The printing presses have barely cooled from the U.S. Federal Reserve's post-crisis $4.5 trillion quantitative easing binge. 2014 seems like a long time ago, but $4.5 trillion is still a lot of money, and that debt is still actively wreaking havoc down in the bedrock of the economy.
Unbelievably, they're firing up the printing presses yet again down in the bowels of the Marriner S. Eccles Federal Reserve Board Building.
This time, they're engaging in a $60 billion monthly bailout of the Treasury market, specifically in the short-duration (six months or less) T-bill space.
That's $60 billion a month, folks. Annualized, this money-printing adds up to another $720 billion in fiat money creation and nosebleed-level deficit financing.
This reeks of pure desperation - panic mode at the Fed. But for savvy investors, there are three unique, easy ways to cash in on the chaos.
Let me show you...
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That Swimming, Quacking Waterfowl? It's a Duck.
The Fed denies this money-printing is quantitative easing (QE), but as with inflation, employment data, and GDP reporting, the Fed is once again doing what it does best in times of panic: It's lying to our faces.
Indeed, rational observers who dare speak the truth - "The Fed is easing again!" - provoke a display of pearl-clutching, outraged denials from the central bankers.
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It's almost funny... almost.
But make no mistake: The Fed is embarking once more on a program of quantitative easing.
Dallas Fed President Robert Kaplan openly admitted last week that the need to print new money was directly related to a recent Treasury issuance.
But Kaplan also said that such printing didn't constitute QE - despite his nose growing longer with each word spoken.
When a central bank prints money out of thin air to buy otherwise unwanted Treasuries, that is the very definition of QE.
In short, QE is back because the artificial, Fed-supported system is once again splitting at the seams.
The simple fact is that the U.S. system is running out of dollars needed to keep its Fed-driven economic machine greased.
We saw this when the U.S. repo market blew apart last month, prompting the Fed to immediately (and I do mean immediately) print more money. It dedicated over $1 trillion in rollover repos into that broken machine.
The Fed said this measure was only temporary. Now, the Fed is pushing repo support into 2020.
Earlier this month, another "supply and demand mismatch" occurred in our Treasury market. That is, there were simply not enough dollars to buy short-duration Treasuries.
The solution? Easy - print more money...
The bottom line is there just aren't enough dollars to go around. The fancy lads call this a "dollar shortage."
I call it a recipe for disaster - as well as an opportunity to make money. I'll show you how after we look at how and why this bizarre scenario is unfolding...
Why the Fed Is Easing Policy Once Again
At $72 trillion and rising, total combined U.S. government, household, and business debt has never been higher or more unpayable. We all know this now. The Fed does too, largely because it's responsible for enabling it.
A decade ago, the Fed decided to sacrifice the net worth and savings of the middle class on the altar of Wall Street's uber-investor class. When the Fed took that momentous, irresponsible decision, it was inevitable that Wall Street would use cheap money to buy back shares to inflate share prices and, by extension, C-suite compensation packages.
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This in turn created a passable facsimile of recovery that central bankers, politicians, and CEOs could point to on television. But all the while the American stock market and the American economy were growing ever more intertwined and interdependent - a very dangerous development if you happen to believe in capitalism.
Now the stock market is the economy, and "it" is utterly sick with and dependent on cheap debt.
With such a debt nightmare before us, the only way to sustain this is to keep the cost of that debt down.
Everything hinges upon this. E-V-E-R-Y-T-H-I-N-G. The entire house of cards.
The only way to keep borrowing costs down is to keep interest rates down, and the best way to keep interest rates down is to keep Treasury bond yields down.
And, as price and yield move inversely, the only way to keep treasury yields down is to keep their prices up.
And the only way to keep bond prices up is if someone (or something) is buying those bonds.
And if no one else will buy those bonds, then that "thing" (otherwise known as the Fed) can simply print money and buy the bonds itself.
Again, that's not capitalism; that's faking it.
This month, the Fed did precisely that - more faking it - with a nervous smile and a growing Pinocchio nose, of course.
The Fed committed to printing $60 billion a month to purchase short-duration U.S. Treasury bills at the same time it aims to further cut interest rates.
That's because in order to keep its unholy creation alive, the Fed must make sure the stock market rises in pace with, or above, the Treasury market.
That's why we track the S&P 500 index (SPX) against the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT).
Since last October, the TLT (in yellow below) has not been keeping up with the SPX (in orange below), but has in fact fallen sharply against it.
Now we're getting to the heart of the juicy opportunity here...
This Might Be the First Time We've Thanked the Fed...
The Fed - painfully aware of its crisis-era Faustian bargain with Wall Street - knows that debt keeps the companies within the S&P 500 alive, and that if the cost of that debt rises (i.e., if short-duration debt prices tank and hence yields/rates spike) the party ends, brutally and swiftly... kind of like an appointment with a firing squad.
Earlier this month, the Fed saw that no one was buying short-duration T-bills, and therefore stepped in to buy them, thus keeping short-term yields artificially suppressed.
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This means a number of things for informed investors in the near term...
- The S&P 500 will rise for now; the Fed just bought the stock markets another round of cheap debt beer to keep the party going.
- If the Fed is openly purchasing T-bills, those short-duration Treasuries are going to go up in price, not down. That's another easy, fat pitch. It's essentially a Fed "front-run."
- If the Fed is printing over a trillion dollars to finance its own debt and bail out both short-duration treasury and repo markets, then it goes without saying that more printed money means weakening purchasing power for dollars and ultimately a longer trend up for gold and silver.
In short, and despite some inevitable pullbacks here and there, the Fed has just signaled a temporary but undeniable buy signal for:
- The S&P 500 itself, as tracked by the SPDR S&P 500 ETF (NYSEArca: SPY).
- Short-duration T-bills.
- Gold and silver, the physical metal, of course, and ETFs that track bullion, like the SPDR Gold Shares ETF (NYSEArca: GLD) and the iShares Silver Trust ETF (NYSEArca: SLV).
Sadly, most retail investors are getting this wrong. Instead of piling into short-duration Treasuries, they are going further and further out on the yield curve in a bid to to get a tiny smidgen of extra yield on longer-dated Treasuries, like the 10-, 20- or 30-year Treasury bonds.
Bad choice. For just a tiny bit of extra yield, they are exposing themselves to considerably more inflation and rate risk down the road.
One can only assume that these poor folks believe Pinocchio has outlawed inflation; nothing could be further from the truth.
As lucrative as the plays I've recommended will be, the danger of the long-term scenario is undeniable. Whenever a central bank has to turn on the printing presses to get markets out of a pickle, it's a fairly obvious signal things are falling apart.
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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.