The Fed Rebuilds the System


Rube Goldberg machinecontraptioninventiondevice, or apparatus is a deliberately over-engineered or overdone machine that performs a very simple task in a very complicated fashion, usually including a chain reaction.

As tax receipts have plowed in and the deficit has adjusted downward, the deluge of T Bills that was associated with the crisis and the budget has ebbed back. This has been met with a logical uptick in the "testing" circle jerk of the Fed's Death Star. Usage has popped to 200B of late but could drop off again this Summer. The entire money market is evolving into an elaborate Fed napkin wiping machine. As Vince Foster said in a conference call today, "The Fed is becoming the money market."

The idea that all this complexity is benign, or more importantly, easily explained is silly. The concept of the Death Star as a "policy tool" is for tools only. Banks will never bid for deposits they don't need and don't want. Someday, somewhere a Fed watcher will realize that the Fed will HAVE TO sell some "stuff." If I were Janet, I would opt for dumping some Notes on the system while people seem to want them and the "extended period" language still has weight.

Practitioners have reduced their risk management to the accepted time line of Fed rate hikes. We think this is a huge blunder. The market is at the acme of last Spring's bond rout. Pundits are hyping the TLT with arguments much more valid to last JUNE ! The truth is the Fed's monopoly will not be able to set both the quantity and the price of its "good." The exotic napkin device formerly known as The Death Star will prove unnecessary and inefficient. Note Traders and Navel Gazers will slowly contemplate 1.5% 5s and 2.7% 10s in a 4% GDP environment.

The fireworks around the 4th of July will be in rates.

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