You’re living through history folks. Never in history has there been negative rates. Never in history has a central bank been this powerful. We’re in the very description of “never seen before” and if anyone says they know how it all works out, they’re lying. Get more popcorn, this show ain’t over.
Sometimes you look at this market and shake your head. We are really not very far from the all-time highs. And yet for the most part, our nation has been effectively shut down. Then there’s the employment issues. Let’s look:
Friday. Friday was jobs day, and we got the most horrific non farm payroll report in about 90 years. But, instead of the market crashing on the news, we ran higher. Much higher. 400+ points higher. What gives?
You all know what gives. The Federal Reserve gives. And gives and gives. What you might not know, is how it does it and why. So let’s dive into that cesspool and see how they’re doing the MLM (Magic levitation machine)
The Feds (so far anyway) don’t have the legal mandate to buy stocks outright. But that doesn’t mean they can’t. They just have to be creative about it. So first, there’s no question that thee major Wall Street banks take some of their Repo money, and use it to buy stocks. That’s without question.
The Feds love our corrupt, rigged market so much, they actually restarted a program they used in bailing out the big banks back in the 2008 / 09 fiasco, called the Primary Dealer Credit Facility (PDCF). If you remember back then the Feds were buying up all the banks toxic crap loan books,bombed out 400K dollar mortgages given to fry cooks at McDonalds, etc. Well they’re back at it again with a vengeance.
Not only are they giving out ¼% loans to these banks, guess what they’ll accept from these banks as collateral? Yep all the toxic crap on their balance sheets, such as commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs), and collateralized debt obligations (CDOs). Oh I forgot something… STOCKS. Yes folks if you’re a bank sitting on a bunch of junk stocks that you’re saddled with, or you have some stock derivatives drilling a hole in your profit ledger, you can hand them over to the Feds!! And get billions and billions of dollars for ¼ of a percent. Oh, and then you can offer credit cards to your hapless customers, and charge 17 to 20%.
What a deal! So let’s get this right; you’re Citigroup and you’ve got billions in non performing junk, and lousy stocks. You simply hand them to the Feds, they lend you many more billions, and you go buy more stocks with it. Estimates are that this will turn into TRILLIONS folks. Yes, trillions.
Secondly, I firmly believe there’s “off the books” type funding that the Feds do, in “dark” operations. But the latest surge higher, say from April 1 until now, hasn’t been the dark money or even the JP Morgans, Citigroups, and Goldman Sachs of the world. No, it’s been our friendly neighborhood global central banks.
In March, Fed head Powell was on the phone with the head of over a dozen central bankers. Since the US dollar is still the world reserve, everyone needs dollars. But, they don’t have any. The world is dollar starved.
On March 19th, the FOMC put out this statement:
The Federal Reserve on Thursday announced the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with the Reserve Bank of Australia, the Banco Central do Brasil, the Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Norges Bank (Norway), the Reserve Bank of New Zealand, the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden). These facilities, like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad.
These new facilities will support the provision of U.S. dollar liquidity in amounts up to $60 billion each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, the Monetary Authority of Singapore, and the Sveriges Riksbank and $30 billion each for the Danmarks Nationalbank, the Norges Bank, and the Reserve Bank of New Zealand. These U.S. dollar liquidity arrangements will be in place for at least six months.
The Federal Reserve also has standing U.S. dollar liquidity swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.
Then, on March 20th, they upped the ante with this:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to further enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.
To improve the swap lines' effectiveness in providing U.S. dollar funding, these central banks have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 23, 2020, and will continue at least through the end of April. The central banks also will continue to hold weekly 84-day maturity operations.
The swap lines among these central banks are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.
Now what Powell really did, was that he reached out to the very central bankers that DO AND CAN BUY US STOCKS. Then he told them he’d do open swaps with them. Guess how much he’s got in play with these things? 450 billion and rising.
So, check it out, who’s getting it? The Swiss national bank, which I’ve shown you from their own books holds almost 100 billion in US stocks. Japan, who’s got about 300 billion in ETF’s and another 7 billion in individual stocks, the Bank of Norway,(Norge) estimated to have 280 billion worth of stocks, etc.
You get the picture? If any of you are wondering how on earth the market can hold up in the face of a frozen economy, with 20% unemployment with tens of millions losing their jobs, with factories to restaurants closed, now you know.
Our Feds are shipping dollars around the world, with the “wink wink, nod nod” that they pitch in and buy up equities. And buy they are.
Which makes what we do, so damn frustrating. We all know where the market should be, and yet it “isn’t” there. Because central bankers have rigged it not to fall. How all this ends, is beyond me folks. Maybe it doesn’t. Maybe they just keep going until the central banks own every stock, every business, every everything. But then what? I don’t know.
The worst part of knowing what I just showed you, is that there’s always the uncertainty of its longevity. In other words, “so far” they’ve been able to keep the plates spinning, so obviously being way long the market is working. But can it keep working? Or do we wake up one day and everything has gone to hell in a handbag?
Except for small corrections and pull backs, I have to grit my teeth and suggest that we’re going higher. We might even ( Gulp) make all-time new highs. Crazy? Yes. Possible? Yes. Probable? Yeah.
When we came into this week, my premise was that the S&P was going to run into some resistance, and a fade lower was probably in order. Monday morning I looked pretty smart as the futures indicated the DOW to be down 200 points. The S&P and NASDAQ were red. But as the day wore on, they worked things higher with ALL THREE going green at one point. Yes it’s true the DOW faded off by 109, but the S&P and NASDAQ remained green.
Today was the first day that the Feds were going to buy Junk bond ETF’s. Yes folks, along with buying equities via proxy, they have announced the buying of corporate junk bonds, via ETF’s. wobble that around in your head for a while.
I'm old enough to remember when the very idea of the Fed buying corporate junk, or using other Central banks to buy stocks, would get you sent to the psychologist for a mental disorder. Now, it's business as usual.
I think the Fed will allow “small” corrections, but you can see that their ultimate goal is to keep this market up at all costs. I think they’ll be happy clams if they can just keep us wobbling up and down in a wide range, with the big picture looking sideways and slightly higher.
You’re living through history folks. Never in history has there been negative rates. Never in history has a central bank been this powerful. We’re in the very description of “never seen before” and if anyone says they know how it all works out, they’re lying. Get more popcorn, this show ain’t over.