- The Fed is signaling a “seismic shift” in policy…
- The Fed’s next bailout…
- Tax season is getting late. Have you learned about one key loophole in the tax code that can LEGALLY save you thousands in taxes this year?
Dear Reader,
Is the “quiet phase” of a global reset unfolding before our unhearing ears?
ITM Trading:
- After months of pretending all was well, the Federal Reserve has quietly slowed its quantitative tightening by 80%, signaling a seismic shift beneath the surface. Why now?
A seismic shift beneath the surface? And why now indeed?
Today we peer beneath the surface… and glance the seismic dynamics occurring presently thereat.
We begin our discussion with an observation of inflation.
Like an interminable visit by a dreaded mother-in-law, inflation will not leave.
Should not the Federal Reserve therefore maintain its pace of balance sheet reduction… if not accelerate it?
Should it not be wringing additional liquidity from the system?
The Fed’s Quiet Reset in Action
Yet the Federal Reserve has reduced its pace of balance sheet reduction by some 80% — and quietly.
I do not believe the Federal Reserve exerts the gravity upon inflation it believes it does.
Yet it itself believes its influence is vast. Its doings are therefore instructive.
And in March it announced it would reduce its monthly balance sheet hackings from $95 billion to $40 billion.
This reduced pace owes, it claims, to lingering complications concerning the debt ceiling.
As Bloomberg explains — or attempts to explain:
- Officials… talked about the potential need to consider pausing or slowing their balance-sheet runoff — a process known as quantitative tightening, or QT, which has been ongoing since June 2022 — until lawmakers can strike a deal to avoid exhausting their borrowing authority.
- In particular, Fed policymakers cited the potential for significant swings in reserve balances over the coming months.
The U.S. Government May Run Out of Money Even Sooner Than Expected
The United States government is projected to deplete itself of funds by September. Or Perhaps August.
Or perhaps even June or May — depending on Uncle Samuel’s tax haul this spring.
And so the Federal Reserve is maintaining its balance sheet against the prospect that Congress will fail to elevate the debt roof before the cupboards run bare.
I hazard it is a plausible accounting. Yet there is the official accounting… and there is the unofficial accounting.
Is there an alternative accounting of the Federal Reserve’s about-face?
Might it less involve the debt roof — than a gathering bond market calamity centered upon overleveraged hedge funds?
Crisis Management in Disguise
The abovesaid ITM Trading:
- [Ending QT is] about propping up a $29 trillion bond market that’s being held together by overleveraged hedge funds…
- It’s crisis management in disguise.
- The truth? Hedge funds are sitting on over $1 trillion in risky trades, propping up the Treasury market with extreme leverage. And just like in 2020, the Fed is preparing to bail them out again — because if even one domino falls, the entire financial system could unravel.
As a keen devotee of impending financial calamity, the story seized me by the snout.
Yet as a keen devotee of impending calamity, endless cries of wolf batter my ears.
The menacing wolf lurks and lurks.
Yet the wolf very rarely appears upon the doorstep.
Yet my inquiries into the matter led me to Bloomberg. And even Bloomberg has confirmed the wolf sighting.
Get Ready for Another Bailout
Thus under the March 27 headline, “Fed Urged to Explore Hedge Fund Bailout Tool for Basis Trade,” we learn that:
- The Federal Reserve should consider setting up an emergency program that would close out highly leveraged hedge-fund trades in the event of a crisis in the $29 trillion US Treasuries market, according to a panel of financial experts.
- Any vicious unwinding of a swath of the estimated $1 trillion in hedge fund arbitrage bets would not only hamper the Treasuries market, but others as well — requiring Fed intervention to assure financial stability.
This is no place for a technical inquest into the basis trade, so-called.
Yet here Bloomberg draws the overall sketch:
- Because the trade often involves heavy borrowing, it can blow up when unexpected events lead to market volatility that forces funds to offload their holdings all at once…
- The trade focuses on the price difference between Treasury bonds and futures tied to those same bonds. Sometimes a bond future’s price rises above the underlying bond price because of heavy futures purchasing by pension funds, insurance companies and other institutional investors.
- To capitalize on this discrepancy, a hedge fund will sell Treasury futures and simultaneously buy the corresponding bonds. By buying cheaper bonds in one market and selling expensive ones in the other, these traders can profit from the small price differences, regardless of whether the bond prices go up or down.
Thus enters risk
Continues Bloomberg:
- When funding costs… rise abruptly — which can happen when there isn’t enough cash sloshing around the banking system — the trade is no longer viable.
- Volatility in the Treasuries market can also increase the cost of the trade, killing its profitability. When these things happen, hedge funds have to rapidly unwind their positions to repay their loans, which increases volatility.
- Those price fluctuations can lead to a drying up of liquidity… When that happens, Treasuries markets can seize up.
The United States Treasury market is the largest and most liquid government bond market on Earth.
In certain respects it forms the granite bedrock upon which Wall Street squats.
Hence the requirement of a bailout should the bedrock fracture.
States financial commentator Taylor Kenney:
- The only thing holding up the most important bond market in the world… is borrowed money and a hope that the Fed will catch the fall.
Moral Hazard
“But wait,” you say.
“If these hedge funds know they’ll be bailed out if their trades blow up, wouldn’t that just encourage them to take even riskier bets? After all, they’d enjoy all the upside if it works out for them, but face no downside if things go south. It’s heads they win, tails they don’t lose. Sign me up for that deal!”
You will not be offered that deal.
That is because you do not hold the fate of the vast United States Treasury market in the hollow of your hand.
The hedge funds, evidently, do.
“This is the quiet phase of the global reset,” says Ms. Kennedy… “and the rest of the world is watching.”
I too am watching. And I do not like what I see.
Nor do I like what I expect to see.
Do you?
Brian Maher
for Freedom Financial News
