Last Time This Happened, The Fed Printed & Gold Soared (Liquidity Crisis In US Financial System)

Summary

In this video, Smart Silver Stacker discusses a brewing crisis in the US financial system, triggered by rising reliance on overnight lending and the Federal Reserve’s shrinking balance sheet. He highlights the risks of liquidity shortages and the potential consequences of the Fed's failure to intervene, using past events like the 2019 repo market crisis as a reference. With rising US debt and geopolitical tensions, including the possibility of foreign institutions selling US treasuries, the situation could soon require the Fed to inject liquidity again, further affecting gold and silver prices.

Takeaways

• 😀 Silver is currently experiencing a rally, with prices over $33 and room for further growth as indicated by the RSI of 55.
• 😀 Gold is also on a rally, nearing $3,400, and could continue its rise depending on the outcome of the Federal Reserve's FOMC meeting.
• 😀 The Federal Reserve's decisions, particularly the language used by Jerome Powell, will likely influence the continued rally of precious metals.
• 😀 The market is focused on trade wars, stock markets, and the NASDAQ, but a potentially more critical financial crisis may be unfolding behind the scenes.
• 😀 A brewing liquidity crisis in the US financial system is linked to concerns in the repo market, with reserves being drawn into the overnight lending facility.
• 😀 The 2019 repo market crisis, triggered by a spike in overnight interest rates, required the Federal Reserve to inject liquidity, highlighting vulnerabilities in the system.
• 😀 The Federal Reserve’s balance sheet expansion and contraction since 2008 has been tied to periods of economic stress, including the 2019 repo crisis and COVID-related interventions.
• 😀 The most recent data shows that the volume of overnight lending has reached a concerning 94% of total bank reserves, signaling a fragile liquidity environment.
• 😀 A potential liquidity crunch could occur if overnight lending exceeds bank reserves, forcing the Fed to intervene, which could trigger a financial crisis and a freezing of credit.
• 😀 US Treasury debt issuance is rising, and geopolitical tensions, including potential foreign sales of US treasuries, are compounding the financial stress, increasing demand for collateralized loans.
• 😀 Investors are overlooking the brewing liquidity crisis while focusing on other factors like trade wars and stock markets, potentially missing the bigger risk that could impact the economy.

Q & A

What is the current trend in the silver market?

The silver market is experiencing a rally, with the price rising above $33. The Relative Strength Index (RSI) is around 55, indicating that there is still room for the price to continue rising.

How is gold performing in the market right now?

Gold is also experiencing a rally, trading close to $3,400, up over $60 on the day. It is near the highs of the day, showing a positive price movement.

What will determine the continuation of the rally in precious metals?

The continuation of the rally in silver and gold will likely depend on the Federal Reserve's decisions in the upcoming FOMC meeting. Investors are particularly focused on the language Jerome Powell uses in his press conference, which will give clues on future monetary policy.

What is the current expectation regarding the Federal Reserve's interest rate decision?

The CME Fed Watch tool suggests a 95.5% chance that the Federal Reserve will not cut interest rates in the upcoming FOMC meeting. However, the market will closely watch Powell's remarks for hints on future policy.

Why is the situation in the US repo market a concern?

The US repo market is showing signs of stress, with a record 94% of bank reserves being absorbed by repurchase agreements. This indicates a fragile liquidity situation, which could lead to a crisis if it continues to escalate.

How did the 2019 repo market crisis unfold, and how is it related to the current situation?

In 2019, there was a spike in overnight lending rates in the repo market due to liquidity issues, which led the Fed to inject $75 billion into the market. The current situation resembles that of 2019, with a high percentage of reserves being drawn into repos, signaling potential liquidity problems.

What role did the Federal Reserve's balance sheet play during the 2019 repo crisis?

In 2019, the Federal Reserve's decision to return to balance sheet expansion was critical in managing the crisis. The Fed had been shrinking its balance sheet before that, but the repo crisis forced them to inject liquidity back into the system.

What are the current trends in the Federal Reserve's balance sheet and reserves?

The Federal Reserve has been shrinking its balance sheet through quantitative tightening (QT), reducing liquidity in the financial system. This has also led to a decrease in bank reserves, which has created a tighter liquidity environment.

What is the significance of the 94% figure in relation to the repo market?

The 94% figure refers to the proportion of bank reserves being used in repurchase agreements. This is concerning because it is much higher than the 86% seen during the 2019 crisis. If this ratio reaches 100% or higher, it could lead to a spike in overnight lending rates and trigger a financial crisis.

How might geopolitical factors, like the trade war, impact the US financial system?

Geopolitical tensions, particularly the trade war, have led to uncertainty in the financial system. For instance, foreign governments, like Japan, have discussed selling US treasuries, which could further strain liquidity in the markets and increase the demand for debt monetization by the Federal Reserve.