28 Responses

  1. FRIST!

    Brent, if you were FR Chair, would you start ratcheting interest up? I know you are unconvinced that the Fed is causing an asset bubble [yet], but isn’t the danger becoming apparent?

    Considering “equilibria” principles, shouldn’t interest rates be a couple points higher, generally?

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      • Scott, on line, it looks like if I am, say FoMoCo, I agree to issue you 10K shares of FoMoCo from the Treasury at $X/share now and agree to buy back at $1.1X/share 366 days from now. So if that’s right, its like collateralized debt, sort of.

        1] Is that an example?

        2] What are real world examples?

        3] Is this done with traded stock as opposed to new issue?

        4] Help.

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        • Mark:

          Sorry, I have been out since this morning, only just now seeing your question. Looks like Brent answered your questions, re reverse repos.

          In my world, the world of interest rate derivatives, we use repos and reverse repos to finance or manage US t-note positions which are used to hedge our interest rate risk on swaps. So, for example, if we do a 10 year swap where I am paying a fixed rate and receiving 3m libor, I can hedge most of the rate risk by buying US treasury notes. But since the T-notes are only a temporary hedge, and I have no interest in holding them to term, I finance the purchase of them via a repo. I buy the notes with next day settlement. Then the next day I go out and repo the notes, basically agreeing to borrow money overnight to finance the purchase of the notes, while putting up the notes I just bought as collateral against the borrowing. I can do this repo for any number of terms (overnight, 1m, 3m, etc) but generally, since I do not know how long I will hold the notes, I will do an overnight repo every day until I no longer need the hedge and sell the notes.

          Alternatively, if I receive fixed and pay libor on a swap, I will sell notes as a hedge. In that case I need to do a reverse repo, ie lend money in exchange for getting the notes as collateral. Once I have the notes, I can deliver them to the person I sold them to, using the proceeds from the note sale to lend to the person putting up the notes as collateral. Again, I will generally do this on an overnight basis until I no longer need the note hedge.

          Just to be clear, regarding your exact question, the term “repo” is short for “repurchase agreement”. Strictly speaking a repo involves selling a particular kind of security (in my world, treasury notes) today and agreeing to buy them back, ie “repurchase” them, at a pre-agreed price on a given day in the future. For all practical purposes all this means it that one is borrowing on a collateralized basis for a given term and, if you do the math, at a given rate. A reverse repo, then, is simply the opposite side of this transaction, buying the collateral today and agreeing to sell them back in the future, or essentially lending on a collateralized basis.

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        • Mark – are you troubled at all by the recent revelations regarding Lois Lerner and the IRS?

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        • Mark – are you troubled at all by the recent revelations regarding Lois Lerner and the IRS?

          Yes. Separately, I think Lerner has attempted “spoliation”; I suspect unsuccessfully. If she was successful, all presumptions in any civil matter should be against her.

          My dealings with IRS over the years have always required hiring recent former supervisors now in private tax consulting practices to run interference for clients. The IRS is so compartmentalized that the left hand does not know what the right hand is doing. Even written agreements from local agents with authority are often ignored by another office. Former Asst US Attorneys who represented IRS in criminal cases are quick to tell me that the quality of response and responsibility is dependent on which office and which agent one is dealing with. The personal fiefdoms are legion. While this is not new to the BHO Admin it has been gradually worsening since computerization, when it should have been rather quickly getting better! My sense is that it is about the same as under GWB, but it surely is worse than under everyone who preceded GWB, going back to RMN and LBJ, under whose tenures the IRS was used as a political tool.

          I am not ready to say IRS is being used as a political tool now because I haven’t seen it at the local level – but I do not at all preclude that possibility. If it is not being used as a tool but the Lerners are picking and choosing who to slow track to exemptions based on key words that are ID’d with conservative groups, that has the same functional effect. I would not be surprised to learn that experiences vary from office to office. My experience with the personal fiefdom mentality at IRS permits me to consider the notion that the buck may well stop below the Department level.

          And thanx for the further explanation of repurchase agreements. I will have some more questions later. One for now: is this ever done with “treasury” stock as a method for financing by a publicly traded company?

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        • Mark:

          If it is not being used as a tool but the Lerners are picking and choosing who to slow track to exemptions based on key words that are ID’d with conservative groups, that has the same functional effect. I would not be surprised to learn that experiences vary from office to office.

          I’m pretty sure Lerner was the director of the Tax Exempt unit at the national office of the IRS, which means that, to the extent that she is involved in targeting conservative organizations, it is definitely not just a local office problem. Which indicates to me that, if she was not simply acting at the behest of the Obama admin, the bureaucracy itself has become an actual political participant with an agenda and will of its own. That, to me, is far more troublesome than if the IRS was being used by the admin to pursue political ends, which of course is itself troublesome enough. I really don’t understand anyone other than the most partisan of advocates for the left isn’t outraged by what seems to be going on at the IRS. This really should be a huge national story, and the fact that it isn’t is an indication of just how partisan and corrupt the media is.

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        • Mark:

          One for now: is this ever done with “treasury” stock as a method for financing by a publicly traded company?

          I honestly don’t know. The repo market I am involved in is almost exclusively an interbank market, but it makes perfect sense that corporations seeking short term funding would utilize any treasury stock it might have to access cheap funds, especially in an environment in which t-notes are in huge demand, producing a negative repo rate. They can essentially get paid to borrow money.

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  2. Fuck them, they’re complicit.

    http://www.latimes.com/business/la-fi-anthem-suit-20140710-story.html

    I hope it bankrupts them.

    No mercy for collaborators.

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  3. @Mark, If I was the Fed Chair, I would be real cautious raising rates but I would end QE immediately, and I would also not be rolling over maturing debt. I think we first have to figure out what the “market” long term interest rate is, let that settle in, make sure nobody blows up, and then start talking about increasing short term rates.

    IMO, you aren’t going to get inflation until you get wage growth. As long as wages are rising at a sub 2% pace, inflation is not a worry. So I wouldn’t even think about raising rates until I start seeing 3% – 4% increases in average hourly earnings..

    Re the repo market, it is basically just a secured loan. Instead of being structured as a loan with an interest rate, it is structured as a sale at 98 cents on the dollar and and then a repurchase price at par. If the borrower defaults, the bank satisfies the loan with the collateral. Of course there is extra collateral for the loan (basically called a haircut) that gives the bank a margin of safety if the borrower gets into trouble.

    Real world example: A mortgage REIT has $100 million to invest in government-backed MBS. They can buy $100 million of MBS, and then borrow $80 million against them and use the proceeds to buy more MBS. So now, they have $180 million of MBS earning interest versus $100 million of equity capital. And they could repo some of the $80 million they just bought and unlock more buying power. A typical REIT could do this many times over – in fact repo lines are the typical way they do things. Some try and raise permanent capital (i.e. a 7 year bond issue), but these are expensive. Most prefer to lever their balance sheet with repo lines. As the mortgages generally get more expensive, they will start selling off MBS and repaying their repo lines. This has the effect of increasing the equity they hold, which lowers their exposure. Conversely, they will lever up when MBS are cheap. Repos allow them to quickly increase and decrease exposure. The advantage to doing it this way: Much cheaper than a 7 year bond. Disadvantage: Repo lines typically last a year, so if there is a financial crisis, the bank may refuse to renew your repo lines.

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  4. IMO, you aren’t going to get inflation until you get wage growth. As long as wages are rising at a sub 2% pace, inflation is not a worry. So I wouldn’t even think about raising rates until I start seeing 3% – 4% increases in average hourly earnings..

    Not sure I agree with this. Energy prices (despite a glut), food prices and the price of metals are high and keeping increasing. If they were included in inflation calc like they used to, we’d *see* it. Consumers, at least lower wage consumers *are* feeling it.

    The currency debasement is causing this inflation and it’s the new normal.

    The Fed isn’t going to really raise interest rates with this much debt and deficit.

    IMO of course. Drug sales has prepared me to pontificate, at length, on Macro Economic issues.

    You’re welcome.

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  5. True, but if commodity prices increase without wage increases, the effect is recessionary, as people have less disposable income. Demand falls, and commodity prices fall. Not inflationary.

    Inflation is done through the wage-price spiral. Commodity prices increase, workers demand (and get) higher wages, which increases demand, which increases prices again. Workers demand (and get) higher wages and the cycle begins.

    That is why it is all about wages…

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    • Brent, thanks for that real world example. Sounds like a relatively safe way to leverage.

      The article talked about overnight rates and I assume overnight transactions. Would that be bank-to-bank?

      And thanx for your take on the Fed. It sounds right to me, but I would adopt your take over what sounded right to me.

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  6. Good write up on the potential Detroit bankruptcy final deal.

    http://www.freep.com/article/20140710/NEWS01/307100123/Orr-Detroit-bankrutpcy-Miller-Buckfire

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  7. Bloomie’s knowledge of this country makes him the PERFECT person to spearhead the anti-2nd Amendment effort.

    THIS is how you win converts.

    “The NRA went after two or three state Senators in a part of Colorado where I don’t think there’s roads. It’s as far rural as you can get. And, yes, they lost recall elections. I’m sorry for that. We tried to help ‘em. “

    http://m.nationalreview.com/corner/382418/michael-bloomberg-people-colorado-might-second-amendment-they-dont-even-have-roads

    I’ve thought about it and I think his problem is that he cares *to much.*

    Wipes tear from eye.

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  8. Thanks Brent!😄!

    (Know it all smart ass.)

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    • Yesterday yello linked to an article about a study claiming that children being raised by two homosexual parents are more gay happier and healthier than their counterparts being raised by traditional, heterosexual parents.

      Turns out the study was 1) comprised of a “convenience sample”, which means it was self-selected, not random, and 2) relied on self-reporting by the parents questioned in the study.

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      • And was led by a homosexual researcher … no agenda there. Where is the firestorm of critics demanding that the authors be reprimanded for such shoddy and biased research? Where is FB to tell us we just don’t understand things like sampling?

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  9. DONT SHIT ON IT, WINGNUT!

    SCIENCE IS SCIENCE!

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    • McWing:

      SCIENCE IS SCIENCE!

      Like so much else, the left has totally perverted the meaning of that word, too.

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  10. Brent, I’ll look into why you’re not able to post your report. I’ll try to contact both Hover (I still own the domain name) and WordPress on your behalf. It may not be until next week though as I’m pretty busy right now. Do you check the email associated with wordpress? I’ll contact you that way if I find anything out and may need to ask you some questions or something.

    You can contact me at plumgirls10@yahoo.com if needed.

    I’m sure everyone here misses your reports.

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  11. Lulu, looks like they fixed it. I just had the “beep beep boop” screen for a few seconds and then it went to a new post. Before it would just sit on the “beep beep boop” screen.

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  12. Fantastic Brent. I may not participate here, but I do look forward to your morning reports, especially anything pertaining to real estate!

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  13. Mark, I actually thought the IRS improved for while under Clinton’s commissioner, Charles O. Rossotti.

    http://en.wikipedia.org/wiki/Charles_O._Rossotti

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    • JNC, I don’t remember which year it was during the WJC Admin that they first claimed everything on file in one office was apparent to every other office… BUT IT WASN’T. There is a complaints handling section that seemed to work under Rossotti better than it has since.

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