One Giant Mess

Another government crisis, another stupid government acronym...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

Here’s another nice mess you’ve gotten us into.

~Oliver Hardy

We almost feel sorry for Jerome Powell. He got the whole world into another nice mess. And now, people turn their lonely, tired eyes to him.

“Help us. Save us. Heal us.”

But what can he do? Just another stupid thing…

We have family visiting, so we’ll be brief.   

But before we start, we would like to thank all the many readers who wrote to us recently with comments (most of them positive) about our service. Many of the comments left us humbled, wondering how we can possibly meet such high expectations. We doubt we are worthy of the high praise we received. All we can say is that we are grateful for your support and will do our best to earn it.

In the last few days we’ve had an illustration of how booms work. How busts work. And how the Fed works. We also see more evidence that the Fed will not be able to stop inflation.

Non-Transitory Inflation

First…the Fed created an outsized bubble – by holding interest rates too low for too long. People borrowed to take advantage of the low rates. Then, the Fed, effectively, “printed money” to meet the demand – particularly from the government, which was handing out trillions of dollars’ worth of ‘stimmie’ checks and PPP loans.

Anyone and everyone who could add 2 + 2 – except perhaps the Ph.Ds. who work for the Fed – knew that inflation wouldn’t be long in coming. And when it showed up, the Fed made another huge error. It judged the inflation “transitory.”  No need for decisive action.

The next foolish move was to try to counter the inflation – which was running above 8% – with tiny rate hikes of only 50 or 75 basis points. Wall Street speculators can add, even if the Fed can’t. For an entire year, they could still borrow at 3% - 7% below inflation. Debt continued to increase. Consumer prices too.

The modus operandi of the Fed is to feed money to the rich (with ultra-low lending rates)…while trying to stop anything bad from happening by backstopping the markets. But then, as debt increases, something bad always does happen…and the Fed then makes it worse by making it easier to borrow even more money.  

Here’s the good news. Last week, two banks that catered to venture capitalists and hedge funds in the tech and crypto sectors caved in. That is what you’d expect.  They took big risks. They made big profits. And then their bets went bad.

All of this was obvious…and predictable. And no real biggie. It’s why we have corrections, tow trucks and funeral parlors. People make mistakes. Markets get ahead of themselves. Things need to be set straight…and put back into balance.

Another Crisis, Another Stupid Acronym

But along cometh the Fed with another big error. Typically, bank deposits are protected by the feds, up to $250,000. Bigger deposits are not. But now even the biggest, richest and most reckless speculators can look to the feds for back up finance. From The Wall Street Journal…

Meet the BTFP, the Fed’s 2023 Crisis Facility     

Among measures to counter fallout from the failure of Silicon Valley Bank, the Federal Reserve said it would create a new lending program for banks: the Bank Term Funding Program, or BTFP.

The facility will allow banks to take advances from the Fed for up to a year by pledging Treasurys, mortgage-backed bonds and other debt as collateral. By allowing banks to pledge their bonds, they can meet customer withdrawals without having to sell their bonds at a loss, which is what Silicon Valley Bank did last week, sparking a run on the bank.…the Fed won’t look to the market value of the collateral, which in many cases reflect big unrealized losses due to the jump in interest rates.     

…The Treasury Department is providing $25 billion of credit protection to the Fed just in case. “The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds,” the Fed said in its announcement Sunday night.

It’s done it again! The Fed has made a bad situation worse, by protecting speculators from their own errors. The Washington Post comments:

The Fed’s fight against inflation just got downgraded

The crisis, which has already prompted a large response from the Fed and other regulators in the form of a new special lending facility and measures to make depositors of the failed banks whole, is raising questions about whether the central bank can continue hiking interest rates in the face of an increasingly fragile financial system.

The Fed says it will continue sparring with inflation. But as soon inflation lands a punch, the Fed will take a dive. It will bail out the banks (and their big customers)…and the little guys will pay higher prices for everything. 

Regards,

Bill Bonner

Joel’s Note: Inflation is expected to have increased to an annual rate of 101.7% in February, according to median estimates in a Reuters poll released Monday. That equates to a 6.2% increase for the month of February alone, up slightly from the previous month. Goldman Sachs forecast a 101.3% rise in prices, year-over-year, as inflation rips through the economy and decimates the savings of…

Oh, wait… sorry, we were looking at the Argentine data. Whoops! We’ll shelve that copy for a future date. Meanwhile, back in Los Estados Unidos…

Consumer prices increased 6% for the month of February, according to the Labor Department’s Consumer Price Index (CPI), out this morning. That’s down from 6.4% in January, though still a mile above the Fed’s 2% target rate. On a monthly basis, prices rose 0.4%, following a 0.5% increase in January. That was up from a slight decrease (to 0.1% from 0.2%) over the previous month.

Thus spake Fed Head, Jerome Hayden Powell, to the US Senate…

“Although inflation has been moderating in recent months, the process of getting inflation back down to two percent has a long way to go and is likely to be bumpy.”

Core CPI (that is, the Fed’s preferred measure… this one that excludes prices that don’t readily cooperate, like food and energy) was up 0.5% from January and 5.5% on the year. (Energy was up 5.2%; food 9.5%. Not great news, if you need those things…)

Continued Powell…

“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Meanwhile, First Republic Bank and Charles Schwab tanked yesterday on fears of contagion in the banking sector (shares of the two mid-sized banks plummeted 77% and 20% respectively during the session). And yet, the rest of the market appears to be reading from a different playbook entirely, bidding up stocks on the assumption the collapse of SVB and Signature Bank will be enough for the Fed to finally pivot and begin hosing the joint down with free-flowing fiat once again.

What gives?

As usual, Dan Denning was on the case from his frozen bolthole up in Laramie, Wyoming. Here’s a word of caution, from an email he fired off to the BPR team this morning…

“Remember, history shows that recessions and stock market corrections usually begin AFTER the rate hiking cycle, when the Fed CUTS.”

And here’s the chart he attached…

Explains Dan: “The blue line is the Wilshire 5,000 to broadest index of publicly traded stocks. The scale is on the left. The red line is the effective Fed Funds rate. Scale on the right. When rate cutting began in 2000 and 2008, falling stock prices and the recession were not far behind.”

And why was that, the inquisitive reader wonders?

“Because, as usual, Fed policy was behind the curve,” explains Dan. “It hiked rates into the recession and stock market correction it had caused with easy rates. If history is any guide, Wall Street might get what it wishes for, The Pivot… and then NOT what it wishes for, the recession and the mean reversion in stocks to follow.”

Until further notice, Bonner Private Research members are locked in “Maximum Safety Mode,” a strategy that is looking better by the day. If you’re not already a BPR member, find a plan that works for you here and batten down the hatches, here…