In today’s episode of Fed POMO TOMO FOMC follies, we got another cut in the Fed Funds target rate, no POMO, and almost no TOMO.
But make no mistake, if the Fed wants money rates to stay down by another quarter, it will need to imagineer even more money.
That’s on top of the $281 billion it has already imagineered into existence since addressing its “one-off” repo market emergency on September 17. This came via “Temporary” Repo Man Operations money, and $70.6 billion in Permanent Open Market Operations (POMO) money.
By my calculations that averages out to $7.4 billion per business day. That works out to a monthly pace of $155 billion or so.
If they keep this up, it will be more than enough to absorb every penny of new Treasury supply. That supply had caused the system to run out of money in mid September. This flood of paper had been inundating the market, and will continue to inundate it. In September, that constant flow of supply finally absorbed all of the excess cash that had been available to fund the issuance.
Today’s Fed POMO TOMO Is Not The Same as QE, Says Powell
Powell says not to confuse it with what he called previous LSAPs- Large Scale Asset Purchases, which is Fedspeak for QE.
I don’t know about you, but I’m not confused at all. This is bigger.
Now the mix of what they’re buying is a bit different under QE New, than QE Two, and One and Three. But the practical impact is the same. The Fed injects this money into the system either via loans to Primary Dealers (repo) under TOMO, or by directly purchasing some of the dealers’ inventory of Treasuries from them.
In both cases, the Fed simply deposits the money into the Primary Dealer checking and trading accounts at the Fed. It’s money that didn’t exist before these “operations,” which is just the Fed’s fancy word for “trades.”
The Big Lie of “Open Market Operations”
In fact, the whole term “Open Market Operations (OMO)” is a euphemism. It’s third rate gaslighting, but it works.
Open Market Operations aren’t Open, they’re not in the Market, and they are trades, not “operations.” An operation is what a doctor does when she removes your gall bladder. Or a planned military strike. OMO are trades that the Fed does directly with, and only with, Primary Dealers, under terms strictly defined by the Fed.
The trades are supposed to mimic the market, but the terms are favorable to the dealers, of course. Otherwise they wouldn’t do them. But they’re trades.
The important thing is that this is the only way, THE ONLY WAY I SAY, that Fed imagineered money gets into the financial system and the economy. The Fed deposits it in Primary Dealer checking and trading accounts.
This is not some amorphous, mysterious process by which money sort of floats into the market from the ether after the Fed prints it. No sir and no M’am! This is a direct injection of cash into the markets. The Fed pays the dealers and the dealers then send that money on its merry way through their trading and lending activities. They get it first. They’re the distributors.
What happens to that money after the Fed imagines it into existence is not up to the Fed. It is up to the dealers.
Monetization By Any Other Name is Still Monetization
Of course some, not all, but some of the money does enter the economic stream. It does so when, the dealers use whatever they have left to spend it on new Treasury paper at next week’s Treasury auctions. In effect, the dealers lend the money that the Fed just imagined to them, to the US government, which then spends it.
This is direct debt monetization by the Fed, only with the interjection of the dealers as middleman. The Fed does that so that it doesn’t look like direct monetization. But really. It is what it is, regardless of the fact that they use the Primary Dealers as a straw man.
The dealers are more than just straw men for the Fed of course. They own and run the stock and bond markets for their own benefit. They are the House. They own the tables. They finance the players. This is their game.
The Fed, as I’ve previously alluded, is their Meyer Lansky, the great gangster fiancier of the Mafia gambling dons in their heydays. If the dealers have a new crime scheme they want to carry out, make no mistake, the Fed will find a way to finance it. And if a few white-hat narcs at the US Treasury try to control them, the dealers will find a way to buy and co-opt them. Once the Treasury agents are corrupted, or marginalized through legislative capture, the crime spree goes forth unimpeded.
Never forget, the Secretary of the Treasury was and is, first and foremost, a Wall Street Made Man.
This is where we are today. The criminals run the show. Trump, Mnuchin, and Powell. Bugsy Siegel, Lucky Luciano, and Meyer Lansky.
The Power of Powell’s Imagination
When the Fed makes these loans, or buys the dealers’ inventory, we see the power of the Fed’s limitless imagination. The only difference between Grand Wizard Powell and the Wizard of Oz, is that what Powell imagines instantly becomes real the minute it hits the accounts of those dealers. Out of the great void, money materializes in Primary Dealer trading accounts. What they do with it is up to them.
The Fed can send smoke signals, but the dealers may or may not inhale. And if they don’t inhale, they don’t blow smoke.
Their securities inventories ballooned on the back of a massive increase in leverage via repo borrowing over the past two years. Note that this massive increase in leverage happened when the Fed was pulling money out of the system. The dealers and banks had to absorb the paper, and they had to borrow to do it.
They’re now stuffed to the gills with paper. They’re in no mood to inhale more. Without that will and ability to buy, it is true, Chief Pow, that the effect of QE New may not be the same as QE Two.
No doubt the intent is there on the Fed’s part, but the dealers are already as long in their inventories as they want to or can be.
So the Fed had to start buying it all new Treasury issuance, if it wanted to keep money rates stable. They would have gone through the roof otherwise. And it seems to be adding enough extra to juice stock and bond prices higher.
Here’s The Fed Gets WIth A Quarter Trillion Today
But what has that $281 billion of new money bought so far? Well, they got the S&P 500 a whole 1 percent higher. At this rate, a trillion would be worth less than 4% in stock price inflation.
And what about bond yields? At the close of business on the day before the Fed started QE New, the 10 year yield stood at 1.84. Today it’s 1.80.
So all that new money bought flat bond yields and 1% higher stock prices. But bear in mind that the 10 Year Treasury Yield got as low as 1.52 on October 8. So whatever appeared to be working to bring yields down stopped working that day.
But at least when the Fed imagineers the next trillion, the US Government will spend it. It will pay interest on the debt, pay for and even increase military spending, and spend it on junkets to Trump Regime properties. Some of the money will trickle down to those who work in businesses that service those beneficiaries.
That way they’ll insure that we continue to get that robust 1.9% GDP growth.
Yeah, that’s the ticket.
For more see:
Knowledge is Your Power With Liquidity Trader
Meanwhile, the question to us is how do we protect our own capital when the Fed is propping Humpty Dumpty on the wall. To answer that, I analyze macro liquidity, show you the forces that dictate the trends, and provide common sense recommendations on how to manage your money accordingly at Liquidity Trader. So if Humpty Dumpty does have a great fall, your portfolio won’t.
Get 90 Days of Liquidity Trader Risk Free
Read Lee Adler’s Liquidity Trader risk free for 90 days if you join now! Satisfaction guaranteed or your money back. 90 day risk free trial offer is for first time subscribers only.
Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.