The Fed Dips Into the TIPS Jar | QPOL Issue #13

How the Fed is using inflation to blackmail Congress.

Oct 21, 2022

Happy Phresh Phil Phriday!

The following interview is between Keith McCullough and former Fed insider Danielle D. Martino Booth during the Hedgeye Investor’s Summit last week.

Everything Booth explains in the interview validates that the Fed is doing everything in its might to preserve credibility and monetary independence from the offshore dollar market. However, because she’s a former Fed insider, she can’t say that quiet part out loud. Below I’ve covered some main takeaways from the interview. The most important of the takeaways is that leveraged loans are the mechanism which destroys the Eurodollar system. Through understanding the points below, it’ll become ever more clear that Powell is not raising rates to fight inflation, nor does he want inflation to go down (at the moment). In fact, the Fed is actually benefiting from inflation.

Prices and Volatility

It’s crucial to understand some fundamentals of the relationship to the price of an asset and volatility. When gauging the strength, weakness, and liquidity of a currency, bond spreads are not what you should be looking at. It’s the volatility that matters. Watching liquidity move from one currency to the next is determined by the rate of change and the bond’s volatility. As bond volatility goes up, the price of the bond goes down.

Ex: By manipulating the VIX (volatility index of the S&P 500), you can force the price of the bond down. This inverse correlation is what matters, not just the spreads. It’s an inverse correlation.

You can manipulate the entire S&P 500 via manipulation of DXY futures, despite the market piling in to buy the dip. So instead of moving the entire market by buying an actual stock directly, you buy the VIX futures and force stock prices up by suppressing the volatility with the futures market.

THIS is how the Plunge Protection Team operates. They don’t buy the stocks, they just manipulate volatility to the downside so stocks move to the upside.

Just the TIPS

Understanding the above, it’s clear that The Move index is the bond equivalent to treasuries. The Fed doesn’t want inflation to drop because they own most of the TIPS (treasury inflation protected securities) market. TIPS provide a constant real yield relative to the CPI.

Ex: if they’re trading at 2% when CPI is 0, then when CPI is 5%, they’re trading at 3% (a hedge)

This is why the Fed doesn’t care, nor wants inflation to decrease right now. They are profiting off of it.

Booth explains that the Fed bought most of the TIPS market during QE to hedge themselves (instead of buying bonds which move in the opposite direction). This was clearly a move by Powell, not Yellen or Bernanke. The latter of the three would have bought treasuries instead, however Powell is doing everything he can to preserve the Fed’s credibility and is using different methods by buying assets that appreciate as inflation rises. Buying back treasuries as the Fed chair is counter-productive if your mission is to preserve Fed-cred and clean up the balance sheet.

Hat In Hand

However, a common fear shared among the financial space is whether or not the Fed with be able to pay Fed pay $500M a day in treasury payouts/interest and worrying about how to balance the budget.

The Fed has a portfolio filled with assets and if they make a profit then it goes back to the treasury (the Fed isn’t aloud to keep the profit). If the Fed loses money, they need to go “hat in hand to Congress” (as Booth says) and explain they need to be made whole. Congress, in this situation, is in charge because they can’t get the money back without permission from Congress.

Former FOMC appointee under Trump, Judy Shelton, has said that eventually the Fed will have to start reporting to Congress on a quarterly basis that they’re losing money and that they need more money out of the budget to balance their books. Congress doesn’t want the Fed shrinking their balance sheet any more than anyone else does because there aren’t any dollars in the market to buy all these assets.

If the treasury has to pay the Fed $15B dollars a quarter because the Fed lost $15B, then that’s money the treasury can’t spend (that’s removing BASE MONEY from the system). Removing this M0 money further destroys the mechanism to fractional reserve lend credit dollars and destroys the offshore dollar market.

The Fed Blackmails Congress

The Fed is using it’s profit in TIPS to blackmail the treasury directly. If they have to go hat in hand asking for $15B from the treasury. Further pulling that base 0 money out of the global economy. Therefore is Democrats are in charge of Congress, they’re directly blackmailing and screwing the Davos-backed treasury department by bankrupting them (taking their base 0 money away) and blaming it on high inflation and the need for the Fed to remain solvent. This what Booth means by “Powell is hiding behind the high inflation numbers.”

This of course all goes without saying that the Fed isn’t tightening because of inflation. Powell is using the inflation numbers to achieve his actual goal of draining not only the globe of dollar liquidity, but Congress as well. However it’s important to consider that a red-wave sweep is critical for the midterms and Powell is clearly playing politics. Why?

The profits the Fed makes via TIPS can be used as ammunition against a financial crisis within America. However, that profit sits at the treasury. It’s hard to imagine that a Democrat/Davos-backed treasury will give that money to the Fed to bail out America when Davos’s entire goal is to destroy the US fiscally and monetarily. There is a point to where Davos won’t want liquidity injected into the market, and the Fed won’t be able to go hat in hand and get the money without Congress’s approval.

Now, the Fed may not be blackmailing a Davos-controlled Congress if it’s not still run by Democrats/RINOs after the midterms. This is all just speculation on my part, but it makes a lot of sense considering what’s going on in the background. If there is a red sweep, then it should mean that the Democrats aren’t in there, which makes the midterms ever so crucial for the fate of the country…