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Saturday, November 27, 2021

President Trump Has “Muscled” the Stock Market Away from the Fed


This week the Fed cut interest rates for the 2nd time since the Great Recession, and found its hands full with another event with potentially catastrophic implications for the economy.

In short, liquidity in the repo markets, a critical cog in the financial system machine seized Tuesday.

In response, the Fed greased the machine with more than $100-B, but not before borrowing costs spun up and out of control.

The Street shed light on some of Tuesday’s market mayhem: The New York Fed was forced yesterday to inject $53.2-B after overnight borrowing costs surged close to 10%, thanks in part to the hefty burden of primary dealers in the Fed system taking down nearly $45-B each day in gross US Treasury bond issuance, and reducing spare cash known as excess reserves at the same time.

The Economy Policy Journal`s bar graph reveals the 10% spike in rates.

But Tuesday’s Fed intervention was not enough, and Wednesday, the action continued with another influx of billions in cash: The Fed Wednesday poured another $75-B into the market following a $53-B rescue by the NY Fed Tuesday. Overnight lending rates have suddenly spiked, and the Fed is acting to bring them back down to keep markets functioning smoothly.

Then again Thursday came another $75-B injection.

The Fed has not intervened like this since Y 2008, which may be signaling something is off, though it says all is good.

The Big Q: Why is the Fed is intervening?

The Big A: The fed funds rate needs to stay in line with the Fed’s target rate. If it does not, the intra-bank lending apparatus, the repo market starts demanding juice. If the fed funds rate veers outside the Fed’s target, the Fed’s words and narratives cease to carry any weight at all, begging the Question, why did this happen? And that Answer is not is not a happy one.

Tax payments” and “large withdrawals” are blamed for the sharp spike in overnight rates, according to Fed Chairman Powell.

Chairman Powell downplayed concerns in recent days about a cash crunch in US financial markets, saying the situation says little about the real economy, a bit odd coming from the Chairman, Yes?

Notably, it is not clear why that happened, but 1 thing that is clear: Any confusion over the reason why this happened is not good.

But the need for the Fed to keep pumping cash into the system could potentially be even greater than it already is, stoking the possibility of returning to QE down the line.

If President Trump’s pressure on short term rates does not ease, the Fed is going to have to make the overnight money pump much more permanent. Reference: The Art of the Deal

That Fed “money pump” already has a huge balance sheet from the last time QE was used. 

Control of the once all-powerful Fed has been hobbled.

And if the Fed fails to regain control of the markets…well we will see.

More short-term interventions and a longer-term return to QE could potentially inflate USD, affect asset valuations, and could threaten the long-term safety of the economy.

When QE was introduced in Y 2008, precious metals like gold and silver thrived, and gold continued to power through its biggest Bull run in years.

So, if we are heading that way again, it may be a good time to consider hedging equity bets now.

DJIA -159.72 at 26935.07, NAS Comp -65.20 at 8117.67, S&P 500 -14.68 at 2992.11

The stock market ended the week on a lower note after a mid-day pause pressured the S&P 500 (-0.5%) into the Red. The index lost 0.5% on the week, the NAS Comp (-0.8%) underperformed, surrendering 0.7% since last Friday

Volume: trade on the NYSE came in at 2.76-B this 3X Witching Friday

  • NAS Comp +22.3% YTD
  • S&P 500 +19.4% YTD
  • Russell 2000 +15.6% YTD
  • DJIA +15.5% YTD

Heffx-LTN’s overall technical outlook for the major US stock market indexes is Neutral to Bullish for the week ended 20 September 2019

Have a terrific weekend.

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