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.

Beware Good News!

This post Beware Good News! appeared first on Daily Reckoning.

Mr. Jerome Powell and his mates sat on their hands today — no rate cut:

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 near the Committee’s symmetric 2% objective.

Nor does “the Committee” intend to cut rates next year. But what of possible rate hikes?

Only four of 17 members anticipate a quarter-point raise in 2020.

Of course… the Committee hooked the standard disclaimer to their announcement:

The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

The stock market greeted the news with a general shrug of the shoulders. It was, after all, expected.

The Dow Jones gained 29 points on the day. That is, it barely made good yesterday’s 28-point loss.

The S&P scratched out a nine-point gain. The Nasdaq fared best — up 38 points today.

The world jogs on.

But let us take a brief canvas of the overall economic condition…

Stocks presently summit new heights, unemployment presently plumbs old depths, consumer confidence is presently up and away.

Meantime, the Organization for Economic Cooperation and Development (OECD) claims the global economy has swung 180 degrees since October.

That is, the global economy has swung from contraction to recovery since October.

Sample quote:

Stable growth momentum is anticipated in the euro area as a whole, including France and Italy, as well as in Japan and Canada. Signs of stabilizing growth momentum are now also emerging in the United States, Germany and the United Kingdom, where large margins of error remain due to continuing Brexit uncertainty. Among major emerging economies, stable growth momentum remains the assessment for Brazil, Russia and China (for the industrial sector).

Just so.

If October did represent an actually inflection point, investors can prepare for a merry run…

Reports Saxo Bank’s Peter Garnry:

Our business cycle map on country level going back to 1973 suggests that if the turning point came in October, then we are entering the most rewarding period for investors in equities relative to bonds. The average outperformance for equities versus bonds in USD terms has been 9.4% for every recovery phase.

Look close. You can almost see the erring stars returning to their courses… the angels returning to their posts… the Perfections returning to view.

But as we have noted before:

While bad news frightens us… good news terrifies us.

Too many animal spirits are unchained, too many guards go down, too many fools rush in.

Have they forgotten the trade war? Are global debt levels falling? Is a white age of peace suddenly upon us?

And we might remind the chronically hopeful of this capital fact:

Recession is a menace that often arrives unannounced, like an influenza… or an unexpected visit from a mother-in-law.

Periods of seemingly incandescent growth may immediately precede it.

Please consult the following dates. Each reveals the real economic expansion rate — that is, the economic growth rate adjusted for inflation — immediately before a recession’s onset:

  • September 1957:     3.07%
  • May 1960:                2.06%
  • January 1970:          0.32%
  • December 1973:      4.02%
  • January 1980:          1.42%
  • July 1981:                4.33%
  • July 1990:                1.73%
  • March 2001:             2.31%
  • December 2007:      1.97%.

(We doff our cap to Lance Roberts of Real Invest‍ment Advice for providing the data.)

You are immediately seized by a strange and remarkable fact:

Recession has followed hard upon jumping growth rates of 3.07%, 4.02%… and 4.33%.

The quote of our co-founder Bill Bonner springs to mind:

“It is always dawnest before the dark.”

Let the record further reflect:

Growth ran 2% or higher immediately prior to five of nine recessions listed.

“At those points in history,” Roberts reminds us, “there was NO indication of a recession ‘anywhere in sight.’”

Once again… here we refer to real growth, which minuses out inflation’s false fireworks.

Now come home…

Third-quarter 2019 GDP came ringing in at 2.1%. And the Federal Reserve projects 2019 will turn in 2.2% growth when the final tally comes in.

What was GDP before the last recession — the Great Recession?

1.97% — a general approximation of the rate presently obtaining.

Shall we enjoy a belly laugh at Ben Bernanke’s expense?

Granted, it is nearly too easy — like guffawing at a justice of the Supreme Court who slips on a banana peel… or whose toupee is carried off by a sudden gust.

But in January 2008 Mr. Bernanke stood proudly before the world and exulted:

“The Federal Reserve is not currently forecasting a recession.”

Below, Jim Rickards shows you why one the Federal Reserve begins intervening in markets, it cannot stop. Where will it take us? Read on.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Beware Good News! appeared first on Daily Reckoning.

Expect Buybacks to Sustain Markets

This post Expect Buybacks to Sustain Markets appeared first on Daily Reckoning.

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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