The Fed’s Balance Sheet is Out of Control — No One Cares

I talked about the period of “nothing ever happens” last week and this remains the case as the Federal Reserve is obviously bailing out markets/institutions without admitting to it.

Just today the WSJ reported the Fed injected another $86 billion of liquidity into a repo market that apparently has gone haywire and dried up.

An alert for you permanent bull faggots out there, my boy Tyler has gone all in on this story, reporting on it regularly. You might loathe him for his end of world doomsday ways, but the man knows his shit. So pay attention.

One week ago we quoted from Wilson’s latest weekly report, in which the now quasi-bullish strategist explained why he had grudgingly turned bullish, saying “we continue to see the 3 largest central banks in the world expand their balance sheets at the rate of $100B per month ($60B from the Fed, $25B from the ECB and $15B from the BOJ).” As a reminder, several years ago, Citi’s fixed income guru Matt King said that it takes $200 billion in quarterly liquidity injections across all central banks to prevent a market crash, and lo and behold we are now well above that bogey.

Wilson continued, pointing out that “as part of our year ahead outlook published a few weeks ago, we cited this excessive liquidity as a reason why we thought the S&P 500 could trade well above our bull case year end target of 3250 while this policy action persists. As of right now, it appears that the Fed, ECB and BOJ will continue at this pace through the first quarter of next year.”

The Morgan Stanley strategist then also laid out how central banks directly affect risk assets, noting that “the central bank transmission mechanism is via suppressed volatility” and ading that “the recent actions by the Fed were intended to reduce volatility in the repo market but it’s also had the effect of reducing the volatility in risk markets.” Little did Wilson know that just a few days later, the Fed would announce a record $490 billion in year-end liquidity backstops in the form of expanded overnight and term repos to avoid a year-end repo market crisis and to keep repo rates low on Monday when about $100 billion in systemic liquidity would be drained as explained previously.

It should be noted the market has been running higher in lock-step with FOMC commitments.

Morgan Stanley summarizes:

The approximately $100B/month of balance sheet expansion from the big three central banks (Fed, ECB and BOJ) is now being further enhanced by the Fed’s overnight repo operations which are expected to increase to $490B by year end. In short, we don’t expect any liquidity issues between now and year end with that kind of money flooding the system. And, while the repo operations won’t have a direct impact on risk markets, we do think the Fed’s $60B of bill purchases and the ECB and BOJ QE operations are absolutely suppressing volatility across most risk markets, including equities…

Bottom line: we no longer have a free market. It is fucking rigged to the bone. Rates are artificially low and 50% of share buybacks are being financed by debt, which is reducing share count and causing IARs to bully their clients into “cheap” stocks — which are cheap due to share buybacks. It is the biggest Ponzi scam of all time and when it blows up — you will rue the day you were conceived. Nevertheless, we’re not ready to blow up just yet. As a matter of fact, all of this rigging is bullish for stocks because the riggers are 100% in control. Alas, pay attention to the small details when said gents lose control. That will, inexorably, be discussed in greater detail inside of the hallowed halls of Exodus. Before year end, spend some of your soft dollars and join the league of Distinguished Gents.