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I didn’t watch Powell’s press conference yesterday. Instead, I followed my twitter feed, where I got the reports, reactions, and impressions of dozens of reporters, analysts, and other observers of various stripes. My reaction to it was predictable. The same old disgust.
These multiple perceptions of Powell’s performance, reinforced my opinion that Powell, and most Fed governors and presidents, are cynical, pathological liars. They will stop at nothing to defend the rigging of the markets to benefit only their cronies and themselves. Meanwhile, those least able or least willing to participate in their game, suffer the consequences.
End of rant.
For our purposes, I remind myself and you, to watch what they do, not what they say. There’s scant evidence that the market anticipates, aka “discounts” the future. There’s lots of evidence that market prices correlate with money flows. In fact, there’s so much evidence accumulated through the years that we would have to be delusional not to recognize cause and effect.
These Composite Liquidity Index reports illustrate that. They don’t tell us anything that we don’t already know, but they serve as a good reminder, as reinforcement. We need to stay focused on what matters! Not the sideshows like the one the Fed put on yesterday, which the Wall Street captured media willing played into.
So what if the Fed says it’s going to reduce its QE purchases? So what if it says that it’s likely to start doing it in November? And so what if they cut by $20 billion per month and stop after 6 months as Powell suggested they might?
Well, ok. One thought is that might coincide with the draining of the RRP slush fund that I’ve pointed out to you in these reports for the past several months. I estimated that the fund would top out at $1.3 trillion, coincident with the lifting of the debt ceiling, probably in early October. Well, here we are at $1.283 trillion in the RRP fund yesterday (9/22).
And all of the headlines are about the looming Federal budget and debt ceiling deadlines.
Something’s happening here. It will get done. Temporary default or not.
Take with a grain of salt all of the predictions of catastrophe if the government defaults. There will be short term dislocations, no doubt, but the politicians will, in God’s good time, pass a budget, and lift the debt ceiling, and the Old World, with all its financial power and might, will step forth to the rescue of the New (with apologies to Churchill).
Lifting the debt ceiling will start the clock on exhausting the RRP slush fund. The catastrophe will come when that fund approaches zero again.
So here we are. The Fed will cut QE. The RRP slush fund will need to be used to absorb the Treasury issuance. If the fund lasts 6 months, which I doubt, then the Fed can follow its $20 billion per month QE cut trial balloon.
But at the end of that time the bond market will collapse, because there won’t be enough money in the financial system to absorb the paper at an equilibrium price. Prices will fall, and will do so continuously, with a concomitant increase in yield.
Or it could come sooner than 6 months. It depends on how fast the Treasury will move to replenish its cash account and repay the other internal funds it raided. If they go low and slow, then they can stretch this charade to the maximum. If they move quickly, then the sheet will hit the fan much sooner. The Fed will not be able to continue cutting purchases for 6 months. It will stop and reverse much sooner.
Not being an insider, I don’t know what the plan is. So again, all we can do, and in fact all we need to do, is watch the data. It will tell us exactly what’s going on at just the right time that we need to know it. This report, and those to come, will show you, with charts and clear explanations (subscribers only), exactly what’s going on and when we’ll need to react .
All will unfold before us in good time. We did not need Jerome Jerry Jaysus Powell, or Janet Yellin’ Yellin to tell us that. We can see the trends for ourselves in the monetary indicators. It’s all there for us to view with our own eyes (subscribers only).
We can predict what they’ll say, and more importantly what they’ll do. But prediction isn’t all that helpful, because, again, the market does not discount. It responds to changes in liquidity, directly and immediately.
On occasion, rarely, it will react to an external shock, like a pandemic. But those events are always temporary. In the end, the market always returns to following the path of liquidity. You’ll see that again, and in the future, in these reports (subscribers only) so that you can act to preserve and grow your capital under the most adverse circumstances.
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