The Fed unveiled what was supposed to be shock and awe. Instead, it was the predictable series of upsizing the bazookas, monetary armaments in name only. I’ll write it again: there is no money in monetary policy. Central banks are not central.
That was the primary lesson of September’s repo rumble, and not for the first time since August 9, 2007. Set aside all the technicalities and bullshit about taxes or regulations. What happened was incredibly simple. Money dealers demonstrated that at the slightest sign of upset they would run scurrying for the sidelines – leaving the system high and dangerously dry.
Back in September, it was only one corner of the marketplace – no spillover – just the dress rehearsal. Never forget that most of this rumble took place when the Fed’s repo operations were open, beginning on the Tuesday (September 17) just the second day of the series. From the very start, they didn’t work.
Over the months that followed, Jay Powell has stuck to the routine anyway. It all might sound impressive but it is actually just the same stuff with different numbers, sometimes bigger. Policies that had already failed in the US, not to mention for so many years in Japan.
Why? They still don’t have much of a big picture idea how this global system works. If you haven’t the framework for an overview, how on earth does anyone expect them to get the details right?
Here’s another example of what I mean. Published today by Central Banking, the author shares what he sure seems to think is a major bit of useful, recently uncovered insight:
Since the 1980s, the liberalisation of international capital movements, as well as the increased size and complexity of money markets, radically altered the interactions between central banks and commercial banks.
Yep, this is March 2020 and these people are just now catching on. Knowledge that might’ve been somewhat helpful had it been published in, say, March 1980; even March 1990. Modestly useful in March 2000. By March 2010, obviously too late. March 2020 is just obnoxious.
Armed with this “new” development, authorities have been hard at work retooling their entire toolkit, right? Oh no.
These guys aren't even hiding their impotence. Fed announces dollar swaps that were already available this whole time. What, are we supposed to be impressed they cut the price on them by 25 bps?
Nope. The Fed just admitted to the global $ shortage. That's all it did.
— Jeffrey P. Snider (@JeffSnider_AIP) March 16, 2020
Not only that, they also admit the $ swaps don't work (we already knew that)
"To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular U.S. dollar liquidity operations have also agreed to begin offering U.S. dollars weekly…"
— Jeffrey P. Snider (@JeffSnider_AIP) March 16, 2020
One overlooked part of last night’s Jay Powell dud QE was the dollar swaps. It was intended to be a major element in Sunday night’s “stimulus” extravaganza. To make a big show of it, yesterday the Fed cut the price on those swaps by all of 25 bps.
Why? Because the dollar swap lines have been open this whole time; last week, last month, last year. They were converted into standing relationships all the way back in October 2013. Thus, in order for Powell to announce something “new” he couldn’t announce that these had been initiated and therefore might add anything to the central bank’s capabilities beyond what clearly didn’t work last week.
Instead, he was left with only the option to cut their price as if that would be a significant change, enough of one which would calm markets. Yes, they really think you are that stupid (expectations policy).
— MacroVoices Podcast (@MacroVoices) March 16, 2020
These “liquidity swaps” had been made a permanent part of the landscape, and yet what good are they at any price? What good were they in October 2008? Despite that past experience, they still sit there in the monetary policy toolkit because…bureaucracies.
The real kicker is the tacit admission that went along with 25 bps reduction. Foreign central banks on the other side of these things are going to be conducting 84-day “liquidity” auctions, in US$s, as part of the “new” arrangement. In other words, Jay Powell basically admitted the dollar swaps don’t work, either. If they did, they’d have been drawn down and the crisis, most of it, averted.
For once, the major message has been received. All this tinkering with “non-standard” policy measures doesn’t exactly inspire confidence. Common sense dictates skepticism, including for the second crisis in a row (2008 being the last one) how there could be so much attention paid to dollars outside the United States.
That’s not what everyone has been taught.
And, of course, it’s not just dollars offshore but also, perhaps more importantly, collateral. Today will go down as one of the worst days for markets, another day long remembered, and it was yet another near perfect example of collateral/repo-driven illiquidity.
Just like last Thursday, an early morning selloff in (almost) everything while the prior session’s (Friday, in this case) repo gets sorted out. Collateral calls herding some into T-bills, some using gold (which gets immediately sold), and some into fire sale liquidations (including stocks). Once yesterday’s repo is squared (by 10:30 am EDT; today 3-16 it was 945am EDT), markets pop back up if only temporarily having to deal with the fire sale aftermath.
This keeps repeating so often only a central banker could mistake the implications.
That’s just the most obvious collateral signals. There are more, including those we can infer from the lack of demand at the “repo” operations. I wrote about these last week, the two $500 billion 84-day TOMO’s that came up 90% short of the ceiling in terms of dealer bids.
It is obviously a liquidity crisis out there in the dollar world, so why aren’t dealers bidding right up to the limit? Either it’s not really that bad (nope), or dealers don’t need, maybe can’t bid for the excess.
Again, the repo operations aren’t really repo operations; they’re auctions of bank reserves for only primary dealers who 1. First have to post eligible collateral; 2. Then are expected to relend/redistribute these reserves to the rest of the system.
If the situation is truly dire, maybe they don’t want to relend to anyone else and therefore there’s no demand for what the Fed has to offer. On the other hand, maybe there’s demand but the dealers don’t have the spare collateral, a shortage suggested by what we see in gold and T-bills, inferring further from the blowout in crap collateral spreads (especially offshore Eurobonds).
Or some combination of the two.
There is far more going on here than what’s ever been written into the Economics textbook. It’s also why no one can come up with a reasonable explanation for what happened in September, and therefore why what just happened (and may still be happening) in global markets took “everyone”, including those at the Fed, by complete surprise.
And when you see a massive, panicky dash into pristine collateral, driving at least those rates lower, resulting global liquidations aren’t so shocking and unexpected. It’s not so easy being Jay Powell, “printing bank reserves” on demand, he just keeps telling you it is. You don’t have to listen to his garbage about “stimulus.”
The bond market gave up on QE many, many years ago. Finally, it seems, the stock market might be ready to let go of the myth, too.
Central banks don’t do money. They don’t. As central bankers realize, in horror, the magnitude of this error, they don’t even know where to begin to plug back into a system they’ve been out of for decades.
Alan Greenspan was never the “maestro”, the Great Oz. The entire time he had been nothing more than that funny little man behind the curtain putting on a huge show all designed to make you think the Fed was this powerful monetary wizard so that you’d stay in line.
As I wrote back last summer, in June, how incredibly simple this was:
There’s your R*, swap spreads, and now Euro$ #4 in a nice, tidy little package. And what are all the world’s bond markets saying right now? Money soon…or else.
Quite predictably, the money never showed up, only QE’s and “repo” operations. Squandering so much time, unprepared and blind to the last, now we’re left to reckon with “or else.”
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