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Protected: What Will the Fed Do Now? Part One

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Federal Reserve Monetizing US Debt Faster than its Previous Tightening

During its brief and utterly failed attempt to reduce its balance sheet (called quantitative tightening), the Federal Reserve only rolled off securities at a rate of $50 billion a month. It is now purchasing US treasuries at a rate of more than $55 billion a month:

Read the remainder of this entry »

The Recession Called “Repocalypse”

There is, at least, one highly recognized economist who agrees with me that a recession started forming in the summer of 2019 and is still emerging, in spite of the Fed’s strongest efforts to stop it — David Rosenberg:

We recall all too well the euphoria that followed the early 2001 and late 2007 Fed rate cuts and curve-steepening shifts, that then switched to malaise as the recession nobody saw coming took hold in the next few months. The lags between monetary policy and the real economy are both long and variable….

Remember, it cannot be denied that during the [2019] summer months the ‘normalized’ New York Fed recession probability model did breach the 80 per cent threshold, and it cannot be taken back, even if it has receded in response to the Fed’s recent liquidity infusions. The Fed has employed both actual rate cuts, and an aggressive QE4 … fully funded [by] the U.S. fiscal deficit. But, with a typical year-long lag, a recession has ensued after the 80 per cent mark has been crossed in the ‘normalized’ New York Fed model every single time in the past five decades....

While the GDP recession never did materialize [in 2019], the median economic sector stopped expanding mid-year and the portion of the economy that is not the consumer has posted no growth at all in the past three quarters…. Not just that, but corporate profits are set to be in a four-quarter recession…. At the start of 2019, the consensus was for a V-shaped earnings recovery to take hold by year-end, but instead of double-digit growth that the consensus had once penned in, Q4 2019 is now seen as coming in at -0.3 per cent on a YoY basis….

The Financial Post

We are also of the same mind in terms of where this is likely going in 2020: (So, I’m not completely without good company with a pedigree far better than my own.)

In classic mature-cycle fashion, we are seeing some cracks emerge in the junkiest parts of the U.S. credit market. This is an area to be focused on as leveraged credits are in an eerily similar situation to what was surfacing out of the subprime mortgage market back in 2007.

In any event, we are light years away from a stable equilibrium. Leverage, financial engineering and the restructuring of the capital structure that followed the recent M&A wave, have become the defining features of this bull market in risk assets — namely equities and corporate credit. The proverbial canary in the coal mine usually resides somewhere in the credit market (think of LBOs in 1989 and subprime mortgages in 2007).

It is doubtful that we will have another year where central banks can transform the weakest period for global economic growth in a decade and pull another rabbit out of the hat in terms of massive excess returns for equity and corporate bond investors.

The Financial Post

Rosenberg believes, just as I’ve long said will prove to be the case with any QE after QE3, that the Federal Reserve, is now sliding down the back end of the diminishing-returns curve. He also believes the next recession will most likely emerge as many past ones have from the credit market.

What is repo, but the credit market right at its core? It is not the slimiest region of the credit market that one might expect to break first (like leveraged loans) but the most typically boring and stable. I think a breakdown is all the more noteworthy when problems break out on the credit market’s spine in the fundamental area that is usually least prone to troubles. So, let’s keep our eyes on that, as well as the slimy junk sector that Rosenberg calls out.

Where are we now in the Repo Crisis?

A simple chart will give us a clear picture of the aggregate of all operations the Fed has undertaken to stem the Repo Crisis by engaging first in overnight repos, then fourteen-day term repos, then longer repos than that, and finally in outright treasury purchases (again … and forever):

The Fed attained the full half-trillion-dollar response level at the start of 2020, and now it is just maintaining its operations at that line. Half a trillion in response that is now ongoing! That clearly indicates a major tear in the credit markets, and where do you think the entire US (and global) economy would be today if not for the Fed’s rapid response?

At the same time, the treasury’s withdrawals from bank reserves (yellow bars) have been increasing, meaning all those Fed operations have not added that much to the diminished bank reserves that starved the repo market, resulting in the Repo Crisis in the first place; and, so, the crisis continues unabated. (There were, of course, some major failing players behind the scenes as laid out in my last Patron Post.)

Just look at the crazy demand explosion (yellow bars) that has happened to all of the Fed’s recent repo interventions since it first started tapering what it was offering (blue bars), since the Fed first tried to reduce the amount of repo it was offering to the market, to see how its taper went … and, thereby, how ongoing this crisis remains:

Zero Hedge

Oops! Back to being massively oversubscribed (more bidders than what was offered). The market was having none of this tapering bit.

After several relatively uneventful reverse-repos to close off the month of January, which saw a gradual decline in submission, February has started off with a bang…. Ominously, the massive demand for term repo today means that the liquidity crisis that continues to percolate just below the surface of the market and has clogged up the critical plumbing within the US financial system, is getting worse, not better, and today’s massive oversubscription indicates that one or more entities continues to face a dire shortage of reserves.

Zero Hedge

The reason the Repo Crisis has not been resolved can be easily explained by that earlier graph showing how much money the treasury is taking out of bank reserves even as the Fed is adding to bank reserves. The US deficit is clearly a constant downdraft now to the Fed’s uplift, locking the Fed into continuing these actions so Fed funds can flow through member bank reserves and into the treasury.

So much for temporary, as the Fed claimed months ago its current actions would prove to be. That is why I am going with calling this new regime QE4ever. With the US treasury sucking so much out of reserves each week, the Fed will no more be able to take this new money back out of the system than it could take its original QE back out ! That doesn’t mean it won’t try, but look out if it does!

Supposedly the Fed is going to get serious about trying to suck the money back out of the monster after the blunt-force trauma tax day will deliver to overnight repos. (Or would if the Fed ended all of this now.) When they do, watch as they scramble right back to QE to see what form it takes next. This monster will be a shape shifter because the Fed has to maintain the lie that it is not permanently financing the US debt.

Gee! Guess what? They’re already preparing the way. Here is an excerpt of their January 29th implementation note from their December FOMC meeting — the one in which the Fed noted the economy was slipping from “strong” household spending to “moderate” household spending:

Effective December 12, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent. In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.… In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary…) in amounts limited only by the value of Treasury securities held outright in the System Open Market Account … by a per-counterparty limit of $30 billion per day.

The Federal Reserve

Household spending may be tapering, but the government’s isn’t. (And this is how government deficits cripple us insidiously from behind the scenes. It doesn’t have to happen by the government defaulting on its debt, as everyone presumes.) Fed re-easing, which was supposed to taper in January and end in April, is now extended more vaguely via continued repos and treasury purchases “into the second quarter,” which is tacit permission to continue to the end of the second quarter if need be. And that is qualified even further with a little “at least,” which means the conductors of Fed policy have been given permission to go further if and “when necessary.”

Maybe the monster that is still emerging from the Fed’s original quantitative tightening will eventually be known as the “Repo Recession” or just “the Repossession” for short (a.k.a., “The Repocalypse”).

(Become a patron in February (at the $% level), and I’ll give you access right away to my last exposé that reveals who the AIG-size player was that was circling the drain last fall. Without this Fed intervention — translate bailout — its collapse would have been as devastating as anything that happened in the Great Recession. I’ll even tidy up the typos that were plentiful because I was so anxious to get the news out.)

Stock Market More Overpriced and Perilous Than Anytime in History

I’m not going to predict when and how the US stock market will crash as I did by laying out the stages of its fall for 2018. That was easy, but the times are different now.

Back then, the Fed had laid out a precise schedule for its tightening, and it was apparent to me where the big increases in Fed tightening would be sufficient to bring down the market that the Fed had artificially rigged.

Today, the Fed is back to easing — back to doing what it does to juice markets up. And the correspondence between what central banks do with their balance sheets and what the stock markets do is now almost 100%.


All of 2019 looks like lockstepping to me.

The Fed, of course, is the primary mover for the US market. Therefore, US stocks being overpriced in the extreme may not matter so long as the Fed is willing to keep the money pumps redlining at maximum RPM.

However, the more the market’s metrics move above all rational and historic benchmarks, as I’ll show they now have, the greater its fall will be if the Fed pulls the plug, AND the more sensitive it will become to the Fed even wiggling the plug. So, the situation is, in that sense, more perilous than at anytime past because some of the market’s most fundamental valuation metrics are now printing at levels never seen before.

Let me lay that out for you.

Market madness still being Fed

As I will lay out in my next Patron Post, the Fed has given some indication of a mild return to tightening in the near future, and that could create problems for the market. The Fed has not, however, laid out any clear schedule for tightening, and it won’t get far down that road before it sees market problems, and goes right back to easing because we are now in QE4ever by which I really mean “QE4ever or die!”

That is because, as soon as the Fed backs away from QE, it will see its dependent child go into paroxysms, and like any parent who knows he or she has a sickly child that is highly dependent on continued life support, the Fed will rush back to supporting its baby — the stock market.

Outside of Fed help, the case to be made against the market is huge — as big as it was before the last two major recessions. The market today looks in almost every way like it did just before the dot-com bust, but the difference, then too, was that the Fed started tightening back then. Therefore, as long as the Fed continues its present path of easing, there may not be anything like the dot-com bust, barring a deep recession that busts everything; but the Fed is now the only thing between the market and a bust.

Here are the similarities that scream market melt-up:

The market is overvalued and melting up

How high is it?

The market is a stoner. As a ratio comparing stock prices to either earnings or sales (two historic benchmarks for assessing how pricy stocks are), the price of stocks is higher right now than it has ever been in history. This market is tripping on some pricy hallucinogens.

(EV/EBITDA compares an enterprise’s value to its actual earnings before interest, tax, depreciation, and amortization. Typically a value below 10 is considered healthy.)

The PEG is another measure that looks looks for overvaluation by comparing the Price/earnings ratios of stocks to their long-term expected growth in earnings. It, too, has soared in the past quarter to reach an all-time high:

Prices are more overvalued based on these historic metrics than they were before the financial crisis that caused the Great Recession and even in the stratospheric run-up to the dot-com bust. We have never — ever — been priced this high! That means fundamentals have further to go to catch up to current valuations than at any time in history.

Investors should keep in mind that market valuations stand nearly three times the historically run-of-the-mill valuation levels from which stocks have historically generated run-of-the-mill long-term returns. In fact, the highest level of valuation ever observed at the end of any market cycle in history was in October 2002, and even that level is less than half of present valuation extremes.

So how do you get to historically run-of-the-mill valuation norms? The answer is simple: Wait nearly 30 years, allowing both the U.S. economy and U.S. corporate revenues to grow at the same rate as the past two decades, while stock prices remain unchanged, with no intervening periods of recession or investor risk-aversion, or alternatively (and far more likely), watch the S&P 500 lose two-thirds of its value over the completion of this market cycle.

My view is that the first 30% market loss from recent highs will be the beginning, not the end of the bear market ahead…. To be clear, a two-thirds market decline would not even drive the most historically reliable valuation measures below their historical norms.

John Hussman, president of the Hussman Investment Trust, in his latest note to investors

So, what is going to drive stock values up even further … other than the one thing that has been driving them for the past decade to the present perilously overvalued height — the Fed? If you know what the Fed is going to do, you might be able to make a safe market bet; but just recognize that your hope for making money in stocks hangs entirely upon your being right about what the Fed will do in the months ahead.

As for any hope of those fundamentals catching up, three quarters of CFOs polled in the US say the market is greatly overvalued. That will not, of course, prevent them from overvaluing it more with more stock buybacks … financed in good part by the Fed’s easy money.

Chief financial officers at big U.S. companies entered 2020 on a cautious note, with almost all anticipating an economic slowdown against the backdrop of an overvalued stock market, according to a survey released Thursday…. 82% anticipate taking more defensive actions, like reducing discretionary spending and headcount, as a way to stave off the looming headwinds.

CNBC

CEO confidence doesn’t look any better and disagrees in the extreme with consumer confidence:

So, the biggest insiders (CEOs and CFOs) are united in their belief that the market is priced to perfection with a business future immediately ahead that looks far from perfect. Yet, the market is rising at a rate that can only be matched by previous melt-ups.

“At this level, many things have to go optimally so that the prices are higher at the end of the year,” comments David Rosenberg on the growing complacency among investors. The renowned economist and strategist is one of the most profound experts on the U.S. economy and one of the last remaining skeptics to warn of a correction.

His bearish view is based on exorbitantly high equity valuations and over-optimistic earnings expectations. He also thinks that the US consumer sector is in worse shape than the consensus believes….

This is a liquidity and momentum driven market. It’s been that way for the past four months where the correlation between the S&P 500 and the Fed’s balance sheet has expanded to a 95% relationship. This is a case of a very accommodative Fed policy. The double-digit growth in the money supply is bypassing the real economy and has entered into asset markets broadly, and specifically into equities. So as long as the Fed is in the game priming the monetary pump, shorting stocks is going to be a very dangerous game to play … but this overall market rally is more a house of straw than a house of brick….

People will claim that there is no recession. Statistically speaking that’s true as far as GDP is concerned. But we know for a fact that we actually had a four-quarter earnings recession. I never quite understood why GDP is so important to an equity investor who is buying an earnings stream. There’s no ticker “GDP” on the New York Stock Exchange. So it’s not about the overall level of GDP, it’s really about earnings and about the fact that if you look at the 30% share of the U.S. economy that is outside of the consumer space, we actually have been in a recession in the past two quarters.

[Does that sound like anything predicted here for 2019?]

On a median basis, the U.S. economy has stopped growing three quarters ago. Also, the U.S. consumer is not as nearly in good shape as people think. We see signs that the labor market is starting to show some fatigue….

The Fed would not be cutting interest rates three times and then re-extending its balance sheet at a rate that even exceeds what they were doing with QE3. The most important correlation to the stock market today is the Fed’s balance sheet. The power of the Fed has become so acute that it has replaced the economy as a principle influence over the stock market to the point where there is only a 7% correlation between GDP and the S&P 500. Historically, in any given cycle that relationship was anywhere between 30% and 70%. The amount of easing that the Fed has done since the beginning of October by expanding the balance sheet is just about as strong in terms of basis points as the three rate cuts they engineered last year. They have cut rates almost a 150 basis points when you look at it on an equivalent basis.

The Market

Rosenberg points out an interesting corollary between the Fed’s recent emergency liquidity explosion and the main event that triggered the dot-com bust in 2000:

We have a template of what happened when the Fed provided a lot of liquidity juice to the marketplace with the Y2K special lending facilities in late 1999. At that time, the market strongly surged, and kept on rallying into the early part of 2000. Then, the Fed started to withdraw that liquidity and it wasn’t a pretty picture.

So, here we are in the early part of 2020 with the market strongly surging due to the Fed having juiced the marketplace with “a lot of liquidity” for the year change in late 2019, exactly as it did in 1999 for the Y2K year change, and again the Fed is, at least, talking about starting to draw down liquidity in April or perhaps before as it did shortly after the Y2K year change.

Will this time also end as “not a pretty picture.”

In 2018 it was easy to know when the market would go into paroxysms because the Fed had published a set schedule for its tightening. This time, as Rosenberg says,…

It’s tough to time when the Fed is finally going to sit back and say: “Ok, you know what: I’m not handing any more candy to the kindergarten class”. My sense is that the response to the Fed no longer priming the pump could be significant.

We’re now “all in”

Don’t let marketeers influence you with their claims that the market is going to rise this year. You can bet that every single one of them, if alive in 2000, was saying the same thing then, too. Though some feared the ridiculous heights the market hit in 2000, almost no one was calling for it to crash.

As Mark Hulbert, who has been in this game for a long time, recalls,

On Jan. 14, 2000, the Dow DJIA … hit its bull-market high prior to the bursting of the internet bubble. And, yet, you’d have never known it by reading what the newsletter editors then were saying. In fact, after reading through my newsletter archives from January 2000, I was struck by the similarities between now and then.

MarketWatch

2008 went the same way. Anyone remember Goldman’s investment advice to its clients just before the 2008 financial crisis implosion? Everything it wrote was printed in vampire squid ink:

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

Rolling Stone

While it sucked everyone dry, it outwardly recommended buying more stocks that would fail, even as it bought up lots of almost everything that would do well when other things crash.

One strong sign of a melt-up and the nearing top of a market is when everyone is in — retail investors like mom and pop and the big money or “smart money” like institutional funds. When there is not a lot of money sitting on the sides, only newly created money can push the market up. When everyone is in, enthusiasm (or euphoria) is at its peak.

Beware those who have stocks to sell. All the big advisors counsel everyone to jump in when MOMO and FOMO hit their peaks. How else will they get rid of all their own holdings so close to the peak? According to Rolling Stone and many other publications, that’s what Goldman did to maintain its Sachs of gold. That’s how it got the name “Vampire Squid.”

We’re now “all in”:

Contrary to several goalseeked indicators which erroneously repeat week after week that whales and other prominent institutional traders remain “on the fence” despite the now daily record highs in the S&P, the truth is that virtually everyone is now all in: from simple human-driven discretionary, to macro funds, all the way to algo and CTAs…. “Equity positioning … has run far ahead of current growth as investors price in a global growth rebound….” The question is, are people starting to feel more upbeat about the global economy or is this just another round of central bank dovishness designed to propel asset prices higher? The answer appears to be, yes. Weakness will be met with overt accommodation. Strength with silence.

Zero Hedge

Or is just another round of Goldman, which populates all levels of the Fed with former GS people and others that it recommends, fleecing the flock? (As a refresher, read the whole Rolling Stone article quoted above, written at the end of those desperate times.)

Money-losing companies are shoving market valuations to the summit

One of the big concerns during the final year or two of the market’s rise before the big dot-com bust of 2000-2002 was that so many companies that never made a dime were leading the market into the stratosphere. We’re pretty well back to that.

Tesla Inc. shares have doubled in three months, while General Electric Co. shares are up 44%. The pair are the two most valuable loss-making companies, part of a shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market.

The Wall Street Journal

The Journal says these two are two very different exemplars of profitless companies in today’s stock market. Tesla has never made a dime, and is now one of the most highly valued companies in the market, and GE is a megalithic dinosaur of great value in the past that has been losing money for years.

The Journal article says that 40% of listed companies in the U.S. are currently losing money quarter after quarter. The biggest area of massive-money-losers in the dot-com gold-rush was the IPO segment of the market. The same is true today:

Maybe it would be good to reflect on what took the market leaders (the “Nifty Fifty”) higher and higher in the prelude to the dot-com bust:

The Nifty Fifty appeared to rise up from the ocean; it was as though all of the U.S. but Nebraska had sunk into the sea. The two-tier market really consisted of one tier and a lot of rubble down below. What held the Nifty Fifty up? The same thing that held up tulip-bulb prices long ago in Holland – popular delusions and the madness of crowds. The delusion was that these companies were so good that it didn’t matter what you paid for them; their inexorable growth would bail you out.

Forbes Magazine, 1977, The Nifty Fifty Revisited

Bonds overflowing

While stocks are overflowing, so is the pouring of money into safe-haven bonds. If the current net flow of money into bonds were to continue all year, it would look like this compared to any other year since the Great Recession began:

Of course, the flow of money into bonds probably will not continue at that rate all year, although several years shown above did continue at the same rate most or all of the year. Still, many others did not and even turned downward partway through the year. Regardless, the steepness of the rise in the first two weeks of January exceeds that seen at the start of any year on the chart, except maybe 2015.

Bonds aren’t the only safe havens rising as a warning sign alongside soaring stocks. Precious metals are, too:

David Rosenberg notes why he believes gold is on the rise and should be:

When you compare the new supply of gold against the supply of money coming into the system from Central Banks, to me it’s a very clear cut case that you want to have very high exposure to bullion….

Gold demand is predicated on the final act which is going to be right-out debt monetization. When we get to the lows of the next recession, we’re going to find that these Central Banks that already have been extremely aggressive are going to engage in what is otherwise known as the “debt jubilee” or a right-out debt monetization which was actually the final chapter of the Bernanke playbook. Remember, Ben Bernanke got his nickname “Helicopter Ben” because in a speech in 2002 he suggested that helicopter money could always be used to prevent deflation. So we’re going to have helicopter money.

The Market

Buyback bonanza is slowing down

It’s no secret that the Fed’s new money and low interest, and the US government’s one-time allowance for low taxes on the repatriation of overseas cash hoards has fueled the market higher.

Over a trillion dollars has been spent on stock buybacks by twenty companies over the past five years to push up the values of the markets leaders. What happens when those companies have used up all the foreign profits they had to repatriate or when interest rises so debt to fund buybacks is not longer cheap or when those “trillion-dollar babies” just reach the maximum amount of debt they feel comfortable taking on … or reach the maximum amount for which ratings agencies feel comfortable selling good ratings?

Currently buybacks are slowing down due to the fourth-quarter reporting period. Repatriation money is also likely running out for many companies, because it has been two years since cheap repatriation of former foreign profits was allowed under the revised tax code as part of the Trump Tax Cuts.

It feels like 2018 all over again

I still think, as I wrote in December, that the following is a strong contender to become the market’s peak before it hits a wall:

The market has a highly attractive 30,000-foot altitude marker in the sky to hit on the Dow. That attractive goal will tend to suck the market quickly up another 5% until it nears that target.

Once the market gets to that target, however, that number tends to become resistance as everyone starts to wonder if it can break it and if it will hold or crash in fear of such great heights. 30,000 is a much stronger number psychologically than 29,000 was because it breaks into a new 10,000-foot level. The human psyche likes big, fat, round numbers like that.

Once it gets to that level, however, it can generate a lot of fear because of how perilously high the market suddenly feels, which makes it an ideal number for an ultimate blow-off top

Santa, No Longer Tariffied, May Rally for Christmas

I’m not predicting 30,000 is the major breaking point. I’m just noting that I think it is a strong psychological milestone that is quite near in the present melt-up stage as both the brass ring for investors to reach for and then perhaps to fade … or even flee if people see a lot of fading happening. It will deepened onhow many other things are going bad at the same time or on one thing going bad — Fed support. (Don’t say it can’t happen. It did in 2018 when the Fed should have known better then, too.)

First, let me point the last time we neared a milestone of this kind (Dow 20,000). You can see in the graph below that it was both a magnet, sucking stocks upward and then a two-month bench to rest on. However, the steep final rise to that level was not a melt-up because a “melt-up” is meant to imply things are about to melt down:

30,000 will be a natural place to catch one’s breath, but what happens at that point will depend a lot on what kinds of events happen when the market takes a pause bringing momentum to a halt — say if buybacks fade for the reasons above or if earnings estimates sink more than expected or a very low GDP print; BUT it relies far more than anything on whether the Fed fades its current easing.

After December, I got out of stocks to sit this mile-marker and possible Fed transition point out. (I don’t even like being in stocks now, given how insane the market is; but my predictions of the market’s fall were based on Fed tightening, so a return to easing changed things for the last few month.)

As for what happens in a Fed tightening regime, the graph above also bears testimony to just how much the market changed in January of 2018 for the remainder of that year and how it remained below its January blow-off top with some hard bouncing even through the first three quarters of 2019 as the Fed’s quantitative tightening continued … even though the Fed stopped raising interest rates. Only when the Fed moved deep into QE4ever did the market finally sustain a rise above its two 2018 high mark.

As for what happened back then when the Fed tightened and how it compares to now,

Stock market investors could be setting themselves up for a nasty fall … according to Mark Newton, a popular independent market technician, in a Friday note to clients.

“US stocks have moved up at a clip that’s eerily reminiscent of January 2018,” he wrote. “No news really matters to shake markets, and bad economic news or earnings, not to mention geopolitical threats matter for a few hours only before the relentless rally continues unabated,” he wrote.”

The S&P 500 index … fell more than 10% between Jan. 26 of 2018 and Feb. 9 of that year, after rallying more than 27% between the start of 2017 and the Jan. 2018 top.

“Make no mistake, this market move is NOT normal, and is NOT something which should be able to continue technically into and through February without a major hiccup,” he added.

“Markets truly seem to be near exhaustion using traditional methods, but it’s proper to wait on the sidelines until the break gets underway, which should prove swift and severe….”

That said, it’s incredibly difficult to predict exactly when euphoric sentiment will take a turn for the worse. “Indicators don’t flash red when the market is at a top,” Newton warned. “It’s hard to go out there and really trumpet a big bearish call, which makes you wonder if its probably the right thing to be doing.”

MarketWatch

BEAR in mind,

Most initial bear market declines are accompanied with versions of Herbert Hoover’s 1929 statement that “the fundamental business of the country is on a sound and prosperous basis.”

John Hussman

The only failsafe red indicator now that the market is ignoring all economic the metrics of all economic/business fundamentals is the light on the power cord to the Fed. Everything depends on the Fed and what it does, and right now the Fed is not all that clear about what it will do. It is certainly not clear that QE4ever will continue without a failed attempt at reversing it.

The big thing to use as your red light is any attempt or mention of an upcoming attempt by the Fed to prove it is not financializing the US debt by moving back toward tightening … or even just stopping the money pumps. (It, of course, won’t mention the “financializing” part, as it doesn’t want you to even think about that, but look for hints of tightening that it can use to support its argument that it is not monetizing the debt with anyone who calls it to task.)

Bear in mind the only way the Fed can maintain its lie that it is not illegally financing the national debt with QE4ever is if it can prove that its recent massive asset purchases were just temporary emergency monetary responses. Lack of “temporary” = QE4ever = the Fed monetizing the US debt by soaking up US treasuries forever … or until the Fed decides to crash the entire economy by tightening again. (It is only 4ever if the Fed wants the economy to keep going.)

So long as the Fed even shows it is going to do nothing more than hold its existing treasuries for years to come, it is, at least, guilty of monetizing that much of the US debt. Throughout QE, the Fed’s sole argument that it was not monetizing the debt rested on its QE being temporary.

The Fed has a great need to quit its repo recovery actions so that the Fed can prove it is not financing the US government by sopping up its debt to roll over in perpetuity. It doesn’t make any difference that the Fed is only buying short-term treasuries, as it now claims for its excuse, if it rolls those short-term treasuries over forever. That is just short-term dressing in name only on permanent monetization of the debt. So economists, analysts and politicians will be questioning the Fed’s “not QE” if they see that the Fed simply cannot stop. The Fed is fully aware of that. As I noted in last year’s early Patron Posts, the Fed expressed great concern about losing trust in 2018.

At the same time, this market has nothing left to keep it up but Fed fumes.

(If you want to read as much as I can lay out about the Fed’s projected moves for the first half of this year, I’m going to give access to January’s Patron Post as soon as it is finished to those who sign up to support my continued writing of free articles like this now at the $5 level or above, even though their first support payment won’t process until February. The Fed has not laid out any clear path, but there are some broad hints, and I don’t want anyone to miss the information in case it is helpful, so I’ll make it available before pledges are processed.)

Where Did the Housing Market Go, and Where is it Going Next? My first 2020 Economic Prediction

Since hindsight is 2020, I thought it might be useful now that we are far past the time in 2018 when I called the fall of the US housing market to assess where its journey went during the year and a half that has gone by before I venture a housing market prediction for 2020.

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Dr. Fed Frankenstein Kept Alive by Zombies

Did you know Dr. Frankenstein created a monster that stays alive to this day by eating zombies? Neither did the zombies. Neither, apparently, did Dr. Frankenstein. In fact, the zombies, being braindead as zombies are, do not realize that they are also keeping alive the diabolical doctor who made the monster that is eating them.

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Repocalypse: The Second Coming

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 very last week of 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.

If not for the obvious bullish bias in all reportage everywhere (except alternative media), the market would have been declared a new bear market at that time (based on the market’s own historic standards where a 20% fall is a bear market), and any bull market after that would be a new bull market, not what is now called “the longest bull market on record.” (I mean, with even the S&P going below the surface intraday, why should the S&P tip the balance against the declaration of all other indices, including the Nasdaq that had driven the market for years and the Dow, which has the longest history?) That kind of reportage, however, doesn’t exist any longer.

The Fed, immediately after this long, dark day last December, slammed the brakes on its interest-rate increases and promised it would stop tightening sooner than it had originally said it would. That was also something I had said for years would quickly become the case when the Fed finally did go into its long-announced tightening regime.

What developed into the worst December in US stock-market history culminated in an extraordinary repo interest spike at the end of the year, which I claimed happened because the Fed’s tightening had already pulled bank reserves down below the depth the Fed’s new fake recovery, as fragile as a Christmas ornament, could withstand. I showed with graphs how the Fed’s tightening was resulting in bank reserves depleting everywhere to a degree that proportionately matched the Fed’s tightening. That depletion was causing banks to stop loaning to each other, leaving a shortage in overnight funding on the biggest reconciling day of the year.

Now we are coming up on that same day of the year for 2019 when all bank accounts and market funds, etc. are brought to their legally mandated balances at year’s end. As we near that critical date again, the man who wrote the Fed’s own Bible on repos has predicted the likelihood of the greatest repo crisis in history at the turn of the year.

Second coming of the Repo Crisis predicted

Two weeks ago, Zoltan Pozsar warned the world and the Fed that catastrophe would bite us all at the end of the year as the culmination of the repo saga that burst out of the deep at the end of last summer. You may never have heard of this Hungarian fellow, but he was long the Fed’s guru on repos. So, when he talks, the Fed DOES listen. (Therefore his warnings may be the one thing that shunts the disaster of which he’s warned.)

Pozsar laid out the foundations for the modern repo system while working at the US Treasury and then at the New York Fed. He also helped guide the Fed in its early response to the Great Financial Crisis (a.ka. The Great Recession). So, he has a good idea of how a financial crisis forms and a good understanding of what the Fed did to create its recovery, and he might, therefore, … might … have a good sense of where the weaknesses in that recovery effort are and in how they could bring destruction again.

Many, even at the Fed, have said no one knows more about repo than Pozsar, who was also a point person for White House officials during the Great Recovery period. Now, I don’t think much of his recovery plan; but it could very well be that he knows its weak points and knows when he sees it breaking up and is not as constrained by position as the Fed is in speaking out about that — since he no longer works for the Fed.

Two week ago, Pozsar laid the Fed bare for its inadequate response to September’s Repo Crisis, which was one of the ugliest ever from day one. In a note titled “Countdown to QE4,” Pozsar explained why all of the Fed’s interventions between September and December failed to put the Repo Crisis to rest.

Pozsar noted how, as I had pointed out at the start of 2019, the Fed’s balance-sheet reduction essentially forced major banks to take on a lot of government securities. Because the Fed was not refinancing those securities, and the market was not buying up the Fed’s slack, the Fed’s member banks were getting stuck with them. While they can carry these almost like reserves on their own balance sheets, they are not as liquid as cash. They are used in overnight to trade in exchange for immediate cash. However, if all banks have more of them than they want, then willing trading partners become hard to find. Cash reserves continued dwindling under the Fed’s continued tightening throughout the first seven months of 2019 as treasuries kept piling up in the Fed’s member banks — especially those that are primary bond dealers.

As Pozsar cautions, the core problem at the heart of the repo blockage is that as banks shifted from owning reserves to collateral (mostly Treasuries) … large U.S. banks like J.P. Morgan that are central to year-end flows spent some $350 billion of excess reserves on collateral since the beginning of the Fed’s balance sheet taper, leaving banks (and especially JPMorgan) dangerously low on reserves.

Zero Hedge

Pozsar posited two weeks ago that …

Dealers and banks loaded up on collateral as a trade – a trade they were supposed to be taken out of by eventual coupon purchases [longer-term treasury purchases] by the Fed. But the Fed never did that, and for the first time we’re heading into a year-end turn without any excess reserves.

Countdown to QE4

In other words, the Fed has maintained that its massive rescue attempts from the Repo Crisis are “not QE” because it is only vacuuming up short-term treasuries in exchange for new reserve money for struggling banks. Its exclusive focus on short-term treasuries allows it to claim its actions are just temporary monetary stabilization and intervening crisis management. It’s a baloney claim because the Fed indefinitely rolls those over, but it’s a claim that Wall Street and politicians have readily accepted. It gives them a shred of an argument to stand on.

Pozsar wrote that approach is exactly why the Fed’s actions aren’t resolving the repo crisis. So, the Fed is going to be shoved off that approach in order to solve the problem. The system is starving for a return to the Fed’s recovery-era balance sheet — for permanently expanded money supply — and the Fed isn’t giving that. The banks are mostly out of short-term treasuries to exchange in repo actions and stuffed with longterm ones the Fed is not offering to buy in its own repo operations. The Fed is creating money supply by endlessly rolling over short-term operations, but the banking system is starving for permanent expanded money supply to maintain the “recovery” that was built on that supply. That’s a problem that I’ve said here for years the Fed and the world would face as soon as the Fed tried reducing its balance sheet on which the whole world was becoming dependent.

What we need for the turn [of the year] to go well are balance sheet neutral repo operations, or asset purchases aimed at what dealers bought all year: coupons [longer-term bonds], not bills – the former to get around foreign banks’ balance sheet constraints around year-end, and the latter to ensure that excess reserves accumulate with large banks like J.P. Morgan.

In other words, it is time for the Fed to quit pretending it isn’t engaged in QE and just give the banks what they really need!

Because banks had more treasuries than free cash, availability of cash to trade temporarily in overnight or term repos (where one bank temporarily exchanges a treasury with another for cash with the promise that the bank offering the treasury will repurchase the treasury the next day or a few days later) was drying up. Banks needed the Fed to permanently suck these treasuries back up and replace them with cash. Rolling them off the Fed’s balance sheet for investors to pick up hadn’t worked as well as expected. Banks couldn’t find enough investors to resell them to and were stuck with them. So, they don’t want to do repos and get even more of them.

The Fed’s quandary, and why it has refused to cave in and do what banks need, is that the Fed is barred from directly financing the US debt, and it maintained throughout all of its QE regimes that it was not doing that on the sole basis that it would eventually roll all of the QE off, making it just a temporary monetary fix to a crisis, not permanent US debt financing. Sucking up all the long-term treasuries that have overstuffed the banks would mean admitting none of that ever worked or ever will (as I have always said would prove to be the case).

Indeed, instead of buying coupon bonds as Dealers have been quietly demanding behind close doors, a process which would allow them to sterilize their massive Treasury holdings, the Fed announced in October it would only buy T-Bills [short-term treasuries] in order to not freak out the market that it is officially launching QE 4 (as a reminder, the only semantic distinction between whether the Fed is doing QE or not doing QE is whether it is soaking up duration; the Fed’s argument is that since Bills don’t have duration, it’s not QE. However once Powell starts buying 2Y, 3Y, 5Y and so on Treasuriess, the facade cracks and the Fed will have no more defense that what it is doing is precisely QE 4)

Zero Hedge

… or, as I am calling it, QE4ever because that is really what it is going to turn out to be as we are now seeing in Pozsar’s argument that the banks need to return permanently to the Fed’s expanded balance sheet in the form of cash in their reserves, or markets developed on that liquidity will starve for cash.

How bad is the Repocalypse?

Pozsar pointed out that, because the Fed was not doing what the banks needed, the end of 2019 would likely be a catastrophe.

Central bank liquidity is useless unless primary dealers have balance sheet to pass it on, and that they’ve been passing it on since September does not mean they will at year-end … …and Murphy’s law applies in money markets too…. In summary, year-end balance sheet constrains will preclude primary dealers from bidding for reserves from the Fed through the repo facility or through repos from money funds. The slope of money market curves suggest that excess reserves won’t build up at banks, and so U.S. banks will not be able to fill the market making vacuum left by foreign banks.

Countdown to QE4

The flash of a repo warning at last year’s turn and then September’s full emergence of the Repo Crisis will all be nothing compared to the full revelation of the Repocalypse that will form at the turn of this year if the Fed does not seriously address this problem.

After noting other serious stresses building up in the banking system toward year end, Pozsar stated that the US banking system will have mere “scraps” left to lend out in repos at the end of the year. And that is after the Fed has already created about $350 billion in new money in the system via its own endlessly rolling-over repos and via its new “not QE” wherein it is buying up short-term treasuries in exchange for newly created reserve cash.

These flows will be scraps of excess reserves … and that’s the best case scenario. The worst case scenario is that collateral upgrades aren’t sufficient and U.S. banks stop making markets in FX swaps and so exacerbate the vacuum triggered by foreign banks. We are on track to realize the worst case scenario, and the market doesn’t price for that.… Repos may still print as bad as last year-end, while FX swaps could end up as the orphaned asset class without an obvious backstop, and that may force banks in some parts of the world to the edge of the proverbial abyss.

Pozsar believes this could create serious problems for some major hedge funds as well, which may not find the kind of balance-sheet rebalancing they need at the end of the year.

The overnight repo problems might stem from the reluctance of the four largest U.S. banks to lend to some of the largest hedge funds. The four banks are being forced to fund a massive surge in U.S. Treasury issuance and therefore [they have] reallocated funding from the hedge funds to the U.S. Treasury. Per the Financial Times…: “High demand for secured (repo) funding from non-financial institutions, such as hedge funds heavily engaged in leveraging up relative value trades,” – was a key factor behind the [recent repo] chaos, said Claudio Borio, Head of the monetary and economic department at the BIS [Bank for International Settlements].

Real Investment Advice

Massively levered hedge funds may be in for a shock in the coming days, as bank sponsors are woefully low on the reserves that the hedge funds need to perpetuate their RV [relative value] trades (and leverage) into the new year.

ZH

As a short explanation, various kinds of funds are required by their own statements to investors on how they are managed to maintain specified relative values of equities to securities to cash in their holdings. As markets change, these have to be rebalanced and brought in line at the end of the year, which may require large cash moves through the banking system in addition to other kinds of trades or swaps.

Given that … excess reserves are gone, the FX swap market, unlike last year-end, may end up without a lender of next-to-last resort, and so it will likely trade at implied rates far worse than anything that we’ve seen in recent year-end turns….

You may end up as a forced seller of Treasuries. Our overarching point is that a dealer is a hedge fund’s enabler, not its friend … and dealers that co-exist with large bank operating subsidiaries have an incentive to introduce imbalances [in] the repo market to boost the value of their banks’ excess reserves, and dealers that have the balance sheet to take liquidity from the Fed’s repo operations will not necessarily do repos with RV hedge funds if FX swaps offer a much better value.

Our big picture conclusion is that… the safe asset – U.S. Treasuries – … will go on sale… Treasury yields will spike. The FX swap market could be the trigger of forced sales of Treasuries around year-end, and these funding market stresses will likely pull away capital and hence balance sheet from equity long-short strategies which could spill over into a broader equity selloff… during a Treasury selloff – that’s not the right kind of risk parity Christmas.

Countdown to QE4

In other words, the greater risk, according to Pozsar, is that all of this spills over into stocks, too, crashing all markets.

Year-end in the FX swap market is thus shaping up to be the worst in recent memory, and the markets are not pricing any of this. Prices don’t seem to discount the facts that excess reserves are gone and the Fed’s operations still have not added any…. Something will have to give and the turn has to get very bad before something gives.

In Pozsar’s view, the Fed could best avert this by giving up its charade that it is not doing QE and launching directly into QE4 before the year’s end.

The Fed’s response

All of this could turn out like the Y2K bug that didn’t bite precisely because everybody responded to the warnings as needed. The Fed listened to Pozsar … sort of … because when Pozsar speaks about repo, the Fed listens. Still, its response remained constrained by its need to maintain the charade that it is not doing QE4ever and, thus, monetizing the US debt. It did something big, but did not do exactly what he said where he said it needed to happen.

In his December statements, Powell noted that interest rate targets will be on hold throughout the coming year (doing nothing to help with Pozar’s noted problems but helping the stock market feel relaxed for the Santa Clause rally). Pressed at the Fed’s presser on Zoltan Poszar’s repo doomsday scenario, Powell stated in the usual Fed tone of calm assurance that all is going smoothly, but the Fed is open to purchasing coupon-bearing treasuries (i.e. longer-term treasuries) if need be. (Still not actually doing it to resolve Polzer’s immediate concern ahead of crisis.) In fact, Powell tried to keep things as short-term on the longterm end as possible:

We’re not at this place, but if it does become appropriate for us to purchase other short-term coupon securities, then we would be prepared to do that if the need arises.

Zero Hedge

With reporters questioning him on Pozsar’s warnings, Powell noted the Fed will adapt if needed. That still left my own longterm question wide open as to whether or not the Fed would ever fully get done what it needs to do in time — something I’ve claimed it would not do.

With Pozsar’s push, the Fed may have finally proved me wrong on that … maybe … by saying it will leap into that if necessary. In other words, it may, at the very last minute do what is really needed just in the nick of time, thanks only to Pozsar’s staunch forewarning.

Powell also said the Fed would adjust its repo operations as required, something it has been endlessly adjusting upward, as I said back in September the Fed would have to do … which still does not resolve Pozsar’s concerns in the manner he prescribed. The stated purpose, of course, would not be to boost bank reserves forever; rather, “the purpose is to ensure monetary policy decisions are transmitted to the fed funds rate.”

Still, not much hope there that the Fed gets it. In the very least, the Fed is constrained from showing it gets it by saying it is engaged in full-fledged QE … forever. Just tweaks of the existing plan into the year end.

So, the repo market continued to suck up all the Fed would throw at it, oversubscribing the next Fed repo offering.

And then …

Two days later, the Fed perhaps saw the light … almost. It expanded (again) its term repo operations to create vast money supply across the New Year turn. The Fed promised it would saturate markets with half a trillion dollars in total repo operations before the year turned! Half a trillion!

You cannot tell me now that the Repocalypse is not the little monster that roared, as I wrote a month ago.

The Fed exceeded anyone’s expectations (except maybe Pozsar’s) and announced it would offer its two-week term operations twice a week for a total of four operations that would be in place to span the year’s turn, and it would (once again) expand its overnight operations (this time to $150 billion), and on December 30th, it would offer a special $75 billion operation that would not mature until January 2nd.

The new schedule would look like this:

That’s almost half a trillion in aggregate in new money in just revolving “temporary” repo operations in place at the end of the year, and when you add the Fed’s ongoing T-bill purchases, it is a half a trillion injected in December alone!

So, no one can convince me the financial world did not crash at the end of summer when I said it would. The Fed may have jumped in with a response massive enough to avoid the recession that I said this financial catastrophe would cause, but that remains to be seen. Anything that requires such an ongoing and gargantuan response was certainly a leviathan of a problem.

The end of the year isn’t here yet, and the Fed has still avoided precisely following Pozsar’s advice by trying to do something similar to what he sought, but in purely short-term temporary operations because it feels constrained to maintain the charade that none of this has to continue beyond the end of the year … or, at latest, beyond April when its short-term T-bill purchases are scheduled to end with those rolling back off the balance sheet fairly quickly, given their short maturity dates. However, banks may simply not have many short-term treasuries to use when D-day comes.

The Fed has been claiming this “temporary” nonsense since September even though each new round of new money had to be increased in new rollovers a week or two later. It has been an ever-burgeoning temporary set of operations that has not hit the half-trillion mark!

In short, all that the Fed has now committed itself to will look like this when it has been completed:

What a coincidence! It expands the Fed’s balance sheet exactly back to where it was before the Fed started to pretend it could unwind its balance sheet … as I always said the Fed would find it could never do! Oh how fun!

For now the Fed’s actions FINALLY seem to have been enough to calm the raging monster. For the first time in months, the Fed is finding fewer takers for its term repo operations than what it is offering:

So, maybe a recession caused by the full emergence of late summer’s Repocalypse has been averted. Maybe the little monster’s head has been chopped off and there will be no second coming at the turn of the year. Maybe. Or…

On the other hand … the Fed has not gone longer-term, full QE as Pozsar prescribed because it cannot publicly admit it is doing that, so MAYBE all of that won’t work. Maybe banks are not soaking up the bigger repo offerings simply because, as Pozsar stated, they are near the end of their capacity to do ANYTHING with shorter-term treasuries. So, maybe they are not sucking up all that the Fed is extending in repos because they can’t. The Fed isn’t buying what they need to trade!

For now, however, the overnight repo rate is back under control:

All is calm, and not a creature is stirring, not even a mouse!

Pozsar is not convinced:

“If the yearend is less of a problem because of the repo bazooka we got from the Fed, and if the message of my report played a part in getting that bazooka, then that’s a nice way to be proven wrong.” However, he then added ominously that “now we’re getting into a point in the year when balance-sheet problems are going to flare up, and I think the system will get gummed up again.

Zero Hedge

Repocalypse may be as quiet as a Christmas mouse again now, but, as we cross over into the roaring twenties, will it, at midnight, become the creature that suddenly roared back out of the deep? The Fed fully failed to see what was needed in September and how bad the problem was, and Pozsar thinks the Fed may still have failed because it is trapped into not admitting it must go full QE and are, therefore, is managing a longterm problem with only short-term solutions that do not resolve the banks’ actual reserve needs.

If the Fed has finally managed to cut the head off the Repocalypse (as the repo charts above seem to indicate), then it may have also nipped my predicted recession in the bud, countering my claim that the Fed would — because of its own blindness and the QE corner it would paint itself into — not do so in time. After all, it has barraged the monster with half a trillion dollars in fire power, equal to the cost of our first year of war in Iraq if I recall. So, maybe what is looking like a 100-day mission has been accomplished!

However, if Repocalypse does make a second coming to roar into the dawning twenties, the recession that I said would be caused by another financial crisis due to the Fed’s tightening may still prove to have first raised its head out of the murky deep in the late summer of 2019 as a problem the Fed failed to slaughter in time.

For the moment, this Christmas the Repocalypse sleeps, so may visions of sugar plums dance in your head.

[See also “Repocalypse: The Little Crisis that Roared.”]

Repocalypse: The Little Crisis that Roared

That didn’t take long. I just published an article showing how the Fed had responded with a quarter of a trillion dollars to save the economy from what it claimed was a mere blip. Since then, the recession-causing Repocalypse I’ve warned of has roared around the world, forcing the Fed to amplify its response again.

The Fed’s planners just cannot outrun the little monster they created. It is growing as quickly as they increase their running speed. In the article I just alluded to, I also stated,

As you look at that, bear in mind that the Fed is continuing to add $60 billion more new money on top of that each month all the way to April, and that several times since September they’ve already had to increase what they said they would do, so may have to increase it more still. By the time we are done, based on the Fed’s schedule for its new QE, the Repo crash will have turned out to be so massive that the Fed will have flooded the economy with, at least, HALF A TRILLION dollars just to prevent the crisis from happening again and causing major banking/credit problems

A Love Letter to my Crow about my 2019 Predictions

I showed this graph of how far they had already gone in trying to pump the failing system back up:

Then I noted that, in spite of such historically rapid and massive Fed intervention, the economy was still sinking toward — if not deeper into — recession.

As for the repo crash being the start of a recession, that remains to be seen. The Fed has leaped in with a quarter-trillion-dollar response to date. We’ll see if that is enough to circumvent the severe banking problems they obviously suddenly fear and the recession I said those banking problems would cause.

Here is another way of presenting the same data:

The red bars show how much was injected into the Fed’s balance sheet under QE, then how much was withdrawn from the Fed’s balance sheet under QT, and now how much has been re-injected under QE4ever. Tell me that the Fed’s current intervention is not every bit as large in scale and faster in timing than any previous round of QE!

And now they’ve increased it again! As it turns out, I was so busy putting together that article, that I missed the news that the Fed had just done what I said I thought it might have to do … yet again. It upped the amperage on its repo operations one more time:

Fed Braces For Year End Repo Turmoil: Announces $55 Billion In 28, 42-Day Repos To Flood System With Cash

The Fed confirmed just how reliant both it, and the entire US financial system is on the repo market, when it released its latest term repo schedule, one which for the first time included 28 and 42-day repos which would mature into the new, 2020 year…. Meanwhile, the NY Fed is maintaining its $120BN in overnight repos indefinitely.

Zero Hedge

These new repos are only supposed to aggregate to an additional $55 billion, but there we go again with the Fed having to add more and more ammo to combat something it continues to say it has under control. It is again stretching the term length of repos to new terms because shorter-term repos to banks are endlessly rolling over but not doing the job. The little monster is growing as quickly as the Fed increases its responses.

This is extraordinary in the truest sense of the word. We’ve never seen anything like it in the repo market. News of the Fed’s constant failure to fully appreciate and address the scale of the funding shortage that began in September keeps pouring in so fast that I am scrambling just to keep up with the news of the Fed’s new steps as I research and write my articles about what it has already done!

How the repo crisis has multiplied like a virus through the financial system

Here is how the Fed’s overnight repos, generally just an end-of quarter one-day phenomenon (and for almost a decade not even necessary at all), continue to roll over:

And here is how the two-week term repos (a new invention by the Fed in manipulating money markets) have continued relentlessly to roll along:

As I look at that, I have to think the Fed, which originally reported it had solved the problem with a single overnight repo operation — maybe two or three at the most — must now be in panic mode as it has gone from inventing fourteen-day term repos to now 48-day term repos to supplement a program that is still not resolving the crisis.

Bank of America sees it as a problem that could be metastasizing into financial collapse:

The repo channel, which is one ingredient within overall financial conditions, is becoming more important as reliance on overnight funding and leverage continues to rise…. The bigger picture is that if repo markets stopped functioning today, the amount of Treasury and MBS securities held outside of banks-dealers requiring liquidation (for lack of funding) would be about twice as large as 2008, and with today’s surprisingly low levels of liquidity in the “liquid markets” the impact could be massive. In this context, we view the Fed’s purchase program as integral to the promotion of easy financial conditions and supportive of asset prices, which is Chair Powell’s second criterion for QE…. In our view, the most worrying part of the Fed’s current asset purchase program is the realization that an ongoing bank footprint in repo markets is required to maintain control of policy rates in the new floor system.

ZH

It’s a good thing this isn’t QE4ever or even QE-at-all (according to Fed Chair Jerome Powell). It is just the new norm in overnight bank funding. Just the new norm. The Fed has stated one other reason (than the one mentioned by BofA in the excerpt above) for saying this is not QE: it no longer comes with forward guidance about how much the Fed will buy and when. How the Fed can get away with claiming that when its schedule is published well in advance is beyond me:

How much more obvious does forward guidance need to be? And who cares if the Fed gives forward’s guidance at this point? The banks are now so used to how QE works that they could intuitively guess at what the Fed will do. Some writers even say JPMorgan manipulated what the Fed is now doing by helping create this crisis with its own massive balance-sheet rotation just to kick the Fed back into QE mode.

Here, by the way, is a great recent article by Chris Martenson about how QE has been working, explaining how the Fed is, for a fact, illegally monetizing the US debt, even as the Fed claims it is not:

The Federal Reserve Is Directly Monetizing US Debt

I’ve written about that in the past, but there is no need for me to go back and try to recap what I’ve said when Martenson covers it so well there. The Federal Reserve is breaking the law, and congress couldn’t care less. Congress didn’t even bother to ask Powell at last week’s congressional hearing how it is that the Fed claims it is not monetizing the debt.

The Fed is not only monetizing the debt directly at this point, but as Martenson says, it is even fully engaged in Modern Monetary Theory without admitting it and without any overt choice by government to go that route. Yet, the financial world sleeps as the train goes by — a congressional circus train for public entertainment about the orange clown named Donald. No, not Ronald MacDONALD. Just Donald. Congress plays with politics while Rome burns.

With such slight of hand, the entire monetary regime of the United States has shifted in two months time into a scale of combat never seen in the history of the US repo market — a central bank directly financing the US federal debt with ever larger rounds of new money, “printed” (an anachronism in that it is done, of course, with the click of computer keys in this age) and deposited in the government’s bank account THE VERY SAME DAY that government treasuries are actually issued!

And no one cares. (Well a few readers here (and there), but not many.)

The colossal size of the Repocalypse

As stated in the following video, the Fed has now moved from lender of last resort for banks to the everything of last resort for banks, the government, the stock market, the bond market, money markets, etc. The entire US economy has become utterly Fed dependent. Here is how the Repocalypse moved insidiously from a nothing-of-significance to a semi-covert almost-everything-has-changed-but-almost-no-one-is-talking-about-it:

To clarify one point at the start of the video, yes, the Fed with its endlessly repeated overnight repos and weekly repos has already done $3 trillion in total operations. However, that is misleading in impact in that almost all of that just refinanced the repos that happened earlier. When you keep rolling over an overnight repo every night for two months, it sounds like you pumped in about fifty times more money than you actually did. In fact, all you’ve done is create one night’s worth of new money and then endlessly refinance the original repo every day for fifty business days to keep it in place. The overnight repos don’t aggregate at all.

Likewise, when you do that every third day or so with two-week term repos, they aggregate over the course of those two weeks, so you wind up with three of four of them accumulated by the end of two weeks. After that, however, each new term repo is essentially just rolling over one of the term repos that happened in the two weeks prior because those earlier term repos are now rolling off the books as you add each new one.

That’s why I used the chart at the top of this article to show what the actual aggregate (to the Fed’s balance sheet) of all these reactions along with the latest permanent $60 billion a month has been — about a quarter of a trillion dollars. Still, a quarter of a trillion dollars is a massive amount of monetary munitions to fire off, which is as great an assault as any QE we ever saw during the Fed’s so-called “recovery” period.

Yes, some QE came in bigger single doses, but averaged over the period between one dose and the next, none of them were any greater than what is happening now. QE 1 added about a trillion dollars in almost one burst, but then that was it for almost two years. QE 2 added another 3/4 of a trillion, but that was it for another two years. Then QE3 added $80 billion a month (for almost another two trillion over the course of another two years).

If you average each of those out as a monthly figure over the years that they covered, they are all less than what has just been injected each month over the last two months, which is the best you can do to compare because we have no idea how long the present operations will continue. The Fed states until April, but the Fed has understated by a very large degree how long every operation it has done will continue since it began these emergency operations in September.

The Fed obviously has no idea how long this level of rapid-fire response will be necessary, so why would anyone continue to take the Fed’s word on it? The Fed also said QT would be continuing right through the present day on autopilot at this time last year. So, why does anyone take its word on anything anymore? It also said there was no recession in site and no housing crisis on the horizon right in the middle of the Great Recession, and it said there was no recession in sight just before the dot-com bust. Why does anyone continue to accord the Fed any deference or credibility at all?

To reiterate what I said a couple of articles back about the scale of this thing and what the Fed understands about the beast it is battling (this time enumerated for clarity) …

  1. First, the Fed burst into $75 billion in overnight funding operations due to obvious shortages all over the map in bank reserves.
  2. Then the surge spread beyond that into longer-term temporary funding of $30 billion twice a week because the overnight loans were not up to the needs.
  3. That still not being enough to end the troubles, the Fed’s rapidly expanded the overnight operations to $100 billion and doubled the term operations to $60 billion.
  4. Those operations still did not end the troubles the Fed’s tightening had created, so the Fed decided to flood the murky money pools of this world with $60 billion in frothy treasury purchases…..
  5. Then, all of that pumping of of new fiat money into the monetary system was still not enough, so the overnight and term repos (essentially loans) had to be extended.
  6. Then, because all of those operations together are still not enough, the Fed promised the repos will continue, “at least,” through January, 2020, and the creation of new money [QE] injected into the banks will continue, “at least,” into April.

During those previous rounds, I’ve stated from time to time each new plan would probably not be enough; and, now, because all of that is still not enough fire power, the Fed has added another $55 billion!

How much will it take for the general public to wake up and realize that the September repo crisis was so enormous that the Fed is still struggling to bring under control? Therefore, I think it merits being called, as some are calling it, “The Repocalypse.” In fact, we still don’t know how big it is, and to keep us from figuring out whom it was eating, the Fed has said it will refuse to reveal what banks are getting this extreme support for two years! (They don’t want to cause a run on banks, you know.) I’ve said this will mount up to at least, $500 billion in new permanent monetary injection, based on the Fed’s stated schedule … and probably more. We’re already halfway there!)

How many times have my own readers heard me warn in years past that, for new rounds of QE to keep working, it is going to take higher and wilder doses of it to achieve the same effect? Isn’t that what we are now witnessing?

As noted in the video above, the Fed’s asset sheet has just slammed from going in reverse (shrinking) at an annualized rate of about 9% into full forward thrust (growing again) at an annualized rate of 23%! The shift point, of course, was September’s repo crisis. That should give you a sound idea of how significant and severe the repo crisis was and is by how much QE it is taking to jar us back out this crisis, hopefully before it becomes a problem across the entire global economy. That is an astounding regime change. And almost no one seems to care.

Everyone is riding along silently in the family car as it flies off a cliff, saying “Dad has this under control.”

The speed with which the Fed reversed and the degree to which almost no one cares has been a little surprising to me, though it shouldn’t have been, given what I’ve seen of economic denial in the years I’ve been writing this blog. The entire US populace, including all the economists and market analysts and politicians have readily and smoothly gone along with the Fed’s claim that it is not doing QE, and acquiesced to their stance that this is just a minor technical blip the Fed is correcting purely to maintain monetary policy. Not many are asking why routine monetary policy now requires daily massive interventions by the Fed in increased regular barrages.

A large part of my claim that we’d go into recession this year because the Fed would not react effectively enough to avoid the recession that would be caused by its tightening was rooted in the belief that the Fed’s astounding return to QE would finally break through people’s denial enough that they’d start raising objections. I thought we’d start to hear arguments like, “Wait a minute here! You told us that QE was temporary. You told us for years you could normalize your balance sheet again and that doing so would be ‘as boring as watching paint dry.’ You told us that QE was not monetizing the national debt precisely because you would normalize your balance sheet again so that it would all go away and become nothing but a temporary measure that was necessary for economic stimulus, not necessary for funding the US debt. Now, all of that has proven to be total bunk, and you’ve had to rush back to QE more quickly than you ever thought possible. In fact, you never thought you would have to return to QE at all. Not much more than a year or so ago, Janet Yellen told us we’d never have another financial crisis in her lifetime, and here you are repeating everything you did in the worst part of the Great Financial Crisis. You guys have no credibility left at all!”

I thought some arguments like that might emerge. In that case, the lack of public trust would prove a HUGE problem for the Fed because even the Fed has long openly admitted trust is its only real stock in trade. Without that the fiat dollar has no value at all.

Yet, here we are, with everyone humming “Dixie Land” or something of the kind and the Fed marching along to its own drum without much criticism, and the attitude almost everywhere (so far) is, “Well, we’ll just see where this goes. The Fed says it will all be fine. I see no reason not to believe them, do you?”

Maybe history is a reason!

I wrote about how little anyone appears to care about this major Fed regime change in a comment on my last article, and I wrote it before becoming aware of how the Fed just increased its repos/stimulus measures for the seventh time in less than twice as many weeks:

They [bankers, politicians, Wall Street, investors, and citizens in general] have no personal interest in outing the Fed and crashing the party. In fact, I think they have no interest in even seeing that the Fed has failed. Most of them aren’t even thinking. Thinking would lead to realizations they don’t want to even consider, and denial is best maintained by not thinking about anything you don’t want to hear.

We see this all the time in individuals who are in denial about something bad in their lives, such as a cheating spouse. They quickly brush off any warning friends give — or even raise a barrier of anger against it so they don’t have to hear it and don’t have to think about it. Thus, ignorant bliss is maintained … for awhile … until one day far down the road reality finally crashes through when they catch their spouse in the bedroom with someone else.

We see it working out the same way in economics today with Joe Citizen who is not asking any questions of the Fed. I had hoped (not a lot, but to some degree) that people would finally smarten up and start asking some real questions about the Fed’s failure now that it is laid out in the open for all to see, but I guess that is beyond hope. I find that the majority of people cannot even be convinced when you dissect the failure in a post-mortem of the Fed’s recovery right in front of them. I still hear back on various forums or from friends that “The Fed says this isn’t QE, so it isn’t” or “The economy is doing the best it ever has because Trump says so, and he’s my president.”

People are believing exactly what they want to believe and not letting anything else in. I thought it might become hard for people to disbelieve in the underlying economic realities and maintain trust in the Fed’s alternate narrative once the Fed was forced to do the opposite of what it had reassured the world it would do and had to leap in an extraordinary way back to QE (as I always said they would do). I hoped people would start to ask questions when they saw the Fed’s total about-face. I thought their doubting the Fed would render the new QE a lot less effective. Even the Fed expressed in a number of speeches that it was now concerned about losing the public’s trust. However, apparently that is not to be case. I’m not hearing many questions even from the average citizen. In fact, almost none.

I think all of this is just human nature living in denial in all segments of economic/business life. I guess the only thing that will crash through denial is total economic collapse.

Even then, I suspect everyone will simply be asking “Why did this happen” and probably fastening on the most ready scapegoat they can find and agreeing that “no one could really see something like this coming.” I’m not sure, in that case, what collapse will look like — just a long run of stagnation into greater and greater confusion and despair about what is wrong with the world (with no clarity) or sudden realization as we all fall off a cliff.

There are a few bigger names by far than I, such as Santelli in the video linked in a comment above, who are saying, “Hold on a minute! What is going on here?” But even they don’t seem to be breaking through the public mindset. Maybe that realization is something that is dawning slowly, but right now it appears the Fed is going to get another free pass by 95% of the citizenry with little effort.

None of the people who should be questioning it, such as the financial media, are going to; but apparently the public isn’t going to either. Investors certainly are not going to, as they only want the market to go up, so don’t bother us with facts about how spectacularly the Fed failed or about how it is now monetizing the US debt on an infinite trajectory. We don’t want to hear it; and, if we do hear it, we’ll simply respond that it doesn’t matter anyway and end the conversation.

For example, I just read a writer who, after noting that the Fed had just IN ONE WEEK pumped an additional $100 billion into the economy (more than it ever did in one month of QE3), summed that up as follows:

“The Federal Reserve is doing what it needs to do to keep its policy rate of interest steady…. I think the Federal Reserve has been doing a good job in some pretty tough times.”

That’s all. The whole massive burst of new money was just normal policy-rate control, and hats off to the Fed. NO question as to why it now takes such ABSOLUTELY MASSIVE actions (by any historical standard) just to maintain its policy rate of interest. All that matters is dad has control of the car as it flies over the cliff. “Back to sleep children. Don’t worry about the trees below that will soon be coming through the floor of the car. Rock a bye baby in the tree tops.”

Congress, which has oversight of the Fed, preferred to sit tight during Powell’s recent meeting with them because none of them want to deal with the massive problem that sits in front of them. So, they enter the meeting, hoping Powell will give them what they need to maintain belief that there is nothing they need to do. Hearing no basis for alarm from the Financier-in-Chief, they leave content that there is no problem they must resolve, no reason to have to reform the Fed because it failed, etc.

Continued belief in the Fed may mean things take longer to crash than I predicted because consumer sentiment holds out longer. We’ll see what happens; but, at the moment, it seems everyone is content to keep whistling Dixie.

That said, economic pressures do continue to mount toward a recession, and consumer sentiment is finally showing minor cracks as denial becomes harder to maintain. It is too early yet for the Fed’s intervention to have provided any stimulus to the overall economy, so stats are still coming in worse than the months before. Whether this breaks through before the Fed’s absolutely massive new stimulus starts to turn things back up a little, remains to be seen over the next couple of months.

As I concluded in my last article,

The question that remains to be seen, therefore, is whether its panicked leap back into QE with both feet came soon enough and is large enough. They stopped QT quicker than they thought they would (but right when I predicted they would) and leaped back in quickly [a couple of months sooner than even I thought they would] with an extremely large response, so maybe they will narrowly avert the recession that otherwise would have started roaring like a blast furnace after September’s huge repo crash.

A Love Letter to my Crow about my 2019 Predictions

[See also the followup article to this one: “Repocalypse: The Second Coming.”

The Big Squeeze on Banks is Back and Badder than Ever!

It’s no longer just me using terms like “Armageddon, crisis, devastating, chaos, Great Depression;” it’s leaders of the world’s most august and conservative central banks!

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Quick Recap of the Fed’s Foundering Follies and Our Descent into Economic Madness

As September rolled into October, the US central bank’s monetary madness blew all over us like a fountain of foam in a windstorm. First, the Fed burst into $75 billion in overnight funding operations due to obvious shortages all over the map in bank reserves. Then the surge spread beyond that into longer-term temporary funding of $30 billion twice a week because the overnight loans were not up to the needs. That still not being enough to end the troubles, the Fed’s rapidly expanded the overnight operations to $100 billion and doubled the term operations to $60 billion. Those operations still did not end the troubles the Fed’s tightening had created, so the Fed decided to flood the murky money pools of this world with $60 billion in frothy treasury purchases. Although this money was permanent reinflation of the Fed’s balance sheet (unlike the temporary overnight and term repos), the Fed told us they are not QE (never mind that exactly like all previous QE, they give new fiat money with interest to primary treasury dealer banks that buy treasuries from the US government). The banks rushed in with more than four times the offers to resell treasuries they had purchased from the government to the Fed than what the Fed was willing to buy.

And, then, all of that pumping of of new fiat money into the monetary system was still not enough, so the overnight and term repos (essentially loans) had to continue. Then, because all of those operations together are still not enough, the Fed promised the repos will continue, “at least,” through January, 2020, and the creation of new money injected into the banks will continue, “at least,” into April.

But there is no problem here, and the Fed assures us none of this is QE, even though the aggregate of all of that is easily as big as any previous rounds of QE. By the end of the Fed’s already slated actions, it is estimated the Fed will have injected, at least, $850 billion dollars into the economy!

In all, a tremendous amount of churn out the flood gates in just one month as the Fed opened its unlimited reservoir to pour a river of money into the banks and economy to save the rich. It leapt back into doing that so quickly it couldn’t even wait until its regularly scheduled October meeting to make a studied decision. The immediacy says this was clearly an emergency, reactionary decision.

But that is not QE4ever!

Not according to the Fed.

You see, it cannot be called QE because a return to QE would be admission of catastrophic economic failure precipitating from of the Fed’s quantitative tightening regime, which I labeled “The Fed’s Great Recovery Rewind,” having seen where it would take us before any of the above madness and mayhem. It also cannot be called QE because, as pointed out in my latest QE4ever article, that would be illegal since QE forever is the same thing as monetizing the national debt, expressly forbade by congress.

How it all came down

The fix is in, and exactly in the manner I have stated for years it would happen. (I’m not suggesting I’m the only one to see how this would play out, as others also saw by similarly conceived routes the USS Fed was headed for the rocks long ago.) Here is the course I laid out by which the ship would hit the rocks:

  1. When the Fed finally stopped interest cuts and stopped QE, the Fed would believe it had actually created a durable recovery. That apparent success would lead it to reverse all of that, as it had long promised it would, in order to prevent economic overheating and runaway inflation.
  2. Thus, the Fed would start down a “post-recovery” path of raising interest targets and attempting to suck money back out of the monetary system (QT) because, for peculiar reasons unreconcilable to the intelligent mind, the Fed never understood that doing the opposite of everything it had done to “create a wealth effect” would bring about equal and opposite destruction of that superficial wealth — common sense not being a modern economist’s forte.
  3. The Fed would, nevertheless, have opportunity to find out very quickly that it was sucking the life out of its recovery because the stock market would crash as soon as the Fed’s balance-sheet reduction built up speed. I laid out that it would crash over a period of years in long-separated legs that timed out with the Fed’s increases in the rate at which it reduced its balance sheet. Once the Fed specified its unwinding schedule, I said the first leg of that crash would hit in January 2018, the next in the summer and the worst for 2018 in the fall, likely starting as an October surprise.
  4. The Fed actually cannot unwind at all, having created an utterly dependent economy, so any point at which it would stop its interest increases and the QT would be too late; but the longer it went, the worse the wreckage of its fake recovery. Because the Fed believed it could tighten, I said it would tighten to a disastrous level before it figured out from the market and economic troubles building around it, how much damage its tightening was causing.
  5. By the time it returned to loosening with new interest-rate cuts and more QE to recover from the damage it inflicted on its own fake recovery, the economy would already be sinking into recession. That, I eventually said (a separate issue from the stock market), would become apparent in the summer of 2019.
  6. Because there is a lag time for the general economy’s response to Fed policy changes of, at least, six months, the economy would continue to recede for, at least, six months beyond the Fed’s resumption of QE as the previous tightening continued to take hold while the new loosening had little effect. (That would be six months beyond now.)
  7. As a result, the Fed would find itself behind the wave because its response would not only be too late but it would be too small because the Law of Diminishing Returns has already shown us that greater and greater amounts of QE are needed to have a similar effect; and the Fed has a six month lag to see before it gets to see the response was not enough.

In other words, we’ll be far down the road of economic collapse before the Fed gets that all figured out. Powell, himself has said,

We think monetary policy works with, as Friedman said, long and variable lags.

The Federal Reserve

Since the Fed’s data, itself, almost always lags any changes in the actual economy by, at least, a month, and since the Fed is still saying all of its changes will be data dependent, and since the Fed says its policy changes have a “long and variable” lag before they start to change the actual economy, it will be a long time before the Fed knows how effective any of its present actions are. Only at that point will the Fed be leaping in with the solution it should have deployed immediately when its recovery started to fail (if it wanted to temporarily prop the economy up again via its familiar means). Right now we are at step #5.

Never was there any chance the Fed’s recovery plan would lead to anything lasting.

The latest signs of continued descent into recession

Here is the situation as the Fed now starts the non-QE of step #5, which is actually going to become QE4ever because the Fed has no exit plan, and all economic matters are still turning worse:

Repo operations have continued unabated:

Retail sales and industry decline:

September’s retail sales fell 0.3% month on month. That was not just brick-and-mortar. Online sales, as a part of that, also declined 0.1%. Business inventories have been slowly but steadily building since 2017, which gradually suppresses wholesale purchases from manufacturers then backs up to production decreases. Not too surprisingly, then, industrial production fell 0.4% month on month in September, double the amount that was anticipated by economists.

CEO confidence falls precipitously:

Who knows better than CEOs whether they have anything to be confident about? Sure, market traders claimed last week that corporations were doing well on earnings because traders have their books to sell. It’s a simple and deceptive as that. They could only claim earnings were fine, however, because, as has happened every quarter this year, earnings expectations were lowered even more than they had been lowered in previous quarters.

That leaves one to wonder if buybacks have soared to record levels again because CEOs and corporate board members are using corporate cash to buy themselves out as quickly as possible:

The housing decline declines again:

I had last noted in a previous article that housing was the only economic indicator that had moved out of sync with my recession predictions. The rest were aligning in lockstep. Well, August’s upward spike turned out the next week to be a mere blip as the downward path has resumed:

Housing starts fell 9.4% in September month on month, but that was still 1.6% above September, 2018. Housing completions, however, fell 9.7% in September, month on month, and were dropped 1% below September, 2018.

Those are just the indicators that have shifted since my earlier October article, “The Relentless Road to Recession.”

GDP pushing recession under heavy trade suppression

Notice how close we came to recession in the fourth quarter of last year, as reported in January of 2019, and notice how rapidly the fourth quarter plunged from the third:


source: tradingeconomics.com

The same rapid plunge could happen in the third quarter of this year, which will be reported October 29, and we still have one quarter to go in the year with not a lot of reasons in all the stats I’ve been showing throughout the third quarter to believe things have any chance of heading up.

Even the partial trade deal that is presently in the works — which won’t be signed until, at earliest and if at all, the middle of November — only locks in place the tariffs that already exist. It is nothing more than an agreement to stop escalating tariffs. Again, it is not an agreement to back the trade war down, but merely to stop escalation that is already scheduled for December. Therefore, it won’t bring any relief to the above picture of declining GDP, except in pork and soybean sales.

In fact, the International Monetary Fund estimated its effect this way, saying it …

could reduce the harm done by tit-for-tat tariffs imposed by both countries over the past 15 months. Instead of dragging global growth down by 0.8%, the impact might be limited to 0.6%, Managing Director Kristalina Georgieva said on Thursday.

CNBC

In other words, without the deal, global GDP growth is expected to fall another 0.8%. With it, damage will by slightly mitigated to where global growth will only fall another 0.6% due to trade wars. The US is impacted more directly by the trade war with China than the rest of the world, so larger declines in either case should be expected. That means you can knock, at minimum, another 0.6% off the above US GDP growth chart in the months ahead just from the continuing US trade wars, and that is the best-case scenario if this agreement gets signed in November.

I think this no-deal trade deal has a better chance of being signed than any past promises; but it is still a deal without hope. Trump may be feeling some desperation to mitigate economic damages as we go into the election year, and Krazy Kudlow is telling him he needs to sign:

President Trump’s top economic adviser last week arranged an Oval Office briefing with outside experts who warned the president that continued escalation of U.S.-China trade tensions could imperil the economy and hurt Mr. Trump’s chances for re-election, according to people familiar with the meeting.

The Wall Street Journal

But it’s still a nothing deal that merely keeps trade from worsening. Meanwhile, new tariffs just went into place last week between Europe and the US, and trade with China will continue to worsen from tariffs already in place that are still working their way down the long Silk Road to the consumer.

With recession advancing relentlessly now from every quarter and the central bank’s recovery broken on the rocks and floating away like flotsam in the ebbing tide, I continue looking deeper into the ongoing words of all central bankers regarding their joint efforts to create a vast, global solution to a now fully global and growing problem in my next Patron Post. It’s not too late to sign up to get access to this ongoing saga of the central banksters’ big plans in their own words, which has been my theme throughout 2019.

The Beginning of the End: Great Recession 2.0 is Obscured but Here!

The Great Recession never ended. I say that because the deep economic flaws that caused it were never corrected. All recovery efforts since merely clouded our eyes to the problems growing larger around us, even making them worse, and now we are going back into the belly of the Great Recession.

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GDP Ain’t What it Used to Be!

Let me help remove the rose-colored glasses for anyone who still thinks GDP this year is good. 

First, GDP growth in the first quarter was not “great” as I’ve heard some claiming. It was, by US historical standards, a little lower than mediocre. Second, the biggest tax cuts in history only got us down to 2.9% GDP growth for 2018. GDP growth had been pegged originally around 3.1%, but that was revised down, as is usually the case. Every administration tends to estimate GDP on the rosy side because bad news is swallowed easier the further back in time it lies. So, estimate high and revise lower seems to be the government’s perennial approach.

If you revise the number down after a little more the time has passed, people don’t care as much because they are now focused on the new number for the latest quarter. Revising actual GDP (not just the headline growth number) from past quarters down also makes it easier to show more growth in the present quarter. That means we are likely to see the second quarter’s number of 2.1% revised down to something like 1.9% when the third quarter comes in. That’ll make it easier to make the third quarter look a skosh better than it otherwise would.

Either way, the latest number is far from being the “healthy pace in the second quarter” that one market commentator I read recently claimed we just saw. A reading around 2% is actually a pathetic number for a number of reasons. When I was young, we considered that a pre-recessionary number. It was an amber light that said the economy was going soft.

GDP growth looks worse in context

It is when one considers all it took just to get us to this 2.1% growth, that GDP growth looks particularly pale compared to most years since the Great Recession. 2018 was the year of our discontent when the stock market crashed to a bear that is still growling around the market (what with Morgan Stanley saying 80% of the indices it monitors remain in bear mode since last year). Yet, 2018 was the first year of the most massive trickle-down tax cuts in history — bigger than the Reagan trickle-down cuts and bigger than the Bush trickle-down cuts! That makes 2.1% GDP growth a truly milquetoast number at best.

Add this to the context: We got there after government “stimulus” spending that put all other deficits in the past to shame. We ran the largest deficit the world has ever seen during a time that was already growing at 2%! We’ve gone exactly nowhere since Obama who also averaged around 2% GDP growth. (See graph above.)

With so much government deficit spending, particularly in the corridors o military-industrial complex, it should have been easy to accelerate the US economy like a rocket ship, as Trump has claimed we could have done with the Fed’s help. Sure, we have had slightly higher deficits when trying to engineer our way out of recession (even then only once), but this deficit came after years of supposed “recovery” when we were already growing with unemployment already at all-time lows. It should have been rocket fuel. And we got nothing!

We poured fiscal gasoline on the entire economy and hit it with a flame thrower, and this 2% GDP growth is all we got for it! That is worse than no bang for the buck! We actually got a decline from the second-quarter growth rate a year ago! In fact, we are essentially right back where we were on the day Trump took office.

All of this speaks to how badly the Fed’s recovery failed as soon the US economy was taken off Fed life support because that is the big force that coincided with all those tax cuts and that stimulus spending. Throughout 2018, the Fed kept raising interest rates and reducing its balance sheet.

Being certain the Fed’s attempt to “normalize” the economy would create a downdraft so massive it would even overwhelm the Trump Tax Cuts and Trumpian-sized stimulus spending is why I have referred to this period as the Fed’s Great Recovery Rewind. The economy spiked briefly then sank rapidly right back to where it began, and the stock market crashed. One might look at it this way: even the new support of mammoth corporate tax cuts and stimulus spending couldn’t save the Fed’s fake economic recovery once the Fed removed its artificial life support from the economy.

The trickle that didn’t

It is not, however, simply that the Fed failed, as Trump would like to place the blame. Putting tax cuts on the supply side (in the hands of the rich) does not stimulate the economy. It stimulates the stock market and drives up asset prices. The Fed has stated that it intentionally orchestrated its money creation to channel through the supply side as well in the hope that driving asset prices up would cause capital investments, which would stimulate the general economy. So, the Fed backed off its supply-side supercharger at the same time the government kicked in supplyside stimulus.

What we saw during the Fed’s supply-side biased stimulus, however, was that almost all of its new money remained in the hands of stock holders. As far as I was concerned, it was a foregone conclusion that it would. Here’s why: If you put all of the tax cuts on the demand side, there would be only one way the rich could get their hands on those tax cuts. They’d have to make things and market them to entice the demand-siders to spend their tax savings in the direction of the rich.

Do you think the rich would just ignore this potential for new markets? If they did, I can assure you entrepreneurs would rise from among the poor to seize the day. Because the demand side (the consumer side) was empowered by the tax savings, they’d be able to demand the products the rich or the new entrepreneurs try to entice them with. That is the only way the rich would have reason to build factories and hire more people.

I guarantee you, tax cuts will always bubble up to the higher strata of society more readily than they trickle down. Far too many filters stop up the channels on the way down for anything more than the slightest trickle to make it to the bottom tiers — not even enough to slake your thirst.

Don’t you find it contradictory that we consider the US economy’s greatest strength to be the consumer and, yet, we repeatedly make sure the consumer who drives the economy gets the least of the tax cuts? That strikes me as the kind of self-contradictory thinking that can only be explained by greed.

If you think 35 years or so of repeated episodes of supply-side economics have trickled down to the demand side of the economy, you might want to take a look at how the average consumer is really faired over that span of time in this last article I wrote: “Bubble Bubba Isn’t Doing Fine Anymore.”