tw0122
3 days ago
Make no mistake. 50bps cut, is a panic cut. So, why did the Fed panic?
Most likely, there were four reasons:
The Fed is racking up massive losses.
Political pressure to not crash the markets before the Presidential elections on November 5 (last FOMC meeting before).
The Federal Reserve is genuinely worried about the economy, but especially about debt levels.
Banking sector fragility.
Like I noted two weeks ago, the Fed is accumulating massive losses from its holdings of Treasuries and corporate bonds. This is because it has bought them when they were much more expensive (rates were lower). When rates rose, the value of Treasuries collapsed, generating heavy losses for the Fed.
Monthly summation of remittances of the Federal Reserve due to the Treasury. Source: Miguel Castro and Samuel Jordan-Wood.
So, the one reason the Fed wants to lower rates (to increase the value of Treasuries) is because it wants to save its own *ss, by increasing the value of the Treasuries it holds. A central bank that holds large quantities of government bonds is never even semi-independent, because their value dictates the credibility of the Bank. The Fed tried to go around this problem by labelling the losses as deferred assets. That is, it marked losses as โassetsโ in its balance sheet. It is obvious that such blatant accounting fraud can fly only for so long. So, the Fed needed to cut to ease the financial burden, on itself.
Markets were expecting a 50bps cut, and so were some of the politicians. However, in actuality, a 50bps cut may turn up badly for the markets, because it signals that the Fed sees some serious weakness in the economy.
I concluded my last weeks piece by noting:
Banks seem somewhat optimistic and they have eased lending standards. There is not much room for leveraging among corporations and especially among households, though, which shows in the stagnation of borrowing. This indicates that the optimism among banks is likely to be a โfalse positiveโ. Their optimism can, for example, be based on the assumption that the Fed easing would create favorable conditions for an economic recovery. Due to the very high level of indebtedness of households and corporations, I consider this to be unlikely. This implies that we could see, possibly a drastic, turn into re-tightening of lending standards and softening of credit demand in the coming quarters.
I think this is the risk the Fed is seeing. There is simply too much private and federal debt and if rates stay high, defaults will start to roll in, with also the likelihood of U.S. sovereign debt rising. This would hurt the economy badly.
U.S. banks continue to struggle under a gargantuan amount of unrealized losses. They arise mostly from the same source as with the Fed, i.e. from Treasuries losing value, en masse. We also noted in the August World Economic Outlook of GnS Economics that the outflow of core deposits seem to have re-started. Deposit outflow is a major risk for the banking sector, because it implies waning trust and, as banking is a business of trust, waning trust implies growing fragility in the banking sector. The Fed cannot stop the outflow of deposits, but it can try to diminish the unrealized losses by cutting interest rates, and hoping that Treasury yields follow. At the time of writing, this was not going well with, e.g. the yield of U.S. 10-year Treasury note shooting up. This is an (early) indication that the bond market now expects inflation to pick up.
Core deposits in the U.S. banking system. Source: GnS Economics, FDIC
Alas, the Fed eased heavily, because of the losses it and U.S. banks are accumulating and because it sees the risk of the economy breaking. These are not encouraging signs.
https://www.zerohedge.com/markets/fed-pivots-panics
Bountiful_Harvest
4 days ago
The second part of that equation (FOMC + BOJ) should be revealed this evening. Then the chart has relevance. Historically, upon FOMC + BOJ policy collision, the USDJPY implodes shortly thereafter. That would reignite "forced" JPY carry trade unwinding.
Get OpEx out of the way this week, along w/ BOJ policy decision then watch what happens.
The market is in supernova mode ahead of the BOJ tonight. Market may or may not, churn for a few days. In any event, the market will fall off the cliff soon. The Fed really set things up in a big way this time. Get the popcorn out and watch the fireworks.
All my opinion of course.
cadillacdave
4 days ago
This is many of the woke CEOs going along with this garbage.
What do most business entities try to do - expand and grow. So big business wants cheap labor which is accomplished through illegal immigration.
Additionally, 20 million + have entered the country. These folks couldn't afford products that are produced or sold in the US. But once they get here, not only do they work, as cheap labor, but they now become customers, as these companies have essentially grown their customer base.
A lot of bad forces at play here. You ask why this isn't being covered in the media, or why the politicians aren't pointing this out? Media is mostly propaganda.
The GOP and Dems are two heads on the same snake. The GOP wants the cheap labor for big business and the Dems are fine with it as well, as most of the CEOs are woke, and that cheap labor is a gift to them.
Furthermore, many are given a driver's license and are expected to vote in the upcoming elections, which will benefit the Dems.
Why do you think they resettle foreign "refugees" into specific areas? They are planting seeds and hoping those areas grow, with intentions of flipping those battleground states, like Ohio.
Same with Florida and Texas, both of which are under attack. Most of the people entering illegally are from warm climates and many of them settle in Florida and Texas. If either of those states shift to blue, it would be difficult if not impossible to win a national election. None of this is by accident.
Lots of reasons from a political perspective to allow this to happen. And none of those reasons benefit the American people.