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Steady As She Goes
The consistent, steady decline in RRP allows market participants to take out the guesswork of year end risk taking.
As we look toward the end of the year, we believe its likely that the market will fall in line with expectations and remain positive for risk assets.
One indicator we consider to make the assumption is the overnight reverse repo facility.
As you can see in the chart, the inverse blue line (reverse repo), has been steady, a constant pull on the black line over time.
The overnight reverse repo has been the pressure value releasing the full effects of quantitative tightening.
The flow of funds from RRP into T-Bills is beneficial for risk assets for a few reasons: a longer time to maturity, greater capacity for margin, and the fed acting in a predictable way.
The consistent, steady decline allows market participants to take out the guesswork of year end risk taking.
Based on our projections, the current pace of the reverse repo drawdown suggests the balance will go to zero by April 2024.
Until that time, we believe there is a reliable tool the Fed has to fight inflation and combat a large market selloff.
For example, If inflation starts to turn in the opposite direction, the reverse repo award rate could increase forcing balances to trend back higher and pull cash away from risk assets.
On the other hand, if there is a sudden stock market crash, the Fed could respond by awarding a daily rate of zero, effectively flooding the market with cash and a boost for stocks for those willing.
For this reason, we think the likelihood of the year end crash is low.
Eventually, the drawdown of the reverse repo will be an end of an era that began in March of 2021.
Thank you for reading and I am grateful and humbled to be able to learn, grow, and invest alongside you at Tuttle Ventures.
Vision, courage, and patience leads to successful investing.
Darin Tuttle, CFA
NOTE - This is not investment advice. Do your own due diligence. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved. Unless there is a signed Investment Management or Financial Planning Agreement by both parties, Tuttle Ventures is not acting as your financial advisor or in any fiduciary capacity.