The Fed Must Offer More Repo Credit as More People Take It
YOUGHAL, IRELAND – Our dreary mission here at the Diary is to follow the money. Over hill, over dale, and along the dusty trail… but mostly into the gutter.
And last night, the Federal Reserve let out word that… surprise!… there’s more money on the way.
That’s right. This morning, there will be more money than there was yesterday. And yesterday, there was more than the day before.
There is a lot of technical mumbo jumbo in Fed policies. Between QE (quantitative easing), not-QE, TOMO (temporary open market operations), and POMO (permanent open market operations), it is easy to get lost.
But the only thing the Fed has to work with is (fake) money. It can either put it in or take it out. And now, it is putting it in to the tune of about $1 trillion per year.
Our subject for today: Where does it go? So, let’s put on our hip boots… and follow the money… into the sewer.
Follow the Money
The ability to conjure up money is in itself a remarkable thing. Money is supposed to represent real wealth – time, resources, houses, cars…
If you can create money without adding a like amount of real wealth, you are simply counterfeiting. The “money” you create is not real.
Since no new wealth is brought forth, this new money is simply an additional claim on wealth that already exists and belongs to someone else. So, printing money is merely a sophisticated form of larceny. The people who get the money end up with other people’s stuff.
Richard Cantillon, a colorful Irishman and associate of the world’s first modern central banker, John Law, figured out how it worked approximately 300 years ago.
Law – like practically all economists today – believed that you could improve the performance of an economy by giving it more money.
But Cantillon, in his Essay on Economic Theory, showed that there was more to the story… that the new money was a fraud. And in his own life, he demonstrated how to game the new system.
In 1716, Law got control of the Banque Générale and issued paper money, backed by shares in a bold startup, the Mississippi Company. The shares rose in price, creating a bubble-like atmosphere in Paris.
But rather than hold Law’s new money to the bitter end (all fake money eventually returns to its intrinsic value – zero), Cantillon sold his holdings early and walked away with his fortune intact.
(Alas, the same cannot be said for Law… who died penniless… or for many of Cantillon’s creditors, who allegedly pursued him with such vigor that he burned down his own house, staged his death in the fire, and made his escape to South America.)
Don’t Fight the Fed
Law and Cantillon are long gone. But the chicanery Cantillon described is alive and well.
And what has intrigued us lately is neither the process (which we’ve been tracking for 20 years)… nor the recipients of the stolen loot (Wall Street, the rich, the insiders, and the Deep State)… nor the victims (the public, Main Street, taxpayers, and consumers).
No. What we’ve been looking at recently is the profiteers – those who understand, like Cantillon, that the fix is in… and figure out how to profit from it…
Ever since the announcement of the Greenspan put (wherein the Fed practically guaranteed that it would fight stock market turndowns), investors have been able to buy with a plausible assurance that the Fed was at their backs.
Most of them had no idea what was going on.
“Don’t fight the Fed” is one of the best-known sayings on Wall Street. Most people thought they were just being wise to pay attention to it.
Mom-and-Pop investors bought stocks… with satisfactory results.
More sophisticated players went into the bond market… front-running QE on a leveraged basis for much higher profits.
And some put the easy money into long-shot tech gambles, such as Uber, Snapchat, and Peloton – counting on even easier money to send prices higher.
And now, the most sophisticated of all – the big players – are working the repo market too.
When yields in the overnight “repo” (repurchase agreement) market shot up last month, the Fed blundered in… vowing, once again, to do “whatever it takes” to keep the cash flowing.
And then, each time the Fed offered more repo credit… more and more people were waiting for it.
The first offer was oversubscribed (more demand than supply) by 4.3 times, our colleague David Stockman reports. The second by 4.8 times. The third saw 5.5 times as many bids as offers. And the last one was up to 5.7 times.
Yes, the players are lining up. They’ve now figured out how to front-run the Fed’s repo madness.
They are borrowing money at rates that are now 50 basis points below the September inflation reading of 2.35%, not including food and energy.
For the moment, at least, they take the money and enjoy the party, confident that the fix is in… and there’s plenty more where that came from.
Our advice: Don’t stay too long.
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