Geometric Thinking Update

By Jim Fredrickson

This chart, or one like it, has been seen countless times by anyone that takes even a cursory look at the business section of any newspaper or website.  It does not take an economist to realize that this ends only one way.  Badly.

Less understood is the talk since September of a repo-market crisis.  I understand most people get glassy-eyed when they hear terms like that.  It is really not complicated though.

Banks lend to other banks ‘overnight’ all the time (every day). Some banks have excess cash in the vault, and want to earn interest on it, others have a shortage and need to borrow that money overnight.  Easy to understand right?  (Overnight is a literal term.  The loaned money is returned in the morning.)  This overnight bank-to-bank lending market is called the “repo-market”.

So what happened in September?  Repo-market interest rates skyrocketed and the Fed has been pumping some $50 Billion/month into the market ever since in a so-far failed effort to control the situation.

Why did the interest rate sky-rocket???   

Is it:

A) because the biggest banks in the world no longer have any excess cash? 


B) because the biggest banks are now afraid to lend their excess money to other banks, even for the very short period of overnight???

Either answer is possible, and both are quite frightening.  If none of the big banks have excess cash anymore, that means a 2008 repeat (on a much larger scale) looms. 

If banks are afraid to lend to other banks overnight, (i.e. they are afraid they won’t get paid back in the morning), then they know something about the current state of affairs which you and I have not been told. 

Hence, either answer, A or B, suggests that a 2008 repeat on a larger scale is likely on the horizon.

That wasn’t so hard to understand was it?  I wonder why the main stream media has not made the situation so clear?  

Be smart.  Be original.  Try to stay a step ahead of the crowd.  We live in interesting times.

Hence, either answer, A or B, suggests that a 2008 repeat is likely on the horizon.

This is not financial advice, just words of wisdom from someone who has seen it all over the past few decades.  Do with it what you will.  Happy Trading! is a must-have tool in this business.  Get an account, if you haven’t already.

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