Ongoing trouble in the repo market, where banks, big hedge funds and others borrow from each other, has forced the Federal Reserve to inject $400 billion into the fed funds market over the past four weeks.
That’s what’s fueling the stock market’s melt up.
Here’s how the problem in the fed funds market is driving stocks higher, why the Fed’s going to have to do even more, and what it means for future market moves.
The fed funds lending market is where borrowers use repurchase agreements, or repos, to borrow overnight or for terms of a few days to a few weeks. It has been in existential crisis mode for weeks now.
The bottom-line there is that big banks who usually lend their excess reserves in the fed funds market, to pick up interest overnight or on term loans, have been keeping more of their excess reserves parked at regional Federal Reserve banks. They’ve been doing this to collect IOER (risk-free “interest on excess reserves,” which the Fed’s been paying banks since the start of the financial crisis). Either that or they’ve been using their excess reserves to buy longer term Treasury bonds to earn more interest and speculate on interest rates falling.
That means there’s not enough money in the system to facilitate normal lending. As a result, the interest that borrowers must pay on repos has, at times, skyrocketed. And worse, sometimes the well’s dry.
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If you think the current “manufacturing recession” in the United States is going to sink the economy and the stock market, you’re not alone.
That’s exactly what some major media outlets are trying to plant in your head right now.
Consumers and investors are being inundated with bad news about manufacturing… and a lot of them are scared.
A New York Times headline from this summer 2019 pushed the idea that a manufacturing recession will infect the economy by saying, “U.S. manufacturing slowed in August in latest sign of economic weakness.”
The Los Angeles Times got on-board shortly after in October announcing, “Manufacturing is now officially in recession, despite Trump’s vow to boost economy.”
CBS upped the fearmongering stating the manufacturing recession as a fact and making it sound viral saying, “U.S. manufacturing is in a recession. What does that mean for the rest of the country?”
Back in July PolitiFact quoted a candidate for president as an expert with the statement, “Elizabeth Warren says manufacturing is in recession…”
Then in October CNN, the media source of all Breaking News, trumpeted, “US Manufacturing Looks Weak. That’s a Problem.”
Even Bloomberg Business got on the naysaying train in October suggesting, “Manufacturing in Recession Might Spread to U.S. Economy.”
And MSN, the blatant basher of good news, claimed, “US manufacturing in ‘technical recession’.”
Rumors of the Federal Reserve’s demise – in part because it was “duped” by the biggest bank in the U.S. – have been greatly exaggerated, though headlines would have us believe otherwise.
MarketWatch titled its piece back in April, “The Federal Reserve Has Lost Control of the Financial Markets.”
The Wall Street Journal asked in June, “Has the Fed Lost Its Mojo?”
Also, in June, the Mises Institute declared, “The Fed Has Lost Control.”
A few months later in September CNBC reported, “Fed loses control of its own interest rate as it cuts rates – ‘This just doesn’t look good’.”
Not only has there been no let up, fearmongering headlines are being ratcheted up.
The New York Times declared, “Fed Jumps into Market to Push Down Rates, a First Since the Financial Crisis.”
In mid-November Politico warned, “Fed’s push into funding market stirs fear of widening role.”
And a few days ago, on December 18th, The Economist, with a graphic of a fire extinguisher in the shape of a dollar sign poised over rising flames cautioned, “Despite the Fed’s efforts, the repo market risks more turbulence.”
It’s a frightening fact that repos (repurchase agreements), short-term borrowing facilities traded in the fed funds market, where banks and other systemically important financial players borrow from each other, blew up in September, right under the Fed’s none.
It’s even more frightening that the “turn” of the year is expected to put exponentially more pressure on repo rates than what the fed funds market saw in September and spiking rates could force banks, hedge funds, institutions, traders, active and passive investors to sell and have to continue selling as margin calls force asset prices lower and lower.
Once again it looks like we’re looking over the edge of an abyss at potentially huge market loses.
But the truth is The Fed hasn’t lost anything. At least not yet.
Maybe the Fed was duped by the biggest bank in the United States into restarting quantitative easing (QE). Or maybe it saw what was happening and let it happen to scare the hell out of banks and overleveraged hedge funds. No-one knows the truth there and the Fed’s never going to tell.
But, the “Fed’s lost control” narrative is fake news.
Sure, one hand came off the tiller, but they still have control of the ship. At least for now.
There’s a recession coming, that’s a given. But it’s not here. In fact, there’s not one in sight, even on the horizon.
But that’s not what you’re hearing from an overwhelming number of mainstream media and financial news outlets.
According to them, the next great recession is bubbling up and about to spill out of the containment towers built up around it.
Investors not participating in the roaring bull market are being cautioned that it’s too late.
Even worse, investors sitting on spectacular gains amassed over the almost 11-year bull market are being targeted with sell recommendations.
Purveyors of the recession narrative want investors on the sidelines to be afraid. Moreover, they want investors who’ve amassed fortunes to sell their stocks and profit from the recession they say is imminent by selling stocks short.
“Say it ain’t so.”
The truth is there’s no recession in sight and the stock market is going higher, a lot higher.
And every moment you wait to jump in, you’re missing out on profits.
Believe me, I’m not the kind of guy to say, “I told you so,” but if I was, I’d sure be saying it now.
I’ve been telling you, my Wall Street Insights & Indictments readers, not to sell short this supposedly long-in-the-tooth bull market, not to believe naysayers, and to get on board with the still rising market.
I’ve been unequivocally bullish and predicting more and more all-time market highs in my Capital Wave Forecast, which you also get for free right here every Monday.
I’ve been inundating my paid subscription newsletter subscribers with specific reasons why markets are going higher and recommending new positions regularly, lately two or three at a time.
I’ve been right. You should be making money on this latest leg up in the market like my subscribers are.