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Repo Markets a Mess, Impeachment Crisis Pending - Nathan McDonald (Dec 18, 2020)

Image of a red pencil sitting on a downward graph with a red arrow pointing down.

December 18, 2019

Fed Chairman Jerome Powell states that the markets are doing great, things are moving along nicely, and the economy is growing at a healthy pace. This is great news, and clearly the stock market reflects this very much "real" reality.

As can be seen from the charts above, the S&P 500 seems to agree with the Fed Chairman's very much true assessment of the current state of the U.S. and global economies, with the S&P 500 continuing to make (and trade at) all-time highs.

Of course, this will continue forever, as currently nothing—absolutely nothing—is on the near, medium, or even long-term horizon that could possibly derail this very much real, not artificially-inflated stock market rally.

 

That is, until you take your rose-colored glasses off and actually look at what is going on in the world around you.

I have extensively followed the ongoing trade wars between the United States and China, and although some short-term resolution may " possibly" be in order, this dire situation is far from over. Even the initial compromises appear to be riddled with problems—problems that will not be silenced and are likely to flare back to the forefront as we head into the 2020 elections.

However, I believe this threat takes a back seat in comparison to the ongoing affliction in the vital overnight repo markets, an affliction that is keeping the Federal Reserve up late at night, despite their seemingly calm demeanor when they jawbone to the general public.

(Source, Bloomberg)

Does this look normal to you?

This historic expansion of the Federal Reserve balance sheet is occurring at the fastest rate ever. Even faster than the months after the 2008 crisis and the massive Quantitative Easing programs that followed when the Fed began to intervene, placing a bandage on the gaping wounds in the economy—wounds that were never allowed to properly heal because the sickness was only papered over, not cured.

The Fed is becoming the market in the overnight repo markets, as financial institutions once again become wary of each other, sparking concerns similar to the days following the 2008 collapse.

Contagion is a very real risk, and the Fed knows this. That is exactly why they are taking such drastic measures, revving up the printing presses to maximum capacity.

President Trump is also engaging in doublespeak similar to the Federal Reserve’s, on the one hand praising how great things appear to be on the surface—which, as shown above, they appear to be at face value—while at the same time calling for lower interest rates and encouraging the Fed to openly enact a new, proper Quantitative Easing program.

Taking to Twitter, President Trump stated the following, once again targeting the Fed:

“It would be sooo great if the Fed would further lower interest rates and quantitative ease. The Dollar is very strong against other currencies and there is almost no inflation. This is the time to do it. Exports would zoom!”

Of course, he knows that his chances of re-election depend greatly on two things: whether or not the economy "remains" strong at face value and also whether or not he is impeached.

The latter of these risks for President Trump is currently unfolding in real time, and at the time of writing, a vote by the House on whether or not to proceed with impeachment is set to soon take place.

This scenario creates extreme uncertainty and anxiety for many within the United States and around the world, as this move could have major ramifications that would be felt for years to come.

Republicans believe that the Democratic Party is simply trying to undo the 2016 election, and they are not going to forget this slight against them any time soon.

Unfortunately for President Trump, it is very likely that the Democratic-controlled House will vote yes on impeachment.

However, fortunately for him, the Senate is controlled by Republicans, who are incredibly unlikely to move forward with a conviction and removal.

This leaves the choice up to voters in 2020, which in my opinion leans heavily towards a Trump re-election if the Fed can continue to keep the repo markets together and stem the current bleeding.

Whether or not they can is yet to be seen.

Yet, gold and silver bullion continue to have a heavy lid placed upon them, even opening sharply lower in today's trading session, despite all of the risks mentioned above and despite the fact that common sense would dictate that they should be moving higher.

Risks abound and uncertainty reigns supreme, but worry not...

Everything is fine.

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About the Author

Nathan McDonald is a libertarian, entrepreneur and precious metals enthusiast. He has always taken a keen interest in free markets and economics since an early age, which naturally led him to become a true believer in precious metals and all that they stand for.

Nathan served eight years in the Royal Canadian Navy as an electronics technician, seeing the true state of the world, before starting his first successful business. He has since gone on to create a number of businesses, all of which are still in operation and growing.

In addition to this, Nathan runs a network of successful precious metals blogs, and a growing newsletter that has attracted readers from all around the world. He is a regular and highlighted writer for the highly respected Sprott Money Blog, which covers world events, geopolitics and of course precious metals.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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