A Disturbing Reminder of 2007
The Fed hasn't done this since the financial crisis... The bottom line on the 'repo market' turmoil... A disturbing reminder of 2007... 'The biggest mass deception in U.S. financial history'...
This week has been almost all about the Federal Reserve...
Yesterday, the central bank's Federal Open Market Committee ("FOMC") kicked off the first day of its September policy meeting. But it was the actions of the Fed's New York branch that made the headlines.
That morning, the New York Fed was forced to intervene in money markets due to a sudden surge in short-term borrowing costs. As Bloomberg reported last night...
The Federal Reserve took action to calm money markets, injecting billions in cash to quell a surge in short-term rates that was pushing up its policy benchmark rate and threatening to drive up borrowing costs for companies and consumers...
Money markets saw funding shortages Monday and Tuesday, driving the rate on one-day loans backed by Treasury bonds – known as repurchase agreements, or repos –as high as 10%, about four times greater than last week's levels, according to ICAP data.
More importantly, the turmoil in the repo market caused a key benchmark for policy makers – known as the effective fed funds rate – to jump to 2.25%, an increase that, if left unchecked, could have started impacting broader borrowing costs in the economy.
In total, the Fed injected more than $53 billion into the repo market on Tuesday, and added another $75 billion this morning.
The financial media has pointed to a number of potential causes for the sudden dearth of liquidity...
These include the Fed's recently concluded quantitative tightening ("QT") program – which saw the Fed shrink its balance sheet by more than $1 trillion over the past couple of years... the dramatic increase in debt issuance by the U.S. Treasury this year... post-financial crisis rules requiring banks to hold greater reserves... and even Monday's corporate-tax payment deadline, among others.
However, the reality is no one is absolutely sure why it's happening.
Still, the consensus among most financial professionals – including the Fed itself – is that this is merely a temporary problem that can be easily corrected by the Fed's short-term interventions.
We're not so sure...
As that old saying goes, history doesn't repeat, but it often rhymes.
And this week's events share some troubling parallels with the money-market "freeze up" of August 2007. As we know now, that "temporary problem" was actually the first rumbling of the financial crisis to follow.
To be clear, we're not predicting that another crisis is imminent. But given the huge excesses in both the equity and credit markets today this problem could be far more serious than most folks believe.
Stay tuned... We'll be following this closely.
In the meantime, the Fed made headlines again this afternoon...
At 2 p.m. Eastern time, the bank wrapped up its policy meeting with another cut to its benchmark short-term rate. The Fed announced it was cutting its federal funds rate by 0.25% – its second such cut in as many months – to a range between 1.75% and 2%.
This was largely expected. However, the decision was far from unanimous, and Fed officials appear to be even more conflicted about what they should do next. As the Wall Street Journal reported...
Seven of 10 officials voted in favor lowering the short-term benchmark to a range between 1.75% and 2%. As in July, two reserve bank presidents dissented from the decision in favor of holding rates steady. This time, Fed Chairman Jerome Powell faced a third dissent from a bank president who preferred a larger, half-point cut...
Seven of 17 officials penciled in one more rate cut this year. The other 10 were split evenly between those who thought the new level of rates, after Wednesday's cut, would be appropriate and those who thought rates shouldn't have to go any lower.
Those divides are even sharper in projections for next year. Roughly half of officials projected rates by December 2020 would sit one-quarter point below the new level, while another half thought it would be appropriate to reverse at least one of the two recent cuts.
Despite this uncertainty, U.S. stocks rallied into the close today. For now, it appears the market was appeased by Powell's post-meeting comments that rates could be cut further if the economy continues to weaken.
But make no mistake... barring a sudden and dramatic reversal in the global economy, the market will soon be begging for even lower rates.
One last note before we sign off today...
In addition to the laundry list of market risks we've been tracking in recent months, we can now add one more...
Forensic accountant Joel Litman – president and CEO of investment-services company Valens Research – has uncovered what he believes could be the biggest "mass deception" in U.S. financial history.
In short, he says thousands of companies – even some of the highest-quality companies you may already own – have been releasing false earnings information to the public.
Fortunately, he's developed a new system – what he's dubbed the "Investment Truth Detector" – that can reveal the true earnings of any publicly traded company.
We were so impressed by this system that we've agreed to partner with him and his company to show you exactly how it works.
Next Wednesday, September 25, at 8 p.m. Eastern time, Joel will be joining us for a special online event to walk you through this remarkable system. It's absolutely free for all Stansberry Research subscribers... and Joel will even let you try his system at no charge, just for signing up. Click here for all the details.
New 52-week highs (as of 9/17/19): Booking Holdings (BKNG), Hannon Armstrong Sustainable Infrastructure Capital (HASI), iShares U.S. Aerospace and Defense Fund (ITA), Lockheed Martin (LMT), and Sysco (SYY).
Yesterday's Digest on precious metals manipulation apparently struck a chord. We're still sorting through all the e-mails and will publish some of the best responses tomorrow. In the meantime, send your notes to feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
September 18, 2019