President Trump: The NEW one and only politics thread

US equity futures are limit up in the overnight -- up 5 percent, so trading stopped. All on "stimulus" hopes.

 

You keep saying that -- about how cheap to borrow it is. THAT is the problem. They created the crisis with trillions of dollars of overleverage out there. And now, the same playbook doesn't seem to be working. You can't hang your hat on, "We will price fix interest rates and then borrow ourselves into oblivion because it's so cheap to borrow." I can't believe sentient people don't see how crazy that is.

In their first attempt at shock and awe, the Fed made $1.5 trillion repo available -- free liquidity to the banks. The banks have only availed themselves to less than $120 billion of it. You know why? This isn't a "We need more freshly printed money" issue. The Fed had already been flooding the banks with liquidity. That money was being used for speculation not for any productive economic reasons -- it drove the asset price bubbles. It was as simple as taking the free money and throwing it right into the casino without any regard for where things might go wrong.

Meanwhile, the interbank lending market has been showing signs of stress for several years, and in particular since September of last year, the Fed had no ability to enforce its overnight lending rate. The actual market (what a novel concept) was not allowing them to fix the price of money anymore.

There is a scarcity of dollar liquidity in the funding markets. Those spreads are STILL blowing out as we speak. The Fed is going to announce QE 4, do the same destructive things. ... and the shitstorm of credit defaults that have built up over the last decade because of the mess they created are STILL going to happen. They are just making it worse.

As for government spending, the problem with the "it's an emergency" stuff is that it wasn't an emergency year after year when we were exploding our amount of debt with trillion dollar deficits. It's always an emergency for politicians.

 

BTW, the BANKS are not where this is concentrated. This isn't 2006. The banks -- especially the Fed's primary dealer banks -- are very well capitalized. The crisis is not going to play out with them.

The problem is the shadow lending markets, and the dollar amounts are going to make the financial crisis look small. The amount of debt tha the Fed has criminally foisted on our economy has mushroomed. It's a worldwide thing, for what it is worth, because it has been all of the major central banks. We lived a fantasy for a decade.

All of that mispriced debt is not concentrated on the balance sheets of major banks. They weren't allowed to play this time around. All of that crap debt is owned elsewhere -- private lending. If you want to see how this plays out, watch our BOND markets. Watch the spreads on high yield debt. It's no secret. The amount of BBB debt (lowest rung of investment grade) has exploded over the last 5 to 10 years. That debt is as good as junk already. The spillover is hitting everything. Even US treasuries, the most liquid market in the world, which is showing some bid / ask spreads that nobody has ever seen. You are seeing it in the freaking muni bond market. The Federal Reserve destroyed price discovery in our lending markets,. In their wisdom, they managed us to prosperity on the back of trillions of dollars of debt that would have never seen the day of light if the market had been calibrating risk instead of a bunch of price czars. There was always going to be a day of reckoning. The virus is the match, but they are the ones who created a massive pile of tinder. Unfortunately, most people have no understanding of how destructive they are, and once again the arsonist is going to ride in on the fire truck to save the day.

 

Yes, it is going to be dire for a lot of people. MUCH worse than it ever should have been; we did this to ourselves. It's not as simple this time as, "Let's print money and drop it from a helicopter." They created too big a crisis (with each reflating of their mess) to answer a debt and leverage problem with MORE debt this time around. The defaults are going to be massive, and I don't think most people understand what is coming. The limits of the central bank being able to price fix our debt markets to mask what they created over decades are closer than I think you realize.