Liquidity Trader

Back in 2008-2009, I chronicled how the Primary Dealers caused the stock market crash. They were the most important and least recognized cause of what the media has labeled the Great Financial Crisis.

The dealers were overleveraged and positioned wrong then. They are overleveraged and positioned wrong today.

It’s not that they choose to be wrong. While greed, stupidity, and even criminality are definitely involved, they’re actually forced to be wrong by virtue of their role as market makers and Primary Dealers. When their biggest clients, in particular the US Government, are all on one side of the trade, the dealers must, by definition, take the other side.

Unfortunately, they get increasingly reckless when they do. Even more unfortunately, they almost never face consequences when they do. It’s called moral hazard. And the Fed is happy to enable and promote it.

Of course, there’s an important difference between 2008 and now. In 2008, when that crisis was at its peak, we did not already have the massive flow of money that the Fed steadily pumps into dealer accounts. The Bernanke put, which became the permanent Fed put, did not exist yet. The Fed didn’t start QE until November 2008, well after the crash was in full swing. It did not start direct Primary Dealer QE until March 2009.

Today, QE is a given.

Today we have constant, permanent QE. The Fed now has no choice. Its constant bailouts have engendered ever larger bubbles, and ever greater reckless behavior.

Because of that the system has collapsed. It looks the same as the old system on the surface. But it’s not. The dealers are no longer independent business entities. They are now fronts for the Fed. They are merely conduits for getting the new money into the markets and the banking system.

Despite that, now,  the dealers are again on the verge of precipitating another crash.

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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

In the mid month QE update, I concluded the intro summary with this warning:

1/16/21 At this point, it seems like we are on the edge of the precipice. The risks are enormous. At the very least, I don’t see the likelihood of significant upside for either stocks or bonds.

Likewise, this could very easily go south in a big way. The Fed would need to act. Would it be too late? Would the market even respond?

We live in dangerous times, both politically and financially. Falling asset prices would lead quickly to a shortage of cash.

Now it appears that this may be beginning, but the trigger did not come from the weakening of the Treasury market. It came from a place called /wallstreetbets (let’s call it wsb), a community on the Reddit message boards. You probably never heard of it before last week, but by now you have become an expert.

However, if you are just returning from a 2 week trip to Mars, this is the public group of wild and crazy day traders which engineered an epic short squeeze in the aptly named GameStop (GME). They drove its price from $4 a few months ago to over $500 in the premarket on Thursday.

In the process, they triggered the collapse of one multi-billion-dollar hedge fund and severely wounded potentially many others, along with their lenders, and one or more brokers.

The best known of those brokers is Robinhood, which hosts many of the wsb types. Robinhood began getting clobbered by the massive moves in GME, with customers unable to meet margin calls. So Robinhood decided to stop traders from opening positions in GME and a few other stocks that the wsb crowd was pumping. It apparently lost a cool billion in the process, forcing its biggest backer to come up with the cash to keep it from collapsing.

Apparently Robinhood is really Robinhoodlum, a strawman front operation for the evil Sheriff of Nottingham, aka, Citadel. Robinhoodlum’s sole purpose is to be the skimmer for Citadel godfather Ken Griffin, not the skimmee for wsb maniacs.

No doubt, this little Game Stoppage has blown up to the point that it destabilized the market. On the surface, we’ve seen bigger market moves to the downside than the upside in the past week. Moreover, I’ve seen bid ask spreads on many stocks widen markedly, especially in the first hour of New York trading. It suggests that dealers are having issues maintaining orderly markets. Narrow spreads signal plenty of liquidity. Wide or widening spreads signal liquidity shortage.

Think about it. The Fed is pumping $160 billion or so a month into Primary Dealer accounts, and we have an incipient liquidity shortage. Mind boggling.

This is the fruit of the poisoned tree that the Fed itself planted when it started bailing out hedge funds who got themselves in trouble with their insanely leveraged, sick gambling habits, more than 30 years ago.

The first of note was LTCM back in 1998. From that point on, the Greenspan put was in place. It evolved into the even bigger Bernanke put. He institutionalized it with ZIRP and QE. As Bernanke said back in 2010, “We pick winners and losers when we make monetary policy. The banks and hedge funds and dealers are the winners. Screw your grandma and grandpa who worked hard and saved all their lives to earn a little interest income to spend in retirement. Their spending doesn’t help the economy. The Hamptons crowd helps the economy by hiring dishwashers, bartenders, tennis instructors, and pool boys to entertain the trophy wives of the Wall Street banker and hedge fund titans. ”

Now it’s just the Fed put. Permanent ZIRP and ever larger QE, whenever its needed.

The banks and dealers and gigantic leveraged speculators all know that they can commit financial malfeasance, and even outright fraud, with impunity because the Fed will always bail them out.

They also know that the Federal Government, starting with the Obama, Holder shakedown racket, and Trump being a crony crook, will never charge any of them with a crime. All they need to do is siphon a few billion from their ill gotten profits, pay it to the Government Protection Racket, and they get a Get Out of Jail Free Card.

Now we have $160 billion a month QE and it’s not enough to maintain orderly markets. It’s never enough. That’s because these Wall Street parasites will always figure out a bigger wealth transfer scam after the current one breaks, brings the financial system to the brink, and progressively weakens the US economy, as they hollow it out with their crooked,  flim-flam financial engineering and skimming schemes.

But too bad for them. A few small time wiseguys at wsb have figured out the game, and they are armed and dangerous, much to the chagrin of the Wall Street mafia and its captured media mouthpieces, CNBC, Wall Street Journal, Financial Times, especially FT. They have all been wailing and bleating like stuck pigs. They features slimy pitchmen like Leon Cooperman, egged on by the likes of the pathetic Street apologist Scott Wapner, to cry and piss and moan about the public actually taking over their crime enterprise.

They’re not the only ones, just salient examples of the clips I have seen on Twitter. They’re all disgusting.

But I digress. Here’s the QE imbalance forecast for February. It gives us an outline of what to expect.

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