Powell: King of Confidence | QPOL Issue #56
The BTFP’s Hidden Quid Pro Quo and What it Means For the Health of the Economy
The recent CPI print for June (3%) made markets pop off as if everything in the economy was hunky dory. Although this isn’t exactly the case, it does demonstrate that Powell’s monetary policy is working and we’re seeing proper price deflation. The worst is yet to come though and inflation could come raging back like a hurricane (more on this later). As per usual though, let’s debunk some near truths, yet some nonetheless FUD from our friends at Zero Hedge…
Confidence is the Key
The Zero Hedge piece below can be summed up as such (shout out to my colleague Davis Mangold for the breakdown).
https://www.zerohedge.com/markets/endgame-us-debt-interest-payments-about-hit-1-trillion
It covers the current US fiscal situation and short term projects/impacts.
TL;DR…
- Defiicits rapidly increasing due to massive outlays and collapsing tax receipts. This could have been one of the main reasons Yellen went to China to encourage them to buy US Treasuries to fill her piggy bank back up.
- Fiscal Year for 2023 tax receipts estimate (so basically the next three months) to be $4.8T and currently at $3.4T... NO fucking way... the difference is $1.4T. I think they will get $750B, almost half of that. US FY ends in Sept (the next three months).. NOT the end of the year, fyi.
- Interest paymnent on US debt ($32T) hit $652B... and with three months left, is projected to be $900B, getting close to $1T.
- Weighted average interest on US Debt is currently 2.76%. If FED stays here (higher for longer) then this rate will be 4% in one year.
There’s a reason I called this fear-porn…Basically, the US can’t pay back its debt and never will (duh). To me, this just reads as another worry-wart hit-piece on the US’s financial and monetary credibility…
It doesn’t matter, as long as the US debt is better/more credible than anyone else, we’re gravy. It’s a confidence game, and the US is the winner of said game as Powell continues to let assets roll off the balance by the tens of billions every month. You know, deflationary monetary policy (AKA tightening).
Banking On A Prayer
Such a game of confidence is definitely played at the banking level as well. A couple weeks ago I came across this headline on LinkedIn claiming the regional banks are now considered “too big to fail.”
The story is wrong and this reporter needs a brain transplant. This isn’t “too big to fail” for mid-size banks if the Fed says they need higher capital requirements…
If anything, this is the OPPOSITE of “too big to fail” bailout talk. If the Fed says banks need higher capital requirements/more reserves/be stingier with who they give out loans to, then this is If ANYTHING, the OPPOSITE of “too big to fail” bailout talk.
This is exactly what hat the Bank Term Funding Program (BTFP) requires. In order to take this (for all intents and purposes) collateralized loan from the Fed, they need to raise capital and be able to pay the loan back at prevailing interest rates. Thanks to Powell’s aggressive hawkishness, those rates will be above 5%, and very could be 6% by the end of the year. This is exactly why this is NOT QE or free money. It comes at a price. THAT is the quid pro quo. I was able to cover this in a rant on spaces this past Friday. Check out the link below. For a timestamp, I start ranting around the 37:30 marker…
https://twitter.com/txmctrades/status/1680060528704536577?s=46&t=IPq_vRSnPZokRJFmdbsW1Q
The BTFP’s Hidden Quid Pro Quo
This quid pro quo is also why banks are discouraged to not use the BTFP, or at least less than we may think. After all, one of the benefits of the BTFP is that it’s an anonymous program, so we may very well never even know which banks took advantage of it. If I had to guess though, it’s the SVB/Silvergate types that benefited from the San Francisco Fed’s monetary policy.
Theses are the types who acted like regional banks but weren’t actually (as Danielle DiMartino Booth says). Those are the actors who didn’t properly hedge themselves because they never expected the Fed to raise rates as aggressively as they did. THIS is where the major deflationary factors come from.
For a primer on all of this, I highly recommend this interview with DDB from a couple weeks ago…
What was really revealing was learning there was no bid for the long bond/ 10 year in March 2020. This proves COVID was a direct hit job on the Fed and demonstrates Powell’s goal and conviction of repatriating treasuries AND freeing the markets from non-banks. Again, going back confidence…The only way to do so is rebuild the Fed’s credibility by raising rates to destroy the leveraged loan markets (offshore dollar system) and ending the Fed Put.
Higher For Longer Is Still the Goal
It’s important to remember Powell isn’t coming to the rescue. Anyone who thinks he’s gonna pivot before 2024 (being extremely generous here) is delusional. The curve on the US dollar markets keeps extending out 6 months further than the last projection. The market has finally come to terms that Powell means business and that he should be taken seriously, mostly thanks to this indicator now being re-indexed to SOFR instead of LIBOR. He’s deliberately ending the Fed Put and forcing CRE to implode. It’s not about inflation, it’s about gaining and giving control of the economy back to the markets to responsible participants where ZIRP wouldn’t have allowed them before.
Powell’s agenda is ultimately about ending the Bernanke Doctrine (AKA never going back to the zero bound). ZIRP caused a brain drain in banking that went to PE (private equity) instead Where these actors had a monopoly over the deals being made in the markets and the regulations under Dodd Frank forced regional banks to make loans for CRE projects (which were viewed as safe investments at the time during ZIRP), that have come back to bite them in the ass. The over leveraging in PE caused a massive mis pricing in markets, especially in CRE. PE’s monopoly on those markets ONLY was possible under ZIRP and now they’re paying for it. This is the result of higher for longer.
After CRE gets demolished, the private credit markets will be able to come in and make deals and buy distressed assets from banks and pension funds to fill the holes on balance sheet because the over leveraged PE firms will be bankrupt because they didn’t hedge themselves for Powell raising as hard and fast as he could.
This is how banks survive. This is why we won’t have a systemic regional banking collapse. Will there be casualties? Yes, but it won’t be as bad as we think (remember the banks that will suffer are most likely the SVB types). Again, Powell is putting the power of responsible actors back into the market. We just have to wait until CRE goes down.
Will there be a recession? Yes. Are we already in one? Most likely. Will Powell keep hiding behind bad economic data to fulfill his goal? Absolutely. The pain will be felt. The real question is who will feel it. Ripples in the economy will effect everyone, and inflation will most likely come back in food etc. as commodities go up. This is what’s needed though, and at the risk of repeating myself, the real cleansing of bad actors in the economic system will be those who thought ZIRP was forever.
Lucky for us, we get to watch it all in real time.
~ Phil Gibson
If you enjoy the content, consider supporting my work for less than what a blue check mark on twitter costs you… 🙂
For more insights and musings, follow me on Twitter @MrPseu
For business inquires, contact heyQPOL@gmail.com
Tip Me on CashApp/Bitcoin:
bc1qhlqefvm3f6mc33k7shgzns299wsgzc9jd9puxs