MOASS incoming. The feds are printing trillions of dollars, hedge funds have lost billions of dollars due to retail. People also seem to be worried about a possible recession.
And, the feds are now requiring major banks to hold roughly $1 trillion in high quality capital – enough to survive a severe recession and still be able to lend to households and businesses.
They crazy thing is only a few out of the 34 major banks hold more than $1 trillion in assets. How will this affect investors, and the common people?
Welcome to Franknez.com – today’s topic is rather grand. How prepared are you for a MOASS?
Lets get started!
There’s a lot going on here. I’m going to break major key points and give my overall thoughts and opinions on how everything ties together.
With so much money being lent out this means it’s all eventually going to have to be paid back sooner or later. Lets dive into the distribution of all this leverage and debt first with repos and how they work.
The Feds & Repos
The feds have been printing out a large sum of money to lend to banks, who also lend to financial institutions such as hedge funds. Well the feds have also been collecting billions in reverse repos from money going back into the repo market.
A repo market is essentially where a transaction between treasure securities and cash meet. In other words, they are short-term collateralized loans.
Money is continuously being printed and transacted back and forth through both repos and reverse repos. This loop is the reason why our dollar is becoming worthless every day.
Who Uses Repos?
Financial institutions such as banks and hedge funds both have access to this unlimited supply of leverage, or cash from the feds.
Repos are used as leverage to trade securities with the intention of profiting from the leveraged cash, and eventually paying the loan back.
While repos are primarily supposed to be used as a short term ‘collateral loan’, institutions take advantage of the loan to further leverage other positions in the market.
Hedge funds can use repo to increase their leverage, which magnifies both their potential gains and their potential losses. We know hedge funds have lost billions of dollars from shorting AMC and GME stock this year alone.
What Can Be Done About Excessive Repos?
The feds might be looking at ways to facilitate the amount to be borrowed by establishing a particular ceiling. However, I personally don’t think this is enough.
Some fundamental questions are yet to be resolved, including the rate at which firms (besides banks and primary dealers) would be eligible to participate.
How Much Leverage Do Hedge Funds Have From Repos?
In the figure below, we can see that 29% of asset managers (hedge funds) have direct access to repos from the feds. However, dealer who hold 41% and banks who hold another 20% can easily lend money to hedge funds with interest.
The problem here is that hedge funds are overleveraged and have too much power as a single entity. Hedge funds have been the root to economic downturns such as the Great Recession of 2008 and the Stock Market Crash of 1929.
In fact, it’s because of the Stock Market Crash of 1929 that the SEC (Securities Exchange Commission) was born. It was meant to protect retail investors from fraud and illicit activity from hedge funds.
Unfortunately, the SEC has only proved to be a lobbied pawn from hedge funds; slapping them with fines that have no effect or real consequence to the injustice in the markets.
Hedge Funds Face Major Scrutiny
Market manipulation has been exposed by a growing community of retail investors originating from the sub Reddit known as r/wallstreetbets.
The community has since grown outside Reddit and established a variety of subcommunities on Discord, Twitter, YouTube, Facebook Groups, and other forums across the internet.
This community of retail investors known as ‘apes’ have sparked a movement worldwide to expose the corrupt tactics hedge funds use to short stock in the market and bankrupt companies.
Some of which include naked shorting and dark pool trading, which CNBC’s Melissa Lee publicly speaks out on.
The attention is now on hedge funds. Both Republicans and Democrats agree strict laws should be imposed on Citadel Securities after the Archegos incident earlier this year.
And it looks like their lifeline is about to be cut off.
Large Banks To Hold $1 Trillion In Capital
Effective October 1st, thirty-four of the largest banks will be required to hold roughly $1 trillion in high-quality capital.
The banks are:
- Ally Financial Inc.
- American Express Corporation
- Bank of America
- The Bank of New York
- BMO Financial Group
- BNP Paribas USA
- Capital One
- Citizens Financial Group
- Credit Suisse
- DB USA Corporations
- DWS USA Corporations
- Fifth Third Bancorp
- Goldman Sachs
- Huntington Bancshares
- JP Morgan Chase & Co
- M&T Bank
- Morgan Stanley
- MUFG Americas
- Northern Trust Corporation
- The PNC Financial Services
- RBC US Group Holdings
- Regions Financial Corporation
- Santander Holdings
- State Street Corporation
- TD Group US Holdings
- Truist Financial Corporation
- UBS Americas
- U.S Bancorp
- Wells Fargo & Company
Out of these 34 companies, only JP Morgan, Bank of America, Wells Fargo, and CitiGroup hold more than $1 trillion in assets.
In this list of the top 15 banks by assets, you can see just how far from $1 trillion a lot of these banks are. And this is just half of them from the feds list!
With so many banks far off from reaching $1 trillion in assets, they’ll have to find the collateral from other means.
In my personal opinion, liquidation in the markets.
What Causes A Stock Market Crash?
A stock market crash is caused by those who bought stock on margin, lost value in their investments, and owe money to the entities that granted them those loans, according to Britannica.
A stock market crash is usually the cause of ‘panic selling’ or heavy liquidation in the stock market. With so many institutions owing other institutions money back, we’re going to see massive liquidation occur during the biggest margin call in history.
Hedge funds and short sellers now have higher margin requirements, and it looks like the feds just applied their own requirements to the biggest banks in the world.
Ladies and gentlemen, this is going to be the biggest opportunity of your life if you’re holding shorted stock, especially if they have a negative beta. Heavily shorted stocks with negative beta include both AMC and GME stock.
How Does A Stock Market Crash Affect The Average Person?
Unfortunately, the average person could lose their pension during a stock market crash and also find it difficult to obtain loans and mortgages. And if you own stock, your portfolio will suffer significant losses.
What Happens To AMC And GME If The Stock Market Crashes?
Stocks with negative beta tend to act the complete opposite during a stock market crash. AMC and GME holders will experience the MOASS as short sellers and institutions begin to cover their overleveraged positions.
But if you hold other common stock, keep in mind its value will drop. If you’re long, this could be seen as a great buying opportunity to add to your stock portfolio.
Other heavily shorted stocks with high short interest should also see a major increase in share price as hedge funds begin to pay their dues.
If the stock market crashes, it will be one of the biggest blessings for both AMC and GME shareholders as institutions will have to pay back every share they borrowed to short both these stocks.
Community, our time is coming. Banks have until October 1st to come up with the capital to fund their requirements. Expect liquidations left and right. Both the stock and crypto markets will be tanking.
And although AMC and GME are currently making upward moves, don’t be surprised if they fall back down one last time before shorts are inevitably squeezed from their short positions.
The MOASS we’ve all been waiting for is on the horizon. Get excited.
Before you leave, I want to say that I appreciate every single one of you who’s read FrankNez since the inception of this amazing community. It’s been a long and powerful journey to say the least.
I’m excited to see what the next chapters hold with you. Keep paying the knowledge forward 🤝.
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