“Liquidity” Is a Drug

By David Stockman  |  November 7, 2019

The headline unemployment rate is at a 50-year low of 3.5%.

The trailing-12-month Consumer Price Index less food and energy posted at 2.35% in September, which is about as close to the Federal Reserve’s 2.00% target as you please.

Those two stats are supposedly the very marks of Keynesian economic nirvana. Meanwhile, the S&P 500 Index just reached another new all-time high.

But our monetary central planners are pumping cash as if its September 2008 all over again.

Indeed, two weeks ago the New York Federal Reserve boosted its “temporary open-market operations,” or TOMO, to $160 billion of cash injections.

Some say it means that the Fedheads know something… and that that something is not good.

None of Them Know Anything

Whether it’s about what’s coming down Main Street or what’s happening with Wall Street’s plumbing.

These fools do indeed believe they can shout back the financial, economic, and political tides.

They’re convinced they can cause interest rates to obey their commands by purchasing as much government paper as it takes to balance supply and demand at the precise money-market yield embedded in their current policy target.

Never mind that this flood of cash snatched from thin air amounts to massive monetization of the public debt.

And it’s also likely as permanent as it is massive. That’s because those TOMO announcements made clear that the Fed intends a monetary “Proud Mary,” to keep on rollin’ these TOMOs over and over on a river of permanent liquidity…

In any event, the implied annualized run rates of the currently announced TOMOs and the $60 billion per month of T-bill-focused “permanent open-market operations,” or POMOs, add up to more than $1 trillion.

Of course, this isn’t “quantitative easing,” or “QE.” It’s not even “monetary policy,” according to the Fed. In fact, our monetary central planners claim there’s nothing to see here except some technicians at work nudging and smoothing the money markets to keep them on an even keel.

So, how do you explain the POMO chart for October 23, 2019?

The dollar value of T-bills offered by the Street, represented by the pink bars, reached yet another high, the aforementioned $44.2 trillion. That’s 5.7 times the Fed’s actual offer.

There’s No Free Lunch

Obviously, there’s more going on here than technical “smoothing.”

Yet our robotic monetary central planners have their heads down and are charging the line, utterly oblivious to a fundamental financial truth known for centuries: that there’s no free lunch.

Also, when you finance the government’s debts at the printing press chronically, massively, and insouciantly, you’re sowing the seeds of your own ruin.

And that’s not just because it ensures that politicians will eventually bury the state under unsustainable debt. In the here and now, massive monetization also unleashes speculative juices in financial markets because it invites get-rich-quick front-running.

That is, the buying early of whatever the lumbering central bankers have announced or telegraphed they will be buying next…

In the case at hand, the Fed has effectively told Wall Street they’ll not brook with any dissenting rates across the entire multi-trillion-dollar range of money-market and repo-sector transactions – even at month-end and quarter-end.

That’s when beat-the-regulators window dressing inherently roils the markets and causes repo and other financing rates to rise as regulated institutions and publicly reporting companies look for safe places to temporarily park their financial hot potatoes.

But that data up there is from October 23, a calendar point at which no windows have historically been dressed.

What’s happening is not at all technical, nor is it temporary. With each passing POMO offer of “Not QE4,” the oversubscribed rate has climbed steadily higher, rising from 4.3 times to 4.8 times to 5.5 times to 5.7 times…

And what it means is that the gamblers down on Wall Street have found still another way to play the Fed.

Rhyme and Reason

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR