THE BIDENOMIC LIQUIDITY PUMP IS EASING FINANCIAL CONDITIONS

Last week we outlined how the stealth Bidenomics Liquidity Pump is presently working. The proof of its effectiveness is the Goldman Sachs Financial Conditions Index, which is now at its ‘easiest’ since the Fed started on its 50bps rate-hikes in May 2022. While the Fed continued to hike rates for the last 9 months, Financial Conditions have done nothing but ease while traders continue to ‘fight The Fed’ with loosening financial conditions (charts below).

We have been long time followers of Grant’s Interest Rate Observer for their keen observations. Recently Jim Grant noted that the alternative Chicago Fed Financial Conditions Index indicates that “the current financial environment is still “easy” even after all of the talk and rate lifting. There’s a difference between tightening and tight. And by the standards of the Volker era, monetary policy is not yet tight”!

We find it interesting on what might have prompted recent research from the Federal Reserve to produce a new index named the Financial Conditions Impulse on Growth (FCI-G). It points out the obvious trap the Federal Reserve is in. The rapid and dramatic increase in rates has created an impulse only now beginning to be felt that suggests that, without the Fed soon significantly reducing rates, the economy will face a seriously harder landing than many can yet imagine! (See the latest MATASII Macro Map below). Clearly the institutions are well aware of this and are “front running” the clear actions the Fed must soon take, even if Inflation is still a long ways from actually being under control (see our latest video release).

Another perceptive analyst we follow is John Hussman, who outlines why we shouldn’t count on the Fed to be able to rescue the market. He feels “a decade of quantitative easing has led investors to imagine that Fed easing reliably supports the stock market, and that it is Fed easing that ends market collapses. The fact is that the Fed eased persistently and aggressively through both the 2000-2002 and 2007-2009 collapses. Historically, the worst market outcomes have typically occurred when the Fed is easing in an environment that combines economic weakness with risk-aversion among investors. If one believes that a Fed ‘pivot’ is something that investors should hope for, one is not paying attention.” That’s not to say the Fed won’t pivot. Hussman is simply pointing out that it will be too little too late to re-inflate this bubble.

WHAT YOU NEED TO KNOW

Q2 EARNINGS: Selling The Earnings Beats!

“Selling the News”! It is not a good sign when a stock is sold off after an EPS “Beats” estimates! So far the Q2 earnings season is experiencing a median sell-off of 5% on stocks beating their consensus estimates. The real news is in the conference calls which are ladened with surprises, warnings and concerns for those actually listening to them!

THE FED’S NEW FCI-G – Further Proof of The Fed’s Self Inflicted Trap Of Waiting Too Long To Fight Inflation

• • Goldman’s Financial Conditions Index is at its ‘easiest’ since The Fed started on its 50bps rate-hikes in May 2022, and while they have continued to hike rates for the last 9 months, financial conditions have done nothing but ease.
  • The Fed has created a major lagging shock to the economy from its rapid 500 bps increase in rates in such a short time frame. The lag effect of this shock has yet to fully hit.
  • The Fed should be reducing rates to minimize the shock, but is trapped because Inflation is not coming down as fast as it should. Inflation has primarily been dropping due to falling energy costs overwhemlingly from falling gasoline prices. In the US this is due primarily to the reduction in the Strategic Petroleum Reserves (SPR). Now, energy prices are again rising with Brent Crude closing Friday at nearly $85, having been recently below $70,
  • The Fed trapped itself by being too slow to raise the Fed Fund Rates, mistakenly believing Inflation was primarily a “transitory” Supply Chain problem.

EARNINGS SEASON – Take Out “Beat” & “Expectations” and You Get the Real Results! – Selling the News

• • Financials are being impacted by the repricing of collateral and risk. This is most evident in the Commercial Real Estate Market (CRE).
  • Banks, already in trouble due to shrinking bank reserves, are feeling the changes underway in many of the effected Financial Institutions.
  • Both Financial Institutions and Banks exhibit differing technical Wave 2 counts, but both suggest 5 wave downward impulse structures.
  • As goes the Financial Institutions so goes the banks and ….. so goes the market!!!
  • Global Revisions remain strongly negative after briefly turning positive mid-June.

FOMC/ ECB / BOJ / BOE – Understanding the Narrative

• • FOMC: Fed hiked the FFR by 25bps to 5.25-5.50%; “want to see core inflation coming down, which is still pretty elevated”; “getting back to 2% inflation has a long way to go.”
  • ECB: Hiked another 25bps hike, taking the deposit rate to 3.75%; Lagarde offered a more downbeat assessment of the Euro zone economy; Markets priced a 25bps hike in September at around 40%; “inflation will drop further over the remainder of the year”, it “will stay above target for an extended period”. 
  • BOJ: Kept its policy settings unchanged, as expected with the Bank Rate held at -0.10% and YCC parameters maintained to target 10yr JGB yields around 0%. OF NOTE IS THAT the BOJ will guide yield curve control more flexibly with its daily fixed-rate purchases of 10yr JGBs at a rate of 1.0% (prev. 0.5%). This essentially means the +/- 50bps band for the 10yr JGB target will now be used as a reference point in market operations, allowing for greater flexibility. Economic uncertainty remains high.

GLOBAL ECONOMIC REPORTING: What This Week’s Key Global Economic Reports Tell Us?

• • The June Core PCE data was dovish overall, in fitting with what was seen in the CPI report, and supports the narrative about easing inflation. Core PCE printed 0.2%, in line with expectations, and cooling from 0.3%, while the annual measure eased to 4.1% from 4.6%, beneath expectations of 4.2%. 
  • Headline PCE rose 0.2% M/M (exp. 0.2%, prev. 0.1%) with the Y/Y rising 3.0% (exp. 3.0%, prev. 3.8%). 
  • We strongly caution in accepting these results, as Inflation has been coming down primarily because of falling energy prices. In the US specifically, due to falling gasoline as a direct result of the politically motivated sale of the SPR. Anti-Fossil Fuel, Policies have yet to be felt because of the lag associated with longer term project lead times.

CONCLUSION

In our last newsletter we outlined how the Stealth Bidenomics Liquidity Pump was working.

This has accounted for approximately $700-$800B in unexpected available liquidity. However, this is only the offsetting element against expectations.

What Bidenomics is implementing, its version of MMT (Modern Monetary Theory) where the central idea (other than deficits and debt don’t matter), is to place money directly in the hands of spenders (consumers or corporations) without having to be “lent into existence” through bank lending and incurred debt.

There are two other stealth elements to Bidenomics Stealth Liquidity Pump, but these two actually effectively inject liquidity directly into the hands of spenders. They are:

1- THE STUDENT LOAN FORBEARANCE SHELL GAME – The Money not being paid is being Spent! ~ $950

2- TAX DEFERRAL RECEIPTS BEING PUMPED INTO THE ECONOMY – Versus Direct Transfer Payments ~442B

Quick arithmetic gives us ($800B + $950B + 442B) = ~$2,192B.

That should create a pretty nice rally?

It Did!!!