Our Thoughts – We are admitted cynics. We also know the order or oikonomia of things in the world of finance and economics. If you haven’t already done so, grab yourself a copy of ‘Secrets of the Temple – How the Fed Runs the Country’ by William Greider. A long, but absolutely eye-opening read. If you really want to understand what is going on, that is the one you want to get. All of this seemingly nonsensical goings-on will make at least some sense after you’re done. In the meantime, we’ll lay it out. The not-so-USFed as we like to call it does run the country as Greider intimates. Don’t let the fact that the President nominates the Chair and Senate confirms said Chair means anything in terms of checks and balances. There are none. It is why Ron Paul’s very logical pleas for an audit of the ‘fed’ fell on deaf ears. The fed couldn’t be compelled to submit to an audit under existing law and everyone knew it. Ron Paul was a genius though in that he used the Fed's responses to place more than reasonable doubt in the minds of many, many Americans that this so-called federal bank was really autonomous – and up to no good. So far so good?

So, the fed runs the country. The currency the Treasury uses and prints for that matter is nothing more than debt instruments of the not-so-USFed. Pull a bill from your wallet and there’s the proof. Right at the top. Hidden in plain sight. Who owns the ‘fed’? It’s member banks. How can we say that? Because every member bank has varying shares of preferred stock in the not-so-USFed. Those preferred shares pay 6% in perpetuity. Here’s the source for that tidbit – right from the horse’s mouth. It’s wordy, but the information is there.

Federal Reserve Act – Section 7

This means that the Goldman Sachs/JP Morgan etc cartel of crooked banks owns the central bank. The Treasury might get a few bucks here and there (see above article – Section 7), but the ‘fed’ runs the entire show. So what does this have to do with Discourteous Steve Mnuchin and his insipid remarks about the stability of the financial system? We believe that option 3 below, as written by the Atlantic is probably the closest to the truth. #1 is idiotic. A middle school in the halls of power? While some of these guys act like middle-schoolers, we’re not buying it. #2 – animal spirits? Seriously? Stricken from the record. And even if #2 were true are ‘animal spirits’ going to listen to Discourteous Steve? The markets sure didn’t listen to Haughty Hank Paulson back in 2008. What’s changed?

No, it’s #3. Financial firms are definitely teetering. Why? Go to the St. Louis Fed’s ‘FRED’ database and pull up the chart for interbank loans. Notice what happened early this year. Huh, another M3. A crucial data series killed off to save the taxpayers a couple bucks, right? And we are Santa and Rudolph. Mnuchin’s message was broadcast to the next Lehman of the world that the Treasury is on the job. These banks are levered at least as much as they were in 2007-08. We’ll pull some data for a future post. When you’re levered at 30:1 or more, what will a 20% drop in your portfolio do? Answer – kill you. Quickly. Granted every big bank isn’t invested in the Dow Industrials, but there have been large enough losses across the board to virtually guarantee a few somebodies are in trouble. DeutscheBank has been in trouble for at least 18 months now, according to some public, but not easily found information. It stands to reason there are others. There are bubbles everywhere. Not just in the US either. Some of them are bursting. Many more will burst before the cycle is over.

Beware days like yesterday. The Dow lost almost 700 points on ridiculously low volume. The timing of the holidays this year has given the powers that be almost 2 weeks without fully staffed trading desks in which to move the markets any way they like with almost no resistance. While the stock market is no longer the referendum on the economy that it once was, it is easy to see the linkage. It’s the debt, silly mallard, not a quarter point FFR increase. This robust and strong USEconomy we keep hearing about is borrowed. The push to 27,000 in the Dow was borrowed as well. Nobody learned a damn thing from 10 years ago. Keep swiping those credit cards, people, but don’t complain about the results.

Imagine having a runny nose, itchy eyes, congestion, and a sore throat, and your doctor telling you that you shouldn’t worry about cancer—she consulted her colleagues and they’re certain it is not cancer, and if it were, they could fight it.

This is roughly what happened on Sunday evening when Treasury Secretary Steven Mnuchin put out a press release on calls he held with executives from the country’s largest banks. Mnuchin’s statement assured the public that they had not been having liquidity problems or “clearance or margin” issues—the sorts of things you would worry about if the country were on the brink of a financial crisis.

The markets have been suffering from something like a nasty cold of late, with a major correction in stock prices due to rising interest rates, trade tensions, the government shutdown, and slowing global growth. But the surprise holiday readout, which came with a heads-up that Mnuchin would be holding a call with some of the country’s top financial regulators as well, unnerved and puzzled investors, bank executives, politicians, and economists. What was the Treasury secretary thinking? Who thought we were tipping into a financial panic? None of the possible explanations are very reassuring, though it seems that Mnuchin was trying to be.

Option one: The Treasury secretary was speaking to an audience of one. Mnuchin is under enormous pressure from President Donald Trump, who is upset about the market sell-off and mad at the current Federal Reserve chairman, Jay Powell. The press release was perhaps an attempt to show Trump that Mnuchin was doing something, anything, to talk the markets back into stability.

It makes some kind of squint-and-see-it sense. Mnuchin used Twitter earlier in the weekend to reassure the markets that Trump was not going to fire Powell, who has continued to tap up interest rates as the economy continues to grow at a decent pace. Mnuchin wrote that Trump told him he “totally” disagrees with Fed policy, calling it “an absolutely terrible thing to do at this time”. But he said that Trump had informed him, “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.” The readout might be a further effort to keep Trump calm by showing him that everything is fine and his Treasury is taking action.

The problem with this explanation is that it means Mnuchin risked roiling financial markets to placate his boss (which of course would only further anger his boss).

Option two: The Treasury secretary believes that the market correction is due in part to animal spirits—animal spirits he could quiet by reminding everyone that the financial system is in fine shape. Perhaps he anticipated further declines in stock prices due to the government shutdown and wanted to calm the markets.

And it is true that the sell-off remains nothing more than a sell-off, at least in most economists’ and corporate executives’ eyes—a correction, not a crisis; a cold, not cancer. Even if the bear market were a precursor to an economy-wide slowdown, that would not necessarily result in bank runs and liquidity panics and cratering financial firms.

But, again, nobody was worried about a banking panic before Mnuchin brought it up. “Can someone who understands markets please explain what Secretary Mnuchin did and why?” Brian Schatz, a Hawaii senator who sits on the banking committee, wrote on Twitter. “Because it seems like a bad look at the minimum, and maybe more concerning than that but I honestly don’t know.”

Option three: Mnuchin has some troubling insider knowledge, and he wanted to broadcast to the markets that he is aware and in charge. Maybe some financial firms are teetering? Maybe rising interest rates and falling asset prices are straining some important market participants, and it just has not yet become evident in public reports?

Whatever Mnuchin was trying to do, he did not succeed in it, instead of stoking market fears and sowing confusion. Perhaps the clearest takeaway is that Mnuchin and Trump’s Treasury lacks the expertise to communicate clearly and forcefully with the markets—no surprise, given how few experienced financial operatives Trump has hired and how many experienced non-political civil servants have fled Treasury during this administration.

If they’re communicating this poorly in the absence of a crisis, just imagine how disastrously they might perform in the presence of one.