If you think interest rate cuts are coming and that will be good for the economy and the market, think again. The chart below shows the amount of money that has been printed into existence via the Fed's Bank Term Funding Program (BTFP) over the past 12 months. This raises some serious questions?
When money gets printed into existence and released into the economy via bank loans or government spending it is called QE - which adds to M2 money supply and usually causes markets to boom. However, the BTFP has not been called QE because it is actually a 12 month loan to the banks from the fed that has to be paid back. So, we can call it a type of temporary QE, where the fed prints money and gives it to the banks one day (QE) and then takes it back 12mth later and burns it (tightening).
The Fed has announced the BTFP will end on March 11. We have all seen the effect this temporary printed QE money has had on the US economy and the market over the last 12 month, but what is going to happen when this money is taken back by the fed and burned over the next 12 months?
The way the BTFP chart is spiking up, we can expect another $100b to $500b to be printed (QE) before it ends. Sugar hit? Volatile markets? Maybe?
Another thing is the colateraleral used for the BTFP loan is valued at par (purchase price) and can be mortgage backed securities (e.g. commercial real estate). So, there is the reason why no banks have failed so far. But when these fed loans come due, the banks will not be able to refinance these bad assets to repay the loan and will go broke.
So, the fed knows exactly which banks will go broke and when and its all going to happen over the next 13 months. The banks must know this and will already be reluctant to lend to other banks - because they do not know exactly who is exposed to all this bad debt. This means the whole thing is primed for another GFC and the "Lehman Bros" event is likely to be the first bank that goes broke.
What makes this GFC different to the last one is the size and scale of the crisis - because the problem is not just with the US banks, its global and involves trillions and no one knows if their money is safe or not.
The big question for us is, how do we navigate this crisis? What to do with your money and the timing is always to difficult part?
(20min delay)