They are going to layer their post-meeting statement with a
steaming pile of if, ands & buts. It will exude an abundance of
caution and a dearth of clarity.
Having judged that a 25 bps pinprick is warranted, the FOMC will then
plant itself firmly in front of the great flickering dashboard in the
Eccles Building. There it will repose to a regimen of
“watchful waiting”, scouring the entrails of the “incoming data” to
divine its next move.
Perhaps the waiting won’t be so watchful as all that, however. What
is actually coming down the pike is something that may put the reader,
at least those who have already been invited to join AARP, more in mind
of that once a year hour-long special broadcast by Saturday morning TV
back in the days of yesteryear; it explained how the Lone Ranger got his
mask.
Memory fails, but either 12 or 19 Texas Rangers rode high in the
saddle into a box canyon, confident they knew what was around the bend.
Soon there was a lot of gunfire and then there was just one, and that
was only because Tonto’s pony needed to stop for a drink.
Yellen and her posse better pray for a monetary Tonto because they
are riding headlong into an ambush in the canyons of Wall Street. To
wit, they cannot possibly raise money market interest rates—-even by 75
bps—-without massively draining liquidity from the casino.
Don’t they know what happened to the $3.5 trillion of central bank
credit they have digitally printed since September 2008? Do they really
think that fully $2.6 trillion of it just recycled right back to the New
York Fed as excess bank reserves?
That is, no harm, no foul and no inflation? The monetary equivalent of a tree falling in an empty forest?
To the contrary, how about recognizing the letter “f” for fungibility.
What all that “excess” is about is collateral, not idle money.
The $2.6 trillion needed an accounting domicile—so “excess reserves”
was as good as any. But from a financial point of view it amounted to a
Big Fat Bid for existing inventories of stocks and bonds.
Stated more directly, Wall Street margined the Fed’s gift of
collateral, and did so over and over in an endless chain of
rehypothecation.
So that’s why December 16th will be the beginning of the end of the
bubble. If the Fed were to actually raise money market rates the honest
way, and in the manner employed by central banks for a century or two,
it would have to drain cash from the system; and it would have to do so
in the trillions in order to levitate the vast sea of money it has
pinned to the zero bound.
Yet actually raising money market rates the honest way would amount
to the opposite of what has gone before. That is, it would become
the Big Fat Offer, triggering a selling stampede in the casino.
The front-running smart money of the bubble’s inflation phase would
become a bow-wave of retreat; and the hypothecated chains of collateral
would morph into a monetary black hole of margin calls and liquidations.
So the Keynesian monetary plumbers of the Eccles Building will try
something truly stupid. That is, they will try to levitate the entire
sea of money-like liabilities they have conjured over the last two
decades, but especially since September 2008, mainly by paying higher
rates of interest to banks on those $2.6 trillion of so-called excess
reserves.
Well now. Will higher IOER (interest on excess reserves) cause money
market funds to pay more to their long-suffering investors; or cause the
repo rate on trillions of government and other fixed income securities
to rise in sympathy; or lift the rate on short-term CP and the multiple
other forms of wholesale money?
No it won’t. The Fed is fixing to call a rate rise but its
preferred tool is powerless to make it happen. The so-called IOER scheme
has always been a pointless crony capitalist sop to the Fed’s banking
system constituency, anyway.
After all, we do not (yet) pay prisoners to stay in jail, but paying
banks on idle reserves amounts to the same thing. Just where were they
going?
The truth is, IOER payments were designed to compensate the banks for
the regulatory cost of capital required to be set-aside against these
assets under the new rules. So the banks got their capital costs
subsidized and Wall Street got more fungible collateral in the bargain.
Yet wait until the cowboys on Capitol Hill figure this out. In not
too many months down the road, the $100 billion per year of
so-called “profit” which the Fed remits to the US Treasury will largely
disappear, leaving one of many gapping holes in the Federal deficit that
are lurking just around the corner.
That’s because even 100 basis points of IOER would cost upwards
of $30 billion a year. On top of that there is also the mega-risk that
prices of the $4.4 trillion of Treasury and GSE debt owned by the Fed
will keep heading south, requiring it to carve out “reserves” from its
earnings to offset the balance sheet losses.
The whole maneuver is a world class scam anyway, and indicative of
the lunacy which passes for national policy. The Fed’s $98.7 billion of
“profits” last year was generated by the $116 billion of interest paid
to it by the US treasury and the GSE’s——less a goodly rake-off for
system expenses and salaries and for funding contract research by say
85% of the monetary economists in the US who don’t already work for Wall
Street.
Click to enlarge. (Source: The Federal Reserve.)
In any event, Congress will surely blow its top if the Fed uses
up this $100 billion “deficit reducer” by paying IOER or other forms of
bribes aimed at make pretend interest rate raising.
For instance, another so-called tool to effectuate rate normalization
is the TDF or term deposit facility. Under that particular gem, banks
may offer cash to the Fed for seven days in return for an interest rate
that would presumably be above the money market rate or say 30 bps after
Wednesday.
Now isn’t that brilliant! The regulated banks are drowning in excess
liquidity—-so sopping up cash seven days at a time will not constrain
their ability to lend in the slightest.
Nor would it elevate the money market rate of interest unless the Fed
issues a humungous open-ended tender to the banking system to take any
and all deposits offered. Exactly thereupon, however, the number of
histrionics-filled hearings on Capitol Hill would be limited only be the
number of TV crews available to cover them.
It would be perceived as, and in fact would be, a massive subsidy to
the banking system. That is, a reward for not lending to main street
America.
At the end of the day, the Fed will not be able to bribe the money
market higher in a manner that is politically feasible. So it will be
forced to repair to the old fashioned recipe——-draining cash from the
Wall Street dealer markets.
Even on this matter, however, these Keynesian fools can’t manage to
be honest about what they will be doing. They will offer up another tool
called RRP or reverse repo; it will be described as an instrument
to manage market liquidity in a manner consistent with its measured
journey toward normalization.
Folks, RRP is nothing more than selling bonds with your fingers crossed.
Once they get started down this path in earnest, they will either
keep rolling the RRPs, which is the same thing as selling down their
$4.5 trillion inventory of treasury bonds and GSEs, or they will relent
and admit the whole interest rate raising gambit had been a blithering
failure.
When the US economy joins the worldwide slide into deflationary
recession some time next year, this will all be academic anyway. But in
the interim you haven’t seen nothing yet in terms of Fedspeak gibberish
and cacophony.
Within no time the hapless 19 Federal Reserve Rangers will be
debating about whether they have actually tightened in the first place;
and whether any actual liquidity that they drain from Wall Street via
TDF or RRP is meant to be permanent or just a short-term
market “smoothing” maneuver.
This much can’t be gainsaid. The combination of encroaching recession
and even moderate liquidity draining moves will be enough to trigger
Wall Street fainting spells, like those of this past week, and
with increasing amplitude and frequency.
The fact, that the junk bond market is already falling apart and
CCC yields have soared back to 17% is not just due to an isolated bust
in the shale patch; its a warning that the hunt for yield that massive
central bank financial repression triggered in the financial markets is
about ready to become a stampede for the exists.
So get ready for the monetary gong show which starts next week.
Today’s Commerce Department report on total business sales and
inventories further confirmed that the inventory to sales ratio is
now decidedly in the recession red zone. This means that the Fed’s
liquidity draining moves will join hands with rising risks of recession.
Can the third great bubble of this century survive a Fed that finally
wants to get off the zero bound after its way too late, but can’t do it
anyway without a massive crash inducing cash drain from Wall Street?
And in the teeth of the next recession to boot?
Yes, the end of the bubble does begin on December 16th.
