A World Gone Mad

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Today we gasp, stagger, reel.

The enormity of it all has finally overmatched our capacities. Consider…

Total global debt presently piles up to 322% of GDP — a record.

Total “developed world” debt piles higher yet — 383% of GDP — another record.

The world’s stock markets combine to $88 trillion, or 100% of global GDP. That is another record yet.

Record upon record upon record has come down… as debt has gone relentlessly up.

And what does the world have to show for the deluge?

Little Bang for the Buck

Real United States GDP growth gutters along under 2%. Fair estimates place European and Japanese 2020 growth under 1%.

Interest rates, meantime, are coming down. And so the supply of “dry powder” available to the central banks is coming down. They will require heaps of it come the next crisis.

Project Syndicate, in summary:

The major developed economies are not only flirting with overvalued financial markets and still relying on a failed monetary-policy strategy, but they are also lacking a growth cushion just when they may need it most.

Direct your attention now to the Bank of England. Specifically, to its balance sheet…

Where’s the Crisis?

As a percentage of GDP…

Not once in three centuries has this balance sheet swollen to today’s preposterous extreme…

Not when England was life and death with Napoleon, not when England was life and death with the kaiser, not when England was life and death with Hitler:


The Bank of England’s balance sheet — again, as a percentage of GDP — presently nears 30%.

It never cleared 20% even when England was absorbing obscene debts to put down Herr Hitler.

Where is today’s Napoleon? Where is today’s kaiser? Indeed… where is today’s Hitler?

Yet the balance sheet indicates England is battling the three at once. And on 1,000 fronts the world across.

We razz our English cousins only because the Bank of England is nearly the oldest central bank going (est.1694) and keeps exquisite records.

It therefore offers a detailed, three-century sketch of central banking’s shifting moods.

Our own Federal Reserve’s history stretches only to 1913. But its compressed history offers a parallel example…

Crisis-Level Balance Sheet

Its balance sheet expanded to perhaps 20% of GDP against the twin calamities of the Great Depression and Second World War.

It then came steadily, inexorably and appropriately down, decade after decade. Pre-financial crisis… that percentage dropped to a stunning 6%.

But then the great quake of ’08 rumbled on through… and shook the walls of Jericho to their very foundations.

The Federal Reserve got out its mason kits and set to patching the damage.

Patching the damage? It built the walls up higher than ever…

By 2014 quantitative easing and the rest of it swelled the balance sheet to 25% of GDP. That, recall, is five full percentage points above its 20th-century crisis peaks.

Mr. Powell’s subsequent quantitative tightening knocked down some of the recent construction.

The balance sheet — as a percentage of GDP — slipped beneath 20% by 2018.

But last year he pulled back the sledgehammers. Then, in September, the short-term money markets began giving out… and Powell rushed in with the supports.

The Fastest Expansion Ever

He has since expanded the balance sheet some $400 billion in a four-month span — over 10%. Not even the financial crisis saw such a violent expansion.

As we have presented before, the visual evidence:


The balance sheet presently nears $4.2 trillion, only slightly beneath its 2015 maximum.

Here then is irony…

“A Magnet for Trouble”

Observe the 2012–14 comments of Carlyle Group partner Jerome Powell — before he was Federal Reserve chairman Jerome Powell:

I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated…. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?…

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response…

Continues the present chairman:

My [next] concern… is the problem of exiting from a near $4 trillion balance sheet… It just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think…

I think we are actually at a point of encouraging risk-taking, and that should give us pause…

I kind of think that a large balance sheet might prove to be a magnet for trouble over time… So I tentatively land on a floor system with the smallest possible balance sheet…

“Why stop at $4 trillion?”… “It will never be enough for the market”… “faster economic growth, which it is probably not in our power to produce”… “a large balance sheet might prove to be a magnet for trouble over time”… “I tentatively land on a floor system with the smallest possible balance sheet”…

Again — here is irony.

What Happened to Powell?

Where a fellow stands often depends upon where he sits. And this particular fellow sits in the chairman’s seat at the Federal Reserve.

The Federal Reserve has a certain institutional… perspective.

And so he leans whichever way it slants.

Our co-founder Bill Bonner puts it this way:

“People come to believe whatever they must believe when they must believe it.”

What does Mr. Powell’s 2012–14 self, the conscience tapping naggingly on his shoulder, tell him?

That no enormity is ever enough for the market? Something about a magnet for trouble? A preference for the smallest possible balance sheet perhaps?

But Jerome Powell has come to believe what he must… when he needed to believe it.

We shudder at what he will come to believe come the crisis — or whatever his successor will come to believe.

Meantime, the world runs to record debt, its stock markets run to record highs…

And we are about ready to run for the hills…


Brian Maher
Managing editor, The Daily Reckoning

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Bigger Isn’t Better

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What caused the overnight lending market to unexpectedly seize up in September? There’s a good reason to believe JPMorgan Chase (JPMC) may have been at the heart of it.

JPMorgan Chase is the largest bank in the U. S., and has about $1.49 trillion in deposits. It’s one of the big banks that provide much of the loans in the overnight money markets.

But it seems the mega-bank had gone on a stock buyback spree from January through September of this year.

Buybacks, which are designed to boost stock prices, have been enabled for years by the Fed’s artificially low-interest rates. Corporations, in fact, have been the largest purchasers of stocks, which is heavily responsible for the bull market that’s now over a decade old.

According to the SEC, JPMC has spent about $77 billion on buybacks since 2013. But the money JPMorgan Chase used for buybacks on its most recent buyback binge was, therefore, unavailable to be loaned out in the repo market.

This information is from the bank’s annual SEC filing (hat tip to the Wall Street on Parade blog):

In 2019, cash provided resulted from higher deposits and securities loaned or sold under repurchase agreements, partially offset by net payments on long-term borrowing… cash was used for repurchases of common stock and cash dividends on common and preferred stock.

That diversion of money likely contributed to the liquidity crunch, which forced the Fed had to intervene in order to make up the difference.

Here’s how Wall Street on Parade sums it up:

Had JPMorgan Chase not spent $77 billion propping up its share price with stock buybacks, it would have $77 billion more in cash to loan to businesses and consumers — the actual job of its commercial bank. Add in the tens of billions of dollars that other mega banks on Wall Street have used to buy back their own stock and it’s clear why there is a liquidity crisis on Wall Street that is forcing the Federal Reserve to hurl hundreds of billions of dollars a week at the problem.

But altogether, JPMorgan has actually withdrawn $158 billion of its liquid reserves from the Fed in the first half of this year. That’s an extraordinarily large amount of money to withdraw in such a short amount of time, as my friends at Wall Street on Parade point out. That’s bound to have an effect on the market.

And that’s what we’ve seen.

Of course, JPM is one of those Wall Street banks that are “too big to fail.” It’s the largest commercial bank in the nation, with $1.6 trillion in deposits.

But it’s not just JPM.

It’s just one part of a system rigged in favor of Wall Street that has been deemed too big to fail. It’s a corrupt and incestuous system filled with perverse incentives and conflicts of interest. Here’s an example…

82% of bank analysts on Wall Street recently gave Citigroup stock a “buy” rating. What you didn’t hear reported on CNBC or Fox Business News is that the major banks they work for — like JPM, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS and Bank of America — have strong incentive to recommend Citigroup.

That’s because all the major banks are interconnected through derivatives. And weakness in one bank could spill over into the others. So it’s not a level playing field at all. It’s tilted in favor of the big banks.

But as one observer asks, “Why should any Wall Street bank be allowed to make research recommendations on stocks and then trade in those very same stocks?”

It’s a corrupt system designed by insiders for insiders. I should know because I used to be one of them.

I worked at four of the world’s major banks for a decade and a half until I finally had enough and walked away. Two of the four banks I worked for, Bear Stearns and Lehman Bros., were destined to implode.

That’s because they overleveraged themselves, taking on too much debt to bet on risky credit instruments. These credit instruments included subprime loans, credit derivatives and Wall Street’s version of a debt buffet called CDOs, or collateralized debt obligations.

It’s now been over a decade since the world’s major central banks reacted to the financial crisis with record-low interest rates and quantitative easing.

Today the big banks are bigger than ever and the amount of debt in the system is larger than ever. There’s been no substantial reform since the financial crisis, just some cosmetic moves that have been passed off as major reform. The big banks are always ahead of the regulators.

My research for my book Collusion: How Central Bankers Rigged the World revealed how central bankers and massive financial institutions have worked together to manipulate global markets for the past decade.

Major central banks gave themselves a blank check with which to resurrect problematic banks; purchase government, mortgage and corporate bonds; and in some cases — as in Japan and Switzerland — buy stocks, too.

They have not had to explain to the public where those funds are going or why. Instead, their policies have inflated asset bubbles while coddling private banks and corporations under the guise of helping the real economy.

The zero-interest rate and bond-buying central bank policies that prevailed in the U.S., Europe and Japan were part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks.

It has, in turn, created asset bubbles that could explode into an even greater crisis the next time around.

The world’s debt pile sits near a record $246.5 trillion. That’s three times the size of global GDP. It means that for every dollar of growth, the world is borrowing three dollars.

Of course, this huge debt pile has done very little to support the real economy. Even the IMF now admits that global central bank policies to lower interest rates in order to stave off immediate economic risks have made the situation worse.

Their actions have led to “worrisome” levels of poor credit-quality debt as well as increased financial instability.

The IMF noted that 40% of all corporate debt in major economies could be “at risk” in the event of another global economic downturn, with debt levels greater than those of the 2008–09 financial crisis.

That huge pile of debt is basically the kindling for the next financial fire. We’re just waiting for the match to light it.

So today we stand near — how near we don’t yet know — the edge of a dangerous financial conflagration. The risks posed by the largest institutions still exist, only now they’re even bigger than they were in 2007–08 because of the extra debt.

It’s not sustainable. But that doesn’t mean the central banks won’t try to keep it going with monetary easing policies in place.

It could work for a while, until it doesn’t.

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The Fed Gets Blindsided… Again

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The big news this week was that the House of Representatives impeached President Trump for abuse of power and obstruction of Congress.

Trump now joins Andrew Johnson and Bill Clinton as the only U.S. presidents to be impeached (Nixon resigned before he could be impeached).

Now it goes to the Senate for trial. But there’s virtually no chance the Senate will convict Trump on the charges, given the Republican majority.

The market has completely shrugged off the news. The stock market is up today, which tells you it doesn’t fear political instability or expect anything to come of the impeachment process.

But the real market story right now on Wall Street has to do with the Fed, and it’s not getting anywhere near the attention it deserves.

Since September, the Fed’s been pumping in massive amounts of liquidity into the “repo” markets to keep the machinery of the financial system lubricated.

So far, the figure stands at about $400 billion. But it’s showing no signs of slowing down.

The Fed has now announced it will provide an additional $425 billion of cash injections into the repo market as the year draws to a close on concerns that funding could fall short into year’s end.

And Jerome Powell has admitted these injections will continue “at least into the second quarter” of 2020.

What does all this bailout money say about the health of the money markets?

And that’s really what it is — a bailout. Without Fed intervention, liquidity in these markets would have dried up.

But the Fed’s massive liquidity injections are basically a Band-Aid on the real problem.

There’s plenty of liquidity in the market right now. The real problem is that the big banks, the 24 “primary dealers” who have direct access to the Fed’s liquidity, aren’t lending the money out like they’re supposed to.

They’re sitting on it, which is depriving other banks and financial institutions of the short-term funding they need.

Part of it has to do with regulations that require these banks to hold a certain amount of reserves, so they’re reluctant to lend them.

But it’s also because these banks can earn more on their money by parking their reserves at the Fed than they can lending it out, which pays very little interest.

Here’s what one portfolio manager, Bryce Doty, says about it:

The big banks are just hoarding cash. They told the Fed they have more than enough cash in excess reserves to meet regulatory issues, but they prefer having money at the Fed where they can still earn 1.55%, rather than in the repo market.

So, until that situation changes, there’s no reason to expect that the Fed’s support will go away anytime soon.

But if you ask New York Fed head John Williams, everything’s just hunky-dory.

He says it’s all “working really well.” But the Fed is having to expand its balance sheet at the fastest pace since the first round of QE began in December 2008.

It’s gone from $3.8 trillion in September to over $4.07 trillion today. And it’s going higher.

Would all this be necessary if the system were working well?

The Federal Reserve’s Board of Governors recently published its annual Supervision and Regulation Report, which measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.

How did the banks grade?

Overall, the board concluded that 45% of U.S. banks with more than $100 billion in assets merited a rating of “less than satisfactory.”

Tellingly, the report did not say which banks have these less-than-satisfactory ratings. It doesn’t want to make any real waves, after all. The entire system depends on confidence.

Of course, the Fed didn’t see problems in the repo market coming at all. They never do. All they ever do is react and pretend that they have everything under control.

Basically, the Fed was blindsided… Again.

But they don’t have everything under control or they would have seen the problems coming and maybe done something about it.

Continued problems in the repo market may mean the Fed could launch another round of official quantitative easing in the very near future, possibly as soon as early January.

The good news for the markets is that the Fed’s liquidity injections have helped boost stocks to record levels again.

The Fed is basically handing investors a Christmas present. Unfortunately, most people on Main Street don’t realize it. The present’s being put under the tree this year (and maybe next) won’t last. They can’t.

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“Stop Worrying and Love The Deficit”

This post “Stop Worrying and Love The Deficit” appeared first on Daily Reckoning.

The prettiest plums dangle tantalizingly before us…

Universal Medicare, a Green New Deal, tuitionless college, guaranteed employment at a minimum $15 per — all are within grasp.

Cowardly Democrats need only summon their courage… and seize them.

This we learn from progressive Marshall Auerback, scribbling piously in The Nation.

From “Why Democrats Need To Stop Worrying And Love The Deficit”:

Delivering on big progressive ideas like Medicare for All and the Green New Deal will never happen until Democrats get over their fear of red ink.

This fellow continues in the same sweet, soaring… and foolish melody:

Progressives could do worse than embrace the sentiment… that “extremism in the defense of liberty is no vice, and…moderation in the pursuit of justice is no virtue”… progressives should be mindful that deficit spending in the pursuit of a prosperous economy that works for all is no vice, and fiscal moderation in the pursuit of social justice is clearly no virtue.

Here, in one gorgeous paragraph, we find the distilled hopes and dreams of our world…

The Modern Pursuit of Alchemy

These hopes and dreams are:

That the alchemy of lead into gold is real, that the print press unchains prosperity…

That the free lunch has actual existence and that Say’s law — that supply creates its own demand — does not.

In words other, that something can truly be gotten from nothing.

1,000 times slain, strangled, murdered, lowered six feet down… 1,001 times this gorgeous fiction has risen six feet up, alive.

And why not?

What is more tempting than heaven without hell, pleasure without pain, wealth without work?

Indeed, what is more tempting than something for nothing?

Individuals, business and governments, all hear the siren’s beautiful cry.

But none is driven madder — none is lured so unerringly to the rocks — than the government of the United States…

De‌bt Binds Most Governments

All governments incline naturally to de‌bt, as all governments incline naturally to roguery and rascality.

But most governments are limited in the amount of de‌bt they can pile up… and thus limited in the swinishness they can get up to.

That is because extreme inde‌btedness would ultimately bring creditors down upon them.

These creditors would question these governments’ ability to make good on their de‌bts.

Interest rates would soar. And the cost of de‌bt would weigh upon the issuing government… as a millstone around the neck weighs upon the posture.

These governments cannot print their way out without sinking their own currencies. Hence they are boxed in.

But the United States government is unlike most governments. For it enjoys the “exorbitant privilege”…

A License to Print Nearly Unlimited Money

The United States fields the world’s premier reserve currency. And the world runs a bottomless appetite for its dollars.

Up to 80% of all international trade is invoiced in dollars. And nearly 40% of the world’s de‌bt is issued in these same dollars.

The United States can therefore run the presses at a clip truly astonishing, without fear of overissue.

And despite America’s heroic go at the print press, its debt has scarcely cost less.

Current yields on its 10-year Treasury bond scrape along under 2%. Yields on its 30-year Treasury run barely higher.

De‌bt has therefore proven a painless gain, a windfall, a wholesale blessing.

Tally the advantages de‌bt offers the United States government…

And it can no more resist de‌bt’s pull than a cat can resist catnip, a bee can resist honey… or a moth can resist the flames.

Toward these flames the United States is likely going. Here is the largest trouble with its de‌bt:

It is largely unproductive.

Keynes’ Warning

John Maynard Keynes put the theory of deficit spending into general circulation. The magic of deficit spending can revive the animal spirits… and set the idle machinery of industry whirring.

But deficit spending was not an open-ended warrant for government extravagance.

As Mr. Lance Roberts of Real Inves‌tment Advice reminds us, Keynes placed a hard condition upon it…

Keynes insisted each dollar of de‌bt give off an economic bang.

That is, Keynes wagged his finger… and insisted that each dollar of de‌bt yield a positive return on investment.


John Maynard Keynes’ was correct in his theory that in order for government “deficit” spending to be effective, the “payback” from investments being made through de‌bt must yield a higher rate of return than the de‌bt used to fund it.

But the vast majority of United States government spending fails Lord Keynes’ exacting test.

“Country A” vs. “Country B”

The United States government appeared before the cre‌dit markets last year, held out its hat … and borrowed $986 billion to make its funding shortage good.

But the lion’s take of these borrowings went to “social welfare” and to service existing de‌bt.

That is, it went largely to non-productive uses. And so it brought down… rather than lifted up.

Here Roberts cites Woody Brock’s American Gridlock:

Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. In order to make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new de‌bt. That new de‌bt is used to cover the excess expenditures but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by de‌bt, was invested into projects, infrastructure, that produced a positive rate of return. There is no deficit as the rate of return on the investment funds the “deficit” over time.

The United States is not “Country B.”

And as Roberts reminds us:

As this money is used for servicing de‌bt, entitlements, and welfare, instead of productive endeavors, there is no question that high de‌bt-to-GDP ratios reduce economic prosperity over time. In turn, the Government tries to fix the “economic problem” by adding on more “de‌bt.

Russian Roulette

Evidence indicates any de‌bt-to-GDP ratio above 60% courts risk. Any ratio above 90% plays roulette of the Russian sort.

What is the United States’ de‌bt-to-GDP ratio?


Meantime, real United States GDP growth averaged 4.3% following each post-WWII recession through the end of the century.

Yet since the end of  the Great Recession — after the government piled up trillions of de‌bt — real GDP growth has averaged a mere 2.16%.

Like a tick infinitely and obscenely engorged by blood, the American economy is infinitely and obscenely engorged by de‌bt.

And as this grotesque insect Dracula has little capacity to expand… the American economy has little capacity to expand.

Next comes this question:

How heavily has de‌bt’s dead weight sat upon the American economy?

De‌bt’s Drag on the Economy

Roberts had a go at the numbers:

Another way to view the impact of de‌bt on the economy is to look at what “de‌bt-free” economic growth would be.

For the 30-year period, from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period.

And today?

Today, with the economy expected to grow at just 2% over the long-term, the economic deficit has never been greater. If you subtract the de‌bt, there has not been any organic economic growth since 1990… In other words, without de‌bt, there has been no organic economic growth.

No organic, de‌bt-free growth since 1990 — can you imagine it?

And why should it turn around now?

De‌bt stacks higher and higher. But GDP sinks lower…

2018 growth came it a serviceable 2.9%.

But Morgan Stanley forecasts real U.S. GDP growth will recede to 2.3% this year… and 1.8% in 2020.

Is There a Way Out?

Naturally and of course the Modern Monetary Theory crew has an answer:

To plunge deeper and deeper into de‌bt… on the belief it will bring us higher and higher up.

We believe precisely the opposite.

But is there a way out? Is there a solution to restore genuine American growth?

Tune in tomorrow…


Brian Maher
Managing editor, The Daily Reckoning

The post “Stop Worrying and Love The Deficit” appeared first on Daily Reckoning.

Central Banks Pushing for Negative (Real) Interest Rates

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This summer I was in Bretton Woods, New Hampshire, along with a host of monetary elites, to commemorate the 75th anniversary of the Bretton Woods conference that established the post-WWII international monetary system. But I wasn’t just there to commemorate  the past —I was there to seek insight into the future of the monetary system.

One day I was part of a select group in a closed-door “off the record” meeting with top Federal Reserve and European Central Bank (ECB) officials who announced exactly what you can expect with interest rates going forward — and why.

They included a senior official from a regional Federal Reserve bank, a senior official from the Fed’s Board of Governors and a member of the ECB’s Board of Governors.

Chatham House rules apply, so I can’t reveal the names of anyone present at this particular meeting or quote them directly.

But I can discuss the main points. They essentially came out and announced that rates are heading lower, and not by just 25 or 50 basis points. They said they have to cut interest rates by a lot going forward.

They didn’t officially announce that interest rates will go negative. But they said that when rates are back to zero, they’ll have to take a hard look at negative rates.

Reading between the lines, they will likely resort to negative rates when the time comes.

Normally forecasting interest rate policy can be tricky, and I use a number of sophisticated models to try to determine where it’s heading. But these guys made my job incredibly easy. It’s almost like cheating!

The most interesting part of the meeting was the reason they gave for the coming rate cuts. They were very relaxed about it, almost as if it was too obvious to even point out.

The reason has to do with real interest rates.

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. But when you consider real interest rates, you’ll see that they’re substantially higher than the nominal rate.

That’s why the real rate is so important. If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

The U.S. has never had negative nominal rates (Japan, the eurozone and Switzerland have), but it has had negative real rates.

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Nominal rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% aren’t. In these examples, nominal 2% is a “high” rate and 13% is a “low” rate once inflation is factored in.

The situation today is much closer to the latter example.

The yield to maturity on 10-year Treasury notes is currently around 1.8%, which is extremely low by traditional standards. Meanwhile, inflation as measured by the PCE core deflator (the Fed’s preferred measure) is currently about 1.6% year over year, below the Fed’s 2% target.

Using those metrics, real interest rates are above zero. But more interestingly, they’re higher than the early ’80s when real rates were -2%.

That’s why it’s critical to understand the significance of real interest rates.

And real rates are important because the central banks want to drive real rates meaningfully negative. That’s why they have to lower the nominal rate substantially, which is what these central bank officials said at Bretton Woods.

So you can expect rates to go to zero, probably sooner or later. Then, nominal negative rates are probably close behind.

The Fed is very concerned about recession, for which it’s presently unprepared. It usually takes five percentage points of rate cuts to pull the U.S. out of a recession. During its hiking cycle that ended last December, the Fed was trying to get rates closer to 5% so they could cut them as much as needed in a new recession. But, they failed.

Interest rates only topped out at 2.5%. The market reaction and a slowing economy caused the Fed to reverse course and engage in easing. That was good for markets, but terrible in terms of getting ready for the next recession.

The Fed also reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that’s still well above the $800 billion level that existed before QE1 (“QE-lite” has since taken the balance sheet up above $4 trillion, but the Fed has done its best to downplay it).

In short, the Fed (and other central banks) only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow.

The Fed is therefore trapped in a conundrum that it can’t escape. It needs to rate hikes to prepare for recession, but lower rates to avoid recession. It’s obviously chosen the latter option.

If a recession hit now, the Fed would cut rates by another 1.50% to 1.75% in stages, but then they would be at the zero bound and out of bullets.

Beyond that, the Fed’s only tools are negative rates, more QE, a higher inflation target, or forward guidance guaranteeing no rate hikes without further notice.

Of course, negative nominal interest rates have never worked where they’ve been tried. They only fuel asset bubbles, not economic growth. There’s no reason to believe they’ll work next time.

But the central banks really have no other tools to choose from. When your only tool is a hammer, every problem looks like a nail.

Now’s the time to stock up on gold and other hard assets to protect your wealth.


Jim Rickards
for The Daily Reckoning

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Beware Good News!

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Mr. Jerome Powell and his mates sat on their hands today — no rate cut:

The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions and inflation near the Committee’s symmetric 2% objective.

Nor does “the Committee” intend to cut rates next year. But what of possible rate hikes?

Only four of 17 members anticipate a quarter-point raise in 2020.

Of course… the Committee hooked the standard disclaimer to their announcement:

The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

The stock market greeted the news with a general shrug of the shoulders. It was, after all, expected.

The Dow Jones gained 29 points on the day. That is, it barely made good yesterday’s 28-point loss.

The S&P scratched out a nine-point gain. The Nasdaq fared best — up 38 points today.

The world jogs on.

But let us take a brief canvas of the overall economic condition…

Stocks presently summit new heights, unemployment presently plumbs old depths, consumer confidence is presently up and away.

Meantime, the Organization for Economic Cooperation and Development (OECD) claims the global economy has swung 180 degrees since October.

That is, the global economy has swung from contraction to recovery since October.

Sample quote:

Stable growth momentum is anticipated in the euro area as a whole, including France and Italy, as well as in Japan and Canada. Signs of stabilizing growth momentum are now also emerging in the United States, Germany and the United Kingdom, where large margins of error remain due to continuing Brexit uncertainty. Among major emerging economies, stable growth momentum remains the assessment for Brazil, Russia and China (for the industrial sector).

Just so.

If October did represent an actually inflection point, investors can prepare for a merry run…

Reports Saxo Bank’s Peter Garnry:

Our business cycle map on country level going back to 1973 suggests that if the turning point came in October, then we are entering the most rewarding period for investors in equities relative to bonds. The average outperformance for equities versus bonds in USD terms has been 9.4% for every recovery phase.

Look close. You can almost see the erring stars returning to their courses… the angels returning to their posts… the Perfections returning to view.

But as we have noted before:

While bad news frightens us… good news terrifies us.

Too many animal spirits are unchained, too many guards go down, too many fools rush in.

Have they forgotten the trade war? Are global debt levels falling? Is a white age of peace suddenly upon us?

And we might remind the chronically hopeful of this capital fact:

Recession is a menace that often arrives unannounced, like an influenza… or an unexpected visit from a mother-in-law.

Periods of seemingly incandescent growth may immediately precede it.

Please consult the following dates. Each reveals the real economic expansion rate — that is, the economic growth rate adjusted for inflation — immediately before a recession’s onset:

  • September 1957:     3.07%
  • May 1960:                2.06%
  • January 1970:          0.32%
  • December 1973:      4.02%
  • January 1980:          1.42%
  • July 1981:                4.33%
  • July 1990:                1.73%
  • March 2001:             2.31%
  • December 2007:      1.97%.

(We doff our cap to Lance Roberts of Real Invest‍ment Advice for providing the data.)

You are immediately seized by a strange and remarkable fact:

Recession has followed hard upon jumping growth rates of 3.07%, 4.02%… and 4.33%.

The quote of our co-founder Bill Bonner springs to mind:

“It is always dawnest before the dark.”

Let the record further reflect:

Growth ran 2% or higher immediately prior to five of nine recessions listed.

“At those points in history,” Roberts reminds us, “there was NO indication of a recession ‘anywhere in sight.’”

Once again… here we refer to real growth, which minuses out inflation’s false fireworks.

Now come home…

Third-quarter 2019 GDP came ringing in at 2.1%. And the Federal Reserve projects 2019 will turn in 2.2% growth when the final tally comes in.

What was GDP before the last recession — the Great Recession?

1.97% — a general approximation of the rate presently obtaining.

Shall we enjoy a belly laugh at Ben Bernanke’s expense?

Granted, it is nearly too easy — like guffawing at a justice of the Supreme Court who slips on a banana peel… or whose toupee is carried off by a sudden gust.

But in January 2008 Mr. Bernanke stood proudly before the world and exulted:

“The Federal Reserve is not currently forecasting a recession.”

Below, Jim Rickards shows you why one the Federal Reserve begins intervening in markets, it cannot stop. Where will it take us? Read on.


Brian Maher
Managing editor, The Daily Reckoning

The post Beware Good News! appeared first on Daily Reckoning.

QE Is Much Closer Than You Think

This post QE Is Much Closer Than You Think appeared first on Daily Reckoning.

Today we hazard a thumping prediction:

The next round of quantitative easing — official, actual quantitative easing — is fast approaching.

Yes… the Federal Reserve will soon be clearing for emergency action.

When precisely can you expect it? And why the urgency?

Answers shortly. Let us first squint in on Wall Street…

The Bears Win on Points

The Dow Jones took a 28-point flesh wound today. The S&P lost but three points; the Nasdaq, five.

Gold gained $4 today, while 10-year Treasury yields rose ever so slightly — to 1.83%.

A humdrum performance altogether, this day put in.

But when can you expect the next round of authentic quantitative easing… and why so soon?

We must first distinguish between official quantitative easing and its junior shadow, “QE-lite”…

The Difference Between QE and QE-lite

Quantitative easing had a strategic vision. That is, it was intended to stimulate.

And so it stomped mercilessly upon long-term interest rates… and battered them down to nothing.

QE-lite — conversely — lacks all strategic vision.

It is workaday… and technical. It simply fills a leakage somewhere within the financial plumbing.

It consists of mere “open market operations” the Federal Reserve has always conducted.

And it fixes upon short-term rates — unlike quantitative easing. Its mission is therefore limited.

The Birth of QE-lite

The Federal Reserve initiated QE-lite in September, when liquidity ran dry in the short-term lending markets.

The Federal Reserve’s New York crisis management team rounded into action, unfurled the hoses… and gave these markets a good thorough drenching.

They are still hard at the business — and inflating the balance sheet beautifully.

The Federal Reserve’s balance sheet came in at $3.8 trillion in September. Yet it presently expands to $4.07 trillion.


Yesterday alone the New York crew emptied in $81.4 billion of liquidy credit.

Yet we are assured none of it has seeped into the central water lines of the stock exchanges.

Morgan Stanley’s interest rate strategist Matt Hornbach thus informs us:

There is little debate that the Fed is increasing the quantity of money, or Q. However… the additional money lacks a direct transmission mechanism to the equity markets or other long-duration risk assets.

Just so. QE-lite nonetheless expands the Federal Reserve’s balance sheet, as shown. And the balance sheet is the central scene of action.

Is it coincidence the major indexes have established fresh records recently?

“Like a Fourth Rate Cut This Year”

As we noted last week:

The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.

QE-lite is “like a fourth rate cut this year,” affirms Matthew Miskin, John Hancock co-chief investment strategist.

Meantime, Jerome Powell claims QE-lite has patched the financial plumbing. All leaks are wrenched shut.

Yet independent inspectors are far from convinced. Some see not patched leaks — but ongoing hemorrhagings…


James Bianco of Bianco Research:

The big-picture answer is that the repo market is broken. They are essentially medicating the market into submission. But this is not a long-term solution… This is now far bigger than anyone thought this was going to be. I think they’re hoping the market will magically fix itself. I don’t see why it would.

Nor do we.

The Federal Reserve is currently three months deep into these “temporary” open market operations.

And they will run “at least into the second quarter” of 2020… by Mr. Powell’s own admission.

We bet high they will go into the third quarter of 2020. And likely the fourth.

But why have the Federal Reserve’s heroic floods of liquidity failed to fill the pipes?

Here is the likely answer:

It can pump in its liquid. And it has. But it cannot guarantee it sloshes on through to its intended destination.

Clogs may bottle it up.

The Clogs in the System

We first must understand the repo market piping. Explains Reuters:

In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often just overnight, to finance their trading and lending. The next day, borrowers repay the loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds.

Twenty-four banks — or “primary dealers” — run direct lines to the liquidity taps.

That is, they transact directly with the Federal Reserve. From these primary dealers the liquidity goes sluicing out through the repo market.

Yet these banks have evidently chosen to sit on their supplies… rather than lend them to thirsting recipients.

Our minions inform us that over 70 financial institutions presently go without.

Hence the liquidity shortage.

The Bank for International Settlements (BIS) has reached the same conclusion.

BIS fingers four banks in particular. Yet it failed to identify the culprits… for what it is worth to you.

But why are these bloated and hoggish banks refusing to lend as needed?

Bloated and Hoggish Banks

Here is why they decline to put loanable funds on offer:

They can store their hoards at the Federal Reserve instead — where they earn a superior interest.

Bryce Doty, is a senior portfolio manager at Sit Fixed Income. From whom:

The big banks are just hoarding cash. They told the Fed they have more than enough cash in excess reserves to meet regulatory issues, but they prefer having money at the Fed where they can still earn 1.55%, rather than in the repo market.

In addition, elevated post-crisis capital requirements incentivize banks to pile up reserves rather than loan them.

So concludes our brief canvas of the repo market… and its present woes.

Yet we promised a prediction at the outset… that the Federal Reserve will soon undertake the next official round of quantitative easing.

But when?

We now gaze into our polished, haze-free crystal sphere for the answer…

Prepare for Imminent “Official” QE

The Federal Reserve will initiate the next official round of quantitative easing — QE4 — before this year runs out.

That is, before Jan. 1, 2020.

This is actually the near-prediction of Credit Suisse analyst Zoltan Pozsar.

Here is the hinge upon which it rests:

Whether or not the Federal Reserve loses control of overnight rates in the weeks ahead.

Mr. Pozsar has toiled for both the New York Federal Reserve and the United States Department of Treasury.

Thus he is exquisitely familiar with the financial plumbing. And this fellow believes the Federal Reserve’s patchwork has failed to plug the leaks.

Repo market funding remains unequal to requirements, he insists. Meantime, regulatory burdens on the primary banks are “shaping up to be a severe binding constraint.”

And so this Pozsar detects a main pipe groaning, rattling and giving… ready to rupture.

He believes the weeks ahead are “shaping up to be the worst in recent memory.” Moreover, he concludes “the markets are not pricing any of this.”

“If we’re right about funding stresses,” he concludes, “the Fed will be doing ‘QE4’ by year-end.”

But let us take this near-prediction, strip its escape clause, challenge its manhood and put steel in its spine:

The Federal Reserve will be doing “QE4” by year-end.

That is our prediction, presented with a wry grin. Let the countdown begin…


Brian Maher
Managing editor, The Daily Reckoning

The post QE Is Much Closer Than You Think appeared first on Daily Reckoning.

Dark Money Will Push Gold Higher

This post Dark Money Will Push Gold Higher appeared first on Daily Reckoning.

Even though it’s on rate-cutting hold, the Fed nonetheless keeps engaging in aggressive oversubscribed repo ops, or as we like to call the process, “QE4R.”

QE4R involves offering money to banks in return for short-term U.S. Treasury and mortgage bonds, in shades of 2009.

The fact that the Fed is expanding its balance sheet through these repo operations allows it to pretend it is merely auctioning “adjustment-based” policy moves, rather than problem-based ones, to keep rates from rising and money becoming too expensive for banks.

This provides the Fed a kind of cover during which it can hold off on rate cuts until it deems that data clearly suggest they do otherwise.

Regardless of the reasons for QE4R, this new flow of dark money has the ability to stimulate the stock and bond markets — along with gold. Although gold prices have rallied on the back of the Fed’s recent balance sheet growing exercise, gold has been rising less quickly than it did during the initial phases of QE in the post-financial crisis period from 2009 through 2011.

However, the stock market has been rising steadily (with some bumps along the way) since the start of the Fed’s QE4R operations. There are several reasons for this phenomenon.

Computer algorithms, ETF-related trading and asset managers for pensions and other forms of retirement funds seeking yields above those of bonds have pushed the market up. So have corporate stock buybacks. There is also the steadfast (and proven true) belief that the Fed will step in whenever it “has to,” as would other central banks around the world.

There’s a reality behind the dark money-infused market euphoria, though. It’s that U.S. economic growth, as well as that of the global economy, has been slowing down and will likely continue to slow.

Shrinking corporate profits in conjunction with lower rates and increased debt loads is not a classic recipe for a prolonged bull market. The fact that bulls continue to run is a mark of just how much dark money can keep markets elevated.

In the past, slowing profits along with more debt and cheap money has more closely reflected a bear market (consider the U.S. stock market in 2000–02, 2007–09 and the Japanese stock market since 1989). Japan’s stock market would be even lower were it not for various QE and ZIRP moves by the Bank of Japan.

U.S. corporate margins may well have already hit a multiyear peak. As we head toward the 2020 U.S. election, it’s hard to see many corporations diverting their debt loads into R&D or investment programs. This could hold true after the elections regardless of which political party wins.

Another reason that the Fed began QE4R is the global shortage of U.S. dollars in money markets. This also happened at the start of the financial crisis in 2008.

The last thing Fed Chairman Jerome Powell wants under his stewardship is a repeat performance. Repo lending rates spiked in September because of this shortage and liquidity problems at the big banks. This continues to this day, as evidenced by the Fed’s term repo lending facilities being often oversubscribed by the largest Wall Street players.

Since Monday, the Fed has pumped $97.9 billion into the market in two parts. One was through overnight repurchase agreements of $72.9 billion. The other was through 42-day repos. The result is that the Fed’s balance sheet has topped the $4 trillion mark and looks to rise from there.

Also, the Fed again increased the amount of short-term cash loans it plans to offer banks to ensure rates remain stable. It now plans to offer $25 billion in cash loans for the 28-day period ended Jan. 6, up from $15 billion previously.

Last week, it increased the size of its 42-day facility for the period ended Jan. 13 by $10 billion, too. This was also based on its recent bank supervisory findings that 45% of U.S. banks holding more than $100 billion in assets have supervisory ratings that are less than satisfactory.

All of this means that the Fed’s easing this year was very much a defensive maneuver. And it continues to act pre-emptively against the potential for a dollar funding squeeze as derivative-trading banks close their books into year-end 2019 through its repo operations.

Though different from the longer-term QE operations the Fed actioned between 2009–2014 that inflated stock, government and corporate bond prices, the result is the same. An artificial stock market rally. And more debt.

The big difference is all of this money manufacturing is now occurring against a backdrop of economic weakness and trade-war and geopolitical uncertainty.

For now, and heading into 2020, there remain six key economic trouble spots in the U.S. alone:

  1. Trade Wars. China trade talks are still going nowhere specific. President Trump has threatened to “raise the tariffs even higher” on Chinese imports if a trade deal cannot be reached by Dec. 15 and went so far as to indicate that he’d be fine if a deal didn’t occur until after the 2020 election. So “phase one,” which was announced over a month ago, has made no real progress…keeping markets knee-jerking on any positive or negative rumors.
  2. U.S. household debt at a high of $14 trillion — $1.3 trillion higher than its prior peak in Q3 2008. This could eventually hurt consumer appetites and dampen U.S. GDP.
  3. U.S. GDP is growing but decelerating. In this 11th year of expansion and easy monetary policy, the expansion may be longer, but it’s also shallower that past expansions.
  4. U.S. $20 trillion national debt is at 104–105% of GDP, having passed 100% in Q3 2012. Though Jerome Powell has stressed to Congress that it must find a way to fix this, the Fed continues to be the largest buyer of U.S. Treasuries, thereby pushing the problem forward of debt growing faster than the economy.
  5. Money supply (M2) has grown since the 1980s, but money velocity (VM2) has declined since 1997, particularly since the financial crisis. That means that local businesses aren’t working together enough to stimulate the foundation of the U.S. economy.
  6. Ongoing quest for risky assets could backfire. These problems were created by central banks. The longer rates are low, the more risk asset managers — i.e., investment funds, pensions funds and long-term insurance companies — take on to meet liabilities. This is exacerbated by slowing economies and means more global exposure to credit and liquidity risk. This increases the underlying instability in the international markets.

Given all of this backdrop, I believe that markets will continue to rally on the back of dark-money operations with volatile periods. However, gold is increasingly an attractive safe-haven investment.

Thus, it’s only a matter of time before gold has a catch-up rally.


Nomi Prins
for The Daily Reckoning

The post Dark Money Will Push Gold Higher appeared first on Daily Reckoning.

The Fed Is on High Alert

This post The Fed Is on High Alert appeared first on Daily Reckoning.

It’s hard to believe the end of the year is upon us and 2020 is right around the corner.

In many ways, it went by very quickly. For economies and markets, it was a year marked by uncertainty over economic slowdowns, trade wars and a complete pivot in “dark money” policy initiated by the Federal Reserve and subsequently followed by other central banks around the world.

Notably this year, it wasn’t just the major nations that engaged in copycat monetary policy easing. It was a plethora of emerging-market central banks jumping on the same dark money bandwagon.

So as we head into the final FOMC meeting of the year next week, we know one thing for certain: The Fed won’t be cutting rates this time. And it’s recently used some fairly hawkish language.

But reinforcing the dovish outlook it adopted at the start of the year that precipitated three 2019 rate cuts, the Fed remains on high-alert mode.

There are two clear signs why…

First, the Fed keeps creating and dumping money into the front end of the U.S. yield curve through repo operations that it initiated in September.

How healthy is the banking sector overall?

The Board of Governors of the Federal Reserve System recently published their annual Supervision and Regulation Report.

The report measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.

Overall, 45% of U.S. banks with more than $100 billion in assets received a supervisory rating of “less than satisfactory.”

That’s not good. As we learned during that crisis, the stability of these large banks is essential to the health of our banking system.

Tellingly, the Federal Reserve report does not say which banks have these less-than-satisfactory ratings.

This should not sit well with hardworking Americans who bailed out many banks during the last crisis in 2008.

When bank lobbyists keep pushing for more deregulation, remember what happened a decade ago with bank bailouts and a market crash.

I would argue that we need more regulation, not less, if banks continue to receive less than a “C” grade on their report cards.

The second indication the Fed is in high-alert mode is because of its language. It continues to note possible risks coming from more economic slowdowns and further strains due to trade wars.

Just this week, President Trump re-slapped steel and aluminum tariffs on Brazil and Argentina, accusing them of devaluing their currencies and thereby hurting U.S. farmers. Though that segue might seem complex and Brazil is supposed to be a friend of the U.S., the takeaway is simple.

The White House reserves the right and the practice of trade war tactics, which will continue to insert uncertainty and thereby hamper investment and economic planning around the world. Not to mention lower overall trade and benefits of the global supply chain.

Last year, when the Fed raised rates in December, the markets greeted the move with disdain. This caused the Fed to do a quick about-face in January.

We could see a similar story unfold next year. If we get a terrible December like we did in 2018 or at the end of 2015, the Fed might be more likely to consider cutting rates in the spring.

Meanwhile, other countries are continuing to cut their rates or otherwise finding ways to inject liquidity into their local markets. This remains particularly true of developing countries.


Nomi Prins
for The Daily Reckoning

The post The Fed Is on High Alert appeared first on Daily Reckoning.

The Fed Is Toying With Fire

This post The Fed Is Toying With Fire appeared first on Daily Reckoning.

Deutsche Bank maintains a strict dossier on all the world’s asset classes.

Stocks, bonds, real estate, commodities — 38 assets, A through Z — Deutsche Bank has them under ruthless and unshakable surveillance.

Last December’s spywork revealed this arresting conclusion:

93% of all the world’s assets traded negative in 2018.

Not even in the fathomless depths of the Great Depression did so many global assets wallow in red.

But last year is last year. Scroll the calendar one year forward… to today.

What do we find?

We find a full 180-degree turning around.

Each and every asset Deutsche Bank tracks — all 38 — trade positive this year.

Affirms Deutsche Bank’s Craig Nicol:

All 38 assets in its tracking universe have posted positive year-to-date (YTD) returns in both local currency and dollar terms.

To what earthly energy can we ascribe this complete and dramatic reversal?

The answer — the truly shocking answer — in one moment.

We first consider a more immediate reversal…

Trump Sends Stocks Reeling

The Dow Jones went badly backwards this morning, down 400 points. It came back a bit in the afternoon, losing only 280 points by closing whistle.

The S&P and Nasdaq followed parallel routes.

The S&P lost 20 points on the day. The Nasdaq lost 47.

The negative catalyst came issuing out of 1600 Pennsylvania Ave. this morning…

Mr. Trump announced that a trade accord can wait. Wait until when?

Until after the 2020 election is concluded:

In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right… I have no deadline… In some ways, I think it is better to wait until after the election if you want to know the truth.

Wall Street’s trading algorithms plucked the news off the wires… and began to sweat.

Trade-sensitive stocks such as Apple and Caterpillar endured the greatest trouncings today, unsurprisingly.

Equally unsurprisingly, safe haven gold jumped $14 on the day.

And so the merry-go-round takes another spin. Which direction tomorrow takes it… who can say?

But to return to our central question:

Why are all 38 assets Deutsche Bank tracks positive on the year — when 93% of these same assets were negative last year?

Too Obvious for Words

We claimed above that the answer was “truly shocking.” But we merely perpetrated a con to hold your attention.

The answer is obvious to anyone with eyes willing and able to see…

The Federal Reserve was increasing interest rates and trimming its balance sheet in 2018. Last December Jerome Powell announced the business would proceed uninterrupted.

That was when the stock market fell into open and general revolt.

By Christmas Eve… it was a whisker away from “correction.”

And so Jerome Powell dropped his weapons, hoisted his surrender flag… and came out hands in the air.

Wall Street had him.

Safely under lock, safely under key… Powell proceeded to lower rates three instances this year.

What is more, he called a premature halt to the quantitative tightening he had previously declared on “autopilot.”

Who can then be surprised that the Dow Jones industrial average has advanced 4,000 points this year?

Or that the other major indexes have marched with it?

But our tale does not conclude here. Instead, it takes a meandering twist down a side road…

A November to Remember

Rate cuts only partially explain this year’s asset extravaganza. The termination of quantitative tightening only partially explains this year’s asset extravaganza.

Can we credit a general optimism on trade (despite this morning’s blood and thunder)?

Perhaps partially — but only partially.

Whatever trade gives, trade takes back.

The promised trade deal has proved an endless frustration, a pretty plum dangled always beyond reach, a Christmas morning put off again, again and again.

For a full and complete explanation of the year in assets… we must peer deep within Deutsche Bank’s report.

There we will find this chestnut sandwiched within:

November posted some of the year’s loveliest asset gains. November, that is, hoisted all boats on its rising tide.

Why November?

For the answer we must first revisit September… and the “repo” market.

Just Don’t Call It QE4

Overnight lending rates leapt to 10% as liquidity ran dry — a high multiple of the federal funds rate then prevailing.

The Federal Reserve instantly hosed in emergency liquids to suppress the insurrection.

Mr. Powell declared the operation “temporary.” But on and on it went — into October, into November (and into December).

By November Mr. Powell and his minions at the New York Federal Reserve emptied in some $280 billion of liquidy credit.

They shrieked, howled and fumed that these “open market operations” were in no way quantitative easing.

Yet these activities inflated the Federal Reserve’s balance sheet… precisely as if they were quantitative easing itself.

From its maximum $4.5 trillion enormity, the quantitative tightening of 2018–19 siphoned down the balance sheet to $3.8 trillion.

But along came September… and its temporary open market operations.

By mid-November they reinflated the balance sheet to $4.04 trillion. Let us reintroduce the evidence we initially entered into record Nov. 15:


Smoking-gun Evidence

In all, the Federal Reserve has inflated the balance sheet $293 billion in under three months.

When was the last occasion the Federal Reserve carried on with such frantic fanaticism?

October 2008 — in the wildest psychosis of the financial crisis.

If you seek a thorough explanation for November’s asset surge, here you are.

But perhaps you demand further evidence. Then further evidence you shall have.

Here is the pistol, smoke oozing from its barrel…

The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.

Mainstream displays of lucidity and insight are rare and shocking. But here you have one, by way of CNBC’s Carl Quintanilla.

Dated Nov. 18:

Whether it should be considered QE4 or not, in the eyes of the market it’s just semantics. Markets view any increase in the size of the Fed’s balance sheet as QE and the $250 billion increase in just two months is no doubt helping to lift stock prices.

And the cup runneth over…

Hence November’s outsized influence on assets in general.

Hence we find all 38 asset classes Deutsche Bank tracks positive on the year.

But here is the danger:

The Federal Reserve’s liquidity may be kerosene that ultimately fans a conflagration…

A Potential Inferno

In Bank of America’s telling, Fed support of repo markets raises systemic financial risk.

That is because it allows excess leverage to pile up. If it comes tumbling down, if the system deleverages… it may strike the match on one royal blaze.

Bank of America’s Ralph Axel:

… there may be a situation in which banks want to deleverage quickly, for example during a money run or a liquidation in some market caused by a sudden reassessment of value as in 2008… the Fed’s abundant-reserve regime may carry a new set of risks by supporting… overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market’s ability to accurately price the supply and demand for leverage as asset prices rise.

Meantime, the Federal Reserve pours forth an average $5 billion of flammable liquid each day.

And someone, somewhere, is holding a match…


Brian Maher
Managing editor, The Daily Reckoning

The post The Fed Is Toying With Fire appeared first on Daily Reckoning.