Reverse Repo (RRP) At 20% Balance: Gas Tank Fueling this Stock Market Rally about to Run Dry
The strongest equity market rallies in the last 15 years have all been triggered as a result of global central banks, led by the Federal Reserve, pumping liquidity into asset markets. But that has NOT been the case for a while now… in fact the Fed has been cutting liquidity as part of its Quantitative Tightening (QT) program since June 2022. And yet equity markets around the world have witnessed eye watering rallies over the last one year! And the reason for this disconnect between the Fed’s posture with respect to liquidity and the trend of key equity markets is this little know facility called the “Reverse Repo” (or the RRP in short) that was stealthily created by the Fed itself between 2021 and 2023.
The RRP grew into a liquidity war-chest of almost $2.4 trillion by Apr 2023! And since then, almost $1.9 trillion have flown out of the RRP. These gigantic outflows, in turn have helped provide liquidity support to almost every asset market in the world over the last one year. These out-flows have helped provide so much liquidity that the net liquidity accrual to asset markets has been positive for the better part of last one year, despite the Fed cutting liquidity as part of its QT program at a staggering rate of ~$95 billion/month.
But no thanks to the scale of these outflows, the RRP facility is now on the verge of running dry! The facility is now left with a balance of just $460 billion! Effectively, the RRP is now at just 20% of its peak balance of ~$2.4 trillion. And this is what prompted me to revisit the RRP with a follow-up video within a span of just 2 weeks. I strongly encourage you to go through my last video on the RRP (The Liquidity Tap Fuelling The On-Going Rally In Stocks Is Now 75% Empty!) if you have not seen it yet.
The RRP has been depleted by almost $90 billion in just the last 2 weeks, and if the rate of depletion continues to hold up at this rate, even the remaining $460 billion in the RRP could well be gone in about 10 weeks!
And once that happens, the primary fuel tank powering this ongoing stock market rally would be fully exhausted, posing a very real challenge to the continuation of this rally!
Watch the Full YouTube Video Below: