The Fed Is Now FORCED to Intervene on a Daily Basis
Last week, I pointed out that the Fed is now forced to intervene in the markets on a daily basis.
And the worst part is that the Fed created this situation.
It’s an unpopular opinion, but the reality is that following the 2008 Crisis, the Fed eased monetary conditions for FAR too long.
As a brief review, in answer to the 2008 Crisis, the Fed:
- Kept interest rates at ZERO for seven years
- Printed over $3 trillion in new money and used it to buy assets from Wall Street
- Engaged in endless verbal intervention, promising additional stimulus whenever the financial markets began to roll over.
The Fed did all of this for SEVEN years (from 2008-2015) – even though there was clear evidence that it could have started normalizing policy as early as 2011/2012.
The end result?
The financial system is now addicted to Fed interventions. Put another way, the Fed can never stop intervening without inducing a crisis.
If you think I’m being extreme, consider the following.
The Bank of International Settlements (BIS), which is considered to be the central bank’s central bank, reported that the Fed was forced to start its overnight and term repo rates because hedge funds and other investors are using tremendous amounts of leverage (more on this shortly).
Here’s an excerpt from Reuters discussing this, emphasis my own.
The unwillingness of the top four U.S. banks to lend cash combined with a burst of demand from hedge funds for secured funding could explain a recent spike in U.S. money market rates, the Bank for International Settlements said.
Cash available to banks for short-term funding all but dried up in late September, and interest rates deep in the plumbing of U.S. financial markets climbed into double digits.
That forced the Fed to make an emergency injection of billions of dollars for the first time since the global financial crisis more than a decade ago.
That rush for short-dated secured funding was exacerbated by hedge funds who had ramped up their Treasury repos to fund arbitrage trades between cash bonds and derivatives.
The BIS also noted that the spike in the repo rate spilled over into the currency derivatives market, on which banks rely increasingly for short-term funding.
The above quotes are quite technical, so let me break it down.
What this article is saying is that hedge funds and other investors are using so much borrowed money (leverage) that there was a shortage of liquidity in the financial system. And in September, this shortage became so extreme that the Fed was forced to introduce overnight lending programs.
What the article doesn’t mention is that the Fed is the reason these hedge funds and other investors have been using so much borrowed money.
The Fed Did This to Itself
Remember: From 2008-2015, the Fed kept interest rates at ZERO while also pumping over $3.5 trillion in liquidity into the financial system. It is not surprising that everyone became addicted to this easy money.
Which is why I say the Fed did this to itself. By getting the entire financial system (corporations, hedge funds, banks, etc.) addicted to easy money, the Fed can NEVER stop intervening.
And we’re not talking about small interventions either. The Fed has an overnight repo program through which it provides $120 billion to the financial system every single night.
(For simplicity’s sake, repo operations occur when banks do not have the required levels of liquidity. They can “park” some of their less liquid assets with the Fed in exchange for cash, thereby increasing their liquidity.)
This is running at the same as the Fed’s $45 billion term repo program AND its monthly QE program of $60 billion.
At some point, all of this excess leverage will lead to another crisis – just as it did in 2000 and 2008.
Lucky for us, that’s a long way off…
The Greatest Bull Market of Our Lives
The good news is that all of this liquidity is going to induce an extraordinary bull market run in stocks in the coming months.
2020 is an election year. Perhaps you heard…
No sitting president has lost his re-election bid unless the economy or the stock market were in trouble.
Ford, Carter, and Hoover were all sitting presidents during incredible financial upheaval. None of them made a second term.
Trump knows this.
And he and the Fed are making choices right now that I believe will drive the market to NOSEBLEED levels in the next 12 months.
I know, trade Wars with China rage on, impeachment hearings continue in the nation’s capital, and no fewer than 9,300 retail stores (Payless, Dressbarn, Family Dollar, and more) will close by the end of 2019, according to Business Insider.
But hear this: none of that matters.
I’ve been following this story all year. In fact, the roots of the story date back to October of 2018. The forces at play here trump all of that. And the result will be twofold:
- Trump will win the 2020 election in a landslide
- The people who understand how he wins will be in a position to change their financial outlook considerably.
I reveal the full story, including how to profit, in Strategic Impact. Head to that page on the website to learn more.
Editor, Money & Crisis