Today, we have several stories in the news that affirm the major trends I’ve warned to watch out for, particularly those mentioned in yesterday’s popular Deeper Dive, where I made a fair part of the article available to everyone for free.
Repocalypse 2.0?
Others are pointing out and worrying about the risk I’ve brought to your attention of another critical shortage in bank funds, known as a repo crisis, in which (in short) banks don’t trust loaning money to other banks or don’t have the money to loan. So, the financial system can rapidly freeze up.
US News writes today,
Repo Market May Throw a Fit, Spur Fed to Action
Some Wall Street executives feel a tantrum coming in U.S. short-term financing markets, perhaps as soon as March. It could put pressure on the Federal Reserve to ease policy….
A series of events are expected between March and May, some of which will reduce the amount of cash in the financial system, while others increase the demand for liquidity, according to interviews with four banking executives.
As I’ve promised, I’ll keep an eye on that. Note the timing around March confirms what I wrote in the Deeper Dive, part of which I just shared with everyone. As I’ve also noted, the Fed will be caught between a rock and hard place, knowing that easing policy to stop such a crisis will turn inflation back up … and maybe way back up, depending on how much easing they have to do to end the repo crisis. Last time well over $100-billion failed to do the job, and they only ended the interbank crisis when they began the trillions of dollars in bailout and stimulus funds of many kinds during the Covid lockdowns that gave us the inflation we are now suffering under and the Fed’s inflation fight that we are also suffering under. Easing policy, as, of course, Wall Street wants, is so much easier said than done this time around when inflation is already above target and edging back upward.
A Fed lending facility that was put in place after the regional banking crisis last year will expire on March 11, with $129 billion outstanding. That will remove what has become an attractive source of funding for banks….
At the same time, the demand for cash is likely to increase, with the issuance of massive quantities of U.S. government debt and quarterly tax payments due on March 15 and annual payments due on April 15. In addition, a move in May toward faster settlement of trades could increase demand for short-term funding as firms that are not fully prepared to make the transition would need more overnight financing.
And, as I just warned in that Deeper Dive in terms of the chaos that is coming, this one thing can, by itself, can cause a dangerous crack in our economic system:
“Liquidity could start to show some cracks as funding needs continue to grow,” said James Tabacchi, CEO of South Street Securities, an independent broker dealer active in Treasury markets. “It is a balancing act, and it won’t take a lot to cause a disruption in the funding markets.“
As I say, I’ll keep an eye on it because I try in my editorials to give you “tomorrow’s news today.”
The ice dam in housing is making cracking sounds
Something else I wrote about was the ice dam in housing as an instrument of chaos likely to be unleashed in 2024: Wolf Ricther writes,
Housing market is frozen, people have gone on buyers’ strike, sellers are hoping that this too shall pass.
The median price of existing single-family houses, condos, and co-ops in the US whose sales closed in December dropped to $382,600, down by 7.5% from the peak in June 2022.
So, maybe the ice dam is also beginning to crack. While that is great news for buyers trapped on the sidelines for many months, it’s bad news for homeowners if they have to sell as their home will be underwater and bad news for banks as their collateral will be underwater, too—a story with which we are all too familiar.
The seasonally adjusted annual rate of sales of existing homes fell to 3.78 million in December, the lowest since the worst two months of the Housing Bust in 2010
Zero Hedge walks back its pivot prediction
Perhaps the most interesting set of headlines were two where Zero Hedge is quickly walking back its latest Fed pivot prediction. In one, they point out the dynamic that I said would undue the very hope that Powell had given markets when he said the Fed might be able to back off early if stock and bond market kept doing the Fed’s heavy lifting for it. I pointed out that the market stopped doing that work the second Powell spoke those words, and now Zero Hedge agrees as you can hear in the following quote:
Even though market pricing centered on an interest rate cut from the Federal Reserve as early as March has withered in recent days, traders are still assigning about a 50:50 chance of one. Should the meltup in stocks continue, the chance of a reduction will crumble to zero.
I already placed it at zero for March, but it’s good to hear ZH recognizing the same reality. The run-up in stock and bond prices (yields down) since November undid the very hope the run-up was based on, as I’ve said in past articles was happening, assuring no Fed pivot in March; and I’ve even warned it creates a small possibility of a Fed hike to undo the undoing of the Fed’s tightening that the market has done.
10-year inflation-adjusted Treasury yields are about 75 basis points lower than they were just three months ago. Little wonder that financial conditions are now near the loosest they have been since the Fed started to tighten policy in this cycle. [ZH: The lagged effect of that massive loosening of financial conditions is about to send macro-economic data soaring…]
Which, of course, is exactly what would send the Fed back to hiking if that happens.
The exuberance around stocks seems to be reverberating through the Fed corridors, with a well-known dove pushing back against market pricing for an early pivot.
San Francisco Fed President Mary Daly cautioned Friday that it is premature to think that rate cuts are around the corner and that policymakers “don’t want to loosen policy too quickly, only to find that inflation gets stuck at way above target.”
[ZH: Simply put, the reflexive cycle of stronger stocks (on expectations of easier policy) driving financial conditions dramatically looser …, remove the need for actual rate-cuts from The Fed… and remove the pillar that is supporting the buying-panic in stocks… and around we go.]
Exactly! Right where I’ve been saying this recent delusional cycle would take us—around a loop right back to additional tightening if the markets don’t undo their undoing of the Fed’s original tightening. Then the Fed will have to give markets a jolt.
The more the markets rejoice on the idea of an impending rate cut by engendering looser and looser financial conditions, the less is the chance that we get a reduction even in May – let alone in March. For, if the markets are already doing the job on behalf of the Fed [of cutting rates this time], there is little incentive for the Fed to add fuel to fire and stoke inflation all over again.
That is exactly what I’ve said the Fed will be afraid of and why it will not pivot with markets having already loosened financial conditions when the Fed wants them to stay tight until the job is done … as Mary Daly just reiterated. The Fed has been consistently telling everyone what it will do, and with inflation creeping back up and the jobs metric that the Fed is watching holding strong, there is no leeway for the Fed to pivot. So, no pivot in March.
Glad to see ZH is now figuring it out.
Recession worries are not receding
The other thing Zero Hedge is confirming for me (walking back just a bit its statements that the Fed’s soft landing is a done deal) is that the recession just keeps on settling in.
US Leading Indicators Slump Continues – Longest Losing Streak Since ‘Lehman’…
This is the 21st straight MoM decline in the LEI (and 22st month of 24) – just barely shorter than the longest streak of declines since ‘Lehman’ (22 straight months of declines from June 2007 to April 2008)…
Despite ‘soft landing’ hype [which ZH contributed to], the LEI is showing no signs at all of ‘recovering’, tumbling back below the peak in March 2006…
Most notably, they concluded:
“Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.”
And from another article in ZH:
And that helped pull rate-cut timing hopes lower, with the odds of a March rate-cut down to just 40% (from practically 100% at their peak in December). Rate-cut expectations for 2024 also declined modestly…
Election time bombs already starting to go off
And we got news of one of the explosions of chaos I said we could expect in elections this year. The AI bombs are already going off in the election arena, and there will be a whole lot more to come to sow confusion and distrust (chaos).
One headline today reports an AI robo call to Democrat voters in New Hampshire, using Biden’s voice, to tell them not to vote because it will only help Trump. While Biden didn’t make it onto the NH primary ballot, some Dems have run a campaign to make him a write-in candidate.
The New Hampshire attorney general’s office says it is investigating what appears to be an “unlawful attempt” at voter suppression after NBC News reported on a robocall impersonating President Joe Biden that told recipients not to vote in Tuesday’s presidential primary.
An article in The Washing Post goes broader and says,
AI is destabilizing ‘the concept of truth itself’ in 2024 election
Weeks into a pivotal election year, AI confusion is on the rise.
Politicians around the globe have been swatting away potentially damning pieces of evidence — grainy video footage of hotel trysts, voice recordings criticizing political opponents — by dismissing them as AI-generated fakes. At the same time, AI deepfakes are being used to spread misinformation.
Not only can AI make such fakes, but politicians can use the existence of AI to wiggle out of real wrongdoing that gets spotted and sent through social media. How will you know if the politician is telling the truth or if he is using AI as his cover?
Last month, former president Donald Trump dismissed an ad on Fox News featuring video of his well-documented public gaffes — including his struggle to pronounce the word “anonymous” in Montana and his visit to the California town of “Pleasure,” a.k.a. Paradise, both in 2018 — claiming the footage was generated by AI.
And, while I welcome the following as good news about a winding down of censorship in major social media, it is happening in a time of surging AI fake news, meaning the guard rails are off:
US heads into “post-truth” election as platforms shun arbiter role
I’d still rather have the guardrails off, but it is going to get more confusing (chaotic) for sure.