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Instant Reaction to Powell’s Dog and Pony Show – What if the Con Stops Working?

Here I was in Zadar, Croatia enjoying myself, while there was a little matter of a Fed Meeting Statement, and Chairman Jerry’s Dog and Pony show.

Wall Street was waiting with bated breath, that’s right, bated, but I had taken an afternoon stroll around the harbor, on the lookout for baited hooks. Just like walking on Wall Street. You gotta be on the lookout for baited hooks.

Zadar Harbor

Then I got really busy enjoying a bowl of cream of leek soup with truffles,Cream of Leek Soup with Truffles

at one of the terrific local bistros.

That was late this afternoon in Zadar, morning in New York.

I completely forgot about the Fed meeting!

The Market Forgot the Fed Meeting Too

I walked back to my apartment in the old town, looked at the charts, and saw that not much was happening. I didn’t expect much to happen. Nor did the market.

The Street’s big mahoffs know the Fed is trapped and simply cannot move the Fed Funds target, nor cut back on QE. Being on the front line, the dealers know that there’s not enough money in the world to absorb the constant tsunami of Treasury supply without the Fed buying or financing virtually all of it.

Meanwhile, the soup wasn’t the only thing I had had.

So I was getting kind of sleepy. I decided to take a little cat nap around 1:15 PM NY time, not thinking about the Fed non-event that was about to occur.

But Some People Were Paying Attention and Woke Me Up!

When I awakened around 2:30PM New York time, this note was waiting for me from Liquidity Trader subscriber, David, a professional investor and analyst.

David always sends me great questions that get me to thinking. When I start to think, that’s not always a good thing. It sometimes gets my blood boiling, and I say things that I probably shouldn’t, lest I offend some Wall Street folks and policy makers.

Alright, fuck ’em. I don’t care. 😄 Their policies and behaviors are offensive. So if they’re sensitive about it, maybe there’s hope.  

So David wrote:


Most recent LT (Liquidity Trader) report was excellent.

Will you be parsing Powell’s statement tonight?

Oops. Apparently not. I slept through it. And thanks for the nice compliment.

But I did read the Wall Street Journal’s real time reactions to Tom and Jerry’s Dog and Pony Show for the Wall Street wholly owned media. I had a couple of reactions to that.

Dave went on:

I wonder if he’ll use the airplane travel restrictions and virus as cover to extend the NotQE purchases.
How else is he going to justify buying the 165B treasuries issued in March?
Repo rates are now under control . . .


Watch Not What They Say For Their Country, Watch What They Do To You

Well, they don’t need an excuse to keep doing what they’re doing. Whatever reasons they give, the market responds over time based not on the talk, but on the money.

As we all know, “Money talks. Bullshit walks.” When dealers and investors have money, they buy stuff. And with the Fed handing them $100 billion a month, there’s enough money so that they don’t need to sell stuff they already own just to buy new stuff. They just hold on to what they have and buy more.

As a result of holding on to what they have and buying more, prices rise. That’s what the dealers and big funds are doing. And that, not coincidentally, is what the Fed is doing. It’s buying Treasuries and holding on to them.

The dealers get cash for those bonds and bills. They buy a few more bonds and bills, and they buy stocks. The next week, the Fed buys all of the bills from them again. And round and round we go.


So let’s not overcomplicate it.

Now, as for the coronavirus thing. When the dealers don’t have enough inventory they find excuses to engineer little shakeouts. With those shakeouts, they get some inventory out of their customers hands and back into their own. That way they can mark it up and sell it again.

That’s what this could be.

Or it could be something more significant that causes the market to finally lose confidence. I doubt it, but too soon to tell.

And whether I doubt it or not doesn’t matter. Recognizing a trend change like that is what technical analysis is for. So rather than rely on doubts and hunches, I’ll stick to interpreting the charts as best I can.

Does He or Doesn’t He? Only His Hairdresser Knows For Sure

Powell said that the Fed will gradually end repo operations.

Duh. The Fed is cashing out the dealers directly by buying Treasuries from them at the rate of roughly $80 billion per month. That’s $60 billion of bills, and a variable of usually around $20 billion per month of coupons. So the dealers don’t need to borrow via repo, but as long as it’s available, they’ll take it.

I doubt that the Fed will end the repo operations completely. That’s play money that the dealers use to drive prices higher. But again, my doubts don’t matter. Follow the money.

Remember, money talks. Ignore speculative conversations.

Dave mentioned that repo rates were under control.

Are Repo Rates Under Control?

If repo rates being “under control” require that the Fed buy up all the short term paper coming on to the market, are they really under control? Depends on your perspective I guess.
The Fed has rigged the interest rate market. Right now it has managed to peg the rate where it wants because it has removed all the supply of new short term Treasury paper from the market. That process requires the Fed to print $100 billion per month, so I don’t see that as being under control. It has that appearance from the perspective of some, but ask your mother or grandmother if she thinks getting 1.5% a year on her savings shows that the repo market is under control.
I bet you’ll hear a thing or two that suggests that something is out of control.
I’d say if short term rates were at 3-5%, then the repo market was “under control.”
At 1.5%, clearly the system has gone absolutely haywire. Something is terribly wrong here. We have a growing economy. Most people have jobs. A lot of shitty jobs, but jobs. And we have lots and lots of inflation in housing and other assets, just not in the places that the Fed and policy makers look.
I see this “control,” this financial repression, as a moral catastrophe. It robs prudent savers of a reasonable risk-free return on their principal. With low returns on short term paper and bonds, their income is thus transferred to Wall Street via fees and commissions. With no income, they are forced to spend principal. Many end up broke before their lives end. That, to me, is not “under control.”
Conversely, with the Fed inflating equities, it is driving people in their 60s, 70s, even 80s into stock mutual funds. That looks great for now. And maybe it will stay “great” for a long time, as the Fed is forced to continue to inject a trillion or more into the markets every year.
So, retirees and near retirees will go on sleepwalking, not noticing those 5% commissions every time unscrupulous money managers switch them into different funds. And they certainly won’t mind the 2% management fee. Why should they? Their stocks are going up! The Fed has everything “under control.”

Control Could Go Up in Smoke and Mirrors

Somehow, I suspect that that won’t end well. The appearance of the Fed being in control could go up in smoke. It is, after all, both about the money, and about the confidence that the money will always work.
But it is a confidence game. As long as the con works, it’s all great. But what if the dealers and big leveraged speculators lose confidence? What if they take the Fed’s money and don’t use it to buy more stocks and bonds? What if they use it to pay off debt, and deleverage?
The con game would collapse.
So the potential is always there for something to go horribly wrong. All we can do is watch the liquidity data and the technical analysis for any sign that that is starting — that trend change is in the wind. When we see those signs we must then act to protect our capital and to profit from the changes under way.
That’s what I do at Liquidity Trader.


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