Follow FREE Research at MATASII.com

PUBLIC EDITION

Any Problems? Notify:  lcmgroupe2@comcast.net

RESEARCH MAILING -- CHANGES / SIGNUP

View Newsletter in Browser (To Archive or Print)

Gordon T Long Research exclusively distributed at MATASII.com

Subscribe to Gordon T Long Research - $35 / Month - LINK

Complete MATASII.com Offerings - $55/Month - LINK

SEND YOUR INSIGHTFUL COMMENTS - WE READ THEM ALL - lcmgroupe2@comcast.net

REMINDER

THE US MARKETS TAKE TWO SHORTENED WEEKS A YEAR - THANKSGIVING & CHRISTMAS -- WE DO ALSO!

ANNUAL SCHEDULE: YEAR END / YEAR BEGINNING

Next Release - The Mid-Week "Gord's Desktop" - Thursday AM 01/02/25

Next Newsletter - Monday PM 01/06/25

THESIS 2025 - Wednesday 01/15/25 (In Lieu of January Videos)

Next Video - UnderTheLens - Wednesday 01/22/25

WHAT YOU NEED TO KNOW!

WHAT DOES THE FED SUDDENLY SEE??

The Fed lowered the Fed Funds Rate 25 bps on Wednesday as it had previously signaled. With unemployment levels barely over 4% and Inflation apparently on the expected glide path towards the 2% target rate, this action is 180 degrees to what is the normal FOMC drill!

What is it that the Fed sees that would merit its Financial Conditions Index to be as loose as it currently is?

The answer is quite easy to answer. Neither the Fed nor private sector believe any of the data that has been coming from the Biden administration's BLS reporting (now abbreviated to simply the BS shop). The market as a consequence was shaken Wednesday by the FOMC's dramatic shift in its dot plot for 2025 signalling serious concerns about Inflation and reports this week that the labor market is much worse (by yet another 250K jobs adjustment) than has been previously reported -- The economy is screaming STAGFLATION!

RESEARCH

THE TRUMP TRADE DEFICIT CHALLENGE

• The central problems in the US can be distilled down to two core issues:

1. The US Consumes more than it Produces.
2. The US Government chronically spends more than it takes in as revenue.

• The result of this is an exploding fiscal & trade deficit with resulting growth in Debt-to-GDP and Deficit-to-GDP Ratios.
• The US must address its chronic trade deficit problem!
• President-elect Trump showed clearly this week how he intends to solve this problem in what is an academically unorthodox approach.
• Trump demonstrates the "Art of Threat & Intimidation!"

THE FED PIVOTS AS DISINFLATION DIES

• The Fed cut interest rates by a quarter point Wednesday, but issued a statement and dot plot updates suggesting that rate-cutting would be far more subdued next year than the market had expected.
• In response, the Dow Jones Industrial Average fell 1123 points, closing near its lows of the day and marking its 10th consecutive day of losses.
• The megabanks on Wall Street were among the big losers of the day. Morgan Stanley dropped 5.25 percent; Goldman Sachs was down by 4.25 percent; Citigroup gave up 4.22 percent; Bank of America lost 3.44 percent while JPMorgan Chase shed 3.35 percent by the closing bell.
• These five megabanks are the banks most heavily exposed to tens of trillions of dollars in derivatives. What the Fed does with interest rates has a major impact on their existing derivative trading positions. The broad selloff in these names suggests these banks have some wrong-way bets in their derivative books, or at least that is the market’s perception.
• The Fed was forced to concede by its actions that the steady decline in the job-finding rate over the last year is consistent with a labor market that has loosened significantly in 2024, "has yet to stabilize" and signals that a labor market recession is imminent if not already here!

DEVELOPMENTS TO WATCH

6% 10Y TREASURY YIELDS?

• The U.S. are not the only people who need to sell a lot of debt. A huge, huge amount of debt is increasingly needed.
• Fed rate cuts will likely limit yield increases on short-maturity Treasury bills.
• The ongoing issuance by the Treasury to fund the government’s deficit spending is continuing to flood the market with new supply.
• The Fed’s quantitative tightening has taken a large, reliable buyer of Treasuries out of the market, further skewing the balance of supply and demand in favor of higher yields.
• Without YCC and QT, 6% Yields are a strong possibility (driven by the "bond vigilantes") to force this to occur!

$663B OF BANK CASH GOES "POOF"

• Cash assets at the 25 largest U.S. banks have dropped by a stunning $663 billion from their peak levels on December 15, 2021. Where is all of this cash going? 
• Since a major part of what these federally-insured megabanks do today is trading, we suspect – but can’t say for sure – that the cash is being used in part to post cash collateral on the tens of trillions of dollars in derivative trades held by a handful of these megabanks.
• The Federal Reserve’s 2007-2010 bailout was conceived by Wall Street, run by Wall Street for its own benefit, and controlled behind a dark curtain at the Federal Reserve Bank of New York – which is, literally, owned by the megabanks on Wall Street.
• A very similar scenario played out during the repo crisis in the last quarter of 2019 when the Fed pumped more trillions of dollars into Wall Street megabanks. That crisis transitioned into the COVID-19 pandemic crisis of 2020 and beyond, which resurrected the emergency loan programs of 2008 by the Fed plus a bunch of new ones.

GLOBAL ECONOMIC REPORTING

LEADING ECONOMIC INDICATOR (LEI)

• For the first time since February 2022, US Leading Economic Indicators was positive in November (post-election). With November’s gain, the LEI no longer signals an impending recession.

DECEMBER FOMC

• The Fed cut interest rates by a quarter point Wednesday, but issued a statement suggesting that rate-cutting would be far more subdued next year than the market had expected.
• In Chair Powell's pre-prepared remarks he stated the Fed is squarely focused on two goals, and that the economy is strong, the labour market remains solid, and inflation is much closer to the 2% goal.
• The Chair added that the policy stance is now significantly less restrictive, and going forward they can be more cautious, something which was indicated from the updated SEPs and statement tweak.
• Powell said that today's decision was a "closer call", but the "right call", suggesting there was a discussion surrounding holding rates at this meeting. Powell added risks are two-sided, and trying to steer between those two risks.

PHILLY FED

• US Philly Fed Business Indx (Dec) -16.4 vs. Exp. 3.0 (Prev. -5.5)
• US Philly Fed 6M Index (Dec) 30.7 (Prev. 56.6)
• US Philly Fed Capex Index (Dec) 18.8 (Prev. 24.9)
• US Philly Fed Employment (Dec) 6.6 (Prev. 8.6)
• US Philly Fed Prices Paid (Dec) 31.2 (Prev. 26.6)
• US Philly Fed New Orders (Dec) -4.3 (Prev. 8.9)

In this week's "Current Market Perspectives", we focus on the signals that Sentiment, Fundamentals and various market Segments (Credit, Bond and Equity) are currently giving us.

=========

THE TRUMP TRADE DEFICIT CHALLENGE

THE US CONSUMES MORE THAN IT PRODUCES

The central problems in the US can be distilled down to two core issues:

1. The US Consumes more than it Produces.
2. The US Government chronically spends more than it takes in as revenue.

The result of this is an exploding fiscal & trade deficit with resulting growth in Debt-to-GDP and Deficit-to-GDP Ratios.

THE EXPERTS ON HOW DO YOU LOWER THE US TRADE DEFICIT?

1- ACADEMIC POSITION - The ways to reduce the US trade deficit include the following:

• FISCAL POLICY: Governments can reduce the budget deficit or increase taxes to lower domestic demand and income. This can reduce imports and increase exports. 
• INTEREST RATES: Governments can increase interest rates to reduce consumption and demand for goods and services. 
• IMPORT TAXES: Governments can impose taxes on imports to make them more expensive and reduce imports. 
• TRADE REMEDY ACTIONS: The US can step up trade remedy actions under WTO rules. 
• TRADE DEALS: The US can make better deals with trade partners. 
• SAVINGS RATE: The US can boost its savings rate. 
• EXCHANGE RATES: The US can realign exchange rates by depreciating the dollar. 
• TRAVEL & TOURISM: The US can make it easier for international travelers to visit the US, such as by shortening visa wait times and removing COVID-era vaccination requirements. 

The Academic Community cautions towards not doing the following:

• Reducing the trade deficit without addressing macroeconomic imbalances could negatively affect the economy. 
• Trade policies are not viewed as the most effective policy tools for affecting the overall trade balance.

2- POLICY PRESCRIPTIONS FROM SOME OF THE EXPERTS - Published Documentation / Research

THE PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS (LINK)

President Trump hates the US trade deficit, and he has made eliminating or reducing large bilateral trade deficits the centerpiece of his trade policies. He thinks that deficits mean the United States is "losing" in global markets, because it is buying more goods and services from overseas than it is selling to foreign markets. This interpretation is misguided, but there are reasons to be concerned about the aggregate trade deficit. The main worry is that sustained deficits over an extended period will rack up debt that eventually must be repaid.

The United States runs a trade deficit, not because of bad trade deals, but because its citizens spend more than they earn and finance the difference with foreign credit. In 2016, the households, firms and government in the United States earned $18.6 trillion, but spent $19.1 trillion on goods and services, resulting in a disparity of $500 billion. Since the deficit is about production and consumption, the tools that will be most

effective in reducing it are those that impact how much US citizens, businesses and governments save.

Three ways to reduce the trade deficit are:

1. CONSUMPTION TAX: Consume less and save more. If US households or the government reduce consumption (businesses save more than they spend), imports will drop and less borrowing from abroad will be needed to pay for consumption. This means that consumption taxes — like those that nearly all other countries in the world have — could help reduce the deficit, by discouraging consumption, increasing saving and reducing the government deficit. In contrast, an unfunded tax cut, such as the one proposed by the administration, will expand the deficit, because the government will be consuming more relative to its earnings.
2. WEAKER DOLLAR: Depreciate the exchange rate. Trade deficit reversals are typically driven by a significant real exchange rate depreciation. A weaker dollar makes imports more expensive, exports cheaper and improves the trade balance. Given the dollar is the world's reserve currency, and still regarded as the safest for investors, it tends to run stronger than other currencies. But when foreign governments actively push the dollar up to maintain their surpluses, the United States could counteract intervention by selling dollars and buying foreign currencies. The administration could also encourage the adoption of other major currencies, such as the euro, yen, or renminbi, as alternative reserve currencies. A weaker dollar would be good for the US economy, but relinquishing the role as the dominant currency would reduce the power of the United States in global markets and the seigniorage (profit) earned.
3. TAX CAPITAL INFLOWS: One of the reasons that the United States runs a trade deficit is because borrowing from abroad is cheap and easy. If it were more expensive, US citizens and the government would borrow less. A tax on (non–foreign direct investment) capital inflows that rises with the size of the inflow could reduce excessive borrowing for consumption and help close the government imbalance. While some worry that capital controls could distort asset prices and reduce investment, they could also curb excessive speculative investment, such as what happened before the financial crisis.

If the administration is serious about reducing the trade deficit, there are ways to do it. Trade policy, however, is not on the list. Although it seems intuitive that trade policy should be the appropriate instrument for a trade deficit — just as fiscal policy is the right tool for a fiscal deficit — the economics do not work that way. Higher tariffs on one country or product divert trade to other countries or products, distorting consumption, but leaving the trade balance roughly unchanged. Higher tariffs on all countries will reduce imports, but they will also reduce exports, again leaving the trade balance roughly unchanged. The reason is that import tariffs reduce the demand for foreign currency and the dollar strengthens, thus the tariffs reduce both imports and exports and distort consumption and production. Overall, higher tariffs can be expected to reduce trade and income, but with a negligible impact on the trade deficit.

CONGRESSIONAL BUDGET OFFICE (CBO.GOV) (LINK)

Many economists believe that the most effective way to reduce the current-account deficit is by reducing domestic spending or "absorp- tion" relative to income by increasing the national saving rate.

WITA - WASHINGTON INTERNATIONAL TRADE ASSOCIATION (LINK)

Realigning exchange rates through the depreciation of the dollar, or ensuring other countries are not intervening in the market to artificially devalue their currencies.. Trade policies are generally not viewed as the most effective policy tools for affecting the overall trade balance.

AMERICAN COMPASS (LINK)

The first and best option is for the United States to make imports relatively less attractive than domestic products by imposing a Global Tariff that rises until the trade deficit is eliminated.

ECONOMICS HELP.ORG (LINK)

This involves higher tax and lower government spending. Higher tax reduces consumers' disposable income leading to a decline in consumer spending and less spending on imports. Also, the deflationary fiscal policy helps reduce inflation and thereby improves the competitiveness of exports.

LINKED IN (LINK)

A country can use fiscal policy to correct trade imbalances by adjusting its budget balance. For example, if a country has a trade deficit, it can reduce its government spending or increase its taxes to lower its domestic demand and income. This will reduce its imports and increase its exports, narrowing the trade gap.

THE TRUMP GENIUS

THE ART OF THREAT & INTIMIDATION

"I told the European Union that they must make up their tremendous deficit with the United States by the large-scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!" 

President-elect Donald Trump warned early Friday morning on Truth Social.



THE RESPONSE - Immediately Compliance

PROBLEM SOLVED

THAT WAS EASY FOR A NEW YORK STREET FIGHTER!

.... AND HE ISN'T YET PRESIDENT?

This is Why Academics / Experts & the "Credentialized Class" are Increasingly the problem and why nothing actually gets done - All talk with no common sense action!

THE FED PIVOTS AS DISINFLATION DIES

The Fed cut interest rates by a quarter point Wednesday, but issued a statement suggesting that rate-cutting would be far more subdued next year than the market had expected.

In response, the Dow Jones Industrial Average fell 1123 points, closing near its lows of the day and marking its 10th consecutive day of losses.

The Dow gave up 2.58 percent of its value while the tech-heavy Nasdaq lost 3.56 percent.

The megabanks on Wall Street were among the big losers of the day. Morgan Stanley dropped 5.25 percent; Goldman Sachs was down by 4.25 percent; Citigroup gave up 4.22 percent; Bank of America lost 3.44 percent while JPMorgan Chase shed 3.35 percent by the closing bell.

These five megabanks are the banks most heavily exposed to tens of trillions of dollars in derivatives. What the Fed does with interest rates has a major impact on their existing derivative trading positions. The broad selloff in these names suggests these banks have some wrong-way bets in their derivative books, or at least that is the market’s perception.

CHART RIGHT: A NEW REALITY

There is a clear re-acceleration of inflation showing on many fronts. Core CPI shows signs of reaccelerating as well as Core PCE, supercore CPI & CPE.

One of the best reactions to the Fed's ridiculous hawkish pivot Wednesday, where the highly politicized central bank decided to turn bizarrely hawkish less than three months after it did a jumbo 50bps cut to "fend off a recession", belonged to Std Chartered FX strategist Steve Englander who said "the real question is if you are going to be so hawkish, why bother cutting". Indeed... but an even better question is what changed so dramatically in just three months for the Fed to go from raging dove to belligerent hawk.

Yet the best question of all is the following: did the Fed make another catastrophic policy decision, (remember "inflation is transitory" and, more recently, "fending off a recession"), and yet again mis-timed its hawkish pivot. The answer, it turns out, is a resounding yes, not because of any unreliable statistics provided by the corrupt and complicit Biden government, where we now know that every incremental data point is a farcical lie, (and not only that near record 818K downward revision to jobs, but more recently, the explanation how "Biden Lied About Everything: Philly Fed Finds All Jobs "Created" In Q2 Were Fake"). Objective, third-party labor market trackers, now confirm that the labor market just imploded.

As Goldman economist Manuel Abecasis writes in a recent note, the job-finding rate of unemployed workers — the share of unemployed workers in one month who become employed in the subsequent month — fell 7% since September to 21%, the largest two-month decline on record (the only exception was the outlier economic collapse in 2020 when the entire world shut down) and the lowest rate since 2014!

The reality is that when combined with the latest Philadelphia Fed data, which found negative job creation in the second quarter, a huge downward revision to the previously reported 1.1% increase, which means that in Q2 over 400,000 jobs will be revised to negative.

Therefore Fed is forced to concede that the steady decline in the job-finding rate over the last year is consistent with a labor market that has loosened significantly in 2024, "has yet to stabilize" and to which we would add, signals that a labor market recession is imminent if not already here.

DEVELOPMENTS TO WATCH

6% 10Y TREASURY YIELDS?

ORIGINAL FULL T. ROWE PRICE PAPER - LINK

The Scary Case for the 10-Year Treasury

to Spike to 6 Percent

 Pam Martens and Russ Martens

NOTES from a November 22 Global Market Webinar at T. Rowe Price: December 17, 2024

ANNOTATIONS TO CHARTS = MATASII 

Arif Husain is the head of Global Fixed Income and Chief Investment Officer (CIO) of the Fixed Income Division of T. Rowe Price. He is also a member of the firm’s Management Committee.

When Husain speaks, Wall Street listens. What Husain has been saying since October is that the U.S. is on a collision course with higher interest rates.

In October, Husain released his interest rate outlook for the next six months, writing the following about the benchmark 10-year U.S. Treasury note, whose yield impacts mortgage rates and a wide swath of debt instruments:

“I think that the 10-year Treasury yield will test the 5.0% threshold in the next six months, steepening the yield curve. There are three dynamics at play:

1. Fed rate cuts could limit yield increases on short-maturity Treasury bills.

2. Ongoing issuance by the Treasury to fund the government’s deficit spending is flooding the market with new supply.

3. The Fed’s quantitative tightening has taken a large, reliable buyer of Treasuries out of the market, further skewing the balance of supply and demand in favor of higher yields.”

Husain’s analysis in October had yet to factor in the outcome of the U.S. presidential election Now that there is no longer any doubt that President-elect Donald Trump and his promised tariffs and tax cuts must be factored into any interest rate forecast, Husain had this to say on a November 22 Global Market Webinar at T. Rowe Price when queried by his colleague, Investment Specialist Ritu Vohora:

Vohora: So coming to you now, Arif. You know, Blerina talked there about one of the key risks is around fiscal policy. The U.S. deficit is on track to be 7% of GDP at the end of the year. I think the interest expense alone is going to be higher than the defense budget, which is mind-boggling. When should we start worrying about the debt burden? I feel like we talk about it, but when do we actually start worrying?

Husain: You should be worried right now. I think, certainly, the initial reaction in the bond market post-the-election was to go after some of the fiscal laggards. So, the European peripheral market got hit. The UK bond market got hit, and so did the U.S. Now there’s been plenty of volatility. So I think you got to be worried about the bond market. I’m on record of saying I think the U.S. 10-year will get to 5%. I said that before the election.

There’s only more evidence, new information, to think, to believe that and frankly, I said 5%, because 5% you need to go through 5 to get to 6.

So for me, what will create fiscal austerity? What will create a little bit more discipline around the deficit? Can’t see it. I really can’t see it. And really, I think the real thing that most people miss when they’re just looking at the U.S. fiscal deficit is a really simple point, which is the U.S. are not the only people who need to sell a lot of debt. A huge, huge amount of debt.

You know, Justin was talking about Chinese stimulus a moment ago. Guess what that is: debt issuance. And every country with the exception of Germany, actually, the German debt break is one of their structural, one of the structural issues holding them back a little bit, but from a bond holder’s perspective it’s a positive, right, but other than that, everyone is selling lots and lots and lots of debt in a time when central banks are no longer buying it. And so from a global perspective, I think we really need to worry about deficits and the lack of plan to address them. And the U.S. is at the front of the queue there. You know, every week, every second week, they’ve got to, they come with massive bond issuance and really to my mind, bond yields need to be a lot higher to be competitive. And you’ve got to see a much steeper yield curve to make that longer duration debt a lot more attractive.

At this point in the webinar, another colleague asks Husain, “Arif, did you, did you just call for 6% U.S. 10-year as a possibility?” Husain responds: “I think we’ll see 5 before 6, that’s for sure.”

This morning, Husain’s outlook for rising interest rates in the U.S. is getting a lot more attention. Bloomberg News has put excerpts from a new report by Husain in a headlined article on its digital front page. The article is apparently syndicated, because it is being picked up by other news outlets, including Yahoo! Finance.

If Husain is correct and the 10-year Treasury yield blows past 5 percent on its way to 6 percent, there are going to be a lot more than bond holders licking their wounds. (As yields on bonds rise in the secondary market, their market price declines in order to bring their yield to the going rate on new bonds of the same maturity.)

Because the yield on the benchmark 10-year Treasury impacts mortgage interest rates, a rise in its yield could price more home buyers out of the market, because they would be unable to afford the higher monthly mortgage cost. This could lead to a slump in home prices and potentially negatively impact consumer sentiment.

A yield of 5 percent or higher on the 10-year Treasury note could also lure money out of stocks and into Treasuries. Should a stock exodus become a stampede, a handful of tech stocks trading at nosebleed valuations might plunge, leading to more selloffs.

Since Donald Trump’s ego is bound up in the stock market only rising when he’s in the driver’s seat, this could lead to Trump making imprudent demands on the Fed Chair, Jerome Powell, or firing him as a scapegoat. Since Powell has said he will serve out his term as Fed Chair, irrespective of Trump’s threats to fire him, a Trump-Powell debacle could unnerve foreign investors, leading to capital flight out of the U.S.

In fact, we’re shocked we haven’t seen that already, given the chaos Trump has outlined for his first 100 days in office.

$663B OF BANK CASH GOES "POOF"

Pam Martens and Russ Martens

December 16, 2024

According to the December 6 release of Federal Reserve H.8 data, cash assets at the 25 largest U.S. banks have dropped by a stunning $663 billion from their peak levels on December 15, 2021. (See chart right, taken from the St. Louis Fed’s FRED graph, which is updated on an ongoing basis. Put your cursor on the FRED chart line here to get the weekly dollar figures.)

Notice also on the chart that cash levels at the largest U.S. banks were a sea of calm for more than two decades prior to the financial crash of 2008, but since that time cash assets have displayed wild gyrations, rising sharply then precipitously plunging.

It should provide no comfort to Americans that the wild gyrations on the chart above are a product of the central bank of the United States (the “Fed”) inserting itself, time and again since December 2007, into bailing out the trading houses on Wall Street – which since the repeal of the Glass-Steagall Act in 1999 are in drag as federally-insured banks.

The Fed’s first giant money funnel began secretly in December 2007 and lasted through at least July 2010. The Fed battled in court for more than two years to keep the names of the banks and the $16 trillion they borrowed a secret from the American people. (See chart below from the GAO audit.) If you add in the dollar swap lines that the Fed made available to foreign central banks during the financial crisis, the Fed’s money funnel comes to an even more staggering $29 trillion.

On July 21, 2011 the investigative arm of Congress, the Government Accountability Office (GAO), released the first-ever government audit of the Federal Reserve. The audit came about as a result of the determined efforts of Senator Bernie Sanders, who was successful in adding an amendment to the Dodd-Frank financial reform legislation of 2010 that mandated a top-to-bottom audit of how much the Fed had spent on bailing out the megabanks on Wall Street.

Sanders issued a statement saying this on the day the findings were released:

“The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression…The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether, some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.”

The Fed’s bailout of the giant insurance company, AIG, was, in effect, a thinly disguised bailout of the Wall Street megabanks, which received 100 cents on the dollar from AIG for the derivative trades (credit default swaps) that AIG owed the banks and would not otherwise have been able to pay.

The reality is that the Federal Reserve’s 2007-2010 bailout was conceived by Wall Street, run by Wall Street for its own benefit, and controlled behind a dark curtain at the Federal Reserve Bank of New York – which is, literally, owned by the megabanks on Wall Street. (See These Are the Banks that Own the New York Fed and Its Money Button.)

A very similar scenario played out during the repo crisis in the last quarter of 2019 when the Fed pumped more trillions of dollars into Wall Street megabanks. That crisis transitioned into the COVID-19 pandemic crisis of 2020 and beyond, which resurrected the emergency loan programs of 2008 by the Fed plus a bunch of new ones. Then there was the Fed’s emergency response to the 2023 spring banking panic that saw the second, third and fourth largest bank failures in U.S. history plus a run on uninsured deposits across the banking landscape. (See Former New York Fed Pres Bill Dudley Calls This the First Banking Crisis Since 2008; Charts Show It’s the Third.)

The Fed defines cash assets as “vault cash, cash items in process of collection, balances due from depository institutions, and balances due from Federal Reserve Banks.” As the chart above shows, cash assets at the 25 largest banks have plummeted from $2.163 trillion on December 15, 2021 to $1.5 trillion on December 4 of this year – a plunge of $663 billion.

Where is all of this cash going? Since a major part of what these federally-insured megabanks do today is trading, we suspect – but can’t say for sure – that the cash is being used in part to post cash collateral on the tens of trillions of dollars in derivative trades held by a handful of these megabanks.

Let’s look at another strange era of cash assets going poof at the megabanks. On April 8, 2015, cash assets stood at $1.398 trillion at the 25 largest U.S. banks according to Fed data at that time. By September 18, 2019, cash assets had plunged to $759 billion – a decline of 45.7 percent.

This next chart shows how the Fed responded to this cash crisis in the fall of 2019, making trillions of dollars in emergency revolving repo loans to U.S. and foreign banks.

When the names of the banks that received these trillions of dollars in cheap loans from the Fed were finally revealed by the Fed two years later, there was a complete mainstream media news blackout.  (Read our report: There’s a News Blackout on the Fed’s Naming of the Banks that Got Its Emergency Repo Loans; Some Journalists Appear to Be Under Gag Orders.)

The 2008 financial collapse was the worst economic crisis in the U.S. since the Great Depression of the 1930s. It took six years for jobs to recover; more than 10 million Americans fell into poverty; and more than 6 million families lost their homes to foreclosure. And yet, Congress has failed to reform the Fed under both Democrat and Republican leadership in the White House.

GLOBAL ECONOMIC INDICATORS:

What This Week's Key Global Economic Releases Tell Us

US

LEI

For the first time since February 2022, US Leading Economic Indicators were positive in November (post-election). With November’s gain, the LEI no longer signal an impending recession.

• "Overall, the rise in LEI is a positive sign for future economic activity in the US," said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board, adding
• "The Conference Board currently forecasts US GDP to expand by 2.7% in 2024, but growth to slow to 2.0% in 2025.“

Building Permits and Stock prices were the biggest positive contributors to the main index while ISM New Orders and the Yield Curve were still notable drags...



DECEMBER FOMC

ANNOUNCEMENT

The Federal Reserve cut rates by 25bps, as expected, to 4.25-4.5% in an 11-1 split, with Hammack voting to leave rates unchanged.

• The statement was little changed from the November meeting, but added in considering the "extent and timing" of additional rate adjustments (prev. In considering additional adjustments), Fed will assess incoming data, evolving outlook and balance of risks.
• However, the further hawkish skew came in the updated Summary of Economic Projections (SEPs) whereby the median dot plot for 2025 and 2026 FFR forecasts were lifted above expectations. Recapping, the median 2025 dot rose to 3.9% from 3.4% (exp. 3.6%), while the 2026 median rose to 3.4% (exp. 3.1%, prev. 2.9%). 2027 and longer run median dot plots rose to 3.1% (prev. 2.9%) and 3.0% (prev. 2.9%), as expected. As such, the 2025 median dot plot looks for just two cuts in 2025.
• Elsewhere, Core PCE inflation is now seen at 2.5% for 2025 (exp. 2.3%, prev. 2.2%) and 2.2% for 2026 (exp. 2.0%, prev. 2.0%). Forecasts for the unemployment rate were largely as expected, with all horizons, ex-longer run, seen at 4.3%, although 2027 was expected. In addition, and as was alluded to in the latest Minutes, the Fed lowered the repo rate by 30bps to 4.25% (lower end of FFR target, vs 5bps above lower end previously).

CHAIR POWELL PRESSER & Q/A:

• In Chair Powell's pre-prepared remarks he stated the Fed is squarely focused on two goals, and that the economy is strong, the labour market remains solid, and inflation is much closer to the 2% goal.
• Ahead of November PCE on Friday, Powell said total PCE probably rose 2.5% in the 12 months ending in November, while core PCE prices probably rose 2.8% in November.
• The Chair added that the policy stance is now significantly less restrictive, and going forward they can be more cautious, something which was indicated from the updated SEPs and statement tweak.
• In the Q&A, the distinct hawkish remark came from the first question, which accentuated hawkish market moves, as Powell said that today's decision was a "closer call", but the "right call", suggesting there was a discussion surrounding holding rates at this meeting. Powell added risks which are two-sided trying to steer between those two risks.
• Chair Powell stated that "extent and timing language" shows Fed is at or near the point of slowing rate cuts, and the slower pace of cuts reflects expectation. Powell said that cuts they make in 2025 will be in response to data and as long as the labour market and economy is solid, they can be cautious as they consider further cuts. In addition, looking to US President-elect Trump's term, Powell said some people did take a very preliminary step and incorporated conditional effects of coming policies in their projections.
• Note, one committee member sees no cuts in 2025, and one sees five 25bps rate cuts - showing a wide range of views on the Fed, but many were centered around the median.
• Continuing to look ahead, Powell said it will be looking for further progress of inflation to make those cuts, and added that from here is a new phase, and the Fed is going to be cautious about further cuts.

PHILLY FED LABOR DISCOVERY

PHILLY FED: The headline tumbled in December, falling to -16.4 from -5.5, well beneath the expected +3.0 and outside the bottom end of the forecast range, -5.1.

• US Philly Fed Business Indx (Dec) -16.4 vs. Exp. 3.0 (Prev. -5.5)
• US Philly Fed 6M Index (Dec) 30.7 (Prev. 56.6)
• US Philly Fed Capex Index (Dec) 18.8 (Prev. 24.9)
• US Philly Fed Employment (Dec) 6.6 (Prev. 8.6)
• US Philly Fed Prices Paid (Dec) 31.2 (Prev. 26.6)
• US Philly Fed New Orders (Dec) -4.3 (Prev. 8.9)

• Looking at the internals, employment and capex dipped to 6.6 (prev. 8.6) and 18.8 (prev. 24.9), respectively, while new orders and shipment fell into negative territory as they printed -4.3 (prev. 8.9) and -1.9 (prev. +4.1), respectively.
• The inflationary gauge of prices paid rose to 31.2 from 26.6, but prices received declined.
• On balance, the firms indicated an increase in employment and continued to report increases in prices.
• Looking ahead, the 6m index fell to 30.7 from 56.6, although the survey’s broad indicators for future activity continue to suggest widespread expectations for growth over the next six months.
• For the record, survey responses were collected from December 9-16th.

GLOBAL

WHAT DOES YOUR SCAN OF THE DATA BELOW TELL YOU? - THE MEDIA AVOIDS BAD NEWS!

We present the data in a way you can quickly see what is happening.

THIS WEEK WE SAW

Exp. =Expectations, Prev. =Previous

IMPORTANT MESSAGE

Due to the increasing size of the Current Market Perspective it will only now be issued Sunday AM (Yesterday) on a weekly basis. You can open it by clicking CURRENT MARKET PERSPECTIVE.

IF YOU ARE NOT ALREADY RECEIVING YOUR SUNDAY MAILING THEN ADJUST YOUR MAILING PROFILE BY CLICKING "UPDATE PROFILE" AT THE BOTTOM OF THE PAGE AND SELECT "LATEST CHARTS"

2020 VIDEOS OUTLINING THE COMING RISE IN INFLATION, STAGLFLATION & COMMODITY PRICES

THE REGULATORY STATE

RELEASED - 01-17-24 --- 212 Page Paper

$9.99 to Download

Pay-Per-View Page Link