Thursday , October 17 2019
Home / Epsilon Theory / The Right Price of Money

The Right Price of Money

Summary:
Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it. But for whatever reason these are articles that are representative of some chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be

Topics:
Ben Hunt considers the following as important:

This could be interesting, too:

Ben Hunt writes To My Fellow Billionaires …

Ben Hunt writes The Common Knowledge of Inflation

Ben Hunt writes In Chinese, the Emphasis is on the Second Syllable

Ben Hunt writes Imagine That.

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it. But for whatever reason these are articles that are representative of some chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


The Right Price of Money

Everyone knows The Price is Right rules … closest bid, without going over.

It’s the same with overnight repo.


The Federal Reserve on Wednesday sold another $75 billion in market repurchase agreements, or repos, in a continued effort to calm money markets and bring interest rates within its intended range.

The round was oversubscribed, as banks requested nearly $92 billion in overnight repos, signaling strong demand for the asset.

The bank began a streak of repo offerings last week, marking the first time such assets were sold since the 2008 financial crisis. The central bank said the offerings would continue through early October.


Well, everyone else has given their take on the recent dislocations in overnight repo markets, so here’s mine.

Overnight repo is where the interest rates that central banks SET meet the interest rates that real economic actors USE.

And when the setting of those interest rates is no longer connected to ANYTHING about the real economy …

When central bankers are cutting interest rates even as growth is robust, unemployment is at 50-year lows, and the stock market is near all-time highs …

When, to coin a phrase, They’re. Not. Even. Pretending. Anymore. …

I think this spike in demand for overnight and short-term financing is a direct result of real economic actors trying to figure out what it MEANS when interest rates are a symbolic communication to markets rather than a clearing price of money in the real world.

I know what it would mean to me.

It would mean that I want the cash, not the securities, and I’d be willing to pay up to get it.

But if the real world price of overnight money is higher than what central bankers SAY is the real world price of overnight money … well, that breaks the world.

So it can’t happen. So no matter how much demand there is for the cash instead of the securities, the Fed will provide as much cash is necessary – truly, as much cash is necessary – to satisfy that demand at the price that the Fed SAYS is the right price of overnight money.

It’s not a crisis per se. There is literally no limit to the liquidity – i.e. cash – that the Fed can and will provide. But it is absolutely indicative of a profound shift in the common knowledge – what everyone knows that everyone knows – regarding the Fed and monetary policy.

And that shift will change everything. Not tomorrow. Not the next day. Not in the form of a market “crash”. But it will change everything.

See, it’s not just Powell and Draghi and the rest of the mandarin crew who are no longer pretending that monetary policy has any impact on the real economy.

It’s us, too.

Everyone now knows that everyone now knows that central banks are powerless to impact the real economy, but are the only thing that matters in the market economy. Everyone now knows that everyone now knows that the setting of the price of money is now a disembodied symbol of governmental will, all-important to the market economy and utterly … utterly! … ignored and immaterial to the real economy.

This is the new common knowledge about central banks and monetary policy … omnipotent in market-world, powerless in real-world.

Dislocations in the overnight repo market are the first place this new common knowledge is shaking the foundations of our political/economic world. It won’t be the last.

With the 2020 election – no matter who sits in the White House – the Fourth Horseman rides into town. And there won’t be a damn thing the Fed or the ECB can do about it.

The Long Now is going to get a LOT worse before it gets ANY better.


About Ben Hunt
Ben Hunt
He is the chief investment strategist at Salient, a $14 billion asset manager based in Houston and San Francisco, and the author of Epsilon Theory, a newsletter and website that examines markets through the lenses of game theory and history. Over 100,000 professional investors and allocators read Epsilon Theory for its fresh perspective into market dynamics.

Leave a Reply

Your email address will not be published. Required fields are marked *