Banking Liquidity Crisis Shorts Consumers

Two weeks ago I wrote of the Federal Reserve pumping billions of dollars into the banking system to sustain repurchase agreements in an effort to create enough liquidity for itself and primary dealers (the top 24 Wall Street firms that do business with the Federal Reserve). The Federal Reserve continues to this measure, but now the effects will be felt at the consumer level. Furthermore, analysts across the board have agreed that the demand for funding liquidity will likely remain high as we go into quarter-

end and banks conserve cash on their balance sheets to meet reporting requirements.

In the finance world there are three basic types of liquidity: market liquidity, funding liquidity and accounting liquidity. Interestingly, in today’s market we are seeing the use of not one but two forms of liquidity: funding liquidity and accounting liquidity. Funding liquidity is the ease of earning outside funding (in this case from the Federal Reserve). Accounting liquidity is the financial health of a company’s balance sheet against other liquid assets like cash or gold and silver. This type of liquidity becomes important as we approach the end of the fourth quarter, which is when companies buy their stock back to prop up share price.

In general, economists consider a market to be liquid if it can absorb trades for liquidity or repurchase agreements without drastic changes in its value. Let’s see how we fare…

According to Pam and Russ Martens in an article for Wall Street On Parade, “JPMorgan Chase is the largest bank in the United States with $1.6 trillion in deposits from more than 5,000 retail bank branches spread across the country. When it withdraws liquidity from the U.S. financial system, that has a reverberating impact. According to the filings that JPMorgan Chase makes annually with the Securities and Exchange Commission (SEC), since 2013 JPMorgan Chase has spent $77 billion buying back its own stock. That includes the whopping $17.01 billion it has spent in just the first nine months of this year buying back its stock.”

Are you ready for the disturbing part? According to the SEC filings, JPMorgan is partly using federally- insured deposits made by all consumers across the country to prop up its share price with buybacks. The same article quoted the filing:

“In 2019, cash provided resulted from higher deposits and securities loaned or sold under repurchase agreements, partially offset by net payments on long-term borrowing…cash was used for repurchases of common stock and cash dividends on common and preferred stock.”

In September, the repurchase agreements jumped from the usual 2% range to 10%, meaning some very big lenders such as JPMorgan Chase were backing away from lending. If JPMorgan hadn’t spent $77 billion in repurchase agreements (buying back their own stock) over the last several years they would have had that in reserves to loan back to consumers. Come to find out, some of it was the consumers’ money anyway! Instead they spent the federally-insured deposits propping up their share price.

JPMorgan isn’t the only bank doing this. Add in the other primary dealers or other major banks and the problem compounds. This forces the Federal Reserve to jump in as a last resort and lend. Last week the Federal Reserve announced it would be ramping up its money printing to Wall Street to a soaring $690 billion a week. The Federal Reserve hasn’t done this since the financial crisis of 2008.

Suddenly it’s easy to see why there is a massive liquidity crisis. Yet in light of all this, Congress still hasn’t even set a meeting to try to get to the root cause – one that should be quite obvious. Even the Wikipedia entry on “Liquidity Crisis” states what we already know – that a “shortage of liquidity could reflect a fall of asset prices… a deterioration in external financing conditions and a reduction in the number of market participants,” or simply put, a recession.

With such uncertainty and insecurity in the financial market and the numerous other economic challenges our nation is facing, it is paramount that your clients’ portfolios are equalized. Physical gold and silver play an inverse relationship to the U.S. dollar and equity markets, which makes them a great hedge in any portfolio, any size. Call or email today to learn how even a small allocation of gold and silver can help mitigate your clients’ risk.