Category: Fed, Central Bank and Banking Macro Liquidity

Ever resolute, the Fed kept pumping the cash into Primary Dealer accounts. It kept at it until, as I calculated elsewhere, it had pumped in about $800 billion more than the dealers, and indeed the entire world, needed to absorb the flood of Treasury supply that was hammering it. That happened by the middle of April.

It was enough for the dealers to get back to their fun business of acquiring inventories of stocks, marking them up, triggering short squeezes, and convincing their herds of institutional sheep customers to follow the shorts and dive back into the market with whatever cash they had raised on the way down.

It worked, as we all know. Stocks have recovered around 55% of what they lost in the crash.

But the Fed has started to do the tighten up. Here’s what you need to know.

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The Fed’s massive bailout of Primary Dealers and its alphabet soup loan programs for all other big financial players, have now made moral hazard permanent and structural. Why worry about risk when you know that the Fed will always take you off the hook when the shit hits the fan?

How can we know how this will play out? How can we know if these loans can ever be repaid? Will they be repaid through inflation, perhaps hyperinflation? Or will the borrowers simply default if the markets and economy recover too slowly?

Then who will be on the hook for the Fed’s guarantees when the Fed must assume the losses? Who pays? Taxpayers? Depositors? Everyone, again through massive inflation?

Of course, there’s always a chance that everything turns out just fine. The world returns to normal in a few months. The economy bounces back, and all the trillions lent by the Fed gets repaid timely, with no financial price to be paid.

We don’t know, but there will be telltale signs in the weeks ahead that will give us a heads up.

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Treasury issuance will go through the roof over the next 5 days while the Fed has decided to cut back its support. That’s a bad combination.

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It worked well in theory and in practice for a dozen years. But at what is likely to be the most important juncture in our lives, if not in modern history, this indicator failed to warn us. Here’s why that’s terrifying.

We also take a look at the foreign central bank issue and tell why that’s also frightening.

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The Fed injected around $600 billion into the markets and the banking system last week. That’s about $2,000 for every American, and it was just one weekly installment. All in the valley of Death rode the 600. We are the 600 and the Fed is leading us into the valley of Death.

Meanwhile banking indicators suggest that the sickness is getting worse, not better.

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