This little monster that feeds beneath the surface of global banking at its core briefly raised one ugly eye out of the water as 2018 turned into 2019. I wrote back then that the interest spike we saw in the kind of overnight interbank lending known as repurchase agreements (repos) was just the foreshock of a financial crisis being created by the Fed’s monetary tightening. I said the Fed’s continued tightening would eventually result in a full-blown recession that would emerge, likely out of the repo market, sometime in the summer. In the final two weeks of the summer, the Repo Crisis raised its head fully out of the water and roared.
When I first wrote of these things at the start of 2019, the Fed had only been up to full-speed tightening for three months, and already it was blowing out the financial system at its core. The stock market had just crashed with the onset of full-speed tightening just as I had said it would. It fell hard enough to where the only index holding just one nostril above the icy water was the S&P 500 at a 19.8% plunge. Even that holdout briefly dipped its last air-hole under water in the middle of the day (i.e., below 20%), but didn’t stay below for the count. All other major indices and most minor ones took the full polar-bear plunge into the deep, dark water by this day in December.