Sunday, December 29, 2019

Repo Market Madness - Liquidity to be increased to 500 billion

What is happening in the Repo market must worry us. The Repo market is meant to be just a clearing house for banks and financial institutions without the Federal Reserve actively intervening.

If there was only one bank in the system and it must maintain a 10% reserve ratio, then it must keep 10% reserve of its' total loan value with the reserve bank. Of course there are more than 1 bank in the economy and during the course of a days trading some may lend out more than the 10% reserve ratio mandated and some will lend less. At the end of the day the banks that lend more will borrow from those that lend less in the Repo market at the market interest rate overnight so that the total reserve ratio of all banks together is 10% or less. This is how the Federal reserve controls the amount of money and therefore debt creation in the system. ( see hidden secrets of money )

If the Federal Reserve have to intervene, then the system is broken. On September 16 2019 the Federal Reserve had to intervene pumping 21 billion into the Repo Market. Had it stop there, that would have been OK, it would have just been a hiccup in the system. But the intervention continued and increased unabated. ( see George Gammon explanation )

The system is broken, something is definitely wrong, but what? There have been no official explanation and much speculation. One plausible reason is rehypothecation. ( what is happening in the repo markets ) It is most likely a combination of several factors including funding the budget deficit which is expected to exceed 1 Trillion dollars. Roughly 100 billion a month or 25 billion weekly. Interestingly the current funding into the repo market since September 16 is just over 400 billion or roughly 25 billion a week.

The amount of support by the federal reserve into the repo market can be tracked by looking at the Federal Reserve balance sheet. Since September 16 it has increased from 3.769 to 4.165 Trillion. How high can it go. More important is when and how the Fed exits the Repo market.

Implications of QE

QE is basically printing money and pumping liquidity into the system. In 2008 it was used to bail out the banks by buying their non performing mortgages and pumping fresh capital into the banks. There is no evidence of mortgage default this time so what is it that the Federal reserve is covering up?

Funding old debts is not inflationary as the money has already been spent. However, if the Fed is financing this new liquidity crisis with new money, the result could be inflationary which will mean higher interest rates.

It is hard to fathom higher interest rate being an allowable scenario as the government debt is already at 24 Trillion with much of that debt being rolled over every six months. Not to mention the adverse effect it will have on the economy pushing it into a recession and possibly depression. How then will this circular cause and effect situation ends is anybody's guess.

Fact is that we are already in a growth period for 12 continuous years without a recession which means an ever higher asset bubble that has never been allowed to correct. The situation must correct eventually as the effects of QE become less effective until it is gone.

The effects of the crash when it comes will be worst for the poor and those that can least weather the storm.

Protecting oneself

All the analysis above is depressing if we don't have a way to protect ourselves against this calamity. The stock market is not a refuge. It is already in a bubble as all the money printing is finding its' way there.

For the rich there is of course gold and other precious metals. If you are financially tight then a small investment in BSV ( Bitcoin SV ) would be the best bet. I have chosen BSV because I believe that it is the real bitcoin. It will eventually replace BTC and perhaps exceeds the current price of BTC. 1 BSV could be worth more than $10,000 within 2 years all because it can scale and be used in many applications that requires micro transactions.

This is of course just my opinion.

Hidden secrets of money episode 4

Repo market - George Gammon

What is happening in the repo markets

This article has been permanently written and timestamped to the BSV blockchain

Thursday, December 12, 2019

What is happening at the Repo markets.

What is happening at the Repo market?

Rehypothecation - The process by which someone pledges an asset for a loan but it has already been pledge for another prior loan. Strange but it seems that this practice is allowed and common among hedge funds, banks and financial institutions. It is also possibly the source of the problem manifesting in the Repo market.

The Repo Market - There are 3 players in the Repo market. The main banks, qualified financial institutions and the Federal Reserve. Banks and financial institutions have to maintain a minimum deposit held at the reserve bank in proportion to their loan portfolio. At the end of the day banks and financial institution lend to each other to keep the system in balance. This system works well and has been working perfectly without the participation of the Federal Reserve since the financial crisis of 2008, that is until September 16 this year, when the Repo rate hit 10%. The Reserve Bank stepped in to provide liquidity and calmed the markets. Since then they have provided 300 billion in short term liquidity.

What happened on 16 September 2019?

Even though some banks had ample reserve deposited at the Reserve Bank, they were unwilling to lend to other institutions as per usual, because they did not trust the "existence" of the assets (treasury bills) that were offered as collateral. They suspected that something was not right.

In overnight lending at the Repo market, the securities are only promised and not actually transferred. So in theory the banks trusted one another to deliver if needed. This trust evaporated on September 16, and borrowers had to offer ever higher interest rates or better securities. Borrowers had to have this money or they will be in breached of their lending ratio. ( Similar to exceeding your bank overdraft limit and the bank request that you deposit money to bring the overdraft under the limit immediately. You have to comply at whatever the cost or your cheques will bounce and your facility terminated. )

The banks knew something and they were unwilling to lend to one or some institutions at the standard Repo rate or perhaps at any interest rate! The only option left for those institutions is the Federal Reserve. Attempts were made to discover the identity of the institutions concerned but the Federal Reserve have block these requests. It seems that they do not have to disclose this information for 2 years.

So now, only the Federal Reserve is able and willing to lend on the promissory notes of the financial institutions affected and to this effect they have printed and loaned out 300 billion on a "temporary short term" basis. This problem is only growing is not going away anytime soon. The Federal Reserve will have to stop pretending that this is short term and actually "bring" those assets into their balance sheet permanently. But there is a problem. These assets don't exist and they do not know how large the problem is. It is at least 300 billion and growing.

In 2008 under QE1 they actually bought the toxic mortgages (Mortgage Back Securities) from the banks and financial institutions giving them fresh liquidity. ( This is similar to a company in trouble transferring or selling the bad debts or dead inventory in their books to another party. ) They actually cannot do the same with treasury bills this time, because the treasury bills don't exist! The banking system has no way of tracking how many institutions have claims to the same securities. Speculations are abound that it is as high as 3 dollars promised for every dollar of treasuries issued! Surely not! But the fact remains that there are no assets for the Federal Reserve to buy. The only option is permanent Repo market operations until they figure this out how large this problem is.

When the tide goes out we will know who is swimming naked.

Under normal circumstances, if a bank borrows on the Repo market from another bank, it will repay the other party with excess money from it's daily operations such as interest received, loan maturities and daily deposits, and take back their promissory note.

However if other banks sense that a particular institution is in trouble then they would require a higher interest, better securities or just refuse to lend. That institution will then have to go to the Federal Reserve window for funding and everyone will then know that, that institution is in trouble and no other banks will be willing to lend on their promise to pay, backed only by securities of doubtful value, as in the case of Lehman Brothers in September 2008.

If circumstances were normal then the failure of a single institution will be just that. However circumstances are not normal. The problem has only grown larger. The Federal Reserve have expanded overnight lending and also refuse to name the institutions involved. The likely scenario is that it is a systemic problem. All the banks and financial institutions are involved no one knows the extent of the rehypothecation. It is at least a 300 billion problem and growing!

How does this end ?

The Reserve Bank cannot keep renewing and extending the lending in the Repo market. This situation must be made permanent sometime and soon. If the treasuries are non existent, then the problem is even worse than 2008. The Federal Reserve can't even pretend to hold these assets in heir balance sheet as they do not exist. It has to be written off. The financial institutions involve declared insolvent and made bankrupt.

But alas the problem is again too big and involve institutions too big to fail. WE HAVE A HUGE PROBLEM. The solution will affect the value of the US dollar and by implication the world economy as the US dollar is the world's reserve currency.

How do we protect ourselves ?

The only way is to hold on to cash, precious metals, collectibles, blue chip companies and perhaps even cryptos. Any asset that does not carry a counter-party risk. Blockchain is a very young industry and we do not even know which crypto will ultimately prevail. My bet is on Bitcoin SV but that is only a personal opinion.  Good Luck. Hold on to your seats there is turbulence ahead!


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Monday, December 9, 2019

Tom Lee Interview Craig Wright And Jimmy Nguyen - Big Win For BSV

The best informative and contextual interview every about the crypto space and especially BSV.
Notice that Tom Lee had a nonchalant attitude from the beginning but as the interview got into the 20th minute his body language and posture towards Craig and Jimmy got warmer.

Fact is that Tom Lee gets that he is speaking to two people that understands the world that he comes from. That is the world of investors and him being a conduit. His job is to give good and valuable advise to the world and his clients.

Tuesday, December 3, 2019

BSV Is The Real Bitcoin

Disclosure. I am invested in BSV and have been with BSV ever since it forked away from BCH.

The reason I chose BSV was because I have always believed that Craig Wright is Satoshi. Refer to my previous article ( )

My conclusion there was that it mattered because if he is Satoshi and if you are invested in other blockchains then you stand to lose some or all of your investments. Well is he Satoshi? After all this time, are we any wiser? Let us examine what has transpired.

Craig says that BSV can scale and scale massively. We can clearly see this happening and gathering momentum daily. Track these 3 metric.

1) Transaction count. Since 10th November transactions have passed BTC and the gulf will now continue to widen.

2) Sent From Addresses.  This measures the number of active users and it is now consistently above BCH. As more applications come online on the BSV blockchain we can expect the line to pass BTC as well.

3) Applications on the BSV blockchain.   Earlier on the detractors were cynical that the only use for BSV was a weather app. If you point to this fact only, without qualifying that BSV has only been alive a few months, it is disingenuous. Today there are 4 such similar apps all writing real data to the BSV blockchain for storage, and later retrieval, as a business model. The mass adoption use cases have not materialised yet and many are in closed beta. We should see huge growth after the genesis upgrade in February.

4) The genesis upgrade will most importantly set the protocol in stone and then also allow for unlimited blocksize.

Why don't he prove that he is Satoshi?

Well he did. It is just that many chose not to believe or accept for selfish reasons of their own. Biggest ask is that he sign a transaction with the original keys. Well this only proves that he has those keys not that he is Satoshi. Satoshi will know every aspect of how, why, when and with whom he created Bitcoin. He has to have the background and knowledge and personality to be able to piece these together in order to create Bitcoin, because it is a hard problem. It a problem which when solve is worthy of a Nobel prize. If you need prove just check his explanations against everything you know about Bitcoin and it's timeline. Examine the trivial details that he reveals because if you set about to fabricate a story you will not drill down to the details and you will often contradict yourself in different retelling of the story.

BSV is focused on usage.

For any crypto to gain value, it has to be useful. For it to become useful it has to be widely used ie it has to scale. BSV can scale, and the most significant use of this is the tokenisation of national currencies. Many countries are planning digitisation of their national currency.Most are planning launch on their own private blockchain. This just bring us back to the intranet and internet argument of the 80's and 90's. Tokenisation on a private blockchain is comparable to the intranet. Tokenisation on the BSV blockchain is akin to building on the internet.

The BSV public blockchain is where cutting edge development in blockchain technology will be taking place.  As the BSV protocol will be set in stone, after the genesis update, developers building on BSV will not have to waste resources, rewriting their application everytime that the protocol is modified. This guarantees longevity, security and eliminates the cost of running and maintaining a less secure private blockchain.

Craig Wright and nChain

nChain is well staff and funded to further the development of the BSV base layer protocol. They are putting in the plumbing for others to build on. In a relatively short period of time there are now numerous tools available for developers.

On top of this nChain through Craig Wright, are building a large trove of patents free to use on the BSV blockchain. The significance of this will be more apparent going forward as developers on other blockchains come to realise that they have to pay a licence fee to use. It is a departure from the current practice of copy and paste code at will for free. Call it selfish or whatever but that is going to be the reality. If any of these patent turns out to be a chain breaking technology than all other blockchains will die.

The halvening

By May 2020 the block reward subsidy will halve to 6.25 coins. The estimated break even cost of mining is about $5000 per block. If true and the price of BTC does not rise then miners on the BTC chain will leave. The chain death spiral scenario looms. If the current bearish sentiment persist, the situation will become volatile to push prices down even further.

Bitcoin was designed for fee to replace block reward. Unless Bitcoin scales massively this will not be possible. Only on BSV is this problem being addressed. Whichever chain will survive and thrive will surely play out by the halvening.

So why is the price of BSV so low.

We should not be fixated on price. The price of BTC fluctuated from between $20,000 and $3500 in the last two years just on speculation. Also in play is the position of people heavily invested in BTC. They have huge balances in all the major exchanges and are in a position to defend the price of BTC until they can't. That is when BSV user base grows with usage and adoption from the wider community. App developers are focused on users using BSV without them knowing that they are. This means using BSV in the background only, invisible to the user.

It will be difficult for BCH to survive the halvening. There are hardly any transactions occurring on the BCH chain meaning that fee based revenue will not be available for miners. The existence of both BTC and BCH are threatened by the rise of BSV.

The price of BSV on the other hand have and will grow over time as it's usefulness grows.