Welcome to the Capital Wave Report Good morning, I woke up, read an article on Zerohedge, and realized… “Gee, modern finance just keeps getting worse and worse…” One bank… just one… is at the epicenter of the recent Repo Crisis. It’s Too Big to Fail… and now… Too Big to Control. I’m closing my account (the backup to my primaries)… because what’s going on is patently absurd. Let me step back for a second… You can always tell what matters most by what gets fixed first. This month, the Fed told us. Without much fanfare, the central bank announced it would start buying roughly $40 billion a month in short-term Treasury bills. Official reason: “reserve management.” The real reason is to keep bank reserves at what they call an “ample” level. That word does a lot of heavy lifting. Bank reserves aren’t money the way normal people understand money. There’s money for us… and then there’s money for the financial system. The latter form is the financial plumbing or settlement layer of finance. This money exists so banks can clear trades, meet regulatory thresholds, and fund overnight markets without anything seizing up. When reserves are plentiful, nobody thinks about them. When they get thin, everything starts to crack. Over the past year, banking reserves drifted toward $2.8 trillion. Nothing magic about that number, but it sits near a psychological floor. Below it, money markets get twitchy, and repo rates misbehave. Funding desks stop assuming tomorrow looks like today. So the Fed stepped in. Now, reserves didn’t fall because of a recession or a wave of bad loans. According to Zerohedge, they fell because one institution made a balance-sheet decision. The Financial Times notes that JPMorgan shifted hundreds of billions from its Fed account into Treasuries. From their perspective, it is totally rational. Reserves earn a floating rate that declines if cuts are made. Treasuries lock in yield. But the scale is the story. JPMorgan’s repositioning was large enough to overwhelm every other bank in the system combined. Thousands of smaller banks added reserves to the system, and one bank removed them. The net effect was scarcity. There’s your irony. For years, JPMorgan has been labeled too big to fail. We’ve been told it’s systemically important… that it’s the stabilizer and the anchor. But scale cuts both ways. When an institution gets large enough, it doesn’t just participate in the system. It now defines it. JPMorgan didn’t need to act recklessly to create stress… it just acted rationally. No rules or regulations were violated. The bank did exactly what shareholders expect. But when one balance-sheet decision can negate the actions of thousands of other banks, the issue isn’t prudence anymore. It becomes a structure. That’s what “Too Big To…” actually means. We’ve seen this movie before. In 2019, reserve levels slipped until repo markets snapped, prompting the Fed to intervene. It was a different trigger to the same plumbing. The system needed a minimum pool of idle liquidity, and nobody knew where the floor was until it cracked. This time, the Fed isn’t waiting for the crack. So it buys bills, replenishes reserves, and smooths the surface. None of these signals an imminent crisis. But it reveals something important about how our world works. The modern financial system no longer operates with slack. It operates within tolerances. When those tolerances get breached, and even if it’s by rational behavior, the central bank will step in. The consequences don’t show up immediately. They never do. But they’re coming… BRRRRRRR. Now… let’s get to our momentum signals and why we’re still on alert this week… Continue reading this post for free in the Substack app
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