Cameras rolled as U.S. Federal Reserve Chair Jerome Powell dished out more accommodative rate cuts for his Wall Street masters on Wednesday...
... but he didn't say one word about the ongoing, extraordinary, and profoundly unsettling intervention in the "repo," or repurchasing markets.
We're three days into this silent crisis. It shows no signs of letting up. The Fed has pumped around $205 billion in emergency liquidity into this little-known but crucially important funding mechanism for banks - but it's been totally downplayed by the spinmeisters in the Marriner S. Eccles Building.
Since we're not likely to get that from anyone in the D.C.-Wall Street pipeline, I'll lay out what's really going on here...
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This Is All Happening Out of View
That the Fed is downplaying the liquidity crisis, which is to say, downplaying reality itself, is no surprise. As I've said before, there's a deep disconnect between what the Fed says and what the Fed does.
So, what has the Fed done this time?
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Well, I hope you're sitting down, because this most recent (and desperate) intervention is big, and it's proof positive that...
- The Fed is terrified.
- The rigged-to-fail markets are facing extreme risk.
- The Fed doesn't want anyone to know just how dicey things are.
So why has the central bank pumped the rough equivalent of the GDP of New Zealand ($205 billion) into an opaque, obscure interbank financial system the general public knows next to nothing about?
Because the money-market cash otherwise available to the Fed's sister banks all but totally dried up by Tuesday. This fatal dearth of liquidity drove the rates on one-day "overnight" Treasury-backed loans (repurchase agreements, or "repos") to unpayable highs of around 10%. That's around four times more expensive than it was last week.
Money market rates leapt by double digits, and as I've said over and over, nothing kills a debt-driven bull market faster than rising rates. Literally everything hinges on a low cost of borrowing, and hence the Fed will do whatever it can to sustain these unsustainable lows.
A cash crunch in bank reserves is never a good sign, and central bank intervention - artificial stimulus - to re-price rates is neither normal, nor healthy, nor sustainable in the long term.
At this rate, it's probably not sustainable in the short term, either.
As repo rates soared, they impacted the infamous "Fed funds" rate. The Fed uses that like a house thermostat to "manage" - which is to say, "rig" - everything from bond markets to inflation to employment.
But of course, we know the Fed isn't "managing" anything anymore - it's merely intervening in a now transparent attempt to artificially control what should otherwise be natural market forces.
But then again, natural market forces would obliterate the 11-year debt party the world's governments and ultra-investor class have been enjoying (on our children's dime).
This Is a Very Bad Sign of Things to Come
So, like QE 1 through 4, or "Operation Twist," this emergency cash infusion is yet another desperate attempt to stop the natural rise of short-term rates.
This means that the Oz-like figures over at the Fed are clearly losing control over the rigged lending mechanism that's become so essential to maintaining the facade of "solid market fundamentals."
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Wednesday's official Fed remarks were particularly disturbing because of what wasn't addressed - the "repo bailout." It was even downplayed in Powell's less formal remarks to the press following the 2 p.m. EDT rate cut statement.
Why the deliberate omission? Simple: For the first time since the financial crisis, the effective federal funds rate had trounced the Fed's target rate.
This matters because the federal funds rate is the most influential interest rate in the nation's economy. It also matters that the Fed has to jump in repeatedly to rescue its target rate because that means the big banks are in control, and not the Fed.
That's a concern, because the Fed has been convincing itself and everyone else that a "Fed market" is more reliable, more under control, than a natural market.
That is, the Fed has actually tried to convince the world that it is in control.
The hubris and ignorance behind such assumptions is the equivalent of a sailor thinking he is "in control" of the Atlantic.
Eventually, natural market forces, like big, turbulent oceans, will utterly crush the arrogance of the Fed and other central banks. The market will crush them the same way a hurricane would crush a sailor arrogant enough to challenge it.
"The Emperor Wears No Clothes"
This week, the Fed has shown us - by its own attempt at deception - that it is running short on credibility and running short on tricks.
At some point - maybe in the next few days - injecting liquidity like this could become a fool's errand. Banks could very well take short rates up as fast as the Fed tries to take them down.
The bottom line here is that eventually there may not be enough liquidity (or printable money) in the artificial system to satisfy natural demand. That would make the Fed's big "extend and pretend" scam all the harder to pull off.
The big question now: Just how much market-distorting time can the Fed buy with easy money and doublespeak? Could it ever face the fundamental, unalterable truth that natural markets ultimately get the last say over "Fed markets"?
Frankly, it's tragic that we have gotten to such a point where Fed intervention is the only thing keeping U.S. markets on this side of the fine line between the sublime and the ridiculous.
For years, we've seen much of the former; soon enough, we'll have to contend with the latter.
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About the Author
25-year run as a hedge fund portfolio manager, family office chief investment officer, managing director and general counsel. Internationally recognized expert in credit and equity markets as well as macro risk management.