A peculiar thing happened in financial markets this week; an oft-overlooked corner of Wall Street where banks and others go for billions of dollars in short-term loans was suddenly in need of cash. The Federal Reserve added liquidity for a fourth straight day to a vital corner of the funding markets, helping to further stabilize rates. Today’s tally was $75 billion through an overnight repo operation. That followed operations of the same size on Wednesday and Thursday, and $53.2 billion on Tuesday, with each of these prior agreements rolling off the morning after they’re completed. The chart below is a good way to visualize the capital injection of $275 Billion. 📈
In order to put this into context, let's perform a quick comparison. Bitcoin’s market cap is ~$181 Billion, and the entire cryptocurrency market is ~$270 Billion. Yes, that's correct; the FED injected more dollars into the money markets in the last 4 days then the entire cryptocurrency market. 😮 In addition, the FED plans on another $30 Billion weekly until October 10 according to MarketWatch. If we rewind time to 2008 we know the bailout package during the global financial crisis cost taxpayers $800 Billion. So the FED injected over a quarter of that amount just this week into money markets. Another 😮
Honestly, there is a lot to unpack here, but this is what’s important:
Why? The Fed took action after interest rates on short-term loans spiked in a sign that banks and other borrowers were running short of cash. While there was similar turbulence in the repo market in the period leading up to the financial crisis, economists say there's no need to worry this time, the financial system isn't about to seize up like it did in 2008.
Equity markets stayed resilient despite the injections, but again note this is how the cookie started crumbing in 2008, so it’s important to stay vigilant as an investor.
The global financial crisis was triggered by many poor decisions (mostly from bankers) but the deep selloff was due to poor liquidity in the credit markets. Liquidity is very important, and now we know the FED will act very quickly if needed.
Where did the injections come from? Literally and figuratively...thin air! The FED “prints” dollars and increases the money supply thus inflating the dollar.
Some economists are suggesting that the weekend attack on oil production facilities in Saudi Arabia could have played a role in increasing demand for cash by foreign banks with exposures to the Middle East.
While it’s alarming, it doesn’t seem to be an indication of market participants questioning each other's solvency, as was the case with the global financial crisis. More so the financial markets are getting used to less cash sloshing through the system due to stricter regulations (think Dodd-Frank Act). An example to note is that excess reserves are down 50% from all-time highs currently. This coupled with settlement on >$75B US gov’t notes/bonds sold last week, corporations withdrawing cash for tax bills, and the Saudi oil supply shock makes for a perfect storm for a shortage of cash.
In the meantime, Bitcoin grew stronger every ten minutes this week and hit a new all-time high in hash rate. That means the network is the strongest and most secure it’s ever been thanks to a huge influx of Capex spending by miners. Remember Bitcoins are earned not “printed out of thin air” by a sovereign government.
Onwards & upwards!
Bly 🏁
📊Charts of the Day📊
ATH!
Great breakdown…
🔥Tweets of the Day🔥
📰What happening; News that Matters📰
CME Group to Launch Bitcoin Options in Q1 2020
Chairwoman of House Committee on Financial Services Maxine Waters to Hold Crypto Hearing With US SEC Chairman September 24
Ripple Files Motion to Dismiss Lawsuit Claiming It Violates US Securities Laws by Selling Ripple (XRP)
Iranian Government Proposes Annual License Renewal Policy for Bitcoin and Cryptocurrency Miners
City of Dublin to Introduce Blockchain-Powered System for Digital Identity Program
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