By Tom Luongo - August 7, 2023
Lenin famously said there are years where nothing happens and weeks where years happen. That was last week, especially in geopolitics. Let’s start small with an article from Zerohedge discussing the latest H.4.1 data from the Fed’s balance sheet.
It came with this headline:
The editors at Zerohedge continue to balk at the script that is playing out in front of them: the Fed of Greenspan/Bernanke/Yellen years is not the Powell Fed. They took a small thing about the Fed’s balance sheet and blew it up to be the headline. I get click-bait titling, but this is something deeper than that
While Zerohedge is naturally and predictably skeptical about that change, there comes a point where you have to throw in the towel when confronted with the evidence.
The End of the End of History
Zerohedge’s mission early on was to explain markets in ways no one else was.
They did (and still do) a fantastic job calling bullshit on the promises of central planners. Zerohedge made their bones during the ZIRP years, educating an entire generation on the intersection of Austrian Economic-style critical thinking, the plumbing of capital markets, and central banking.
It was truly disruptive in ways we’ll never fully quantify.
And on this front no one can have asked for a more noble mission from a bunch of Wall St. exiles. That said, no one is perfect and no one is immune to their own success.
This is as much a warning to myself as anyone else.
One must be willing to constantly as Ayn Rand put it, “Check your premises.” That means, ultimately, constantly re-evaluating the incentives of those who have the power and capacity to move capital markets.
Politics and markets today are inextricably linked in ways that are too complicated for anyone to map. Martin Armstrong tries to do this by farming out the cross-market analysis to his AI algorithm, Socrates.
But even there his work is based on mathematical models constantly shifting with new data inputs. He’s forever trying to hit moving targets, and gods bless him for trying.
It reminds me a lot of Hari Seldon’s Psychohistory from Issac Asimov’s “Foundation” books.
Strauss and Howe’s Fourth Turning models attempt this same predictive macro analysis from a purely historical perspective, no Greek letters in evidence. Both have their limitations because once humans know they are being observed in this way, they alter their behavior to avoid or lean into these predictions.
Marty’s even commented on how WEF High Klingon Klaus Schwab is using his 2032 predictions to force Schwab’s vision onto it.
But, that said, there is something unarguably interesting about these attempts at understanding the flow of history.
It’s hard to ignore them, honestly. Not because they are purely predictive…. they aren’t. But because they spur us to think about events differently as they unfold. They give us new frameworks for looking into the future.
The Powell Turning
For me, both Armstrong and Strauss/Howe were bouncing around in my head in 2021 when Jerome Powell went off the reservation and began what I called ‘stealth tightening’ by raising the Reverse Repo Rate 5 basis points above the Fed Funds Rate.
I had a choice in that moment, stick with my reflexively ‘anti-Fed’ personal opinion or consider the discordant nature of what Powell had just done.
At the time one could argue that he did this to stave off the 30-day T-bill nominal rate going negative. There was so much demand for short-term US paper that Powell had to do something lest the specter of negative yields coming to the dollar would undermine its global reserve currency status.
But he could have also understood this was the one lever he could pull to begin draining the world of Yellen’s horror show and the ravages of the COVID monster.
The result was a massive inflow into RRP, draining the world of more than $1 trillion in base money net of treasury spending. This was a global event. You can argue it was done out of desperation or you could argue it was strategic given the political realities of the day.
The net result was the same.
Inflation was coming. Everyone knew it. But the Democrats were desperately trying to push through their Davos-demanded “Build Back Better” spending bill, to “help us overcome COVID-19,” a crisis they created to create their preferred future outcome per Herr Schwab.
Powell had to weather a political storm that no Fed Chair, even Paul Volcker, ever had to face. Because this was for all the future marbles. This was the Fed facing its Jungian shadow. Face the evil you’ve done as an organization or turn away and be obliterated.
Honestly, it was never even a contest in doubt if Powell was for realz. He’s been for realz.
So, going back to Zerohedge’s article about capital movements through the US system. As expected, the money is flowing out of the RRP facility and bank deposits into higher-yielding money market funds thanks to the Fed’s historical tightening.
The Fed is just as aggressive as ever, shrinking their balance sheet, allowing USTs to run off on schedule.
The Bank Term Funding Program (BTFP) hit a record usage of $106 billion. This is where Zerohedge loses the plot. Somehow they think this is the lede and not the afterthought. It betrays where their head is, editorially.
As Danielle Dimartino Booth put it to me in our last podcast together the BTFP is really emergency money. At 5.5% it’s really expensive. It’s not a bailout facility but an emergency fund facility. And a $106 billion balance is a rounding error at this point. If this were QE or a real bank bailout then it would have been lower cost, say FFR minus 3% or something like that. It’s not.
It’s telling the banks get your houses in order. And if need be, go out and raise some capital.
Because, if Powell was giving them a deal, the balance would be $2 trillion, not $0.106 trillion.
This isn’t a replay of the RRP move of 2021.
There’s no denying that we are headed for an ugly credit crunch here in the US. We are.
The fact that the BTFP balance is still rising is saying that banks can’t raise deposit rates for savers yet. That is itself something very worrying. But they are offering better terms on CDs to keep the money from flowing out fast. And for most people with a couple of thousand in the bank that should be enough.
I’ll use a local credit union as an example. I can get a . . .
[SNIP]