The Fed Is Stealing Our Future

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The pestilence presented the Federal Reserve two options.

The first was to wash out the sins of the past decade. The second was to sin on a vastly mightier scale.

Lance Roberts of Real Investment Advice:

    1. Allow capitalism to take root by allowing corporations to fail and restructure after spending a decade leveraging themselves to [the] hilt, buying back shares and massively increasing the wealth of their executives while compressing the wages of workers. Or…
    2. Bail out the “bad actors” once again to forestall the “clearing process” that would rebalance the economy and allow for higher levels of future organic economic growth.

The Federal Reserve selected option two. That is, it chose sin on a vastly mightier scale.

All the imbalances, all the fraud, all the dishonesty of the past decade it is multiplying — by two, by three, by four, by five.

And so it is condemning the United States economy to a lost decade of stagnation and anemia.

Cutting off the Future

The Federal Reserve is dynamiting the bridges leading from present to future. To future recovery. And future growth.

That is because massive debt drains the future… and leaves it emptied.

Plunging into debt introduces a sort of hand-to-mouth living. It diverts cash flow to the service of existing debt — often unproductive debt.

And so investment in the future goes channeling backward. It is a titanic larceny of the future.

And artificially low interest rates are the stickup gun.

The Chains of Debt

Explains Roberts:

Low to zero interest rates incentivize nonproductive debt. The massive increases in debt, and particularly corporate leverage, actually harm future growth by diverting spending to debt service…

The rise in corporate debt, which in the last decade was used primarily for nonproductive purposes such as stock buybacks and issuing dividends, has contributed to the retardation of economic growth…

The massive debt levels being added to the backs of taxpayers will only ensure lower long-term rates of economic growth.

A debt-based financial system heaves every principle of sound economics out upon its ear.

It is an economics of the hamster wheel — frantic — but stationary.

In back of it all is a vicious hostility to savings…

The Fed’s War on Savings

The Federal Reserve would heat your savings into a potato so hot you cannot hold them for an instant.

You must throw them into profitable investments… which will coax the economic engine to life.

Or you must spend them on goods and services. That will yield the same healthful effect.

This is the royal route to growth — as the theory runs.

Thus the saver is a public menace, a criminal of sorts, a rascal.

Saving is a passable evil in normal times, most economists allow.

But in dark times — as these — saving locks needed capital out of the productive economy.

The central bank must therefore suppress savings to increase spending. And investment.

But there can be no investment without savings, say the old economists… as there can be no flowers without seeds.

Saving Equals Investment

Explained the late economist Murray Rothbard:

Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings… In order to invest resources in the future, he must first restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.

The more accumulated savings in the economy… the more potential investment.

An economy built atop a sturdy foundation of savings is a rugged economy, a durable economy.

It can withstand a blow.

In the past we have cited the example of a frugal farmer to demonstrate the virtue of savings. Today we cite it again…

The Prudent Farmer

This fellow has deferred present gratification. He has conserved a portion of prior harvests… and stored in a full silo of grain.

There this grain sits, seemingly idle. But this silo contains a vast reservoir of capital…

This farmer can sell part of his surplus. With the proceeds he purchases more efficient farm equipment. And so he can increase his yield.

Meantime, his purchase gives employment to producers of farm equipment and those further along the production chain.

Or he can invest in additional land to expand his empire. The added land yields further grain production.

This in turn extends Earth’s bounty in wider and wider circles — and at lower cost.

That is, his capital stock expands and the world benefits. Only his original surplus allows it.

He also retains a prudent portion of his grain against the uncertain future.

There is next year’s crop to consider. If it fails, if the next year is lean, it does not clean him out.

He has plenty laid by. And so his prior willingness to defer immediate gratification may pay a handsome dividend.

He can then proceed to rebuild his capital from a somewhat diminished base. Without that savings base of grain… he is a man undone.

We will call this man Farmer X. Contrast him, once again, with Farmer Y…

The Wastrel Farmer

This man enjoys rather extravagant tastes for a farmer. He squanders his surplus on costly vacations, restaurants, autos, etc.

He likes to parade his wealth before his fellows.

It is true, his luxurious appetites keep local business flush. But his grain silo perpetually runs low.

That is, his capital stock runs perpetually low. That is, he has little savings. That is, he has little to invest.

He deprives the future so that he may gratify the present… and rips food from future mouths.

And should next year’s crop fail, this Farmer Y is in a dreadful way.

Assume next year’s crop does fail.

The surplus grain that could have sustained him he has dissipated. He has no reserves to see him through.

He is hurled into bankruptcy. He must sell his farm at a fire sale.

If only this wastrel had saved.

The Lesson

Multiply this example by millions and it becomes clear:

A healthy economy requires a full silo of grain — of savings, that is.

An empty silo means no investment in the future. And society has nothing stored against future crises… like an imprudent squirrel that has failed to stock acorns against winter.

Henry Hazlitt, from Economics in One Lesson:

The artificial reduction of interest rates discourages normal thrift, saving and investment. It reduces the accumulation of capital. It slows down that increase in productivity, that “economic growth” that “progressives” profess to be so eager to promote.

The Enemies of Savings

The critic of savings will concede that saving may make individual sense.

But if everybody saved, he argues, consumption would wind to a halt.

Government must therefore race in to supply the demand that individual savers will not.

It must be “the spender of last resort.”

But that which applies to the individual applies to society at large, the old economists insist.

Saving Is Actually Spending

When society saves in lean times, it is not eliminating consumption. It is merely delaying it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Thus today’s savings are therefore tomorrow’s spending, tomorrow’s consumption.

Or to return to Hazlitt:

“‘Saving,’ in short, in the modern world, is only another form of spending.”

Artificially low interest rates drain the pool of savings… and leaves society poorer.

But the Federal Reserve has made its choice. It will drown us all in debt. And all for a mess of pottage.

Thus we face a future of limited growth… slender prospects… and frustrated ambitions.

But at least Wall Street will prosper…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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No Words for This

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6.6 million fresh unemployment claims this week. 3.3 million last week.

Combined you have a cataclysm of 9.99 million claims within two weeks.

“No words for this,” writes Pantheon Macroeconomics chief economist Ian Shepherdson — speechless, gobsmacked, floored, broken beyond endurance.

“What we are going through now dwarfs anything we’ve ever seen,” laments Heidi Shierholz, the Economic Policy Institute’s senior economist — “including the worst weeks of the Great Recession.”

Alas, the lady is correct.

This week’s unemployment figure rises 10 times higher than any week between 2007 and 2009.

In all, the United States economy shed 15 million jobs in that 18-month span. But at the present gallop… the economy will give up 15 million jobs in weeks.

Inconceivable — but there you are.

“The great financial crisis happened over a number of years,” says Wharton finance professor Susan Wachter. “This is happening in a matter of months — a matter of weeks,” she adds.

The New York Times estimates the unemployment rate is presently 13% and “rising at a speed unmatched in American history.”

You may wish to consider the reliability of the source. The true rate may be lower. But this you also must consider:

It may be higher.

And the Congressional Budget Office presently projects second-quarter GDP to plummet to an annualized -28%. That is correct.

One small example:

National box office sales ran to $204 million one year ago this week. And one year later?

$5,179 — essentially a $204 million collapse of the cinema industry.

The travel, retail and restaurant and ale house industries confront similar hells.

An economy such ours is like a long stretch of dominoes. Knock one down and the others go over…

The suddenly unemployed may lack the wherewithal to make rent. The landlord who depends on it may be unable to meet his own obligations. So with the person above him… and the next above him… all the way up the ladder.

A fellow going by the name of Mark Zandi is Moody’s Analytics chief economist. His researches indicate perhaps 30% of Americans with home loans — some 15 million of them — could fall into arrears if the economy remains shuttered through summer.

Meantime, the freshly unemployed send additional dominoes toppling…

The unemployed store manager can no longer afford the auto he planned to purchase. And so the automobile salesman goes without. His planned vacation he must cancel. He further abandons plans to renovate the kitchen or add the extension to his home.

The airline and hotel people then must suffer. As must the carpenter who would have worked the job. And the lumber men who would have sold the wood. As must the gasoline vendor who would have fueled its transportation.

And so on and so on, one domino knocking down the next in line, all the way through.

Multiply the business by 10 million, 15 million — 20 million — and you face a situation.

“No words for this.”

The Federal Reserve estimates the unemployment number may scale an unspeakable 47 million.

We find limited solace knowing the Federal Reserve nearly always botches the numbers. It is nonetheless a bleak arithmetic we confront.

The United States government is attempting to choke off the hemorrhaging with payments to businesses and the unemployed. But it will prove dreadfully unequal to its task.

What is more, multiple sources report some checks may not mail for 20 weeks — five months.

How will the unemployed with no savings rub along for five months?

Tens of thousands were driven to suicide during the Great Depression. Over 10,000 took the identical route out of the Great Recession.

Another suicidal wave — a large one — will wash on over should present conditions extend too long.

But you may be relieved to learn that the Federal Reserve is on the job…

It has expanded its balance sheet $1.6 trillion since mid-March alone. It required 15 months to attain that same figure during QE3.

And the balance sheet presently bulges to $6 trillion — a 60% increase in a mere six months.

One staff member of the Federal Reserve, meantime, believes it will swell to $9 trillion by year’s end.

We place high odds that it will expand further yet.

Well and truly… this is a time of superlatives.

But how much can the balance sheet expand… before bursting at the seams?

No one truly knows. But do we wish to find out?

Besides, its previous manias of balance sheet inflating did little for the real economy, the economy of things.

There is little reason — none, that is — to expect a different outcome now.

Here is another superlative:

The Dow Jones has endured its deepest first-quarter plunge in its entire 124 years. And heavier losses await, depend on it.

And so here we are, trapped… the devil to one side… the deep blue sea to the other.

“No words for this.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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R.I.P.: Requiem for a Bull

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For the longest bull market in history… it is a time to die.

For the Dow Jones, aged 11 years and two days, the soul quit the body yesterday afternoon.

Immediate cause of death: coronavirus disease (COVID-19).

Underlying cause of death: irrational exuberance.

The sickness was brief, acutely brief — a mere 19 days.

Only in November 1931… in the teeth of the Great Depression… did the index plunge from record heights to bear market depths in so short a space. Such was the violence of the death spasm.

Both S&P and Nasdaq joined it in the morgue this afternoon.

And so the flags over Wall Street flap at half mast today… and the black crepe is up.

Yet as we have argued previously:

The stock market is an ingenious device constructed to inflict the greatest suffering upon the most people… within the least amount of time.

In Memoriam…

The eulogies have already come issuiwwng…

Linda Zhang is chief executive officer of Purview Investments. Says she, a pearl of sorrow coursing down her cheek:

This bull market will go down in history as the one that nobody believed would last this long… What destroyed us in 2008 was overleverage. What brought us to where we are in 2020 is too much hope, sky-high valuations.

Doug Ramsey is chief investment officer of Leuthold Group. This fellow labels the late lamented decade the “steroid era” of the stock market — and identifies the supplier:

It was the most hated bull market — people said that early on. I think in the middle of the decade people [got] on board. Certainly in the last year they became believers. I’d also call the whole decade the steroids era because of all the help out of the Federal Reserve. I think it certainly did get a lot of help from the Federal Reserve. This was the steroids era of the stock market — the Fed propped it up.

Will the Federal Reserve attempt to blow life into the deceased? And how long can you expect the bear’s market to run?

Possible answers below.

But the exuberant, marauding bears desecrated the corpse this morning — before the Dow’s body was cold…

Another 15-minute Trading Halt

Within minutes of the opening whistle… the poor Dow Jones plunged another 1,700 points into eternity.

The S&P plummeted 7%, overloading the circuits and tripping the breakers — for the second instance this week.

For another 15 minutes the markets suspended breath.

Why this morning’s fresh stampede out?

The President Fails to Inspire Confidence

Apparently the president’s fireside chat last evening inspired little confidence. It failed to indicate a government response equal to the crying need.

Fifteen minutes after this morning’s halt, markets reopened for business. They should have remained closed…

The rout promptly resumed.

The market — meantime — places 83.4% odds the Federal Reserve will hatchet rates to between 0% and 0.25% next week.

That is, to financial crisis levels.

But dare we ask… is the worst over?

“You Likely Have not Seen Anything Yet”

“You likely have not seen anything yet,” wails Eric Parnell of Global Macro Research:

A potentially great fall lies ahead. Unfortunately for investors, conditions for the stock market have the potential to get worse, much worse, in the intermediate term. And all of the king’s policy horses and all of the king’s policy men may not be able to put this market back together again when it’s all said and done…

In short, you likely have not seen anything yet when it comes to today’s stock market.

After years of policy stimulus, stocks are trading at record-high valuations and bond yields are at historic lows. It is only a matter of time before reality returns to global capital markets.

But the coronavirus may merely be the tip of the berg that has gashed this Titanic down deep…

Think Lehman Bros.!

Phoenix Capital’s Graham Summers, introduced here this week, argues the bulk of the berg is invisible:

Now, let’s talk about the REAL crisis that is hitting the financial system…

[Global] debt-to-GDP is north of 200%. Leverage is higher today than it was in 2007. And the world is absolutely saturated in debt on a sovereign, state, municipal, corporate and personal level.

However, everything was running smoothly as long as nothing began to blow up in the debt markets [or] credit markets.

And despite a few hiccups here and there, the debt markets have been relatively quiet for the last few years…

Not anymore.

Someone or something is blowing up in a horrific way “behind the scenes.”

The Fed was FORCED to start providing over $100 BILLION in free money overnight back in September 2019. And even that massive amount is proving inadequate…

[Two nights ago], the Fed was forced to pump another $216 BILLION into the system.

You don’t get those kinds of demands for liquidity unless something is truly, horrifically wrong.

Think: LEHMAN BROS.

But we suppose that is why the Federal Reserve answered the klaxons this afternoon, dripping icy sweat…and rounded into action…

QE4 Is Here

Shortly after 1 p.m., it announced it is hosing in a staggering $1.5 trillion of liquidity today and tomorrow.

Between September and December it expanded its balance sheet at a rate unseen even during the financial crisis.

But the flow was but a trickle compared to the torrent on tap:

IMG 1

What is more, the Federal Reserve will conduct purchases across a “range of maturities.”

A full range of maturities includes longer-dated Treasuries. Thus it can no longer deny it has resumed quantitative easing…

Its purchases since September centered exclusively upon shorter-term Treasuries. Since QE targeted long-term Treasuries, it could throw out a smokescreen of deniability.

But no longer. Thus today we declare the onset of “QE4.”

The Rescue Doesn’t Hold

The drowning stock market seized upon the life ring thrown its way. And it rapidly made good half its losses on the day.

But it began to lose its purchase on the ring, on life… and resumed its slide into depths.

The Dow Jones finally settled at 21,200 by closing whistle — a 10% loss on the day — its worst since Black Monday, 1987.

Perhaps history will label this date “Gray Thursday.”

The S&P hemorrhaged an additional 9.51% on the day; the Nasdaq 9.43%.

The Leaders up Are Leading the Way Down

Are ruptures within the credit markets why stocks continue plunging, Mr. Summers?

This is why the markets are failing to rally. It is why every major central bank is out talking about launching new aggressive monetary policies. And it is why the Fed is privately freaking out.

Below is a chart showing [a proxy for] the credit markets (black line) relative to the stock market (red line).

As you can see, the credit market led stocks to the upside during the bull market. And it is now leading stocks to the downside. Credit is already telling us that stocks should be trading at 2,600 or even lower.

IMG 1

This is a real crisis. And from what I can see, the Fed can’t stop it anytime soon.

The Fed’s One Option

But if the prospect of rate cuts and additional QE cannot hold the line… does the Federal Reserve wield any options at all?

So what could stop this?

A globally mandated intervention in which the Fed and other central banks start buying corporate debt.

However, in the U.S., the Fed CANNOT buy corporate debt…

It would need authorization from Congress to do so. And from what I can tell, no one is even suggesting this.

I don’t mean to be a fear-monger, but this is a very dangerous situation.

We would have to agree. It appears a very dangerous situation.

But how long can you expect the bear’s market to endure? The answer in one moment.

But first… will the Federal Reserve actually attempt to reanimate the corpse?

Perhaps not.

The Fed Wants to End the Market’s Dependency

As our own Charles Hugh Smith claimed in a recent reckoning, it has grown fearful of the monstrous bubble it inflated.

But it did not wish to shoulder blame for draining the air out.

Thus the coronavirus has done it a great service by seizing the sharpened pin.

And it may not wish to risk blowing another bubble. Do we speculate?

No. Here former Dallas Federal Reserve President Richard Fisher speaks for himself:

The Fed has created this dependency…

The question is do you want to feed that hunger? Keep applying that opioid of cheap and abundant money? The market is dependent on Fed largesse… and we made it that way…

But we have to consider… that we must wean the market off its dependency on a Fed put.

The question is worth considering. But how long can you expect this bear to run amok?

Here is the answer, says history:

Roughly seven months for the S&P… and perhaps nine months for the Dow Jones.

Of course it could end sooner. But it could also end later.

More tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“The Most Critical Time Since the Financial Crisis”

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“We’re faced with the most critical time since the financial crisis.”

This we have on the grim authority of money man Sven Henrich.

Last evening prepared us for this morning’s hells…

In overnight trading, S&P futures plunged 5% in four hours. The selling frenzy tripped the “circuit breakers.”

These fail-safes were installed after 1987’s “Black Monday” to prevent encores.

Thus S&P futures trading screeched to a halt, suspended… lest the fever deepen.

But the opening whistle blew this morning. And the delirium resumed precisely where it had ended…

A Trading Halt

The S&P went instantly careening. It shortly sank 7%.

Once again the violence tripped the circuits (the threshold for regular-session trading is higher than after-hours trading).

The referee called a halt at 9:34 — the first ever under existing rules — and administered a 15-minute standing count.

For 15 minutes the market fought to recapture its legs… and its wits.

At 9:49 the ban came off. Though woozied, the market “stabilized.”

But the battened and bludgeoned market could scarcely maintain the vertical.

The Worst Day Since “Black Monday”

Both S&P and Dow Jones went along, 5% down through noon. The remainder of the afternoon worked little improvement.

The Dow Jones tumbled 8% at one point this afternoon — the most since another Monday, long distant — “Black Monday” in 1987.

It closed the day down 7.79% to 23,851, a 2,014-point waylaying.

The S&P gave back 226 points on the day, for a 7.60% loss.

The Nasdaq similarly absorbed a 625-point trouncing, losing 7.29% on the day.

Thus the three major averages presently camp upon the doorstep of a bear market. One more slip… and they go in.

A bear market is a 20% plunging from recent peaks.

European stocks officially crossed over today — down over 22%. Not three weeks ago they traded at record heights.

Meantime, 10-year Treasury yields plunged to a starvation-level 0.318% this morning.

Words fail us.

“The Path of Least Resistance is Still Down”

Is the worst over?

“The path of least resistance is still down,” shouts Liz Ann Sonders, chief investment strategist at Charles Schwab.

Once again we must point our accusing finger at “passive investing.” The computers caught a fever, unloading positions at electronic speeds.

But there are few buyers on the other end to take them in.

That is why — we theorize — “corrections” have attained great ferocity in recent years.

That is also why markets have gone from record heights to bear market’s doorstep within three weeks.

But what happened this morning? Why did the bottom drop away?

Oil Collapses

Oil is the explanation most widely on offer. Investors Business Daily:

Oil prices began to collapse on Saturday as negotiations between Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, and Russia over production quotas failed. The breakdown in talks led the Saudis to sharply slash prices in the onset of another price war. The Saudis also said they would abandon OPEC’s current production curb, a move that opens the same door to other OPEC members, threatening to flood the already-oversupplied oil market with possibly more than 3 million barrels per day in additional production.

Oil prices had already sold off for three straight weeks, losing more than 37% as global markets grappled with the potential impact upon demand of the coronavirus outbreak begun late last year in China.

Crude oil hemorrhaged 25% today — its heaviest rout since 1991. It has come all the way down to $30.93. And oil stocks took a savaging today.

Two “Black Swans” Converge

Thus two “Black Swans” pooled their mischiefs… and came swooping in this morning.

These nightmare birds are the coronavirus and oil. Combined they account for this sudden terror.

So argues Seabreeze Partners Management president Doug Kass:

Over the weekend one old Black Swan (coronavirus) and a new Black Swan (substantially lower energy prices) joined forces in the pond as the collapse in yields and energy prices is serving to crater global equity markets this morning. In scope and rapidity, the accumulated declines in bond yields and stock prices are unprecedented…

There will be enormous fallout where large bets have gone wrong — ranging from bond, equity, commodity and VIX positioning.

Adds one Chris Rupkey, chief financial economist at MUFG Union Bank:

[Stock market investors] want out. Big-time. The sky is falling. Get out, get out while you can. Wall Street’s woes have to eventually hit Main Street’s economy hard.

A Minefield of Debt

The energy sector is soaked through with debt. A fair portion is “high yield.” That is because it is, as the professionals say… risky.

Many of the big banks hang on the other end of it. Bank stocks absorbed some of the heaviest slatings today — not coincidentally, we hazard.

What if losses pile up in the energy sector? Defaults could go barreling through the credit markets.

And woe to ye of earth and sea once they do…

Nordea’s global chief foreign exchange strategist Martin Enlund:

If “unforeseen losses” show up in the high-yield sector (very energy-heavy), it might damage the credit cycle… and if the credit cycle cracks, forget about buybacks, mergers and acquisitions and the S&P’s current valuation.

Buybacks are the chief gimmick behind the market’s gorgeous multiyear spree.

Who will buy if the corporations do not? Who will pick up the standard… and carry forward?

The questions nearly answer themselves.

Next we come to a central actor in the drama unfolding before us — the central bank.

Heading Back to Zero

What can you expect from the Federal Reserve in the days and weeks ahead?

Its recent “emergency” 50-basis point rate cut came thudding down… like a zeppelin of lead.

But of this you can be certain: More is ahead.

Goldman Sachs chief economist Jan Hatzius is convinced the Federal Reserve will hatchet another 50 basis points at this month’s FOMC meeting.

It will proceed to another cut in April, says he:

We now expect a 50bp cut, in part because the bond market is already priced for a large move and the FOMC will likely be reluctant to risk further tightening in financial conditions by refusing to deliver. We are also penciling in a final 50bp cut at the April 28-29 meeting.

At which point rates would hover between 0–0.25% — all the way back to post-crisis lows.

Remember “Normalization?”

And so Mr. Powell’s previous designs to “normalize” rates now appear a cruel, cruel jest.

We never believed he would succeed. The market is so entirely dependent on abnormal interest rates… it would collapse without the backstop.

He attempted to pull it out gradually after he came on duty. But he put it back after December 2018, when the market wobbled badly.

Now it is riveted into place and reinforced with cement.

But recession menaces — greater than at any point in years.

And like a blunderbuss artillery man who squanders his ammunition ahead of the main action… the Federal Reserve is blasting its remaining “dry powder” ahead of time.

As we razzed last week:

The Federal Reserve will be reduced to scraping powder off the floor. If recession swept in tomorrow… it could scarcely fire off a cannon.

Monetary policy is a spent cartridge, an empty shell casing.

Central banks will be forced ultimately to surrender command to the fiscal authorities.

Prepare for Fiscal Policy

“Helicopter money,” Modern Monetary Theory, some variant of the two, these we will see.

Depend on it.

We opened today’s reckoning with a lament from analyst Sven Henrich:

“We’re faced with the most critical time since the financial crisis.”

And so we conclude with Mr. Henrich:

The constant subsidy of markets and the economy has led us to the largest credit and asset bubble in our lifetimes and the architects of the monstrosity have left themselves weak and depleted. They are now begging for fiscal stimulus from governments that are traditionally slow to react. The big bazookas will come, the question is whether it will be too late.

That is our question as well.

More tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Did the Fed Bail out the Market Today?

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The good news first:

We learn by the United States Labor Department this morning that the economy took on 273,000 jobs last month.

Consensus estimates came it at 175,000.

Unemployment slipped from 3.6% to 3.5%… equaling a 50-year low.

Meantime, December and January estimates were upgraded by no less than 85,000 jobs.

Thus there is more joy in heaven.

Now the bad news:

The stock market picked up the news… and heaved it into the paper basket.

“Black Swan-dive”

The Dow Jones hemorrhaged another 800 points by 10 a.m. The other major indexes also gave generously — again.

VIX — Wall Street’s “fear gauge,” exceeded 48 this morning. It had guttered along under 15 until late February.

In all, global equities have surrendered $9 trillion in nine days — $1 trillion each day.

Never before have global equities retreated so swiftly and violently.

Meantime, the 10-year Treasury note achieved something of the miraculous this morning…

Yields collapsed to an eye-popping 0.664%.

Many were flabbergasted when yields sank to a record 1.27% low in July 2016. Yet this morning, they were nearly half.

Well and truly… these are interesting times.

Michael Every of Rabobank shrieks we are witnessing a “Black Swan-dive, as yields and stocks tumble in unison…”

A New Contrarian Indicator

But at least the crackerjacks at Goldman Sachs gave us advance notice of this thundering stampede into Treasuries…

A Bloomberg headline, dated Feb. 10:

“JPMorgan Says Bonds to Slump, Fueling a Return to Cyclicals.”

And this, bearing date of Feb. 23:

“JPMorgan Says Rally in Treasuries May Be Nearing Turning Point.”

May we suggest a new contrarian indicator?

The “JPMorgan Indicator.”

The reference is to the famed 1979 BusinessWeek cover declaring “The Death of Equities.”

Of course equities embarked upon the grandest bull market in history shortly thereafter.

Perhaps JPMorgan can provide a similar service.

As Zero Hedge reminds us, most hedge funds are clients of JPMorgan. Those who took aboard its advice are presently paying. And royally.

They “shorted” longer-term bonds — betting they would fall.

If You Don’t at First Succeed…

We imagine Mr. Jerome Powell is scratching his overlabored head today. His “emergency” rate cut Tuesday failed to fluster the fish.

But that does not mean more bait is not going on his hook…

Markets presently give 50% odds the Federal Reserve will lower rates to between 0.25% and 0.50% by April.

The central bank is already woefully unprepared to tackle the next recession. Yet it appears ready to squander what little ammunition that remains.

And Bank of America is already assuming a global recession is underway:

“[Our] working assumption is that as of March 2020 we are in a global recession.”

A global recession can wash upon these American shores.

What is the Federal Reserve to do in event it does?

Dwindling Options

It has little space to cut interest rates, as established. And purchasing Treasuries has lost its punch. Recall longer-term Treasury yields presently dip below 1%.

Additional purchases could drag yields to zero… and below.

Eric Rosengren presides over the Federal Reserve Bank of Boston.

He moans these conditions “would raise challenges policy makers did not face even during the Great Recession.”

Again, what could they do?

In a situation where both short-term interest rates and 10-year Treasury rates approach the zero lower bound, allowing the Federal Reserve to purchase a broader range of assets could be important.

… We should allow the central bank to purchase a broader range of securities or assets.

Full English translation:

The Federal Reserve should be authorized to purchase stocks.

But Is It Already?

This Tuesday we vented the theory that the Federal Reserve has been sneakily — and illegally — purchasing stocks.

Citing Graham Summers, senior market strategist at Phoenix Capital Research:

For years now, I’ve noted that anytime stocks began to break down, “someone” has suddenly intervened to stop the market from cratering…

[And] a year ago, I noticed that the market was behaving in very strange ways.

The markets would open sharply DOWN. Seeing this, I would begin buying puts (options trades that profit when something falls) on various securities, particularly those that had been experiencing pronounced weakness the day before.

Then, suddenly and without any warning, ALL of those securities would suddenly ERUPT higher.

Mr. Summers theorized that the Federal Reserve was purchasing Microsoft, Apple, Alphabet (Google) and Amazon stock.

Because these behemoths wield such vast heft, they can haul the overall market higher.

Did the Federal Reserve possibly resort to the same skullduggery today?

The Smoking Gun?

At 3:08 we noticed the Dow Jones flashing 25,268 — another whaling to conclude the week.

We next looked in shortly after 4 to tally the final damage.

Yet we were astonished to discover the index had surged to 25,938 in that hour.

For emphasis: That is a 670-point spree in the span of one hour.

It settled down to 25, 864 by closing whistle. But the index closed the day only 256 points in red — a victory of sorts.

What happened?

A quick look at Apple revealed it began rising around 3 o’clock… as if by an invisible hand.

Microsoft displayed a nearly identical pattern. And Amazon. And Google.

All mysteriously jumped at 3 p.m.

We leave you to your own conclusions.

A Record of Mischief

It’s long been argued that the Fed shouldn’t and doesn’t buy stocks.

However, the fact is that the Fed does a lot of things it’s not supposed to do. According to the Fed’s own mandates, it should never monetize the debt by printing money to buy debt securities.

The Fed’s already done that to the tune of over $3.5 TRILLION.

Moreover, we know from Fed minutes that as far back as 2012, the Fed was shorting the Volatility Index (VIX) via futures, or options. Here again, this runs completely contrary to the Fed’s official mandate. And if you think this is conspiracy theory, consider that it was current Fed Chair Jerome Powell who admitted the Fed was doing this!

Simply put, the Fed has been skirting its mandate for years in the name of “maintaining financial stability.” In fact, what usually happens is the Fed does things it shouldn’t, denies it for years and then finally admits the truth years later, by which point no one is outraged.

I believe the Fed is currently engaging in precisely such a practice when it comes to the outright rigging of the stock market today.

The Laws Fall Silent

The Federal Reserve Act does not authorize the central bank to purchase equities.

But financial emergency is akin to wartime emergency.

And as noted, the Federal Reserve took… extreme liberties with the law during the last crisis.

It may be taking additional liberties at present. And it will again if necessary.

“Inter arma enim silent lēgēs,” said Cicero — “In times of war, the law falls silent.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Did the Fed Bail out the Market Today? appeared first on Daily Reckoning.

Heading Into Negative (Real) Interest Rates

This post Heading Into Negative (Real) Interest Rates appeared first on Daily Reckoning.

Last July I was in Bretton Woods, New Hampshire, along with a host of monetary elites, to commemorate the 75th anniversary of the Bretton Woods conference that established the post-WWII international monetary system. But I wasn’t just there to commemorate  the past —I was there to seek insight into the future of the monetary system.

One day I was part of a select group in a closed-door “off the record” meeting with top Federal Reserve and European Central Bank (ECB) officials who announced exactly what you can expect with interest rates going forward — and why.

They included a senior official from a regional Federal Reserve bank, a senior official from the Fed’s Board of Governors and a member of the ECB’s Board of Governors.

Chatham House rules apply, so I still can’t reveal the names of anyone present at this particular meeting or quote them directly.

But I can discuss the main points. They essentially came out and announced that rates are heading lower, and not by just 25 or 50 basis points. Rates were 2.25% at the time. They said they have to cut interest rates by a lot going forward.

Well, that’s already happened. The Fed cut rates last September and October (each 25 basis points), bringing rates down to 1.75%. And now, after Tuesday’s emergency 50-basis point rate cut, rates are down to 1.25%.

That’s a drop of one full percentage point. If the Fed keeps cutting (which is likely), it’ll soon be flirting with the zero bound. And if the economic effects of the coronavirus don’t dissipate (very possible), the Fed could easily hit zero.

But then what?

These officials didn’t officially announce that interest rates will go negative. But they said that when rates are back to zero, they’ll have to take a hard look at negative rates.

Reading between the lines, they will likely resort to negative rates when the time comes.

Normally forecasting interest rate policy can be tricky, and I use a number of sophisticated models to try to determine where it’s heading. But these guys made my job incredibly easy. It’s almost like cheating!

The most interesting part of the meeting was the reason they gave for the coming rate cuts. They were very relaxed about it, almost as if it was too obvious to even point out.

The reason has to do with real interest rates.

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate.

That’s why the real rate is so important. If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

The U.S. has never had negative nominal rates (Japan, the eurozone and Switzerland have), but it has had negative real rates.

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Nominal rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% aren’t. In these examples, nominal 2% is a “high” rate and 13% is a “low” rate once inflation is factored in.

What is the real rate today?

The yield to maturity on 10-year Treasury notes is currently at a record low of under 1% (it actually fell to 0.899% today before edging slightly higher). That’s never happened before in history, which is an indication of how unusual these times are.

Meanwhile, inflation as measured by the PCE core deflator (the Fed’s preferred measure) is currently about 1.6% year over year, below the Fed’s 2% target.

Using those metrics, real interest rates are in the neighborhood of -.5%. But believe it or not, that’s actually higher than the early ’80s when nominal rates were 13%, but real rates were -2%.

That’s why it’s critical to understand the significance of real interest rates.

And real rates are important because the central banks want to drive real rates meaningfully negative. That’s why they have to lower the nominal rate substantially, which is what these central bank officials said at Bretton Woods.

So you can expect rates to go to zero, probably sooner or later. Then, nominal negative rates are probably close behind.

The Fed is very concerned about recession, for which it’s presently unprepared. And with the coronavirus, now even more so. It usually takes five percentage points of rate cuts to pull the U.S. out of a recession. During its hiking cycle that ended in December 2018, the Fed was trying to get rates closer to 5% so they could cut them as much as needed in a new recession. But, they failed.

Interest rates only topped out at 2.5%, only halfway to the target. The market reaction and a slowing economy caused the Fed to reverse course and engage in easing. That was good for markets, but terrible in terms of getting ready for the next recession.

The Fed also reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that was still well above the $800 billion level that existed before QE1 (“QE-lite” has since taken the balance sheet up above $4 trillion, and it’s probably going higher since new cracks are forming in the repo market).

In short, the Fed (and other central banks) only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow.

The Fed is therefore trapped in a conundrum that it can’t escape. It needs to rate hikes to prepare for recession, but lower rates to avoid recession. It’s obviously chosen the latter option.

If a recession hit now, the Fed would cut rates by another 1.25% in stages, but then they would be at the zero bound and out of bullets.

Beyond that, the Fed’s only tools are negative rates, more QE, a higher inflation target, or forward guidance guaranteeing no rate hikes without further notice.

Of course, negative nominal interest rates have never worked where they’ve been tried. They only fuel asset bubbles, not economic growth. There’s no reason to believe they’ll work next time.

But the central banks really have no other tools to choose from. When your only tool is a hammer, every problem looks like a nail.

Now’s the time to stock up on gold and other hard assets to protect your wealth.

Regards,

Jim Rickards
for The Daily Reckoning

The post Heading Into Negative (Real) Interest Rates appeared first on Daily Reckoning.

What Really Happened Last Week?

This post What Really Happened Last Week? appeared first on Daily Reckoning.

Yes, but why was last week’s correction so pitiless?

Monday we put our finger on “passive investing.” That is an investing strategy that flows with the tides.

A rising market tide lifts all vessels — even the leaking, decrepit, unseaworthy hulks.

But when a strong gravity pulls the water the other way… all go down with it.

And it was an angry moon last week, exerting a mighty tug.

But passive investing may only tell a portion of last week’s harrowing tale.

We have clawed our way deeper into the facts — and deeper again — to arrive at a fuller explanation.

Details to follow. But here is your hint:

It implicates the Federal Reserve… despite our unshakeable faith in its infallibility.

First, today’s tidal reading…

Stocks Rise on a Surging Tide

We are pleased to report the water rose today. And high…

The Dow Jones rose 1,173 points — its second-highest (point) gain in history.

The S&P gained 127 points. And the Nasdaq, 334.

And so all three indexes have uncorrected. That is, they have all three emerged from correction.

But why?

Explains CNBC:

Stocks surged on Wednesday as major victories from former Vice President Joe Biden during Super Tuesday sparked a massive rally within the health care sector…

Tuesday’s primary results sent health care stocks flying. The S&P health care sector surged 5.8%, posting its best day since 2008. UnitedHealth and Centene jumped 10.7% and 15.6%, respectively. Shares of UnitedHealth had their biggest one-day gain since 2008.

Many investors have applauded Biden for his middle-of-the-road tact in contrast to the more progressive policies of Sanders and Sen. Elizabeth Warren.

Gold shed $6.10 today.

But the somber bond market merely shook its head… and sighed. 10-year Treasury yields remain under 1%.

But to proceed…

If passive investing does not fully explain last week’s fearsome correction… what does?

The Great Liquidity Flood

Our tale begins last September…

A main line ruptured deep within the financial plumbing. And liquidity ran dry in the critical “repo” market.

Pouring icy sweat, panicked, the Federal Reserve rushed in with the hoses… and let the valves out.

It emptied in so much liquidity over the next four months, it inflated its balance sheet $400 billion — a $1.2 trillion annualized rate.

Not even during the lunatic days of the financial crisis did it carry on at such a gait:

IMG 1

The stock market surged on the rising water, nearly perfectly, four months running:

IMG 2

And so the Federal Reserve inflated a bubble — a bubble within a greater bubble.

But here our tale gathers steam…

The Fed Closes the Hoses

In December, the Federal Reserve tightened the valves. And liquidity, formerly flowing in gushes, dwindled to a trickle.

And so the delirious stock market lost its energy… like an airplane that has lost its lift.

The thing went on momentum for a time. But nothing was pushing it along. And so it was vulnerable…

We introduced you to Mr. Graham Summers yesterday. In reminder, he is a senior market strategist at Phoenix Capital Research.

From whom:

From September 2019 to December 2019, the Fed provided some $100 billion in liquidity to the financial system every single month.

The Fed then stopped these policies on a dime in mid-December. From that point onward, the Fed’s balance sheet, which expands when the Fed is providing liquidity to the financial system, completely flatlined…

Lost amidst all the talk of the coronavirus and potential global economic contraction is the fact that the Fed’s balance sheet has been flat to down since early December. This tells us the Fed completely ended the aggressive liquidity pumps it was running from August through the end of the year…

You can see these developments in the chart below:

IMG 3

The “Pin” That Popped the Bubble

Then the coronavirus chewed through its leash… and ultimately through the ticker tape.

But it was merely the “pin” that punctured the bubble, says Summers:

Now, you can see the impact these policies had on the stock market in the chart below.

The Fed created this environment with its monetary policies. The fear of an economic slowdown due to the coronavirus was simply the “pin” that burst this mini-bubble.

IMG 4

What does Mr. Summers conclude?:

The big lesson here is this: The financial system is now completely addicted to Fed liquidity. The Fed can try to talk tough about withdrawing liquidity from the system, but at the end of the day, the market is going to force the Fed’s hands.

In turn, we conclude:

Passive investing — twinned with plateaued liquidity — conspired tp deal markets the swiftest, sharpest correction since 1928.

This fearsome combination sent markets careening from record heights to correction in a mere six days.

But you can be sure the Federal Reserve is preparing to unfurl the hoses yet again…

Liquidity Running Dry Again in the Repo Market

It appears the repo market is entering another drought. And the major banks — primary dealers, so called — have reacquired a panting thirst.

They have requested $111.48 billion in overnight loans from the Federal Reserve.

But the Fed can only dole out $100 billion under existing arrangements.

“Oversubscribed” is the term.

That $111.48 billion comes on top of the $108.6 billion dealers requested the night before — again, oversubscribed.

The Federal Reserve had intended to suspend repo operations next month. But reports The Wall Street Journal, in predictable understatement:

Those plans could change amid the rapidly shifting economic and financial outlook. Some in the market are already wondering if the Fed will increase the size of its temporary operations to accommodate the high level of demand from banks.

We wager high those plans will change. 180 degrees.

Will it reinflate the stock market?

We have no answer. The market faces a mighty foe in a miniature virus.

But little surprises us these days.

Dangerously Low on “Dry Powder”

Meantime, the Federal Reserve squanders what little “dry powder” that remains.

Yesterday’s 50 basis point blast reduced the federal funds rate to between 1% and 1.25%.

Goldman Sachs projects another rate cut when the FOMC huddles in two weeks. And another in April (each 25 basis points).

If true, the Federal Reserve will be reduced to scraping powder off the floor. If recession swept in tomorrow… it could scarcely fire off a cannon.

And given the global economic outlook…

It will be unable to restock its magazines for years and years — and years.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post What Really Happened Last Week? appeared first on Daily Reckoning.

EXPOSED: The Fed’s Deepest Secret

This post EXPOSED: The Fed’s Deepest Secret appeared first on Daily Reckoning.

Today we don our reporter’s fedora, sit at our typewriter… and pursue a question truly scandalous.

We will be denounced for fanning “conspiracy theories.” Social media will excommunicate us for hawking “fake news.”

We expect fully to be tried for sedition… and packed off to the gallows for offending God and king.

But we will take the consequences as we must.

For we are hot to expose an illegal Federal Reserve manipulation of the stock market.

Today we haul forth forbidden evidence.

Doesn’t the Fed Already Manipulate the Market?

“But wait,” you say. “Isn’t it common knowledge that the Fed manipulates the stock market through interest rates and tricks like quantitative easing?”

Yes, it is. And it does.

Yet these are indirect influences, actions at distances, nudges at one remove.

We refer instead to a direct market intervention — and again, an illegal intervention.

It is as if the Federal Reserve has the stock market by the scruff of the neck.

And might it explain how the market came shooting from the depths late Friday… when all was in freefall?

The answer — the possible answer, in fairness — anon.

But first today’s urgent news…

Powell Rides to the Rescue

This morning we noted the Dow Jones was 250 points in red. Not 10 minutes later we glanced again — only to learn it was suddenly 300 points in green.

A 550-point sprint… in 10 minutes!

But why? Here is the answer:

Chairman Powell came charging over the hill this morning… and slashed interest rates 50-basis points.

It was the first 50-basis point cut since December 2008.

Declared Napoleon on his white horse, bloody sword in hand:

The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one. Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.

Alas, Mr. Powell’s gallantry offered only temporary inspiration…

Why the Market Retreated

Stocks were in swift retreat shortly thereafter, pulling all the way back to negative territory.

“Where are they going?” he must have shouted inwardly. “Didn’t I just give them what they wanted?

“I didn’t even wait for our FOMC meeting in two weeks. And I cut by a full 50 basis points, not a measly 25.”

But that is precisely why stocks likely fled the field of battle, Mr. Chairman. Your move suggests panic.

It tells them this coronavirus is a genuine menace, a true fee-fi-fo-fum, something really to watch.

The Dow Jones ended up retreating further still. It shed another 786 points on the day.

The S&P gave up another 87 points; the Nasdaq, 268.

An Historic Day

Meantime, the 10-year Treasury yield dropped beneath 1% today as the stampede to safety continued.

Not once in history has the 10-year slipped below 1% — not once.

And gold made a bid to reclaim safe haven status today, gaining a thumping $41.70.

But should the rout deepen…

Do not be surprised to see stocks rise unexpectedly under invisible influence — as if by conjury.

And so we return to our central questions:

Does the Federal Reserve directly intervene in the stock market?

That is, has it become its own Plunge Protection Team?

And does any evidence exist for it?

A Puzzling Market Anomaly

Graham Summers is senior market strategist at Phoenix Capital Research. And his researches have shoveled up some odd and exotic findings:

For years now, I’ve noted that anytime stocks began to break down, “someone” has suddenly intervened to stop the market from cratering…

[And] a year ago, I noticed that the market was behaving in very strange ways.

The markets would open sharply DOWN. Seeing this, I would begin buying puts (options trades that profit when something falls) on various securities, particularly those that had been experiencing pronounced weakness the day before.

Then, suddenly, and without any warning, ALL of those securities would suddenly ERUPT higher.

What made these moves even more bizarre were that they were happening at roughly the same time of day (9:50–10:00 a.m. EST). And as if that wasn’t odd enough, these violent rallies were occurring on almost NO volume, meaning that real investors were not driving them.

And this was happening almost every week.

I’m always looking for new ways to make BIG MONEY from the markets. So suffice to say, this discovery REALLY got my attention.

What followed was a labyrinthine journey into the guts of the financial system. It took several months, but after countless hours of research, I came to a startling conclusion.

Which was what, Mr. Summers?

I 100% believe the Fed is actively intervening in the stock market.

I don’t mean indirect interventions via rate cuts or quantitative easing (QE) programs… I mean that I believe the Fed is LITERALLY buying stocks directly to stop the stock market from falling.

But That’s Not Legal

It is true, some central banks such as the Swiss National Bank and the Bank of Japan are legally authorized to purchase stocks. Both take advantage in full.

But the Federal Reserve Act — Section 14 — grants our own central bank no similar authority.

It may purchase Treasury debt and mortgage-backed securities, yes. But not stocks.

You are alleging, Mr. Summers, that the Federal Reserve is acting contrary to the laws of the United States.

What evidence have you?

Look to Jan. 7., he instructs us:

Stocks opened in a sea of red based on increased tensions between the U.S. and Iran. Then, suddenly, stocks went absolutely vertical around 10 a.m.:

IMG 1

Your explanation, Mr. Summers?:

Fed interventions involve indiscriminate buying… Large financial institutions don’t place buy orders that move the markets… Whoever placed the buy order that triggered this wanted the market to rip higher.

Interesting. But certainly you have more evidence than that?

The Market Mysteriously Rebounds

Yes, we are told. Mr. Summers next directs us to last Friday, when markets were plunging once again.

During the previous five sessions, Microsoft, Apple, Alphabet (Google) and Amazon were tumbling faster than the overall S&P.

But early afternoon Friday, Apple and Microsoft mysteriously pulled up… and halted the S&P’s sell-off.

But why?

Microsoft had warned on Wednesday that manufacturing kinks in China would kink its bottom line.

Apple was similarly upset by the coronavirus.

Yet by closing whistle Friday, Microsoft posted a 2.42% gain. Alphabet, a 1.61% gain.

Meantime, Apple and Amazon nearly clawed even:

IMG 2

Again we ask… what prompted the about-face?

Perhaps Mr. Summers is correct.

Both the Dow Jones and S&P closed the day in red. But given their outsized weighting, these particular stocks halted the rout.

And both indexes ended Friday far higher than they otherwise would have.

Summers believes the Federal Reserve purchases these specific wagon-pullers to haul the freight along.

The Role of “Passive Investing”

The strategy relates directly to the “passive investing” we tackled yesterday.

Mr. Summers:

The Financial Times recently reported that according to data from JPMorgan and Lucerne Capital, only 10% of stock market volume comes from actual fundamental stock investors.

The other 90% of all market trading today is generated by passive funds/index derivatives. Meaning 90% of trading comes from automated computer trading programs that buy stocks passively. These programs buy individual stocks or entire stock indexes without thinking.

Because of this, the Fed knows it only needs a significant percentage of stocks to ratchet higher to get the entire market to rally.

Those stocks, again, are Microsoft, Apple, Alphabet and Amazon.

Please, continue. Do you have additional evidence of this ongoing — and illegal — operation?

The Evidence Mounts

Fed interventions occur at specific times of day. Real investors don’t arbitrarily place large orders at particular times of the day. [But] I’ve noticed time and again that these kinds of large indiscriminate moves occur at 10:00 a.m. on days when the market opens in the red. [Also]…

Trading volume falls during Fed interventions. Volume fell as the market ripped higher, indicating that there were few real buyers in the marketplace. If this had been a real market move based on real buyers coming into the markets, the trading volume would have stayed strong or only declined slightly.

Who else could this be but the Fed?

We have no answer. You present a compelling — dare we say, convincing — case.

We demand a Congressional investigation at once. The alleged conduct is again, illegal.

This is a nation of laws after all.

And who, besides the FBI, CIA, NSA, IRS  — and Department of Justice — is above the law?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post EXPOSED: The Fed’s Deepest Secret appeared first on Daily Reckoning.

Jerome Powell Confesses

This post Jerome Powell Confesses appeared first on Daily Reckoning.

Heaven forfend — angels and ministers of grace defend us! — the chairman of the Federal Reserve has confessed the truth.

We write from our back today, floored, still unable to recover from the blow.

For yesterday the chairman ripped the central banker’s mask from his face, and let them have it straight in the eye… and right from the shoulder.

What mighty and stupendous truth did he uncage yesterday?

Patience, dear reader, patience. You must first suffer under today’s market notes…

Can’t Shake the Coronavirus

The stock market traded at record heights today. But the coronavirus struck again this afternoon. CNBC in summary:

Equities fell sharply to start off Thursday’s session after China said it confirmed 15,152 new cases and 254 additional deaths. That brings the country’s total death toll to 1,367 as the number of people infected jumped to nearly 60,000, according to the Chinese government.

The Dow Jones ended up losing 128 points by closing whistle, to 29,423.

The S&P lost five points on the day; the Nasdaq, 14.

Gold, meantime, gained $7.30 today to close at $1,579.20.

But to return to today’s thumping question…

What sublime truth did Jerome Powell let out yesterday?

Powell’s Monetary Policy Report to the Congress

Here is the setting:

The Dirksen Senate Office Building 538, Washington, D.C. The Banking Committee of the United States Senate is in session.

Addressing the committee is the Hon. Jerome H. Powell, chairman of the Board of Governors of the Federal Reserve System.

He is a man heavy with duties to the American republic…

He is delivering the semiannual Monetary Policy Report to the Congress, in fulfillment of his obligations under the Humphrey-Hawkins Full Employment Act of 1978.

It is late morning. Committee members fight valiantly to maintain consciousness, but sleep has vanquished several.

Chins rest upon chests, rising gently at longish intervals… as if buoys bobbing in lazy ocean swells.

Faint snores can be heard above Mr. Powell’s hypnotic droning.

One dreaming senator — we had best keep his identity dark — mutters something about “your sexy lips” and a name other than his wife’s.

A swift elbow from an adjacent senator nudges him awake.

But then — of a sudden — the truth came roaring from the chairman’s mouth like fire from the mouth of a cannon…

The Truth!

Out it came, knocking us flat in the process:

“Low rates are not really a choice anymore; they are a fact of reality.”

Low rates are not really a choice anymore; they are a fact of reality.

No more talk of “normalization.” No more whim-wham about “the outlook.” No more “monitoring conditions.”

Instead, low interest rates are no longer a choice. They are a “fact of reality.”

Poor Alan Greenspan would be spinning in his grave today — if only he had a grave to spin in. Old Alan yet lives and breathes.

But does Powell not realize that a central banker’s job is to dodge, to weave, to talk… but not say?

We can only speculate that the fellow was overtaken by a temporary delirium, a transient psychosis.

But Mr. Powell’s uncharacteristic outburst of honesty gives powerful, almost invincible confirmation of our deep belief…

Our belief that the Federal Reserve can never increase interest rates by any meaningful measure.

Higher Rates Would Collapse the Walls of Jericho

High interest rates — even historically normal interest rates — would bring down the very walls of Jericho.

The entire financial and economic system would come thundering down.

Please observe the chart below. It reveals that United States private financial assets — the stock market, essentially — presently rise to an obscene 5.6 times United States GDP.

And so it puts all existing records in the shade:

IMG 1

Shriek the doom mongers of Zero Hedge:

“Any sizable drop in the stock market would lead to an almost instantaneous depression.”

We fear they are correct.

The stock market and the decade-long economic “recovery” center upon ultra-low interest rates.

A meaningful rate increase means debt service becomes an impossible burden — a crushing burden.

But returning to Chairman Powell…

“We Will Have Less Room to Cut”

Our unlikely Job was not done yesterday. He confessed another truth:

“We will have less room to cut.”

The federal funds rate presently squats between 1.5% and 1.75%. But as we have noted often, the central bank requires rates between 4% and 5% to push back recession.

Should recession invade the United States tomorrow, the Federal Reserve would enter the combat at half-strength… or less.

Thus it plans to send additional quantitative easing and “forward guidance” hurtling against the onrushing enemy.

“We will use those tools,” Mr. Powell pledged yesterday. “I believe we will use them aggressively.”

We have no doubt they will. But we are not convinced they will irritate or bother the enemy.

The Federal Reserve’s balance sheet already stretches to emergency wartime levels. And each expansion packs less wallop than the previous.

How much remains?

The Point of Diminishing Returns

Even Powell’s deputy commander — Vice Chairman Richard Clarida — recognizes the limits:

The law of diminishing returns is a very powerful force in economics, and so we have to be concerned that it may also apply to quantitative easing.

What then of “forward guidance?” Is it formidable?

No, argues our own Jim Rickards. It is a mere popgun, firing a blank cartridge:

Forward guidance lacks credibility because the Fed’s forecast record is abysmal. I’ve counted at least 13 times when the Fed flip-flopped on policy because they couldn’t get the forecast right.

Thus the forked counterattack of quantitative easing and forward guidance may prove blunt in both prongs.

But might our central bank house another weapon to punch back? Yes, it might…

The Fed Looks to the Past

The chairman and his fellows may blow the dust off another anti-recession weapon — a weapon it has not employed in 69 years.

Reveals The Wall Street Journal:

As part of their contingency planning for the next recession, Federal Reserve officials are looking at a stimulus scheme the U.S. last used during and after World War II.

But what could it be?

From 1942 until 1951, the Fed capped yields on Treasury securities — first on short-term bills and later on longer-term bonds — to help finance war spending and the recovery.

Placing caps on Treasury yields. That is the anti-recession weapon under consideration.

This scheme involves intricacies far too subtle and delicate for our dull understanding.

We therefore enlist the Journal to help penetrate the mystery:

Yield caps would be a cousin to QE. In QE, the Fed committed to purchasing fixed amounts of long-term securities. With yield caps, by contrast, the Fed would commit to purchase unlimited amounts at a particular maturity to peg rates at the target.

The goals of either approach are similar: drive down longer-term interest rates to encourage new spending and investment by households and businesses…

Some officials think capping yields could deliver the same amount of stimulus while acquiring fewer securities than they did through their bond-buying programs from 2012 until 2014, when the Fed purchased more than $1.6 trillion in Treasury and mortgage securities.

Do you understand it now? Below you will find our email address. Please contact us at your earliest convenience. For we do not understand it.

Breaking the Invisible Hand of Capitalism

Yet of this we are certain:

Capping Treasury yields — whatever it is — represents a further warfare upon the free and open market, further violence against transparency and honesty.

It seizes Adam Smith’s invisible hand of capitalism… and snaps another finger in two. Few remain as is.

What is it then but a gloved admission — that all previous central bank offensives have failed in their aims?

That is, a concession that they have failed to yield a healthy, prosperous and sustainable economy.

Ten years of them and victory remains as elusive as ever before.

Yet to paraphrase the good Chairman Powell, they are now facts of reality. And they will remain facts of reality… until they are proven fictions of reality.

But this much we will say for the chairman:

He is finally honest about it…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Jerome Powell Confesses appeared first on Daily Reckoning.

Time to give Powell Truth Serum

This post Time to give Powell Truth Serum appeared first on Daily Reckoning.

The coronavirus has gone… “viral.” At the very least its media coverage has.

You may have therefore missed the news yesterday:

The Federal Reserve concluded its January FOMC meeting. It thereupon announced it is holding interest rates steady.

The federal funds target rate stays sandwiched between 1.50% and 1.75%.

Jerome Powell gave off his usual post-announcement whim-wham. He talked a lot, that is… but did not say much.

Example: A reporter rose before him with a question…

He asked the chairman if he feared withdrawing support for the “repo” market. The stock market may file a vigorous protest if he does, the implication being.

Powell came back at him this way:

In terms of what affects markets, I think many things affect markets. It’s very hard to say with any precision at any time what is affecting markets.

Yet here is the very picture of precision:

IMG 1

Here, once again, the precise union between the Federal Reserve’s balance sheet and the S&P 500.

The two have gone happily arm in arm, linked, since early October.

Yet a Federal Reserve chairman must master the artful dodge, the skill to pretend ignorance of the most elemental facts — even the evidence of his own eyeballs.

Imagine the scene…

You enter a dining room for your evening meal. Jerome Powell is by your side.

You are astounded to discover a behemoth draft horse lounging upon the dining table. Stunned, ruffled, gobsmacked, you solicit comment from your dining mate…

“What horse?” asks he. “I don’t see a horse.”

Do we condemn the chairman? Do we impugn him, belittle him, call him into ridicule?

No. We are actually in deep sympathy with him. What — after all — is this fellow to say?

Is he to concede that the stock market is a house constructed of playing cards… and that he is its foundation?

That it would come heaping down without his determined and continuous support?

An honest answer would take the floor out of a vast fiction — the vast fiction that the stock market goes by itself, that its own pillars hold it up.

Dose him with C11H17N2NaO2S — that is, dose him with sodium pentothal — that is, dose him with truth serum…

And the ensuing geyser of honesty would collapse the Wall Street stock exchanges… as surely as the ancient Israelites collapsed the walls of Jericho.

Here is a brief sample of what Mr. Powell would confess under chemical influence:

That he is a mediocrity, a blank, a preposterous formula…

That he is far out of his depth…

That he is as fit to chair the Federal Reserve’s board of governors as he is to chair a board of barbers…

That he cannot tell you the next quarter’s GDP at the price of his soul…

That his enflamed hemorrhoids torture him ceaselessly…

That he cannot possibly determine the proper interest rate for millions upon millions of independent economic actors…

That he wields far less influence over interest rates than commonly believed…

That the president of the New York Fed smells…

That there is no actual money in monetary policy…

That he clings yet to his boyhood fantasy of becoming a salesman of life insurance…

That his wife’s cooking is a daily source of agony…

That his — no, no — we had better stop here. Some truths must remain dark. That counts double for a man of Mr. Powell’s high station.

Instead, the good chairman will babble what the world wants him to babble. Like this, for example, from yesterday:

The committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions and inflation returning to the committee’s symmetric 2% objective.

Or this, also from yesterday:

[The] labor market continues to perform well… We see strong job creation, we see low unemployment [and] very importantly we see labor force participation continuing to move up.

And this:

Some of the uncertainties around trade have diminished recently and there are some signs that global growth may be stabilizing after declining since mid-2018.

Does Mr. Powell believe the words issuing from his own mouth? We are far from convinced.

Perhaps it truly is time to fill him with sodium pentathol…

Below, Jim Rickards shows you why the happy talk is simply that, and why the Fed has “never been more divided.” Read on.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Time to give Powell Truth Serum appeared first on Daily Reckoning.