There is no doubt, if stocks don’t stage a turnaround soon, the coronavirus could bring the U.S. economy to its knees.

But there is another entity that could cause even more panic in the markets than a virus, and that’s the Federal ReserveIn fact, the Fed has already been creating uncertainty in the markets since last September.

Back then, a sudden 10% jump in repo market borrowing costs caused panic and liquidity problems. The Fed reacted by injecting billions in cash in attempts to restore sanity (and liquidity).

Fears of a return to quantitative easing (QE) started to emerge later that month. In October, those fears were justified, even though Fed Chair Jerome Powell carefully chose the term “organic balance sheet growth” to mask the return to “QE-like” operations.

But the markets weren’t fooled

Dave Kranzler was among many people (including us) in December 2019 who thought a market meltdown was on the way, thanks to these ongoing Fed liquidity operations.

Which brings us to the end of February, where the meltdown appears to have begun on February 24, with a 3,800 point drop in the Dow Jones by the 28th. The Dow briefly recovered, only to get torpedoed again (see chart below):
fed reserve graph

Which brings us to today. Was this evaporation of billions in market value solely due to the coronavirus? Does the Federal Reserve play a key role? Or both?

The “Repo Machine” that Could Whip the Markets into a Frenzy

On Seeking Alpha, an article reveals the “machinery” that could be the main reason that the markets are more violent than a caged bear:

The Fed’s actions from September could have been a sign that a major bank was in trouble, or that they are beginning to lose control of the short-end of rates. The Coronavirus panic has therefore been a convenient excuse to extend the stimulus and liquidity provision by slashing rates towards zero.

You can see how much liquidity that the Fed has injected in the repo markets in the official balance sheet:

fred graph

As you can see, a total of about $500 billion has been injected since September 2019, which is when the Fed started the new “repo machine” back up.

The article by Kevin George finishes with a piece of advice, to read beyond the headlines:

Most importantly, investors should read beyond the headlines and consider what’s happening in the repo market. The Federal Reserve has quietly reversed the previous tapering to flood the market with liquidity, but the repo problems started before the Coronavirus was even heard of.

It sure seems like a mix of coronavirus fear and the Fed’s “repo machine” have helped to stir the recent market panic and resulting correction.

It also seems like “correction” may be the norm, for the near term, at least.

Don’t Wait Any Longer

Examine your savings, and ask yourself if they’re as diversified as you’d like for them to be. If they’re not, consider assets that can help to add some counterbalance and help to preserve some measure of stability for the months to come.

Precious metals like gold and silver could help protect your savings in case this downturn turns into the next recession.

Republished by permission of Birch Gold Group

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