SNAFU Market Thrives On Chaos As China Deal Signed, Trump Impeached (again)

Since it's probably naive to believe that US equity markets are anything other than "fair and open," Wednesday's solid gains - record highs all around - have more to do with internal tinkering than any outside effects. Algorithms that apparently think sending articles of impeachment against President Donal J. Trump from the House of Representatives over to the Senate (after a month-long delay) is not as important an event as the signing of Phase 1 of the US-Chaina trade accord, both of which occurred almost simultaneously.

One can wonder exactly what traders are thinking these early days of 2020, but the algos may be on the right track given that the impeachment drama has been and ought to have been discounted as bad theatre, whereas the trade deal might turn out to be a big deal for global commerce.

No matter the details, stocks continue to soar, practically every day notching new record highs, without as much as a superfluous pullback every few weeks or so. The driver of this irrationals madness has recently been the Fed's easy money via daily repo injections, with the Federal Reserve providing ready cash in exchange for treasury bills, notes, and bonds they sold to primary dealers just days prior.

It's an open secret that the Fed's balance sheet is growing by monstrous proportions again, having begun in September and continued to burgeon through the holidays and into the new year. The Fed has plans to cease such onerous operations sometime in April, though there's ample consideration that such a move might prompt a dipsy-doo on the order of the ones that accompanied rate tightening in October and again in December of 2018.

For now, the bloom is on the rose and for all intents manages to stay blushing through impeachments, royal defections, plane crashes, Middle East noise, and all other hyperbolic geopolitical events. If nothing is done to stop the SNAFU (Situation Normal, All F--ked Up) 2020 could end up being a lot like 2019, replete with outsized gains for everybody, despite chaos all around.

At the Close, Wednesday. January 15, 2020:
Dow Jones Industrial Average: 29,030.22, +90.55 (+0.31%)
NASDAQ: 9,258.70, +7.37 (+0.08%)
S&P 500: 3,289.29, +6.14 (+0.19%)
NYSE Composite: 14,053.23, +16.10 (+0.11)

WEEKEND WRAP: Trump Charged, Johnson Elected, Fed Throws Money to the Wind

What a week!

Not only was President Trump brought up on impeachment charges of abuse of power and obstruction of congress (whatever that is) by Jerry Nadler's gutless judiciary committee, it came on the heels of a crushing conservative victory for Boris Johnson in England. And that came just after the Federal Reserve's FOMC decided to keep the federal funds interest rate right where it was, at 1.50-1.75%.

All of this happened on Wednesday, Thursday, and Friday. There was little time, in between, for the United States and China to announce, denounce, defer, define, defend, and eventually demystify the outlines of some vague phase one trade deal, which still hasn't happened, but is supposed to, any time, any day now.

So there it was, except for a few details that may have slipped over the transom or under the proverbial rug, like the Federal Reserve supplying $500 billion in liquidity to REPO markets to handle "the turn" from December 31, 2019 to January 1, 2020.

That little nugget came and went. Everybody was too much involved over impeachment and Boris and the trade deal to notice. Such an amount of money just to get from 2019 to 2020? It sounded absurd, spending half a trillion dollars to change the calendar. Remember, there was $700 billion in TARP, back in 2009, and that supposedly rescued the entire global financial system. This amount is more than two thirds of that.

In a related story, Lee Adler of The Wall Street Examiner purports that the Federal Reserve has bought up 90% of the government's issuance of treasury bills, notes, and bonds since September 16, effectively monetizing the debt.

So, this $500 billion of liquidity from the benevolent Fed, is it a precursor of more debt monetization, or simply a safeguard against some hedge fund or larger institution crashing as one year turns to the next? Its hard to say. Like recessions, the world will likely have to wait until after the fact to find out.

On a weekly basis, the Dow has gained in seven of the last 10 weeks. The S&P was up nine of the last 10, the NASDAQ moved higher nine of the last 11, and the Composite Index finished higher nine out of the last 10 and this week closed at an all-time high, proving, once again, that it's folly to fight the Fed.

As a footnote to the coming week, the full house is expected to vote on articles of impeachment on Wednesday.

At the Close, Friday, December 13, 2019:
Dow Jones Industrial Average: 28,135.38, +3.28 (+0.01%)
NASDAQ: 8,734.88, +17.56 (+0.20%)
S&P 500: 3,168.80, +0.23 (+0.01%)
NYSE Composite: 13,697.34, -0.06 (-0.00%)

For the Week:
Dow: +120.32 (+0.43%)
NASDAQ: +78.35 (+0.91%)
S&P 500: +22.89 (+0.73%)
NYSE Composite: +109.05 (+0.80%)

Fed Holds Rates Steady; Repo Madness Debunked

There was little reaction to the final FOMC policy decision of 2019, as the Fed chose to stand pat on the federal funds rate, adding that they expected to be no rate movement at all in 2020.

Keeping rates fixed for the next 12 months may be wishful thinking, but it also may be a level-headed approach, since, after all, 2020 will be an election year, the country has been through all manner of pain and suffering for the past three years, and a bit of stability would surely be welcome to many.

Coming from the Fed and the sobering mellow intonations of Chairman Jay Powell, the calming effect on not just markets, but society as a whole may provide a soothing tonic. With steady interest rates, businesses can plan with more confidence, individuals can maintain their standards of living and maybe balance their budgets for a change. It's a welcome relief.

At the press conference, Chairman Powell fielded one question on the intriguing REPO malaise, but didn't express any kind of apprehension or surprise. Perhaps the whole thing has been a little overblown by various pundits and press people. One article in which the Repo scare is debunked by Jeff Snider at Alhambra Partners suggests that there never was a reason to be worried about a market crash or any other unforeseen, nasty event in the first place.

So, as the holiday season continues apace, the Fed has apparently managed to calm the markets, albeit temporarily, but with an eye toward the future. If there are no interest rate changes in the coming year, that would be a feat worthy of high praise toward an institution - the Federal Reserve - that is normally the butt of jokes and the object of roundhouse criticism.

If, come late December 2020, the federal funds rate remains at 1.50-1.75%, we can call it a "Christmas miracle." For now, we can temper our optimism, relying on the scattered and unpredictable nature of world events and markets to prove the Fed wrong.

At the Close, Wednesday, December 11, 2019:
Dow Jones Industrial Average: 27,911.30, +29.58 (+0.11%)
NASDAQ: 8,654.05, +37.87 (+0.44%)
S&P 500: 3,141.63, +9.11 (+0.29%)
NYSE Composite: 13,579.92, +34.62 (+0.26%)

Waiting On The Fed Futility Amid Repo Crisis

Back in mid-September, as many will no doubt recall, the Fed had to step into the REPO market and provide liquidity via collateral auctions, mainly in the form of treasury bills and notes, and mortgage-backed securities (yes, the deadly MBS), which are still out there, floating around, handled like hot potatoes.

Since that time, the Fed has kept up appearances by continuing to provide POMO and TOMO (Permanent (P) and Temporary (T) Open Market Operations) to the tune of anywhere from $30 billion to $60 billion per day. That's right, PER DAY, and it's often been more. That's how big the overnight lending business is. Huge. The REPO market is also what triggered the Great Financial Crisis of 2008, when first, Bear Stearns, then, Lehman Brothers, were forced into bankruptcy by being unable to borrow from the overnight REPO market.

The problem with both Bear and Lehman was that their collateral consisted of highly toxic, dodgy MBS, or as is commonly referenced, sub-prime packaged loans. Lenders on the other side of the ledger were hesitant to lend to either, fearing that not only was the collateral of a suspect nature, the firms - Bear and Lehman - were buying more of them as an integral part of their business structure.

In 2008, this all blew up, the Fed stepped in, flooded the world with liquidity (buying up all the toxic MBS it could) and the collapse of the global financial system was averted.

Note that the collapse was averted, not solved, not cured, not by a long shot. The Fed's been busy keeping markets in some degree of stability ever since.

On Wednesday (today), the Fed's FOMC will likely announce no change n the federal funds rate, but that, besides being a foregone conclusion, isn't the real story. For that, in the interest of time and space, Money Daily bids adieu to this commentary, and offers a couple of links that may or may not render the REPO markets as something understandable to the reader.

First, this excellent video with Paddy Hirsh explaining just how the REPO market operates (about 8 minutes of time well spent):


Then, just to make matters a little more interesting, this ZeroHedge story featuring Zoltan Pozsar claiming that the REPO market is about to explode again, and that a stock market crash is imminent.

Take that ZeroHedge article with as many grains of salt or sugar your risk appetite will absorb, but bear in mind that Mr. Pozsar was, as ZeroHedge purports,...

instrumental during his tenure at both the US Treasury and the New York Fed in laying the foundations of the modern repo market, orchestrating the response to the global financial crisis and the ensuing policy debate (as virtually nobody at the Fed knew more about repo at the time than Pozsar), serving as point person on market developments for Fed, Treasury and White House officials throughout the crisis (yes, Kashkari was just the figurehead); playing the key role in building the TALF to backstop the ABS market, and advising the former head of the Fed's Markets Desk, Brian Sack, on just how the NY Fed should implement its various market interventions without disrupting and breaking the most important market of all: the multi-trillion repo market.

The Fed's FOMC policy meeting concludes at 2:00 pm ET on Wednesday, with the release of their statement followed by a press conference headed by Fed Chairman, Jay Powell, who will try his best to avoid answering direct questions dealing with the REPO market, for obvious reasons.

Party on!

At the Close, Tuesday, October 10, 2019:
Dow Jones Industrial Average: 27,881.72, -27.88 (-0.10%)
NASDAQ: 8,616.18, -5.64 (-0.07%)
S&P 500: 3,132.52, -3.44 (-0.11%)
NYSE Composite: 13,545.31, -9.77 (-0.07%)

JP Morgan and the Federal Reserve "Not QE" Money Spigot

Monday, Monday, can't trust that day...

So said the Mamas and Papas back in the 60s. We can still hear the echoes of their lament on the highways to work, in the coffee drive-throughs, and back seats of car pools (some people still do this).

Papers scattered over desks, it's time to get down to business, earn the paycheck, do whatever it is you do to keep yourself afloat.

Monday mornings are a grind, unless, that is, you happen to be a big bank, a global systemically important bank, otherwise known around financial circles as a G-SIB. Then, Monday is just another day to goose your bottom line. And this Monday was a good one.

Thanks to algo-spiking headlines suggesting - for about the 20th time in the past six months - that a China-US trade deal was on the way to becoming reality, stocks roared out of the gate at the opening bell, sending the Dow, S&P, and NASDAQ to all-time closing highs. All-time highs are all well and good, mind you, except when they're built on the back of a drama that never ends, like the ongoing US-China trade deal.

Since the US and China have been engaged in this delicate dance markets have soared every time a possible breakthrough is mentioned and fallen whenever snags are discovered. It's what happens when computers run markets instead of people, even though the computer algorithms were programmed, supposedly, by humans (ahem).

More interesting, however, is the lack of news surrounding the ongoing implosion in repo markets that began in late September and continued through October, now extending into November. It's a real crisis, but now it appears that all of this was triggered by the good people at JP Morgan, yes, that G-SIB bank at the top of the list in the up-article link.

According to the usual somewhat reliable folks at Zero Hedge, JPM was going about its work to keep the economy humming along by selling loans and buying long-dated bonds, according to rules laid out by none other than the Federal Reserve.

How tidy, for Morgan and CEO, Jamie Dimon, to have the incredible good fortune to be able to make more money selling loans than making them (not making this up; it's what happens when interest rates are too low). But, because of JPM's massive portfolio, it cause a not-insignificant disruption in the overnight lending market (repo), that prompted the Fed - hearing the wailing of cash-poor clients - to offer up some emergency TOMO (Temporary Open Market Operations) overnight auctions and eventually cede to POMO (Permanent) and "not QE," to quiet the troubled sector at the heart of the global economy.

So far, it seems to be working, though the general public doesn't even notice, probably because of the fabulous Dodd-Frank legislation that allows the Fed to do essentially bailouts on an ongoing basis without having to go to congress, as was the case in 2008 with TARP.

Jimmy Dore, with help from Dylan Ratigan explain in the 12-minute video below (worth the watch):



John Pepin chines in with pithy commentary from his incapp.org blog:

If the demand for debt exceeds the banks ability to loan then one of several things must happen. Either the interest rate rises, (and we all know that is unacceptable), or the banks have to take hidden loans from the federal Reserve to cover that demand for debt.

Monday, Monday, can't trust that day. Worry not, the week is just getting started.

At the Close, Monday, November 4, 2019:
Dow Jones Industrial Average: 27,462.11, +114.75 (+0.42%)
NASDAQ: 8,433.20, +46.80 (+0.56%)
S&P 500: 3,078.27, +11.36 (+0.37%)
NYSE Composite: 13,355.44, +55.14 (+0.41%)

Stocks Flat on Eurozone Recession Fears; Fed Committed to $1 Trillion Liquidity Injection

Stocks gained early and faded late as poor economic data from Europe dampened the mood on Wall Street at the start of the last week of the third quarter.

Eurozone manufacturing PMI fell to 45.6 on Monday, the worst reading in nearly seven years, with the German manufacturing PMI falling to 41.4 in September from 43.5, the worst number since the fall of Lehman Brothers sparked the global financial crisis.

The poor figures sent European stocks reeling, fearing recession, especially in Germany, Europe's powerhouse, could be right around the corner. US indices were less-affected, though the Dow Industrials was the only index to post a positive close.

At the same time, the US banking system was being monitored, as the Fed continued its series of repo auctions. In this statement from the New York Federal Reserve, the central bank committed to 1.05 trillion in overnight repo auctions through October 10, and at least an additional $90 billion in two-week term repo auctions.

The sudden appearance of repo auctions, with the Fed buying back treasuries or MBS in exchange for ready cash from (supposedly) primary dealers has economists on edge, especially considering the huge amount of excess reserves clogging up the system.

Those not so alarmed point out that these extraordinary repo auctions are the result of a highly-predictable cash crunch for banks as corporations tax payments are due at the end of the quarter. This causes a drain on the system overall, though there was no need for such measures since the Lehman debacle a decade ago.

What happens next in markets is probably more volatility and sideways trading due to uncertainty. Recession fears in the Eurozone are probably real, though the US may actually be in good enough shape to avoid a significant downturn through 2020. The Fed has cut rates twice this year after raising them by decidedly too much. Political forces are bound to keep the Fed honest and operating largely at the behest of the markets and President Trump, who has loudly criticized the Fed's step-behind operations.

At the Close, Monday, September 23, 2019:
Dow Jones Industrial Average: 26,949.99, +14.92 (+0.06%)
NASDAQ: 8,112.46, -5.21 (-0.06%)
S&P 500: 2,991.78, -0.29 (-0.01%)
NYSE Composite: 13,085.33, -8.47 (-0.06%)

Weekend Wrap: Cash Crunch Easing, Though Culprits Remain Anonymous

Ending a streak of three consecutive weekly gains, all major US indices took an about-face when Friday's quad-witching day sent stocks South.

Losses were not large, though they were widespread, as fear of a looming recession and confusion over the Fed's four straight days of repo auctions took away market enthusiasm.

Make that five straight days, as the Fed held another $75 billion repo auction on Monday, prior to the opening of equity markets in the US. Signs that the cash crunch was easing, only $66.75 billion was accepted as collateral by the Fed, making the auction officially undersubscribed.

On Friday, the Fed had also announced that it would conduct overnight repo auctions every day until October 10, and additionally would provide three 14-day term repo operations for an aggregate amount of at least $30 billion each, Tuesday, Thursday, and Friday of this week.

While nobody is certain which banks - or single institution - is having a hard time balancing its nightly books, any sense of panic has been effectively blunted by the Fed's actions.

As markets open the final week of trading for the third quarter, it will be instructive to note how markets respond, especially on Thursday and Friday. With the close of the quarter, some firms traditionally buy stocks in favor, as so called "window dressing," though it appears that this quarter might have a wholly different tone, given the stress in the system.

In what could be a most important week for markets, any words from Fed speakers should also be quantified in relation to ongoing cash shortages and the global condition.

At the Close, Friday, September 20, 2019:
Dow Jones Industrial Average: 26,935.07, -159.73 (-0.59%)
NASDAQ: 8,117.67, -65.21 (-0.80%)
S&P 500: 2,992.07, -14.72 (-0.49%)
NYSE Composite: 13,093.80, -17.50 (-0.13%)

For the Week:
Dow: -284.45 (-1.05%)
NASDAQ: -59.04 (-0.72%)
S&P 500: -15.32 (-0.51%)
NYSE Composite: -30.54 (-0.23%)

Anticipating Federal Funds Rate Slash, Fed Conducts Repo for Cash-Strapped Banks

In case you missed it, on Tuesday, the Federal Reserve conducted a repurchasing event - known in the business as a "repo" - to inject cash into the system, which had run low on reserves.

Essentially, the primary dealers, among them the nation's largest banks, found themselves a little short on cash and needed to sell some bonds back to the Fed. In all, the Fed took back $53 billion and the system survived a rare liquidity crunch. It was the first repo auction since the great Financial Crisis of 2008.

This kind of activity may not be so rare going forward. The Financial Times reports that the Fed is holding another repo auction on Wednesday morning, offering up $75 billion in cash in exchange for various types of bonds, most typically, Treasuries or Mortgage-backed securities (MBS).

What triggered the double-dip into repo-land is the unusually high volatility in bond markets, which have been whipsawed of late. The benchmark 10-year-note, for instance, has yielded as low as 1.46% and as high as 1.90% just this month, and currently sits at a yield of 1.81%. The high rate at which bonds are turned over by the primary dealers and others may have left some banks upside down, or wrong-footed, this week.

The second repo has taken place, ending before 8:30 am, Wednesday morning.

The results were less-than-encouraging going forward. The auction was oversubscribed by $5 billion, meaning somebody has a short-term cash flow problem. The Fed offered up $75 billion and $80 was bid, so somebody didn't get what they were seeking. $5 billion is a lot of money, no matter how you slice it. This is going to show up somewhere and it won't be pretty. Prepare for bank failures at an increasing rate.

Otherwise, the markets stay relatively calm on the surface, with futures modestly in the red. At 2:00 pm ET Wednesday, the FOMC will announce their policy directive, ending a two-day meeting. They are widely expected to decrease the federal funds rate by 25 basis points, from 2.00-2.25 to 1.75-2.00.

If the idea of a range, rather than a distinct point for the federal funds rate seems different, it is. The Fed used to just set the rate at a distinct point, like 2.50%, but now they issue a range. That change occurred in 2008, when they dropped the rate to zero, or actually, 0.00 to 0.25. The Fed didn't like the rate being exactly zero bacuse that would have sent a bad signal, so they changed to a range.

What really happened is that the global fiat currency economy broke in 2008. ZIRP and the various forms of QE were bandages when a splint and a cast were needed. The system is still broken, moreso than in 2008 and the injury, once a break, is now amplified with a fever, an infection, and the hospital is out of meds.

Tra-la-la.

At the Close, Tuesday, September 17, 2019:
Dow Jones Industrial Average: 27,110.80, +33.98 (+0.13%)
NASDAQ: 8,186.02, +32.47 (+0.40%)
S&P 500: 3,005.70, +7.74 (+0.26%)
NYSE Composite: 13,131.41, +23.43 (+0.18%)