Author Archives: Nomi Prins

U.S. GDP Could Get Hammered

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February is half over, and we’re that much closer to spring.

As far as the markets go, this past week has been driven by a lackluster set of new economic data and heightened concerns about whether the coronavirus is contained or not, whether the Chinese have downplayed the figures or not and what the real economic impact in China and around the world might be.

But we could already be feeling the effects here at home…

The latest information reveals that consumer spending dropped substantially in January. And core retail sales dropped off.

Clothing sales, for example, dropped 3.1% last month. That’s the largest month-over-month decline since March 2009.

U.S. factory output also slackened. Manufacturing output slipped 0.1% from December, mostly due to Boeing’s ongoing production halt for the 737 Max.

Export demand is also a source of concern, as the coronavirus could affect critical supply chains and hamper demand in the weeks and months ahead.

Meanwhile, weak corporate investment could also put a drag on growth.

All these factors may combine to put a big dent in this quarter’s growth…

A new CNBC survey of 11 economists projects that first-quarter 2020 GDP growth will drop dramatically to 1.2%, far below the 2.1% rate from Q4 2019.

A Bloomberg survey is somewhat better, but not much. These economists project a 1.5% growth rate.

While these numbers are weak, economists surveyed by Bloomberg don’t believe the Fed will be cutting rates soon. But they do believe the drop-off in personal consumption makes the economy vulnerable to “exogenous shocks”:

While the economic outlook remains strong enough for the Fed to keep interest rates on hold, personal consumption moderating from last year’s robust pace makes the economy vulnerable to exogenous shocks, such as the halt in production at Boeing and potential supply chain disruptions stemming from the coronavirus.

Since consumer spending is about 70% of GDP, a downturn in spending could hit the U.S. economy hard.

Federal Reserve Chairman Jerome Powell spoke at his regularly scheduled testimony before Congress this week.

What did he have to say?

The upshot was he reconfirmed the fact that the coronavirus would have an economic impact, but it was too soon to tell the extent of it. So he left it as an excuse, in my opinion, to ease policy if needed down the road.

If the coronavirus threat continues into the second quarter and beyond, he may not have a choice.

What about the ongoing trouble in the “repo” market?

When you add up all the Fed’s support for the “repo” market since September, it comes to over $6.6 trillion.

When pressed by Congress about whether he saw financial risks in the banking system, he pointed to how well the Fed’s bank stress tests have been working.

That’s great, but it seems the liquidity issues are getting worse, not better. The Fed’s latest repo operations were three times oversubscribed, meaning the demand for fresh funding in the repo market far exceeded the supply.

Although the Fed won’t make the information publicly available, the ongoing problems suggest that one or more trading houses on Wall Street are having problems.

The Fed has basically said these loans will continue “at least” through April. But they could continue longer. At the going rate, total loans would reach $29 trillion by the middle of the year.

That would equal the $29 trillion bailout the Fed handed out between 2007 and 2010.

When you add everything up, the economic effects from the coronavirus coupled with ongoing problems in the repo market, things can get really shaky this year.

Regards,

Nomi Prins
for The Daily Reckoning

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Bigger Isn’t Better

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What caused the overnight lending market to unexpectedly seize up in September? There’s a good reason to believe JPMorgan Chase (JPMC) may have been at the heart of it.

JPMorgan Chase is the largest bank in the U. S., and has about $1.49 trillion in deposits. It’s one of the big banks that provide much of the loans in the overnight money markets.

But it seems the mega-bank had gone on a stock buyback spree from January through September of this year.

Buybacks, which are designed to boost stock prices, have been enabled for years by the Fed’s artificially low-interest rates. Corporations, in fact, have been the largest purchasers of stocks, which is heavily responsible for the bull market that’s now over a decade old.

According to the SEC, JPMC has spent about $77 billion on buybacks since 2013. But the money JPMorgan Chase used for buybacks on its most recent buyback binge was, therefore, unavailable to be loaned out in the repo market.

This information is from the bank’s annual SEC filing (hat tip to the Wall Street on Parade blog):

In 2019, cash provided resulted from higher deposits and securities loaned or sold under repurchase agreements, partially offset by net payments on long-term borrowing… cash was used for repurchases of common stock and cash dividends on common and preferred stock.

That diversion of money likely contributed to the liquidity crunch, which forced the Fed had to intervene in order to make up the difference.

Here’s how Wall Street on Parade sums it up:

Had JPMorgan Chase not spent $77 billion propping up its share price with stock buybacks, it would have $77 billion more in cash to loan to businesses and consumers — the actual job of its commercial bank. Add in the tens of billions of dollars that other mega banks on Wall Street have used to buy back their own stock and it’s clear why there is a liquidity crisis on Wall Street that is forcing the Federal Reserve to hurl hundreds of billions of dollars a week at the problem.

But altogether, JPMorgan has actually withdrawn $158 billion of its liquid reserves from the Fed in the first half of this year. That’s an extraordinarily large amount of money to withdraw in such a short amount of time, as my friends at Wall Street on Parade point out. That’s bound to have an effect on the market.

And that’s what we’ve seen.

Of course, JPM is one of those Wall Street banks that are “too big to fail.” It’s the largest commercial bank in the nation, with $1.6 trillion in deposits.

But it’s not just JPM.

It’s just one part of a system rigged in favor of Wall Street that has been deemed too big to fail. It’s a corrupt and incestuous system filled with perverse incentives and conflicts of interest. Here’s an example…

82% of bank analysts on Wall Street recently gave Citigroup stock a “buy” rating. What you didn’t hear reported on CNBC or Fox Business News is that the major banks they work for — like JPM, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS and Bank of America — have strong incentive to recommend Citigroup.

That’s because all the major banks are interconnected through derivatives. And weakness in one bank could spill over into the others. So it’s not a level playing field at all. It’s tilted in favor of the big banks.

But as one observer asks, “Why should any Wall Street bank be allowed to make research recommendations on stocks and then trade in those very same stocks?”

It’s a corrupt system designed by insiders for insiders. I should know because I used to be one of them.

I worked at four of the world’s major banks for a decade and a half until I finally had enough and walked away. Two of the four banks I worked for, Bear Stearns and Lehman Bros., were destined to implode.

That’s because they overleveraged themselves, taking on too much debt to bet on risky credit instruments. These credit instruments included subprime loans, credit derivatives and Wall Street’s version of a debt buffet called CDOs, or collateralized debt obligations.

It’s now been over a decade since the world’s major central banks reacted to the financial crisis with record-low interest rates and quantitative easing.

Today the big banks are bigger than ever and the amount of debt in the system is larger than ever. There’s been no substantial reform since the financial crisis, just some cosmetic moves that have been passed off as major reform. The big banks are always ahead of the regulators.

My research for my book Collusion: How Central Bankers Rigged the World revealed how central bankers and massive financial institutions have worked together to manipulate global markets for the past decade.

Major central banks gave themselves a blank check with which to resurrect problematic banks; purchase government, mortgage and corporate bonds; and in some cases — as in Japan and Switzerland — buy stocks, too.

They have not had to explain to the public where those funds are going or why. Instead, their policies have inflated asset bubbles while coddling private banks and corporations under the guise of helping the real economy.

The zero-interest rate and bond-buying central bank policies that prevailed in the U.S., Europe and Japan were part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks.

It has, in turn, created asset bubbles that could explode into an even greater crisis the next time around.

The world’s debt pile sits near a record $246.5 trillion. That’s three times the size of global GDP. It means that for every dollar of growth, the world is borrowing three dollars.

Of course, this huge debt pile has done very little to support the real economy. Even the IMF now admits that global central bank policies to lower interest rates in order to stave off immediate economic risks have made the situation worse.

Their actions have led to “worrisome” levels of poor credit-quality debt as well as increased financial instability.

The IMF noted that 40% of all corporate debt in major economies could be “at risk” in the event of another global economic downturn, with debt levels greater than those of the 2008–09 financial crisis.

That huge pile of debt is basically the kindling for the next financial fire. We’re just waiting for the match to light it.

So today we stand near — how near we don’t yet know — the edge of a dangerous financial conflagration. The risks posed by the largest institutions still exist, only now they’re even bigger than they were in 2007–08 because of the extra debt.

It’s not sustainable. But that doesn’t mean the central banks won’t try to keep it going with monetary easing policies in place.

It could work for a while, until it doesn’t.

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The Fed Gets Blindsided… Again

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The big news this week was that the House of Representatives impeached President Trump for abuse of power and obstruction of Congress.

Trump now joins Andrew Johnson and Bill Clinton as the only U.S. presidents to be impeached (Nixon resigned before he could be impeached).

Now it goes to the Senate for trial. But there’s virtually no chance the Senate will convict Trump on the charges, given the Republican majority.

The market has completely shrugged off the news. The stock market is up today, which tells you it doesn’t fear political instability or expect anything to come of the impeachment process.

But the real market story right now on Wall Street has to do with the Fed, and it’s not getting anywhere near the attention it deserves.

Since September, the Fed’s been pumping in massive amounts of liquidity into the “repo” markets to keep the machinery of the financial system lubricated.

So far, the figure stands at about $400 billion. But it’s showing no signs of slowing down.

The Fed has now announced it will provide an additional $425 billion of cash injections into the repo market as the year draws to a close on concerns that funding could fall short into year’s end.

And Jerome Powell has admitted these injections will continue “at least into the second quarter” of 2020.

What does all this bailout money say about the health of the money markets?

And that’s really what it is — a bailout. Without Fed intervention, liquidity in these markets would have dried up.

But the Fed’s massive liquidity injections are basically a Band-Aid on the real problem.

There’s plenty of liquidity in the market right now. The real problem is that the big banks, the 24 “primary dealers” who have direct access to the Fed’s liquidity, aren’t lending the money out like they’re supposed to.

They’re sitting on it, which is depriving other banks and financial institutions of the short-term funding they need.

Part of it has to do with regulations that require these banks to hold a certain amount of reserves, so they’re reluctant to lend them.

But it’s also because these banks can earn more on their money by parking their reserves at the Fed than they can lending it out, which pays very little interest.

Here’s what one portfolio manager, Bryce Doty, says about it:

The big banks are just hoarding cash. They told the Fed they have more than enough cash in excess reserves to meet regulatory issues, but they prefer having money at the Fed where they can still earn 1.55%, rather than in the repo market.

So, until that situation changes, there’s no reason to expect that the Fed’s support will go away anytime soon.

But if you ask New York Fed head John Williams, everything’s just hunky-dory.

He says it’s all “working really well.” But the Fed is having to expand its balance sheet at the fastest pace since the first round of QE began in December 2008.

It’s gone from $3.8 trillion in September to over $4.07 trillion today. And it’s going higher.

Would all this be necessary if the system were working well?

The Federal Reserve’s Board of Governors recently published its annual Supervision and Regulation Report, which measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.

How did the banks grade?

Overall, the board concluded that 45% of U.S. banks with more than $100 billion in assets merited a rating of “less than satisfactory.”

Tellingly, the report did not say which banks have these less-than-satisfactory ratings. It doesn’t want to make any real waves, after all. The entire system depends on confidence.

Of course, the Fed didn’t see problems in the repo market coming at all. They never do. All they ever do is react and pretend that they have everything under control.

Basically, the Fed was blindsided… Again.

But they don’t have everything under control or they would have seen the problems coming and maybe done something about it.

Continued problems in the repo market may mean the Fed could launch another round of official quantitative easing in the very near future, possibly as soon as early January.

The good news for the markets is that the Fed’s liquidity injections have helped boost stocks to record levels again.

The Fed is basically handing investors a Christmas present. Unfortunately, most people on Main Street don’t realize it. The present’s being put under the tree this year (and maybe next) won’t last. They can’t.

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Dark Money Will Push Gold Higher

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Even though it’s on rate-cutting hold, the Fed nonetheless keeps engaging in aggressive oversubscribed repo ops, or as we like to call the process, “QE4R.”

QE4R involves offering money to banks in return for short-term U.S. Treasury and mortgage bonds, in shades of 2009.

The fact that the Fed is expanding its balance sheet through these repo operations allows it to pretend it is merely auctioning “adjustment-based” policy moves, rather than problem-based ones, to keep rates from rising and money becoming too expensive for banks.

This provides the Fed a kind of cover during which it can hold off on rate cuts until it deems that data clearly suggest they do otherwise.

Regardless of the reasons for QE4R, this new flow of dark money has the ability to stimulate the stock and bond markets — along with gold. Although gold prices have rallied on the back of the Fed’s recent balance sheet growing exercise, gold has been rising less quickly than it did during the initial phases of QE in the post-financial crisis period from 2009 through 2011.

However, the stock market has been rising steadily (with some bumps along the way) since the start of the Fed’s QE4R operations. There are several reasons for this phenomenon.

Computer algorithms, ETF-related trading and asset managers for pensions and other forms of retirement funds seeking yields above those of bonds have pushed the market up. So have corporate stock buybacks. There is also the steadfast (and proven true) belief that the Fed will step in whenever it “has to,” as would other central banks around the world.

There’s a reality behind the dark money-infused market euphoria, though. It’s that U.S. economic growth, as well as that of the global economy, has been slowing down and will likely continue to slow.

Shrinking corporate profits in conjunction with lower rates and increased debt loads is not a classic recipe for a prolonged bull market. The fact that bulls continue to run is a mark of just how much dark money can keep markets elevated.

In the past, slowing profits along with more debt and cheap money has more closely reflected a bear market (consider the U.S. stock market in 2000–02, 2007–09 and the Japanese stock market since 1989). Japan’s stock market would be even lower were it not for various QE and ZIRP moves by the Bank of Japan.

U.S. corporate margins may well have already hit a multiyear peak. As we head toward the 2020 U.S. election, it’s hard to see many corporations diverting their debt loads into R&D or investment programs. This could hold true after the elections regardless of which political party wins.

Another reason that the Fed began QE4R is the global shortage of U.S. dollars in money markets. This also happened at the start of the financial crisis in 2008.

The last thing Fed Chairman Jerome Powell wants under his stewardship is a repeat performance. Repo lending rates spiked in September because of this shortage and liquidity problems at the big banks. This continues to this day, as evidenced by the Fed’s term repo lending facilities being often oversubscribed by the largest Wall Street players.

Since Monday, the Fed has pumped $97.9 billion into the market in two parts. One was through overnight repurchase agreements of $72.9 billion. The other was through 42-day repos. The result is that the Fed’s balance sheet has topped the $4 trillion mark and looks to rise from there.

Also, the Fed again increased the amount of short-term cash loans it plans to offer banks to ensure rates remain stable. It now plans to offer $25 billion in cash loans for the 28-day period ended Jan. 6, up from $15 billion previously.

Last week, it increased the size of its 42-day facility for the period ended Jan. 13 by $10 billion, too. This was also based on its recent bank supervisory findings that 45% of U.S. banks holding more than $100 billion in assets have supervisory ratings that are less than satisfactory.

All of this means that the Fed’s easing this year was very much a defensive maneuver. And it continues to act pre-emptively against the potential for a dollar funding squeeze as derivative-trading banks close their books into year-end 2019 through its repo operations.

Though different from the longer-term QE operations the Fed actioned between 2009–2014 that inflated stock, government and corporate bond prices, the result is the same. An artificial stock market rally. And more debt.

The big difference is all of this money manufacturing is now occurring against a backdrop of economic weakness and trade-war and geopolitical uncertainty.

For now, and heading into 2020, there remain six key economic trouble spots in the U.S. alone:

  1. Trade Wars. China trade talks are still going nowhere specific. President Trump has threatened to “raise the tariffs even higher” on Chinese imports if a trade deal cannot be reached by Dec. 15 and went so far as to indicate that he’d be fine if a deal didn’t occur until after the 2020 election. So “phase one,” which was announced over a month ago, has made no real progress…keeping markets knee-jerking on any positive or negative rumors.
  2. U.S. household debt at a high of $14 trillion — $1.3 trillion higher than its prior peak in Q3 2008. This could eventually hurt consumer appetites and dampen U.S. GDP.
  3. U.S. GDP is growing but decelerating. In this 11th year of expansion and easy monetary policy, the expansion may be longer, but it’s also shallower that past expansions.
  4. U.S. $20 trillion national debt is at 104–105% of GDP, having passed 100% in Q3 2012. Though Jerome Powell has stressed to Congress that it must find a way to fix this, the Fed continues to be the largest buyer of U.S. Treasuries, thereby pushing the problem forward of debt growing faster than the economy.
  5. Money supply (M2) has grown since the 1980s, but money velocity (VM2) has declined since 1997, particularly since the financial crisis. That means that local businesses aren’t working together enough to stimulate the foundation of the U.S. economy.
  6. Ongoing quest for risky assets could backfire. These problems were created by central banks. The longer rates are low, the more risk asset managers — i.e., investment funds, pensions funds and long-term insurance companies — take on to meet liabilities. This is exacerbated by slowing economies and means more global exposure to credit and liquidity risk. This increases the underlying instability in the international markets.

Given all of this backdrop, I believe that markets will continue to rally on the back of dark-money operations with volatile periods. However, gold is increasingly an attractive safe-haven investment.

Thus, it’s only a matter of time before gold has a catch-up rally.

Regards,

Nomi Prins
for The Daily Reckoning

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The Fed Is on High Alert

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It’s hard to believe the end of the year is upon us and 2020 is right around the corner.

In many ways, it went by very quickly. For economies and markets, it was a year marked by uncertainty over economic slowdowns, trade wars and a complete pivot in “dark money” policy initiated by the Federal Reserve and subsequently followed by other central banks around the world.

Notably this year, it wasn’t just the major nations that engaged in copycat monetary policy easing. It was a plethora of emerging-market central banks jumping on the same dark money bandwagon.

So as we head into the final FOMC meeting of the year next week, we know one thing for certain: The Fed won’t be cutting rates this time. And it’s recently used some fairly hawkish language.

But reinforcing the dovish outlook it adopted at the start of the year that precipitated three 2019 rate cuts, the Fed remains on high-alert mode.

There are two clear signs why…

First, the Fed keeps creating and dumping money into the front end of the U.S. yield curve through repo operations that it initiated in September.

How healthy is the banking sector overall?

The Board of Governors of the Federal Reserve System recently published their annual Supervision and Regulation Report.

The report measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.

Overall, 45% of U.S. banks with more than $100 billion in assets received a supervisory rating of “less than satisfactory.”

That’s not good. As we learned during that crisis, the stability of these large banks is essential to the health of our banking system.

Tellingly, the Federal Reserve report does not say which banks have these less-than-satisfactory ratings.

This should not sit well with hardworking Americans who bailed out many banks during the last crisis in 2008.

When bank lobbyists keep pushing for more deregulation, remember what happened a decade ago with bank bailouts and a market crash.

I would argue that we need more regulation, not less, if banks continue to receive less than a “C” grade on their report cards.

The second indication the Fed is in high-alert mode is because of its language. It continues to note possible risks coming from more economic slowdowns and further strains due to trade wars.

Just this week, President Trump re-slapped steel and aluminum tariffs on Brazil and Argentina, accusing them of devaluing their currencies and thereby hurting U.S. farmers. Though that segue might seem complex and Brazil is supposed to be a friend of the U.S., the takeaway is simple.

The White House reserves the right and the practice of trade war tactics, which will continue to insert uncertainty and thereby hamper investment and economic planning around the world. Not to mention lower overall trade and benefits of the global supply chain.

Last year, when the Fed raised rates in December, the markets greeted the move with disdain. This caused the Fed to do a quick about-face in January.

We could see a similar story unfold next year. If we get a terrible December like we did in 2018 or at the end of 2015, the Fed might be more likely to consider cutting rates in the spring.

Meanwhile, other countries are continuing to cut their rates or otherwise finding ways to inject liquidity into their local markets. This remains particularly true of developing countries.

Regards,

Nomi Prins
for The Daily Reckoning

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How to Slice Your Cell Phone Bill in Half

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Can you name any other cell phone providers other than AT&T, Verizon, Sprint or T-Mobile?

If you can’t, I don’t blame you. The ‘Big Four’ have dominated the mobile provider space for decades.

And with their dominance, they’ve been able to dictate the price of your monthly phone plan. The average starting price of an unlimited plan within the Big Four is now $68.75 a month.

Notice I said “starting” price. J.D. Power reports the average monthly cell phone bill last year was $157 up from $149 the year before.

The only good news is the price of smartphones seems to be going down. The average selling price of a smartphone worldwide has gone from over $300 in 2010 to $215 this year, according to Statista.

Even last week, the highlight of Apple’s keynote event at its corporate campus in Cupertino, California was the cheaper iPhone 11 ($699).

It’s the first cheaper new iPhone to launch since 2016.

If you look at your budget, not far behind your mortgage, car, and grocery bill is your phone bill. Too many Americans are overpaying for cell phone service these days.

Here’s how to cut your bill in half and still get great service.

Look Beyond the Big Four

If you’re not bound by a contract, then I recommend shopping beyond the Big Four service providers.

Cricket — which runs on AT&T’s network — offers unlimited plans starting at $50 a month after their autopay discount. And, like other smaller carriers, Cricket’s price includes taxes and fees, so there are no hidden fees when you get the monthly bill.

Making the move, could save you over $200 a year compared to AT&T’s unlimited plan. Plus, you typically get to keep your old number too.

Other cheaper carriers to consider are: Metro by T-Mobile (formerly Metro PCS), Ting, Consumer Cellular, Straight Talk Wireless, Walmart Family Mobile, and Republic Wireless.

Most of these budget carriers still run on the Big Four’s network towers so you don’t have to worry about losing coverage.

Pay for What You Actually Need

Another cost saver is simply looking at how much data, minutes, and text messages you use each month and choosing a more appropriate plan. Most people don’t need unlimited data.

The average person, including younger demographics, uses about 5.8GB per month, according to market research firm NPD Group. I suggest looking at your last three month’s bills and figure out how much data you actually use.

If you’re using 5GB or less, stick to a fixed data plan. A lot of budget carriers like the ones mentioned above, offer cheaper monthly plans with 8GB of high-speed data.

Go Prepaid

If you’re really on the fence about switching carriers, consider at least changing your plan to prepaid. Switching to a prepaid carrier can cut your monthly phone bill in half without sacrificing coverage.

The Tax Foundation found that, in 2017, taxes, fees and surcharges made up a full 18.5 percent of the average customer’s wireless bill.

When you move to prepaid, you typically avoid paying many of these fees. AT&T has a prepaid unlimited plan starting at $50 per month for one line and Sprint has a $60 prepaid unlimited plan.

Meanwhile T-Mobile and Verizon offer prepaid unlimited plans for $50 and $65 a month, respectively. You’d be saving anywhere from $15-20 a month compared to these carrier’s similarly priced postpaid unlimited plans.

At the very least, there will be no surprise costs. Because you pay for your service upfront, you don’t have to worry about overage charges.

Rethink Insurance

Most carriers offer premium protection plans. These plans can include extended warranties on your device, 24/7 tech support and insurance in case your device gets damaged or lost.

In most cases, whatever the basic insurance plan offered is should be enough coverage. It’ll protect you in case your phone breaks, gets stolen or you lose it.

This should cost you around $10/month. After a year, consider dropping protection altogether. Mark a date in your calendar and cancel it. Why? The replacement cost of your phone should go down significantly after one year.

Take Advantage of Autopay

The last tip I want to give you is to sign up for autopay if you can. Most wireless carriers will slash $5 to $10 off your bill if you sign up for automatic payments. T-Mobile, for instance, will knock off $5 per line. If you’re a family of four, that’s $20 a month in savings just by switching to autopay.

It’ll depend on your carrier, but it’s best to link a credit card versus your checking account or debit card. That way the money is not gone from your account, just in case you have to dispute any bills.

Follow these five tips and you’ll significantly cut your cell phone bill down.

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Expect Buybacks to Sustain Markets

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With uncertainty swirling around the financial markets right now, many are warning about a financial storm brewing and how to navigate through it.

Let’s consider the storm elements in the world right now. The ongoing trade war is obviously a major concern, which is nowhere near being resolved. Growth is slowing in many parts of the world and central banks are preparing to begin cutting rates again.

Geopolitical tensions are also rising again, especially in the Persian Gulf. Late last week, Iranian forces seized a British-flagged tanker in the Strait of Hormuz, one of the world’s most important chokepoints. Britain has demanded the ship’s release.

On the U.S. domestic front, we are facing government dysfunctional, trade war uncertainty and a looming debt ceiling deadline. A deal will likely be reached, but that is not a guarantee. If a deal isn’t reached, the federal government would run out of money to pay its bills.

That’s why you should consider the tactics of Warren Buffett along with the strategy used by some of the most skilled sailors.

Buffett, one of the most successful investors in history, has made billions by knowing how to steer through storms. One of my favorite Buffettisms has to do with keeping your eye on the horizon, a steady-as-she-goes approach to investing. It also happens to relate to sailing.

As he famously said, “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.”

What that means is that you should carefully consider what’s ahead and choose your course accordingly. Buffett doesn’t strive to be a hero if the risk of failing, or crashing against the rocks (in sailing lingo), is too great.

In a storm, there are two possible strategies to take. The first one is to ride through it. The second is to avoid it or head for more space in the open ocean. In other words, fold down your sails and wait it out until you have a better opportunity to push ahead.

While there is no perfect maneuver for getting through a storm, staying levelheaded is key.

We are at the beginning of another corporate earnings season, which is the period each quarter when companies report on how well (or poorly) they did in the prior quarter.

The reports can lag the overall environment but still give insight on how a company will be positioned in the new quarter. But to get the most out of them requires the right navigation techniques.

This season’s corporate earnings results have been mostly positive so far. But what you should know is that Wall Street analysts always tend to downplay their expectations of corporate earnings going into reporting periods. That because corporations downplay them to analysts. It’s Wall Street’s way of gaming the system.

When I was a managing director at Goldman Sachs, senior members of the firm would gather together each quarter with the chairman and CEO of the firm, Hank Paulson, who went on to become the Treasury secretary of the United States under President George W. Bush.

He would talk with us about the overall state of the firm, and then the earnings figures would be discussed by the chief financial officer.

This would be just before our results were publicly disclosed to the markets. There was always internal competition amongst the big investment banks as to what language was being provided to external analysts about earnings and how the results ultimately compared with that language.

You couldn’t be too far off between “managing expectations” of the market and results of the earnings statements. However, there was a large gray area in between that was exploited each quarter.

When I was there, it was very important for Goldman to have better results than immediate competitors at the time like Morgan Stanley, Merrill Lynch or Lehman Bros.

It was crucial to “beat” analysts’ expectations. That provided the greatest chance of the share price rallying after earnings were released.

The bulk of our Wall Street compensation was paid in annual bonuses, not salaries. These bonuses were in turn paid out in options linked to share prices. That’s why having prices rise after fourth-quarter earnings was especially important in shaping the year’s final bonus numbers.

Here’s what that experience taught me: There’s always a game when it comes to earnings.

Investors that don’t know this tend to get earnings season all wrong. However, successful investors that take forecasts with a grain of salt will do better.

Years later, I realized this was also Warren Buffett’s approach to analyzing earnings. As he has told CNBC, “I like to get those quarterly reports. I do not like guidance. I think the guidance leads to a lot of bad things, and I’ve seen it lead to a lot of bad things.”

We’ll have to see how earnings season turns out. But good or bad, markets are finding support from the same phenomenon that powered them to record heights last year: stock buybacks.

Of course, years of quantitative easing (QE) created many of the conditions that made buybacks such powerful market mechanisms. Buybacks work to drive stock prices higher. Companies could borrow money and buy their own stocks on the cheap, increasing the size of corporate debt and the level of the stock market to record highs. Corporations actually account for the greatest demand for stocks..

And a J.P. Morgan study concludes that the stock prices of U.S. and European corporations that engage in high amounts of buybacks have outperformed other stocks by 4% over the past 25 years.

Last year established a record for buybacks. While they will probably not match the same figure this year, buybacks are still a major force driving markets higher.

And amidst escalating trade wars and all the other concerns facing today’s markets, executing buybacks makes the most sense for the companies that have the cash to engage in them. If companies are concerned about growth slow downs in the future, there is good reason to use their excess cash for buybacks.

What this means is that the companies with money for buybacks have good reason to double down.

As a Reuters article has noted, “the escalating trade war between the United States and China may prompt U.S. companies to shift money they had earmarked for capital expenditures into stock buybacks instead, pushing record levels of corporate share repurchases even higher.”

So buybacks could prop up the market through volatile periods ahead and drive the current bull market even further.

Of course, buybacks also represent a problem. They boost a stock in the short term, yes. But that higher stock price in the short may come at the expense of the long run. It’s a short-term strategy.

That’s because companies are not using their cash for expansion, for R&D, or to pay workers more, which would generate more buying power in the overall economy. Buybacks are not connected to organic growth and are detached from the foundation of any economy.

But buybacks could keep the ball rolling a while longer. And I expect they will. One day it’ll come to an end. But not just yet.

Regards,

Nomi Prins
for The Daily Reckoning

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Why Powell Might NOT Cut Rates

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The market’s been bouncing around lately, anxiously waiting to see it the Fed cuts interest rates next week. All indications now suggest that it will. The question is by how much?

Minutes from June’s Federal Open Market Committee (FOMC) meeting that were released earlier this month indicated support for a rate cut. Certain committee officials noted that as long as uncertainty still weighed on its outlook, they would be willing to cut rates.

And during his much-awaited biannual testimony before the House Financial Services Committee, Federal Reserve Chairman Jerome Powell hinted — strongly — that a rate cut was around the corner.

Powell told the committee, “It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”

But the subsequent release of better-than-expected June employment figures complicated the matter of rate cut size and timing.

They raised the possibility that those positive jobs numbers would keep the Fed from cutting rates. After all, it doesn’t make a lot of sense to cut interest rates when the job market is so hot and unemployment is at 50-year lows.

But despite that concern, markets are still placing the odds of a rate cut of 25 basis points at 100%, with lower expectations for a 50 basis point cut.

This means a rate cut is already “baked into the cake.” However, the risk is that if Jerome Powell and the FOMC don’t cut rates next week, it could cause a sharp sell-off.

We’ll have our answer next week. But despite the overwhelming market expectations for a rate cut, I think there’s a chance the Fed won’t cut rates yet. That’s because Powell may still want to signal the Fed’s ability to act independently from White House pressure.

I realize that puts me in the extreme minority. But that’s OK, it certainly isn’t the first time.

But there’s something else going on right now that could trip up markets.

Earnings season is underway. Over the next few weeks, all of the S&P 500 companies will be rolling out their earnings figures. And more than a quarter of them will report earnings this week.

Firms from Google’s parent company, Alphabet, to Amazon, McDonald’s and Boeing are among the more than 130 companies that are reporting.

Even with a rate cut, poor corporate earnings could spell trouble for stocks. The trade war would be partly responsible. Certainly, there remains no resolution on the U.S.-China trade war front. And the trade war combined with slowing growth could amplify the effects of weak earnings.

As one article reports, “Stocks could struggle if the earnings message from corporate America focuses on the murky outlook for the economy and negative impacts from the trade wars.”

Earnings so far have been positive, but that can be misleading. That’s because second-quarter earnings expectations were kept low so that corporations could easily beat them.

Their actual earnings may not be underwhelming. But if they beat expectations, that’s all that counts.

And as I learned on Wall Street, corporations often talk down their earnings estimates in order to set a low bar. That way they can easily beat the forecast, which produces a jump in the stock price.

As Ed Keon, chief investment strategist at QMA explains:

No matter what the economic circumstances are, no matter what the backdrop is, there’s this dynamic that companies like to lowball and analysts like to give them headroom. The fact that numbers are coming in better than expected — it’s been the case for decades now.

Of the 114 companies that provided second-quarter guidance as of last week, 77% released negative forecasts, according to FactSet.

But it’s still early and there’s a long way to go.

Most industrial companies haven’t reported earnings yet. And they could reveal extensive damage from the trade war. As CFRA investment strategist Lindsey Bell says:

As we get more industrials in the next couple of weeks, I think that will create more volatility and drive the market lower in the near term… Chemicals and metals are two areas where I expect pressure.

We’ll see. But if markets do stumble, you can expect the Fed will be ready to cut rates at its meeting in September. That means more “dark money” will be coming to support markets, even if the Fed doesn’t cut rates next week.

And that’ll keep the bull market going for a while longer. One day the music will end. The imbalances in the system are just too great.

But we’re not at that point yet, and you can expect markets to rise on additional dark money injections.

Enjoy it while you can.

Below, I show you one major factor that will continue to support stocks this year. It doesn’t have to do with the trade war or earnings. What is it? Read on.

Regards,

Nomi Prins
for The Daily Reckoning

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Get Used to the “Powell Put”

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In the land of the Federal Reserve and its market-manipulating mechanisms, there’s now an unofficial market term called the “Powell Put” or the “Powell Pivot.”

It is in direct reference to Fed chairman Jerome Powell. Before he became chairman, Wall Street referred to prior heads’ policies with terms like the “Greenspan Put” the “Bernanke Put” and the “Yellen Put.”

In layman’s terms, what the term means is that if the markets fall by too much, the Fed will swoop in and try to save the day, the month, or the year. A “put” in options terminology is insurance against a drop in prices. Nowadays, the “Powell Put” is the market’s insurance that the Fed will act to stimulate the markets if necessary.

Markets had been waiting for it to materialize. But Powell had previously talked about the need to raise rates to give the Fed “enough ammunition to fight the next crisis.” The size of the Fed’s balance sheet would also have to be reduced enough to provide it enough room to grow if needed.

Markets began to worry the Powell Put might never materialize when he raised interest rates in December, when the market was in the middle of a severe correction (that nearly culminated in a bear market). He also said the balance sheet reductions, or quantitative tightening, would run on “autopilot.”

Markets tanked on his comments. But then on Jan. 4, after stocks fell nearly 20%, the “Powell Put” finally materialized.

In comments addressing the American Economic Association, Powell said he was “prepared to adjust policy quickly and flexibly.”

And about the balance sheet reduction policy that was on autopilot in November, he said

“We wouldn’t hesitate to change it.

Powell has subsequently emphasized the need for “patience.” The Dow has continued to rally behind his newfound dovishness. In fact, this January was the best January in 30 years. If the rally continues, the market could soon be testing its early October highs.

What this means is that the Fed isn’t going to raise rates anytime soon. As my colleague Jim Rickards has explained, “patience” isn’t just a word. It’s a signal to markets that the Fed will not be raising rates anytime soon, and that it will give them notice when it is.

The Fed is also unlikely to reduce the size of its balance sheet in a bold way, as long as economic headwinds from around the world continue. That in turn, means dark money will remain available to boost markets.

There are two main ways the Federal Reserve can unleash dark money into the financial system. One is by keeping interest rates (or the cost of money) low or at zero percent. The other is through quantitative easing (QE) or bond-purchasing, where the Fed creates money electronically and uses it to give to banks to buy Treasury or mortgage bonds from them.

Reducing the cost of money, or interest rates to zero, was done for the first time by the Fed in the wake of the financial crisis. The Fed did this supposedly as an emergency measure to inject money into the system because banks had stopped lending. In addition, QE was enacted because interest rate policy wasn’t effective enough. Again, supposedly, it was supposed to be an emergency measure.

But we saw how the stock market reacted when Powell said QT would run on autopilot. Now the Fed is ready to finalize plans that would leave the balance sheet at a much higher level than it previously envisioned. Again, that means additional support for markets.

In the latest development, as Brian Maher discussed in yesterday’s Daily Reckoning, Federal Reserve Bank of San Francisco President Mary Daly suggests that the Fed could decide to use its balance sheet as a routine part of how it guides the economy, not just as a last-ditch measure to deploy in emergencies.

That means what was once supposed to be an emergency measure could become just another regular policy tool if normal interest rate policy isn’t enough to stimulate a non-responsive economy. We’ll have to wait and see if this idea gains traction within the Fed. Either way, reducing the balance sheet to “normal” levels is no longer a priority for the Fed.

But it’s not just the Fed that is putting additional tightening on hold. Central banks around the globe have been re-calibrating their policies to reflect the weaker economic environment.

As one Wall Street Journal article recently reported, “Central bankers have geared their messages toward pausing on tightening steps rather than imminently launching new stimulus.”

Central banks from South Korea, Malaysia, Indonesia and Canada, who all raised rates last year, are now questioning such plans. The Bank of Japan and European Central Bank also indicated last week that their negative rates are here to stay for the foreseeable future.

The truth is it’s all about the $21 trillion of dark money fabricated by, and dispersed from, the world’s major central banks. The volatility periods, including last year’s nearly 20% correction, are related to the fear that dark money supplies will go away.

These factors will keep sparking intermittent fear and volatility this year — but dark money collusion will not be going anywhere. While there will be some minor rate hikes here and there, and mild tweaking of massive asset books, the overall story will remain the same. You should expect major central banks to end the year, on average, with asset books in total size right where they started.

Once again, that means dark money will continue to be available to markets.

The fact is, dark money is the #1 secret life force of today’s rigged financial markets. It drives whole markets up and down. It’s the reason for today’s financial bubbles.

On Wall Street, knowledge of and access to dark money means trillions of dollars per year flowing in and around global stock, bond and derivatives markets.

I learned this firsthand from my career on Wall Street. My first full year working on Wall Street was in 1987. I wasn’t talking about “dark money” or central bank collusion back then. I was just starting out.

Eventually, I would uncover how the dark money system works, how it has corrupted our financial system and encouraged greed to the point of crisis like in 2008. When I moved abroad to create and run the analytics department at Bear Stearns London as senior managing director, I got my first look at how dark money flows and its effects cross borders.

That dark money goes to the biggest private banks and financial institutions first. From there, it spreads out in seemingly infinite directions affecting different financial assets in different ways.

Yet these dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups. To be a part of the dark money elite means to have control over many.

These is not built upon conspiracy theories. To the contrary, alliances make perfect sense and operate publicly. Even better, their exclusive dealings and the consequences that follow are foreseeable — but only if you understand how the system works and follow the dark money flows.

Dark money rules the world, and it could keep the bull market running longer than most people expect, even though the eventual turnaround could be ugly.

Regards,

Nomi Prins
for The Daily Reckoning

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Expect the Buyback Wave to Continue This Year

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A crucial theme from last year is continuing into this year — stock buybacks. Last year was a banner year for companies buying back their own shares. A month into 2019, it appears that Wall Street is set to continue that trend.

Last year, U.S. companies announced a whopping $1.1 trillion worth of buyback plans. Armed with extra cash from favorable corporate tax policy enacted in 2017, they enthusiastically bought back their own shares.

But as of mid-December, only about $800 billion of those buybacks had actually occurred. That means there could be another $300 billion of the total 2018 target still waiting to hit the market.

In fact, Wall Street is already gearing up for another banner buyback year. In a recent report, J.P. Morgan strategist Dubravko Lakos-Bujas wrote, “It’s expected that S&P 500 companies will execute some $800 billion in buybacks… in 2019.”

The Wall Street strategist also explained that the quality of 2018 buybacks were high. He revealed that companies were using their cash, rather than borrowed money, to fund buybacks. Using cash toward buybacks is expensive less than using debt.

But why did the wave of buybacks slow down late last year?

The first reason is that companies involved had already purchased stock at a very rapid rate through last September. That was one major reason we saw the market peak around that time, and in fact, hit new records.

The second was that despite trade war fears and uncertainty, companies felt confident enough to go ahead with their buybacks initially. That’s why we saw market players largely shrug off warning signs through the first three quarters of 2018.

But sentiment shifted dramatically during the last quarter of the year, culminating in essentially a bear market by late December. And more reports around the world began to point to slowing economic growth ahead.

A key factor cited for this slowdown was the impact of prolonged trade wars, which could curb real economic activity and create more uncertainty. In turn, growing volatility would keep businesses from planning expansions, or using the cash originally set aside for buybacks.

A third reason for the drop off in buybacks late last year was a record amount of public corporate and consumer debt that had to be repaid or at least serviced regularly. This overhang of debt was weighing on growth expectations. That debt load would become even more expensive if the Fed kept up with its forecasted rate hike activity in December and throughout 2019.

Some analysts even warned that the Fed might go ahead with another four rate hikes this year. That triggered fears on Wall Street that the central bank stimulus game could truly be over.

The reason for the concern is simple: The higher the interest rates, the more expensive it is to borrow and repay existing debt. For more highly leveraged corporations and emerging market countries, this would be an even greater threat. A higher dollar, resulting from more Fed tightening, could cause other currencies to depreciate against the dollar. That would make it harder to repay debt taken out in dollars.

Finally, there was heightened tension in the financial markets due to political uncertainty. With U.S. election results ensuring added battles between Congress (with Democrats taking the majority in the House of Representatives) and the White House, doubt set in over the functionality of the U.S. government going forward.

Those reservations were justified. The government shutdown that kicked off 2019 had a lot to do with shifts in the political balance in Washington.

Geopolitical tensions also rose at the end of 2018, including Brexit in the United Kingdom, street revolts in France, potential recession fears in Italy and growing unrest in South America.

All these factors combined ensured that markets were extremely volatile during the last quarter of 2018, and why it was the worst one for the markets since the Great Depression. It was not conducive to buybacks. Buybacks are supposed to raise the stock price. But strong market headwinds could have largely canceled their effects.

The prudent approach for companies facing such a negative environment was to wait out the problems until the new year.

But Jerome Powell subsequently gave into Wall Street and took a much more dovish position on both rate hikes and balance sheet reductions. That means the coast is clear again to resume the buybacks.

Back in December, some major players announced plans for 2019 buybacks. These include Boeing, which announced an $18 billion repurchase program. It also includes tech giant Facebook, which plans to buy back $9 billion of its own shares, in addition to an existing $15 billion share repurchase program started in 2017.

Also in on the buyback wave is Johnson & Johnson, which announced a $5 billion stock buyback. Others include Lowe’s and Pfizer, which both announced a $10 billion stock buyback program.

These plans are now much more likely to go forward.

Furthermore, many large corporations like Microsoft, Procter & Gamble, Home Depot and Walmart didn’t even announce buybacks in 2018.

They could well announce them for 2019. Companies that did announce big buybacks last year, like Apple, could also engage in more, adding a potential $100 billion share repurchases this year to match 2018.

Another indicator for a sizeable 2019 buyback wave is that stock prices are lower now than they were going into the fourth quarter of 2018. That means companies can buy back their shares at cheaper prices. They could buy at a discount, in other words, or at least what they hope will be a discount.

My old Wall Street firm, Goldman Sachs, has already forecast $940 billion worth of buybacks for 2019. They previously had predicted over a trillion dollars’ worth of buybacks for 2018. The number of buybacks for 2018 even exceeded their predictions.

By mid-January, of the S&P 500 companies that reported their fourth-quarter earnings, nearly 70% of them have exceeded Wall Street’s profit expectations. It’s a favorable environment for buybacks.

Yet, it may still take some time for companies to move forward with this year’s buybacks. That’s because we are still in the “black-out” period that the Securities and Exchange Commission (SEC) has created.

The period covers the time just before and after companies post earnings results. The sell-off in October coincided with the third quarter earnings season’s “blackout period.” The combination of negative environmental factors plus fewer buybacks drove markets even lower.

Now, once earnings season and the current blackout period is over, Wall Street will be unleashed to buy large blocks of stock for their major corporate clients.

If the Federal Reserve truly holds back on its former interest rate and quantitative tightening plans, as it seems likely to do, expect central bank stimulus to continue to fuel markets.

Of course, buybacks do not come without negative implications. That’s because companies are not using their cash for expansion or to pay workers more, which would generate more buying power in the overall economy. But in the short run at least, they tend to raise the stock price.

Even if Wall Street comes up against headwinds of volatility, slowing economic growth, political strife and trade wars, they can now expect the Fed and other central banks to have their backs.

Buybacks could become a very powerful force once again this year, and keep the ball rolling a while longer.

Regards,

Nomi Prins

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