be repaid by the treasury. The Fed is scheduled to stop temporary repurchase lending in June of 2020. This will cause a sharp reduction in the Fed balance sheet in January and the first six months of 2020. Many expect interest rates to rise and the juiced stock market to end. The problem with money injections and opioid use is that the system easily becomes dependant, and even craves more. Withdrawal can be painful. Diluting money is unbiblical, "You shall do no injustice in judgment, in measurement of length, weight, or volume." Leviticus 19:35. If the Fed continues repo lending in perpetuity, or begins purchasing long term treasury bonds, we could expect price bubbles, and inflation to spike. The Fed appears to be in a box with no exit in an election year. I am long Gold Resource Corp (GORO).
