The Fed is Sending a Message To Us All… Time To Listen

Let me get this straight… the Federal Reserve announces a series of restrictions for major banks, noting that the most recent stress tests have shown that they are approaching critical points in their reserve accounts. The suggestion is that was the economy declines below anticipated levels, the banking system might find itself with insufficient funds to clear their obligations, which is a very bad thing.

Volcker Rule

At the same time — literally, the same day — the Chair of the FDIC announces that she wouldn’t mind seeing banks take greater risks with the money that they hold for depositors. The memo makes it seem like a minor correction to the technical definitions in order to facilitate more funding for businesses; in conjunction with the actions taken over the past year-plus, it represents an almost total gutting of the “Volcker Rule”, a critical element of the Dodd-Frank legislation enacted after the last time the banks almost led us into the abyss.

Oh, yeah… the Volcker Rule? That was the last shred of restraint left from the government’s reaction to our last encounter with impending doom. That whole never-again thing is soo 2008…

So, let’s tally this thing up. The Fed announces that it’s happy to print as much money as is needed and to give it out at zero interest to every major company or financial institution with a pulse. The Treasury announces that it doesn’t mind a few trillion in new deficits and that we shouldn’t pay any attention. The FDIC suggests that banks roll the dice more than they already are, specifically noting that some high leverage gambling on derivatives and startup companies seems like it might make sense right about now… and the Fed quietly notes that maybe the big banks might be a little light in the wallet.

Wall Street is shocked — shocked, I tell you — that the virus hasn’t gone away with the arrival of summer, and despite the virtually unlimited support from the Fed and Treasury, it bounces around like a leaf in a tornado every time anyone with a lab coat reminds them of the numbers. The opening of the economy is going about as well as Fauci said it would, and the big boy politicos (California, Texas, Florida) that were so smug a month or two ago are starting to make little coughing noises whenever they see a microphone or camera.

The Senate and the Administration have gone from saying that the recovery was going so well that additional stimulus would be gilding the lily, to waving wads of bills at the restless populace. Congress can’t get their calculators clicking fast enough, and the once dead, now assumed next stimulus bill picks up another trillion every day or two. The polls are suggesting a lop-sided November the wrong way for the Administration, and the new kids running are routing all the old guys. The volume and nature of the movement in the markets suggest that the usual patsies are jockeying like they always do just before the rug is pulled out under, and with every revision of economic recovery, the justification for optimism is getting weaker.

Americans Spending Dollars

Oh, and the EU doesn’t want us dirty Americans spending dollars in their countries, because, well… while they are all doing great at this pandemic thing, our charts look a lot more like Brazil’s, and that’s not a good thing.

Hmm…

Could it be that Powell, Mnuchin, FDIC Chair Jelena McWilliams and the rest of the powers that be are looking at all the information in front of them, and quietly burying some cash in their backyards? Every message sent says the same thing: that light ahead is not the other end of the tunnel, but a really big onrushing train. It’s not particularly subtle.

Ask yourself this: How likely is it that the doomsday decisions being made by the Fed, the Treasury and Congress are just an overabundance of caution, and part of a brilliant, long term, economic plan?

How much do you really trust a market that overreacts to every day’s news flash, and professes surprise at what’s in front of their face? A market that has been given infinite resources, and still needs more and more? How safe do you feel about a banking system that also has the benefits of an open checkbook, and still can’t balance its accounts without increasing the risks that it takes with depositor funds?

That big flashing sign standing in your way is using simple words now. It’s possible that we’re fine, and that everything is under control. It’s possible… but as for me, I’m looking for a mason jar and a shovel. I’ve got a hole to dig in my backyard, and I may not have much time to dig it.