Well, Mr. Powell’s big meeting and press conference came and went giving all appearances that “They got this!” But, there’s a very real problem, still. And those that believe he delivered “Mission Accomplished” status are concluding only half correctly.
The only reason why (all my conjecture, of course) is that he sidestepped the main issue with a brilliant display of “Texas Two Step” bedazzlement when he was asked his second question (paraphrasing):
Q: What is the Fed’s view on the SLR? (Supplementary Leverage Ratio)
A: I’m not going to answer that question, we’ll have something to announce in the coming days.
Result? It was the only question that mattered, for once he took it off the table – the “markets” skyrocketed for the rest of the session. Below is same chart I’ve been using notated and updated as of around 7:00am EDT this morning. To wit:
Now, a lot of you may be saying to yourself “What’s a ‘SLR’ and why should I care? The markets went up, right? It demonstrates they got this, so everything’s OK, right?” Well, yes and no. Here’s why…
Without going into-the-weeds, all you need to understand is that the SLR is a portion of the monetary system that works in conjunction with the Repo Markets and others. In other words – think of it as another “pipe” in the financial plumbing system. However, it’s also a very important pipe, for if it gets clogged, much like when the Repo Market did, it can have similar repercussions. Remember, it took the Fed alone, not counting the other central banks, a near doubling of its balance sheet in one year – and – the need to purchase (which it is still doing today) $120 Billion per month of additional QE.
Now – it appears the SLR is increasingly causing havoc. The proof? Let me remind you that so far in 2021, the two sell-offs that suddenly sent the Fed into a bout of consternation, where they needed to address the “markets” with public statements, was when the 10Y Treasury was rising and toying with 1.5% and higher, making them nervous. Currently, as I’m typing this, the same 10Y is looking to push through 1.75%
The “markets” took Mr. Powell’s statement as “We’re OK to get through this big expiry Friday. Jerome just said he’s got our back, because he’s not going to mention anything for days! What a bud!”
Bonds, however, seem to either “smell a rat” or, are going to push the Fed’s hand to see just what they had to wait for.
This is why I stopped concerning myself with financial commentary on a daily basis, for it’s just become a complete and utter comedic side show. (Note: The only reason why I’m commenting on this latest, is because of the true implications, for much like the repo market, which no one else saw, the implications here are just as worrisome.)
Here is the Fed directly after a two day conclave discussing the most pertinent issues, and probably the most pressing one of the entire meeting in regards to its function as “Head Plumber” concerning the SLR, they say – you’re gonna have to wait a bit till we give you an estimate. Why?
Hint: Options expiry (Quad witching if I’m not mistaken) Friday, where the whole thing could possibly send the “septic system” into distress with just the wrong word or phrasing. Need I remind you of the “autopilot” disaster? Trust me, Mr. Powell remembers it very well, which is precisely why he both sidestepped the question, as well as left it hanging on the dance floor.
But, the Treasury market does not forget. My advice would be: he had better keep his dancing shoes on, because the Treasury markets can be very vindictive if it feels its been “used” via interest rate suppression – only to be jilted by another named “stonks.”
© 2021 Mark St.Cyr