Maybe it’s just me but in looking at what I have been seeing here since the beginning of the week something appears to be massively wrong in the funding markets. So far, as of Tuesday the Fed has done $53 billion in repos. A repo is basically the Fed taking an illiquid asset of a financial institution and simultaneously issuing liquidity (cash) to the borrower. Of course, as with all of their “assets”, this liquidity is conjured up out of thin air and is closely akin to QE (Conjuring up “money” out of nowhere).
What this is saying is that there are major players who are in need of liquidity and do not have sufficient liquidity to continue operations. The fact that the overnight rate spiked to 10% on Monday is a clear sign that liquidity was needed so bad that someone was willing to pay almost 5X the going rate to get access to it. Another clear sign is that after that $53 billion injection the overnight rate, as of 9-18-2019 in the morning, is still elevated and, according to Zerohedge, there have been over $80 billion in bids submitted today insinuating that the problem is growing rather than receding.
The last time the Fed had to do this was in 2008. Sign?
This reminds me of when I had a doctors appointment last year and was fine until I walked into the office and started feeling lousy. I was told that I had a 102 degree fever and was sick for a week. Today, the Fed will let us know about their rate decrease that we all expect. They CLAIM that all is well and that the economy is strong- even though all of the economic reports suggest otherwise.
I believe that they will have to admit (probably without saying it but by actions) that things are far more precarious than we have all been led to believe. With the funding problems front and center we may actually hear about renewing QE- although they will likely call it something else because if QE worked we would be well on our way to a new boom rather than where we appear to be today.
I wrote back in January that it was apparent that the central banks were now painted into a corner. The action in December (20% market correction) was an obvious sign that any attempt to normalize interest rates or, heavens forbid, stop purchasing stocks and bonds would lead to an unceremonious collapse in asset prices. Basically, inflate or die. It is only banks that want higher prices. Inflation is deadly to anyone on a fixed income and is not good for anyone particularly if wages are not rising as fast as the inflation.
Keeping this in mind and believing that the central banks will keep this illusion going for as long as possible I am again imploring EVERYONE who is holding paper assets to consider adding at least a small percentage of real stuff to your portfolio. This would be food and companies that produce it. Water and companies that provide it. Utility companies. Gold, silver and companies that mine it.
Keep in mind that hundreds of trillions of dollars, yen, euro, yuan, etc. have been conjured up out of nowhere and STILL we have a funding (lack of cash) problem. The answer, as always, is more debt, more cash- which is also a unit of debt (Federal Reserve Note).
Anything that is real and cannot be produced with a keystroke is likely to outperform meaningfully going forward.
One last thought- if there are short-term funding problems this could lead to a lack of liquidity to buy back shares, to continue buying stock by major players and bond buying by the same players. If it gets bad enough could lead to wholesale selling. If that takes place look for a reversion to the mean the likes we have never seen before. Artificially propped up assets will likely fall hard and those artificially repressed will likely spike in price.
I will do an update after the Fed decision.
Financial Advisor, Raymond James Financial Services, Inc.
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