I’ve written a bit about, and mentioned in a recent video, the massive challenge the Fed is facing in the repo market; the market where financial institutions take care of their short-term cash needs. I.e., for a variety of reasons, the Fed has had to recently, and aggressively, inject hundreds of billions into what is essentially the plumbing of the financial system — to keep its pipes from clogging. Hmm….
Of America’s largest financial institutions, JP Morgan is the one most intimate (as it’s the largest “primary dealer” in the repo market) with the present goings on.
Here’s macro strategist Raoul Pal’s take on a very interesting move JP Morgan recently made in its own portfolio:
“Watch what JP Morgan does, not what JP Morgan says…
….the largest balance sheet in the US is shifting away from cash and into bonds. JP Morgan has moved $130bn out of the money markets and into long-dated bonds, whilst at the same time reducing their loan book by 4% (a significant amount).
This is a risk-reduction strategy and demonstrates a clear expectation for a bullish steepening of the yield curve, i.e., rate cuts and recession.
Just remember, JPM has real-time bank account spending and credit card data on all 56 million American account holders. If anyone knows ahead of time whether a recession is coming or not, they do. Owning the long end will give them capital gains and yield.“
Well, I sympathize with Raoul’s position that this is a clear sign that JP Morgan sees potential trouble ahead; and while, in the above, he doesn’t specifically point to repo, that’s $130 billion it’s taking out of play.
What Raoul didn’t mention, but, in my opinion, should have (if he thought about it), is that this move — by reducing its loan and increasing its bond exposures — also effectively reduces JPM’s G-SIB (global systemically important bank) score, which lowers a related regulatory surcharge,
Whether this is an all-out under-the-surface recession call (as Raoul is implying), or simply a hedge (a big hedge!) just in case, and/or a maneuver to reduce its G-SIB surcharge remains to be seen. Time will tell…
For more on repo: I came across this video produced by the Wall Street Journal; while it merely scratches the surface in terms of all that presently threatens the financial system’s plumbing, it does a good job with the basics…