Black Coffee: The Fed Quietly Mans Its Battle Stations

It’s time to sit back, relax and enjoy a little joe …

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

Merry Christmas, everyone!

I hope everyone is enjoying their weekend! In the meantime, why don’t we get this show on the road? Then I can start mine …

Damn the torpedoes; full speed ahead!

— David Farragut

Change is the essential process of all existence.

— Mr. Spock, Star Trek

Credits and Debits

Debit: Did you see this? The US government deficit spiked 12% to $342 billion during the first two months of the 2020 fiscal year. At that pace, the deficit is on track to surpass $2 trillion — in a single year! Imagine that.

Debit: Meanwhile, the Fed has printed more than $320 billion of emergency daily repo market support since mid-September, when overnight lending rates jumped from 2% to 10% — and they just announced that they’ll print $500 billion more over the next 30 days. Yes, one-half trillion. I’m sure there’s nothing to worry about. After all, printing nearly $1 trillion over a 90-day period is perfectly normal and the sign of a healthy financial system … Isn’t it?

Credit: With nearly $1 trillion of new currency printing quietly going on behind the scenes, it’s no wonder that macroeconomist Alasdair Macleod is saying that, after a decade of loose monetary policy — followed by a crisis spurred by money tightness — “the planners are worried about losing control” of the financial system. Ya think? So … just how worried are the “oracles” at the Fed? This worried:

Debit: While the Fed’s rescue operations have been running at warp factor 8 in terms of supplying the banks with quick and cheap funding, they haven’t been so effective when it comes to luring those same banks to fund each other, as the big banks continue to hoard cash instead of lending it to other banks. And, uh, in case you’re wondering, that odor wafting past your nostrils is the unmistakable smell of … fear.

Debit: The market has been turning over $1 trillion in overnight loans in the US. But, as Wall Street on Parade observes, the Fed only provides about $100 billion a day, with the biggest banks and money market funds covering the rest. Thus, the repo loan crisis is telling us that “the biggest banks are backing away from lending to institutions at risk of bankruptcy.” Apparently, there are a lot of risky institutions out there.

Debit: Of course, the Great Financial Crisis in 2008 also saw banks’ reluctance to lend to other banks. The good news is: this time the Fed is proactively providing the necessary liquidity to pick up the slack and keep the system from imploding. But the quadrillion-dollar question is: How long can they keep it going without causing a panic-inducing loss of confidence in the financial system?

Credit: Now for the punchline: the current repo crisis is getting worse. As Dave Kranzler noted this week, “Despite printing money in an amount that’s close to the peak monthly QE after the 2008 crisis, the Fed (decision) to quietly increase the amount it’s printing for the banks is a clear indicator the problems in the banking system are escalating at a faster rate than the Fed’s money printing operation.” Obviously, the Fed needs to step it up …

Debit: Indeed, in a shocking admission this week, the Bank of International Settlements — also known as the central banks’ central bank — all but admitted that the world now finds itself in a position where central banks have no choice but to constantly print money out of thin air to prop up asset prices. And do it forevermore. Well … unless they want to see the entire financial system to implode.

Credit: As Bill Holter notes, “If you read between the lines, the financial system itself is at risk without the Fed’s liquidity fire hose because a lack of available overnight capital would force banks to sell holdings, which would damage asset values. Bank equity would be wiped out quickly — as in ‘overnight’ — and then the failures will begin to spread.” Let’s hope the Fed is enjoying the financial hamster wheel because it’s going to be on that thing until it breaks.

Credit: Don’t tell any of this to the stock market, as the party on Wall Street continues unabated, with the S&P 500 ending the week on yet another all-time high, goosed by global central bank monetary spigots that can never be shut off.

Credit: I know what some of you are thinking: If things are so bad, why are stocks still soaring? Well … aside from the Fed’s money injections, the market is in denial regarding the evidence for stocks’ excessive valuations. As Adam Taggart point out, “there is a time lag between the collapse of the argument underlying the 10-year bull market and investors’ recognition of that.” As such, it’s only a matter of time before the longest bull market in stock market history ends up like this:

Credit: The good news is, at some point, the world will rediscover the benefits to an economy that uses gold as a store of value, if not a medium of exchange, including lower prices via product innovation, technologies and competition. It also encourages borrowers to repay their debts quickly and — most importantly — it rewards savers by preventing their long-term savings from being depreciated over time, and protects nest eggs from being sharply devalued in a currency crisis.

Credit: That’s especially important if you believe Charles Hugh Smith, who is warning that: “Eleven years into the loose-money recovery (consisting of) useless financial activity, disconnected from the real-world economy, this sucker is finally going down for reasons that have little to do with tight money – but everything to do with the fact that none of the structural problems have been addressed, much less fixed.” If true, all that’s left is the order to abandon ship.

By the Numbers

The US job market grew at a much better-than-forecast rate in November, suggesting that the economy’s momentum can continue into the end of the year:

266,000 Jobs added to the economy in October.

187,000 Number of jobs that Wall Street was expecting to be added.

3.5% The unemployment rate for October; that is down from 3.6% in September.

26 Percentage reduction in the pace of monthly job growth over 2018.

50 The number of years since the unemployment rate was as low as it is today.

Source: Forbes

The Question of the Week

[poll id=”298″]

Last Week’s Poll Result

How old were you when you bought your first home?

• I was in my 20s (69%)
• I was in my 30s (22%)
• I was in my 40s (8%)
• 50 or older (1%)

More than 1500 Len Penzo dot Com homeowners — or previous homeowners — responded to last week’s question, and it turns out that slightly more than 3 in 10 of them bought their first home when they were 30 or older. As for me, I was 27 year old; sadly, I bought my first home three months before the Southern California home market topped in the early 1990, and I was upside down for the next seven years. But that’s another story for another day.

If you have a question you’d like me to ask the readers here, send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.

Useless News: The Traffic Stop

A man got pulled over by a cop because he was weaving in and out of the lanes. The cop got out of his car and asked the driver to blow in a breath-analyzer tube to check his alcohol level. ”Oh, no,” the driver said. ”I can’t do that. If I do that, I’ll have an asthma attack and die.”

”OK,” said the officer, ”let’s go down to the station and you can pee in a cup to check your alcohol level.”

”Oh, no, I can’t do that,” said the driver. “I’m a diabetic and if I pee my blood sugar will go down so low that I might die.”

”Fine then,” the cop replied, “let’s go to the station and take a blood test to check your alcohol level.”

”Oh, no, I can’t do that,” countered the driver. “I’m a hemophiliac and I’ll never stop bleeding if you draw my blood.”

”All right then,” said the officer. “Then just step outside your car and walk this white line for me.”

Again, the driver declined. ”Oh, no, I can’t do that,” he said.

”Why not?” asked the cop.

”Because I’m drunk.”

(h/t: Susan)

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Useless News

Here are the top — and bottom — five states in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:

1. New Mexico (4.68 pages/visit) !!!!
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46. Illinois (1.28)
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48. Hawaii (1.20)
49. Montana (1.13)
50. Wyoming (1.00)

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Letters, I Get Letters

Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com

Last week I received this note from Carroll:

“Thanks for the advice! I think your blog deserves more attention than it’s getting. I’ll probably be back again to read more.”

Aww, thank you, Carroll! Hey … wait a minute. What do you mean, “probably”?

If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.

Photo Credit: brendan-c