Peter Schiff sees Fed capitulation where June’s skipping rate is the end of the tightening cycle and the beginning of loosening.

This is no pause or a let’s wait and see approach.

Fed chair Powell is seeing the fallout of rate hikes on bank balance sheets, and regional bank runs of the past few months and has blinked.

So squealing banks means Peter Schiff sees Fed capitulation, a trough in the central bank liquidity cycle, just as we forecasted.

It is a no-brainer, the Fed is a banking cartel, and the kingpin looks out for its members.

Powell‘s rationale for skipping a rate hike, while admitting the risks to inflation are still to the upside, doesn’t make sense. 

Powell is worried about the evolving financial crisis but doesn’t want to spook markets. So he’s done hiking, but doesn’t want to admit it,” tweeted Peter Schiff.

“Powell’s rationale for skipping a rate hike, while admitting the risks to inflation are still to the upside, doesn’t make sense”

PETER SCHIFF

Peter Schiff sees Fed capitulation in a banking liquidity crisis

So the cards are on the table. Fed’s hawkish bluff is over, as the overnight Reverse Repo hit two trillion US dollars, in late May, June, an unprecedented amount, worse than during the 2020 global lockdowns.

The REPO market provides short-term lending, often overnight borrowing for banks looking to fulfil their reserve requirements. 

Put simply, the Fed is providing banks with a historic amount of liquidity to prevent massive bank failures. Think about it. Highly liquid banks with healthy balance sheets do not need the Fed’s REPO market facility.

The fact that there is unprecedented demand for Fed’s REPO facility can be interpreted as being in the eye of the storm of a banking liquidity crisis. Moreover, banks’ record demand for REPO liquidity, which is not inexpensive finance, means that the economy is far from robust. 

“the Fed is providing banks with a historic amount of liquidity to prevent massive bank failures”

WEALTH TRAINING COMPANY

Why are banks’ balance sheets so battered?

Turn the clock back a few years, inflation was not on the radar. 

So with the 10-year treasury yields offering around one and two per cent yields, the Fed underplayed inflation and convinced the banks to buy long-maturity treasuries. The return on cash deposits was zero or near negative, in Europe, banks were charged for holding cash deposits, in a bizarre policy called negative interest rate policy. So, treasury bonds with a few percent yields had a global appeal for conservative investors, after all, treasuries were perceived as safe assets. If the Fed owns copyrights to the world reserve currency then the US government is unlikely to go broke.

Moreover, the Fed chair stood on his soapbox with a loud microphone telling everyone that US inflation was temporary, transitory, and then sticky. So a raft of believers, global conservative investors from banks, and pension funds to insurance companies, bought the ten-year treasury when yields were just above zero. 

As inflation headed higher, the Fed continued raising the Fed fund rate 10 times in 2022, which blew up the treasury market, as investors dumped long-maturity Treasuries sending yields on the 10-year smashed above 4%. 

“Global capital is attracted to the lowest-risk high-return asset”
Wealth Training Company

In less than a year, banks were sitting on sizable balance sheet market-to-market losses on the long-maturity treasury portfolio. 

Making matters worse, with Fed fund rates at around 5%, bank depositors, savers, were pulling their money out of the banks and buying directly from the treasury short-maturity six-month treasuries with 5% yields, which is better than a measly few percent interest on a cash deposit.  

Global capital is attracted to the lowest-risk high-return asset.  

So, it is no surprise that the most underreported banking liquidity crisis is in play. If the banks were to raise capital to pay their depositors by selling their long-maturity treasury portfolio acquired a few years ago, they would realise huge losses. Hence, the Fed’s Repo facility has hit a record high because conservative investors believed the Fed’s temporary inflation narrative and underestimated the maturity risks of holding treasuries.   

“We will be above the interest rate level that precipitated the 2008 financial crisis and Great Recession” – Peter Schiff

Peter Schiff sees Fed capitulation as the Fed’s hawkish charade continues

Just before the Fed’s “hawkish” rate pause Dallas Fed President Lorie Logan said she is concerned that “much too high” inflation is not cooling fast enough to allow the Fed to pause its interest-rate hike campaign in June.

The data in the coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”

Fool me once, shame on me, fool me twice, shame on you.

So the stock market shrugged off tough Fed talk, the dollar strengthened, gold fell,l and the short end of the bond market also sold off.

The FOMC did not raise rates in June and decided to keep the Fed funds rate between 5.25 to 5.5%. 

But as Peter pointed out, this would drive rates above the peak of the last cycle in June 2006.

“We will be above the interest rate level that precipitated the 2008 financial crisis and Great Recession. The difference is today that we have so much more debt than we did back then. Everybody has a lot more debt — the government, corporations, and individuals. So, that level of interest will do far more damage today than it did in 2007. And we know how much damage it did then because we had the financial crisis of 2008. So, the financial crisis that has already begun in 2023 is going to be much worse than the one that we had in 2008,” he said. 

What is the reality of Peter Schiff seeing Fed capitulation?

There is no market, as it is the Fed’s trillion-dollar game, where central bank liquidity is the main decider of where risk assets head next.

We are in the eye of the storm of a banking crisis, economic crisis and as warped as it sounds, this could be the early innings of a bull market. 

All that matters is the Fed’s balance sheet and the Fed fund rates. 

The lyrics to Metallica come to mind, “Nothing else matters.”