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Fed SLR exemption to expire March 31, 2021. Mr Market has hissy fit

Written By | Mar 20, 2021
Fed SLR

US government photo in the Public Domain.

WASHINGTON – I predicted a rocky trading day would unfold Friday, primarily due to absurdly spiking US interest rates. That rally-destroying negative was made worse by its convergence with March quarter-end quadruple witching festivities. Unforeseen, however, at least by me: Despite trainloads of money dumped on unworthy Blue States via the recently passed Porkulus Bill, and despite the Fed’s continuing easy money policies, the Fed dropped a somewhat unexpected bomb on the market Friday. The nation’s central bank confirmed that its accommodative SLR exemption would expire on schedule on March 31.


Also Read: March quadruple witching, interest rates haunt Thursday stock action


What’s an SLR?

No, SLR in this case doesn’t refer to Single Lens Reflex cameras. It’s a predictable Washington alphabet soup abbreviation for “Supplementary Leverage Ratio.” The Twin Tylers of ZeroHedge explain this latest bit of monetary arcana for the rest of us.

“The federal bank regulatory agencies today announced that the temporary change to the supplementary leverage ratio, or SLR, for depository institutions issued on May 15, 2020, will expire as scheduled on March 31, 2021.

“The temporary change was made to provide flexibility for depository institutions to provide credit to households and businesses in light of the COVID-19 event.”




Restated, this effectively means that the Fed will take away a useful punchbowl of flexibility provided to the nation’s banks a year ago to keep credit markets from choking up as a result of the WuFlu panic. Many bankers expected that this temporary lightening up on the Fed SLR monetary security rules for banks would be extended. At least until most of this nation’s increasingly counterproductive lockdown orders finally expired.

But surprise! For once, a government agency decided to do something on time. Add that nasty bank surprise to all Friday’s continuing interest rate freakout and the quadruple witching expiration of mass quantities of options and futures contract, and you got one heck of a weird trading day today.

Big banks clobbered by the Fed SLR announcement

Big banking and financial stocks bore the brunt of a nasty little decline in the Dow Jones Industrials. That average took a -234.33 point hit for a 0.71% loss on the day.

The broader based S&P 500 flirted with green ink all day, but finally threw in the towel late in the day for a miniscule 2.36 point loss (-0.06%). But, in a pleasant surprise, the badly damaged, NASDAQ rebounded. That tech-heavy average posted a 99.07 rise, good for a 0.76% gain, the opposite of the Dow’s lackluster performance.

So why did the Fed toss this nasty little surprise into today’s guaranteed-to-be-volatile stock market action? Once again, the Tylers seem to have the answer, and it involves pressure from a pair of wealthy faux-socialist Senators we sadly know all too well.

“…the Fed decided – under political pressure from progressive Democrats such as Elizabeth Warren and Sherrod Brown – to let the temporary Supplementary Leverage Ratio (SLR) exemption expire as scheduled on March 31, the one year anniversary of the rule change.

“This outcome is the one (again) correctly predicted by former NY Fed guru Zoltan Pozsar who following the FOMC said that “the fact that the Fed made this adjustment practically preemptively – the o/n RRP facility is not being used at the moment, so there are no capacity constraints yet, while repo and bill yields aren’t trading negative yet – suggests that the Fed is “foaming the runway” for the end of SLR exemption.”

Love that “foaming the runway” metaphor, BTW. Inspired bit of writing.

Let’s follow ZH to the bitter end…

“Knowing well this would be a very hot button issue for the market, the Fed published the following statement to ease trader nerves, noting that while the SLR special treatment will expire on March 31, the Fed is “inviting public comment on several potential SLR modifications” and furthermore, “Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability” – in short, if yields spike, the Fed will re-introduce the SLR without delay…”

Wall Street bulls still figuring out how to make money in this environment. But for how long?

Our portfolios actually made a bit of money today. We attribute this to our ridiculously large number of small positions scattered throughout all investment sectors. Personally, my mistrust of this Potemkin Village of an Administration and its ineptitude grows by the day. Hence, caution in all things. That tends to limit short term damage when it occurs.




As for now, the government at last seems interested in paying some attention to partially inflating us out of at least part of our continuing, post-Great Recession disaster. That could prove more beneficial than spending every waking and sleeping hour trying to defenestrate our once and future President Trump. Noticing this, stocks took some heart that this country might not come to an end yet.

Some traders now dare to imagine that the USA may continue its recognizable existence for a year or three more. At least until the community organizers and other nutcases running Capitol Hill and environs can get around to destroying our voting system and borders and doubling the life-saving tax cuts that Trump and the GOP pushed through barely more than two years ago.

But rest assured. They plan to work on their tax increase agenda ASAP. They know they need your money more than you do. Against this background, the Fed’s SLR notice today seemed to put many investors on high alert. Good idea. Skepticism may soon become a healthy attitude to take in a nation now led by a befuddled shell of a man. A man whose brain is being  overwhelmed daily by a surging tide of amyloid plaques.

But not to worry. The overpaid media hacks who helped bring us here by covering up for Slow Joe tell us all is well. Move along, folks. Nothing to see here.

And the wrap…

That said, Mr Market became a bit more worried today when the Fed announced its SLR move. So did nervous investors. They contributed to much of today’s heavy (but often option-related) selling.

Next week’s another week, of course. But we may start layering some good-til-canceled (GTC) stop orders onto already profitable positions. We all need to protect those profits we have should Mr Market decide to head for the exits sometime soon.

I’ll try to put up a column tomorrow, hopefully offering some useful investment advice. Meanwhile, have a great weekend!

 

Terry Ponick

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17