Hawkish Bluff Rally

The hawkish bluff rally in assets has left the gate as investors shelter wealth from entrenched inflation might be in its infancy.

Staring down the double barrel of a liquidity crisis, a tsunami of bad loans, a real estate meltdown and an economy on the edge of a cliff it is hard to believe that Fed Chair Powell believes his hawkish rant about further rate hikes to tackle sticky inflation.  

By the Fed’s preferred measure of inflation, core inflation, future data could soon be touted as evidence that inflation has succumbed to restrictive monetary policy. Hawkish talk about further rate hikes could be just that talk, bearing in mind a worse liquidity crisis than the 2008 financial crisis is looming. As Darren Winters warns, this highly leveraged economy is beginning to buckle under the Fed’s current restrictive monetary policy.    

There are already signs of a liquidity crisis, banks are in trouble. The fallout in 2023 writing is on the wall. 

Here are the facts supporting a hawkish bluff rally, 

Five banks failed in 2023, according to the FDIC. 

  • Silicon Valley Bank of Santa Clara, CA, on March 10, 2023
  • Signature Bank of New York, NY, on March 12, 2023
  • First Republic Bank of San Francisco, CA, on May 1, 2023
  • Heartland Tri-State Bank, a bank based in Elkhart, on July 28, 2023 
  • Citizens Bank, Sac City, Iowa on November 3, 2023. 

Bad loans are piling up, as Wells Fargo, JP Morgan, and Citibank wrote off approximately four billion dollars in bad loans.

Moreover, Reverse Repo fell by $100 billion on November 24.

Money Market Mutual funds and banks use Reverse Repo to stash cash in highly liquid US Treasury Notes.

This allows them to receive the Fed fund rates at 0.05% APR in overnight loans in exchange for T bills and do the opposite the next day.  

Reverse Repo fell by $100 billion on November 24.

Hawkish Bluff Rally

High demand for Fed credit swap lines suggests global shortages of US dollars. The swap lines are designed to improve liquidity conditions in dollar funding markets in the US and abroad by providing foreign central banks with the capacity to deliver US dollar funding to institutions in their jurisdictions during times of market stress.  

The Fed’s discount window was set up where banks can turn to favourable rate funding under stress.  

So, restrictive monetary policy is already creating a liquidity crisis, five bank failures, and billions of dollars in bad loans.

Buoyant demand for Repo market credit, discount window credit and credit swap lines further support the view of banks requiring short-term funding to meet their daily commitments.  

The hawkish bluff rally centres on a system near the breaking point, where more rate hikes could potentially blow up prime collateral, trigger global financial contagion and a currency banking collapse

The Fed can talk as much as it likes about more rate hikes, but after five bank failures in 2023 and the worst bear market in bonds in history, they have got the message. 

Current restrictive monetary policy could already mean a tsunami of commercial and residential real estate mortgage defaults in 2024 as millions struggle to service their mortgage payments at existing interest rates.   

The parroted mainstream narrative tighter for longer could be the latest fairytale as bets are placed when rate cuts could take place in 2024, with some betting as early as March.  

A residential real estate crash is knocking on the door, with new home sales prices down 20% YoY, and existing home sales numbers collapsing to 2009 levels. Millions of home buyers who bought at the peak in the early 20s could be in negative equity. So banks could be hit with a wave of bad loans in 2024 as homeowners decide to hand the keys to the bank and default on their loans. Those with variable-rate mortgages will have seen their monthly mortgage payments increase by about 50% in this Fed tightening cycle. Fortunately for US residential homeowners, most mortgages were locked in at the lower rates but commercial real estate is all variable rate mortgages. 

Trillions of dollars of commercial real estate mortgages are being refinanced with current interest rates.

The tsunami of potential mortgage defaults in commercial real estate is worse than the 2008 subprime mortgage crisis.  

As Darren Winters points out, consumers and banks are tapped out as the economy approaches the end of 2023 on a cliff edge.  

The bet is not whether the Fed will make the next rate hike but rather when the next cut will be, which could be sooner than most anticipate.      

The hawkish bluff rally is based on a pending massive liquidity event which could force a monetary policy pivot from restrictive to easing

Every crisis offers opportunities.

The final chapter could be a monetary crisis, and if that is so tangible assets, companies offering goods and services people need are likely to do well.  

Gold hitting an all-time high could be a lack of confidence or an over-extended and exhausted monetary system in a backdrop of geopolitical instability.

It is no surprise central banks bought the most gold in one year since the World Gold Council started tracking this in 1950.

The liquidity crisis has already sparked a long, slow trickle of bank failure.

It seems a system backed by words and the belief in the competence of monetary policymakers is lacking, investors are scrambling for a liferaft, something tangible. 

Fed Head’s words may not cut it any longer, and we are seeing a hawkish bluff rally

In 2017, Venezuela’s stock market rallied 600% in 12 months. 

However, the International Monetary Fund projected earlier that year that Venezuelan inflation would be about 43,000 per cent due to a currency collapse. When the music stops in a hyperinflation currency collapse, a bar of soap is more valuable than cash.     

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