I still maintain no one will mark June 16th, 2021 as the day the world changed. Watching the dollar surge into this weekend thanks to a breakdown in the euro only validates that conclusion in my mind.
Remember, on June 16th Presidents Biden and Putin met for a summit which altered the course of geopolitics forever, agreeing to disagree about Nordstream 2 and reversing the worst of U.S./Russian relations among other things.
While that was happening the FOMC met and reversed the flow of dollars globally.
I told my Patrons something was up on June 18th. Then I did 2 hours worth of podcasts on it (here, here, and here) after thinking it through. Finally, after fully digesting it I wrapped it all up in a lengthy post on July 3rd.
The Fed’s decision to pay 5 basis point on Reverse Repos was the subtlest but most effective way to taper without tapering, tighten without tightening and undermine the WEF’s Great Reset while seemingly still supporting it.
I can hear the howls from the gallery who think otherwise so I’ll address them first.
Yes, normie macro-guys, the bond market has been screaming at the Fed that inflation is soaring and they need to raise rates.
Yes, first year domestic policy students, the Fed looks like it is putting pressure on Republicans to cave to Nancy Pelosi’s hardball over the Infrastructure, Budget and Debt Ceiling deadlock, so far to no avail.
Yes, second year geopolitics students, the Fed is forcing China to respond to soaring commodity prices while simultaneously trying to defend the yuan.
Yes, these are all effects of the Fed’s move in June.
From Wall St. With Love
But none of them are the real reason why the Fed did this. Because the real reasons are still hidden behind the veil of Jerome Powell’s seemingly incoherent Fedspeak on inflation.
Remember, everything in the U.S. politically today is meant to look like the country to a person is incompetent. Biden’s botched withdrawal from Afghanistan is the latest example. The fight over spending on Capitol Hill is another. The multiple diplomatic gaffes by Secretary of State Antony Blinken and his diversity hires are yet another.
It’s all there to reinforce the failing confidence we in Financial Crank-Space like to think ourselves so smart and insouciant to see.
It’s become the norm rather than the exception when a prominent U.S. official acts like a blithering idiot.
So, you can be forgiven if you just thought Powell’s publicly retarded comments about inflation felt like that to you as well.
But this, like so many other things we see, is also part of the psy-op. Because the first rule of Fed Watching is to never listen to what they say, that’s for the algorithms and the momo-monkeys chasing nickels in front of the freight train do.
Smart observers watch what they actually do. And with those 5 basis points the Fed defended itself and the dollar.
Because the Fed, as I’ve said multiple times now, works for Wall St. if it works for anyone other than itself.
So, it scans, strategically, that anything which jeopardizes the Fed’s hegemony over capital markets globally will be ruthlessly opposed by the FOMC when push comes to shove. I’m laying aside for now what the Fed’s longer-term goals are.
What I see, for the first time since Nixon closed the gold window fifty years ago, the Fed was getting hemmed in by outside forces looking to throw its favored sons, Wall St., to the wolves.
And that will not stand.
The world has been begging the Fed for more dollars for 2 months now. Please sir, I want MOAR heroin to feed my addiction. We can’t survive The COVID-9/11 or The Climate Change without them!
Powell, for his part, two weeks before he raised the RRP rate (see chart above) told ECB President Christine Lagarde, “Um. No,” in about that many words and things have progressed from there.
The Euro, has been in freefall ever since. For the past few weeks the ECB has tried desperately to defend the late March $1.1703 low. It failed again this week to hold that low, despite a post-European close ramp to paint the weekly tape during Friday’s late trading.
The result of this has been the predictable explosion of the use of Reverse Repos by domestic counterparties. It jumped a few hundred billion in the aftermath of June 16th’s announcement. The RRP facility is there to push U.S. Treasuries, of which there is a shortage for use as bank collateral, back into the domestic banks.
Go Big or Go Broke
With the breakdown in the Congress over the Budget and Infrastructure Bills, thanks to Kyrsten Sinema and others the stage was set for the Fed’s next big move at the July 28th FOMC meeting. I outlined it when I talked about us entering the eye of the storm Davos has made for all of us.
I ask you to think again about the last two Fed meetings.
First, {Powell} drained overseas markets of dollars by raising the Reverse Repo Rate to 0.05% {on June 16th}. This week he created a standing Repo Facility for foreign counterparties to hand them back those dollars. They’ll do this only because they are now desperate for them but it will drain them of their high-quality Repo collateral, i.e. US. Treasuries.
Since the Fed knows there will be no new U.S. Treasuries issued for the next few months thanks to the debt ceiling kerfluffle being unresolved, they need a supply of them to hand back to the banks they know are going to be in need of them.
And the result was just as predictable. RRP facility usage soared to more than $1.16 trillion. It let a little pressure off the euro for a couple of days (see euro chart above) but not enough to change the direction of things. The Fed is still draining foreign markets of dollars.
Nothing the Fed has said since then has materially changed this position. In fact, the Foreign Repo Facility is just another tool to repatriate U.S. Treasuries to insulate U.S. banks and corporates from the very financial storm the Fed is actively fighting not just to save itself but to bankrupt Europe in the process.
This week James Bullard talked about tapering QE as early as September and begin raising rates in 2022. Powell mentioned he may have to raise the limits on the Reverse Repo Facility above $80 billion per counterparty just like he did when he first raised it from $50 billion earlier in the year before then actually raising the rate.
These are all technical moves which signal the Fed is preparing for another RRP rate rise. They are actively defending Wall St. and leaving the Biden Administration out to hang, not helping it achieve its goals, destroy the United States.
Because Biden et.al. all work for foreign powers, be they China, Davos or both.
Davos is trying to destroy confidence in the U.S. at every level, especially the dollar, to make Europe the destination for capital fleeing U.S. insanity.
The Fed is reminding everyone who the big boy on the block is and it only takes a measly 5 basis points to get reinforce this. Moreover, has anyone noticed it’s Wall St.’s biggest suckups in Congress sticking monkey wrenches in all this legislative bickering over a measly $4.7 trillion?
Those thinking the Fed is making a policy mistake to allow the dollar to strengthen simply doesn’t understand the rules of the game. The Fed is inviting a crash. It’s inviting a revolt against the insane commies and traitors currently running the U.S. government.
And why would the Fed do this when it stands to gain a tremendous amount of power? Well, to protect itself from inbred and feckless Eurotrash and be the one institution left standing after the dust settles.
I didn’t say that the Fed was being magnanimous here, just loyal to its own interests and that, for now, is enough to derail Davos.
Again, I can hear the gallery chattering on my shoulder saying that the Fed has to do this.
Yes. I agree.
When short term money market rates were pegged at zero percent the Fed had to do something to raise them lest the market believe the Fed was okay with negative nominal yields in U.S. money markets.
Today 1 month U.S. paper is trading at 0.04%, below the RRP rate, so pressure is building again. Demand is rising and we’re likely headed back towards the zero-bound unless the Fed does what? Raise RRP again.
So, do we expect the Fed to give Europe what it wants; validation of their insane negative interest rate policy?
No. Of course we shouldn’t.
A Hole in One
With Jackson Hole coming up next weekend Powell and the FOMC will tell the world they are staying the course, if not intent on raising RRP to a whopping 10 basis points if conditions warrant. They will still tell the beautiful lie that inflation is ‘transitory’ while giving off the impression that they are on top of things…. because in truth, they are.
What do you think happens to the euro then?
Because once $1.17 and $1.16 (See chart again) fall on a weekly closing basis, there’s nothing to suggest it will be a slow, steady move lower. If the ECB was okay with this they wouldn’t be fighting a falling euro so hard. With Lagarde at the helm real incompetence is on display, not the Muppet show Powell puts on.
Thinking this through, once $1.16 falls with the European bond market trading at these nosebleed prices, how much of a move in the euro will it take to unwind all of these newly-minted carry trades, rate swaps and the like put on during this rush into European sovereign debt which pushed the German 3 year bund to a recent low of -0.856%?
Remember, what leverage giveth on the way up it takes away ten times as fast on the way down. At these yields the Europan bond market is over-leveraged to the point where it makes the stupid shit we see people do on Binance during a Bitcoin mania look like prudent financial risk management.
The mother of all safe-haven trades is what is emerging quickly here. The Dow keeps pushing higher, while European stocks have broken down. The Dollar is breaking out of a multi-year downtrend, gold is holding it’s ground, cryptocurrencies (Wall St.’s latest darling) are exploding, and there are trillions of euros worth of capital that are scared to death of what Powell says next week in Wyoming.
So, a cascading series of defaults and blow-ups is in Europe’s future if Powell and the Fed do what I expect them to do.
Davos may love chaos as an opportunity to take power, but as we’ve seen since the operation to humiliate the U.S. in Afghanistan is proving, they were caught flat-footed by the speed with which the Taliban ran the table.
This is chaos they didn’t plan for, because well, it’s fucking chaos. *sigh*
The same thing is on the horizon in Europe politically and financially. There is a political price to pay for denying people food over a vaccine against the something as dangerous as the annual flu.
Just like there is a financial one to pay for taking a shot at the king and missing.
After all, it’s just… five … little…. points.
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As a follow up to Tom’s piece, many might find this interesting:
British Requests For $3 Billion In US Treasury Gold: The Trigger That Closed The Gold Window
“There will be much written this month about the 50th anniversary of the closure of the US gold window, but less so about what exactly triggered it and why the timing had to be 15 August. So without further ado, here is why, and it all revolves around the British ambassador to the US. the 3rd Earl of Cromer, a.k.a. George Rowland Baring, showing up at the US Treasury offices in Washington D.C. on 12 August 1971 and demanding that US dollars held by Britain be converted into gold.”
https://www.zerohedge.com/markets/british-requests-3-billion-us-treasury-gold-trigger-closed-gold-window
I will have to leave it to Tom and others to parse this piece, but superficially, to my untrained eye, it does appear to support Tom’s thesis regarding the “rift” between Europe (Davos) and the United States. (I would not have even noticed this w/o Tom’s prior pieces btw).
Anyway, I hope this adds something to the conversation..
Sighs Wistfully ….. As a Brit, I dream of those halcyon days when we understood and gave a fark about gold. It’s been a while since Brown’s Bottom and we will be caught out in the worst way as we have little in the bottom drawer, and certainly not the common sense and financial acumen we supposedly once had. Carney is a bigger traitor than Lord Haw Haw.
Yes he is Kevin. And now the UK is asking the US for some gold to bail out the LBMA… You can’t make this stuff up FFS
Hi Kevin,
Thanks for the reference to Brown’s Bottom. I seem to learn something from Tom’s website every time I visit. I have been puzzled about why China & Russia have been purchasing so much gold lately and I suspect it has more to do with an “insurance policy” for its oligarch class, in case they should suddenly get cut off from the Swift System or get in the way of US sanctions,, than it is about stabilizing their currencies in general.
If you are interested in exploring economic drivers of history, I really recommend Kotkin’s first biography of Stalin and Morehouse’s Hitler’s Pact with Stalin. That history is pretty well worn, but in those two works you clearly see the dire importance of grain to those two economies (it was what they used to obtain foreign currency for industrialization or needed to import in exchange for foreign currency) and the only place to get it was from the small-holder peasants and thus the two regimes were ultimately and utterly dependent on that class (hence, Tom’s: Gold, Goats and Guns, the “little people”.).
Generally, we have been taught that is was “ideology” that drove the famines (Holodomor) and the genocides (Holocaust), but in those two books you can clearly see the hidden hand of economics. For Stalin it was about how to extract as much as possible from the peasants (to produce foreign exchange) without killing the “golden goose” (the peasant producers) and for Hitler, it was about eliminating “useless eaters”. Both of those countries were on severe food rationing throughout the war. And once you realize that, something like the Siege of Leningrad takes on a whole new character. Hitler did not want to take on the responsibility of feeding 3 – 4 million more people and Stalin didn’t want to feed a population that was not producing anything for the war, thus they starved.
Anyway, thanks for the reply…
To Tom: About the LBMA reference… thanks for pointing that out. I am guessing that shortfall is the result of countries and individuals hedging against fiat currency(and its potential restrictions)?
From the history I am aware of (contained in the books I mentioned to Kevin) economies based on commodities and gold were constrained and more difficult to manage as they were based on real “tangibles”. So, it is easy to see why financial institutions and economists gravitated to fiat currencies. It is much easier to print the money you need than be dependent on peasants to grow grain.
There are so many anecdotes in those books where city people, in search of food, show up at a peasant’s homestead with large amounts of cash and tradeable items, like pocket watches and silk stockings and the peasant shows them rooms full of paper money and other items and tells the city dweller, “what am I going to do with another pair of silk stock stockings, my wife already has 47 pairs”. The city dwellers were appalled at how much “wealth” the peasants had accumulated during those eras through barter.
So, I don’t know what to make of fiat currency (including Bitcoin) when in times like that, the only thing that mattered were GOATS… it is amazing. IMHO
Anyway, thanks again!
Have you noticed that Lagarde (and the Governor of the Bank of England) have not been invited to Jackson Hole this year? Could that be to give the Fed cover to get on with its busines without having an argument with them?
I think it’s even a clearer signal that the Fed is done letting Davos set its agenda
Who do you believe owns the Fed, and what is THEIR agenda?
It’s gone virtual, conveniently now.
After today’s Biden press conference, in which Biden exhibited no idea what is happening in Afghanistan, the democrat propaganda machine CNN said the situation on the ground and the White House rhetoric were miles apart. They added the situation at the airport was chaos. The right hand does not know what the left hand is doing.
This is another CNN lie.
The right hand is holding the ice cream cone. The left hand is holding napkins.
Of course there’s a preference for Wall Street on behalf of the government. There’s a revolving door that leads directly from Wall Street into the highest financial roles of the financial workings of gov’t, and Goldman Sachs is often the training ground for higher-up. It is a flattering and sincerely humbling thing to take the rudder of government.
How many academics does it take to figure out Middle East immigrants (to Europe or to the USA) will donate to their tribe back in their home country (eg they see themselves as visitors, not immigrants)? These visitors will not donate to their already tax exempt, heavily subsidized alma mater.
Meanwhile the evil white males that think Europe or the USA is their home have been villified, slandered and libeled…. And can donate their money to any of a very very long list of charities with their hands out.
local governments are in desperate need of tax revenue, and the largest property owner in the municipality is the university that uses municipal resources but doesn’t pay a penny in taxes. Zero property taxes. Zero usage fee taxes. Zero sales taxes. Zero income tax on their endowment.
It’s obvious now that college tuition more than negates the added salary income that alumni can expect, even for law and MBA students. There is no student loan problem, there is a college cost problem.
Grad students in the USA are trying to unionize and get paid a living wage. Tenured professors who show up for 3-4 hours a day and make their grad students do the actual work (and much of the teaching) for far less than minimum wage.
The self labeled intellectual class is going to have a serious come-uppance, even if the dementia patient manages to write down a token amount of defaulting student loans.
What to make of the US$ falling hard on Powell’s speech today?