REVEALED: The Fed’s Next Trick

This post REVEALED: The Fed’s Next Trick appeared first on Daily Reckoning.

Today we lower our ear to the rail… and report the approach of a rumbling locomotive.

Free and honest markets are roped to the tracks, squirming, writhing, sobbing.

This iron horse is barreling toward them. Mr. Jerome Powell is at the controls…

And murder is on his mind.

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

And will it pull off the caper?

Answers anon.

We first look in on the seemingly condemned — squirming, writhing, sobbing on the tracks…

A Quiet Day on Wall Street

The day counted plus and minus.

The Dow Jones lost 39 points. The S&P scratched out a 1.85-point gain today. The Nasdaq, meantime, took the ribbon with a 32-point advance.

A dull affair altogether. Yet tomorrow may bring high adventure of course.

And so we now return to today’s central question:

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

Let us first flip back the calendar to the war year of 1942… where our tale begins.

How the Fed Fought WWII

Wars are costly enterprises. And taxes alone would not purchase the arsenals of democracy.

Uncle Samuel therefore held his cap before the bond market… and went upon the borrow.

But the authorities were hot to keep borrowing costs within reasonable limits.

The Federal Reserve and the Treasury Department therefore signed onto an agreement:

The Federal Reserve would place a cap on the government’s borrowing costs.

This it accomplished by purchasing any government bond with yields above a predetermined level.

These purchases shrunk the yield (purchasing Treasuries hammers down the yield; selling Treasuries ratchets yields higher).

If the 3-month Treasury bill yielded above 0.50% — for example — the Federal Reserve purchased 3-month Treasury bills until yields fell to 0.50% or below.

If longer-dated Treasury yields exceeded 2.5%… the Federal Reserve purchase longer-dated Treasuries until yields dropped to 2.5% or lower.

Thus borrowing costs were clamped to tolerable levels.

The Fed Cedes Monetary Policy to the Treasury

The proper term for the business is “yield curve control” (more on which below).

The Federal Reserve — in essence — ceded monetary policy to the United States Department of Treasury.

The Federal Reserve likewise surrendered control of its balance sheet, notes Jim Rickards:

The cap also meant that the Fed surrendered control of its balance sheet because it would have to buy potentially unlimited amounts of Treasury debt to implement the rate cap. (Such asset purchases had inflationary potential, but in World War II, inflation was managed separately through wartime price controls.)

The monetary base doubled between 1942–45… incidentally.

The Federal Reserve continued to abdicate its responsibility for monetary policy until 1950.

Now come home…

The Fed’s Fighting a New War

It is the year of pandemic. To battle its economic catastrophes, the Federal Reserve has reset its target interest rate to zero.

Thus interest rate policy is… limited.

Might our adventuresome central bank wade into the dense swamp of negative rates?

It may — in these pages we have maintained it will. Yet to date it has heaved the wet blanket upon all speculation of them.

And negative interest rates have not met advertising where attempted — in Japan and parts of Europe primarily.

How then can the Federal Reserve coax the reluctant economic machinery to life… and stuff down borrowing costs?

Yield curve control — the same yield curve control that financed the Second World War.

The Fed Would Take Direct Control of Interest Rates

In reminder, the yield curve plots bond yields across the spectrum — from short-term bonds to long-term bonds.

Yet this you must understand:

The Federal Reserve only fixes the federal funds rate. That is the “overnight” rate banks charge one another to borrow.

That is, the Federal Reserve’s actual control over interest rates is limited.

It influences longer-term rates, nudges them, leans on them, blows against them.

But it does not control them… to its everlasting disappointment.

And longer-term rates unlock the grails of borrowing and consumption.

How can the Federal Reserve seize direct control of longer-term rates?

Yield curve control.

Targeting Longer-Term Yields

Assume a particular Treasury yield exceeds the Federal Reserve’s preferences.

It can then purchase and purchase that particular Treasury until yields sink to its liking.

Explains one Sage Belz — and another David Wessel — they of the Brookings Institution:

In normal times, the Fed steers the economy by raising or lowering very short-term interest rates, such as the rate that banks earn on their overnight deposits. Under yield curve control (YCC), the Fed would target some longer-term rate and pledge to buy enough long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy if bringing short-term rates to zero isn’t enough.

And that is lovely because:

Lower interest rates on Treasury securities would feed through to lower interest rates on mortgages, car loans and corporate debt, as well as higher stock prices and a cheaper dollar. All these changes help encourage spending and investment by businesses and households. Recent research suggests that pinning medium-term rates to a low level once the federal funds rate hits zero would help the economy recover faster after a recession.

Meantime, the federal government is piling up debt at rates truly fantastic…

Bottling Borrowing Costs

The federal deficit in the current year may well exceed $4 trillion. And trillion-dollar deficits stretch to the farthest horizon.

The authorities are therefore keen to bottle interest rates… lest borrowing costs rise and become a millstone about the neck.

Yield curve control permits the Federal Reserve to throttle borrowing costs.

“Wait one minute,” you say. “Are you not describing quantitative easing? The Fed purchased Treasuries and other assets to drive down yields. What’s so different about this yield curve control?”

Precisely correct you are. But quantitative easing did not grant the Federal Reserve direct control over rates.

Yield curve control — as the title faintly suggests — does.

It’s All About the Yield

The Federal Reserve would purchase the requisite number of bonds to hammer yields to its desired level.

If 100 bonds fails to work the trick, then 1,000 bonds it will be. If 1,000 bonds proves inadequate to purposes, then 10,000 it will be… all the way up to a million or more.

Michael Lebowitz and Jack Scott of Real Investment Advice:

Assume the Fed set a 0.75% target yield on the 10-year U.S. Treasury note. They can then employ QE in any amount needed to buy 10-year notes when the rate exceeds that level. If successful, the rate would never exceed 0.75% as traders would learn not to fight the Fed.

Thus “Don’t fight the Fed” would assume an even greater ferocity.

Is this yield curve control in the offing?

“Whatever It Takes”

The Federal Reserve Bank of New York president — Mr. John Williams — says he and his fellows are “thinking very hard” about it.

We have no doubt they are… to the extent that they are capable of thinking very hard.

Our spies in Washington inform us the Federal Reserve will hatch its yield curve control operation later this year — for what it is worth.

Jim Rickards likewise believes yield curve control is coming:

The Fed and Treasury will reach a new secret accord, just as they did in 1942. Under this new accord, the U.S. government could run larger deficits to finance stimulus-type spending…

The Fed can use open market operations in the form of bond buying to achieve the rate caps. This means the Fed would not only give up control of interest rates, but it would give up control of its balance sheet. A rate cap requires a “whatever it takes” approach to Treasury note purchases.

“Whatever it takes.” We suspect “it” will take much. Then some more.

And so we will have more manipulation. More distortion. More fraud.

Reduce the thing to its core and this is what you will find:

The Federal Reserve attempts to fix the price of the dearest commodity of all — the price of time itself.

What king ever sought such power?


Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: The Fed’s Next Trick appeared first on Daily Reckoning.

The Fed’s Forever War Against Savers

This post The Fed’s Forever War Against Savers appeared first on Daily Reckoning.

The war on savers rages into its second decade.

And yesterday Field Marshal Powell vowed indefinite bombing, shelling, machine-gunning and bayoneting… until the white flag rises over enemy lines.

It is war to the knife… and from the knife to the hilt.

The only peace terms he will accept are these:

Complete, undiluted and unconditional surrender.

These hoarding hellcats must be vanquished. And their cities must be sowed with salt… as triumphant Rome vanquished Carthage… and sowed it with salt.

Here is yesterday’s dispatch from headquarters:

We are going to be deploying our tools — all of our tools — to the fullest extent for as long as it takes… We are not thinking about raising rates; we are not even thinking about thinking of raising rates.

Zero Rates Through at Least 2022

Powell and staff indicated they will clamp rates to zero, or near zero… through 2022.

We wager rates will remain clamped to zero longer yet.

Deflation hangs over the battlefield like a thick cloud of chlorine gas. And the Federal Reserve’s 2% inflation target appears more wishful than ever.

We do not expect any rate hikes until it lifts. And we hazard little will lift until 2022 has passed.

Meantime, Marshal Powell reminded us yesterday that the pre-pandemic 3.5% unemployment rate yielded little inflation.

He suggested, that is, that unemployment could sink below 3.5% before inflation menaced.

But it could be a long, long while before unemployment drops to pre-pandemic levels.

As we recently noted:

After the last financial crisis, over six years lapsed before employment fully recovered — 76 months.

If we assume a parallel recovery… pre-pandemic unemployment would return in 2026.

Of course comes our disclaimer: Pre-pandemic unemployment would return before 2026.

We simply do not know. Nor does anyone.

But who can say if pre-pandemic levels of unemployment will ever return?

The Fed Doesn’t Expect a “V-Shaped” Recovery

Even Powell himself is nagged by doubts:

Unemployment remains historically high. My assumption is there will be a significant chunk … well into the millions of people, who don’t get to go back to their old job… and there may not be a job in that industry for them for some time.

The Federal Reserve therefore fears an arduous and protracted recovery. This is the argument of one Joseph Brusuelas, chief economist at RSM:

It is clear that the Fed does not anticipate a V-shaped economic recovery and is positioned to move forcefully to support the economy…

Adds Charlie Ripley, senior investment strategist at Allianz:

The Fed understands we are just in the beginning phases of the economic recovery and making rash changes to policy or forward guidance is premature at this time.

The Federal Reserve’s fears may well prove true…

We have cited evidence recently that each recession is fiercer than the previous. And that additional debt is required to put down each successive menace.

Comparing the 1990, 2001 and 2008 Recessions

Once again, Michael Lebowitz and Jack Scott of Real Inves‌tment Advice:

  • The [2008–09] recession was broader based and affected more industries, citizens and nations than the prior recessions of 1990 and 2001…
  • The 2008–09 recession and recovery also required significantly more fiscal and monetary policy to boost economic activity…
  • The amount of federal, corporate and individual debt was significantly lower in 1990 and 2001 than 2008–09…
  • The natural economic growth rate for 1990 and 2001 was higher than the rate going into the 2008–09 recession.

“The economic growth rate going forward may be half of the already weak pace heading into the current recession,” these gentlemen conclude.

We in turn conclude that zero interest rates will be with us for years… as will the warfare against savers.

The Fed Will Keep Buying Ammunition

But the enemy of the saver is the ally of the speculator.

The Federal Reserve intends to purchase roughly $120 billion of Treasury notes and mortgage-backed securities each month of the year.

Its balance sheet may swell to 40% of the United States economy by year’s end.

What percentage of the United States economy did it represent in 2007?

A mere 6%… if you can believe it.

These assets represents ammunition in support of Wall Street.

And as long as the Federal Reserve rains down ammunition upon savers… Wall Street can advance under the covering fire.

Powell insists he’s battling for the economy’s life.. If my policies prosper Wall Street, be it so, says he (with a wink and a nod):

We’re not focused on moving asset prices in a particular direction at all — it’s just we want markets to be working, and partly as a result of what we’ve done, they are working.

Just so. But the stock market has evidently advanced too far. And the stock market has evidently advanced too fast.

The Market’s Worst Day Since March

Today the market took to its heels… and fell into panicked and headlong retreat.

The Dow Jones pulled back 1,861 points on the day. Both the S&P and the Nasdaq took similar trouncings.

The S&P did, however, manage to hold the 3,000 line.

The combined rout nonetheless represents the market’s greatest daily plunge since mid-March… at the height of the havoc.

The reasons on offer in the mainstream press reduce to two:

A) Yesterday Powell’s dour comments emptied ice water upon the heads of sunny-siders expecting the “V-shaped recovery.”

B) A resurgence of coronavirus cases following reopenings may delay additional economic progress.

Texas, Arizona, Florida, North Carolina and California among others report what the journalists like to call “alarming” increases.

“This Thing’s Going to Linger Longer Than Probably the Market Had Thought Of”

And so, says Mr. Dan Deming, managing director at KKM Financial, reports CNBC:

“You’re seeing the psychology in the market get retested today” as traders weigh the recent uptick in coronavirus hospitalizations and a grim outlook from the U.S. central bank… “The sense is maybe the market got ahead of itself, which makes sense given the fact that we’ve come so far so fast.

“The reality is this thing’s going to linger longer than probably the market had thought of.”

But the stock market should take heart:

The full arsenal of the Federal Reserve is in back of it.

Savers, meantime, must only despair:

The full arsenal of the Federal Reserve is against them…


Brian Maher
Managing editor, The Daily Reckoning

The post The Fed’s Forever War Against Savers appeared first on Daily Reckoning.

Is Monetary Policy Too Tight?

This post Is Monetary Policy Too Tight? appeared first on Daily Reckoning.

No negative interest rates — “for now.”

This we have on authority of the Federal Reserve chairman himself. For Mr. Powell announced yesterday that:

I know there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good tool kit, and that’s the one that we will be using.

Like a fireman hosing a junior fire before it fans an inferno… Powell was out to stream freezing water upon all talk of them.

From one direction the president was pushing him…

On Tuesday Mr. Trump implored the Federal Reserve to “accept the GIFT” of negative interest rates.

From another direction the market was pulling him…

The futures markets had begun to project negative rates — by mid-2021.

What if Mr. Powell failed to swear off negative rates yesterday?

“Forward Guidance”

Silence often talks louder than talking itself. And markets may have heard a shout in his silence. It would have informed them that negative rates are truly in prospect.

The stock market would have begun to factor them. And it would have endured a severe letting-down if Powell failed to carry through. Do not forget:

“Forward guidance” is one of the implements in the fellow’s “tool kit.”

Its purpose is to telegraph rate policy — to wire a sort of advance weather report — so markets can chart a proper course.

An unexpected gust could knock them off their heading.

What, Monetary Policy Is Too Tight???!!!

Yet the stock market is not the economy. And the economy is in for dirty weather.

Only additional easing will see it across the other side… or so we are told.

We are further told monetary policy is too tight for the challenge ahead — if you can believe it.

Deutsche Bank’s credit strategist Stuart Sparks, for example, tells us:

For all the measures taken by the Fed and fiscal authorities to counter the COVID-19 shock, policy remains too tight.

Yet rates are presently set to zero. How can monetary policy remain too tight?

To locate the answer we must get… “real.” That is, we must look beyond nominal interest rates… to real interest rates.

It’s the Real Rate That Counts

Explains Jim Rickards:

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…

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).

Just so. What then is today’s real rate?

A Shocking Conclusion

The 10-year Treasury note currently yields a skeletal 0.614%. Meantime, the latest core inflation runs to 1.4%.

If we subtract the core inflation rate (1.4%) from the nominal rate (0.664%)… we find the real rate equals -0.786%.

Thus the real rate is negative — but only slightly.

Let us compare today’s real rate with the real rate from 1981…

Nominal rates at the time were killingly high — 13%. But real rates? Once again, Jim Rickards:

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.

Thus today’s real rate — though negative — nonetheless runs higher than 1981’s -2% real rate.

This, despite the fact that 1981’s nominal rate (13%) vastly overtowered today’s vanishing 0.664%.

It may flabbergast you, it may astound you. It may dynamite the bedrock upon which you stand.

But the facts are the facts.

And so comes the question: Are today’s rates negative enough?

Not according to Harvard economist Kenneth Rogoff…

The Economy Needs -3% Rates

You may recognize the name from these pages. That is because we have often brought him into ridicule.

He is perhaps the loudest drummer for negative interest rates — and the abolition of cash. And Mr. Rogoff believes today’s slightly negative real rate is inadequate to purposes.

The following is from a Reuters article, summarizing Rogoff’s position:

While core inflation excluding volatile energy prices was a healthier 1.4%, that fall in inflation could mean “real” interest rates are not deeply negative enough to swiftly revive the virus-hit economy as the Fed hopes.

To what depth should real rates sink?

Minus 3% — “or lower.” The blessings would spread wide, far and deep:

Negative rates of -3% or lower could lift firms, states and cities from default, boost demand and jobs and be a boon to many hobbled emerging economies too.

Assume for the moment this fellow is correct. Only deeply negative rates could work the trick. Yet Mr. Powell has declared against negative rates.

Can he nonetheless engineer negative real rates to push up the economy? How?

Look to the Balance Sheet

The aforesaid Stuart Sparks — of Deutsche Bank — lights the path:

“Further easing must be provided by the size and composition of the Fed’s balance sheet.”

That is, by additional quantitative easing.

As the gentlemen of Zero Hedge remind us, the Federal Reserve has made the previous estimation:

Each $100 billion of quantitative easing roughly equals three basis points of rate cuts (a normal rate cut is 25 basis points).

Let us assume the Federal Reserve takes aboard Mr. Rogoff’s counsel… and guns for a real -3% rate.

Recall, today’s real rate is -0.786% by our calculations. The Federal Reserve would need to sink the real rate at least two percentage points. Only then would it scrape -3%.

Two percentage points equal 200 basis points.

If $100 billion of quantitative easing approximates three basis points of rate cuts… the Federal Reserve would therefore require the equivalent of 66 rate cuts.

Thus it must empty a satanic $6.66 trillion onto the balance sheet.

That balance sheet presently swells to $6.72 trillion. $6.66 trillion would double the thing to $13.38 trillion — three times its 2015 high.

And so the Federal Reserve could plunge real rates to -3% while nesting nominal rates at zero.

Will it come to pass?

Powell’s Conundrum

We hazard no prediction. And we do not believe monetary policy can bring the economy back up.

We merely sketch a blueprint.

Is Mr. Powell prepared to balloon the balance sheet to a delirious $13.38 trillion?

Balance sheet expansion has a limit. An unknown limit — but a limit.

Drive past it and the dollar could crumble, all confidence lost.

And so we find Mr. Powell hung upon the hooks of a mighty dilemma…

In his mind he could:

A) Risk a dollar collapse by inflating the balance sheet to $13 trillion, or…

B) Risk a deeper economic collapse by failing to inflate the balance sheet to $13 trillion.

Our wager is on A…


Brian Maher
Managing editor, The Daily Reckoning

The post Is Monetary Policy Too Tight? appeared first on Daily Reckoning.

Did the Fed Bail out the Market Today?

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

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.”


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.


Jim Rickards
for The Daily Reckoning

The post Heading Into Negative (Real) Interest Rates 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.:


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:


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?


Brian Maher
Managing editor, The Daily Reckoning

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

Why the Fed Won’t Save the Market

This post Why the Fed Won’t Save the Market appeared first on Daily Reckoning.

A very convenient conviction is rising in the panicked financial markets that the Federal Reserve will “save the market” from a COVID-19 collapse. But they won’t.

“Buy-the-dip” punters are placing bets on the belief the Fed can’t possibly let the current bubble pop.

Oh yes they can and yes they will. Why?

It’s about control. Here’s what I mean…

Just as the Fed gets panicky if interest rates start getting away from its control, the Fed also gets nervous when its speculative bubbles get away from it, even though it causes them in the first place.

When speculators no longer fear a downturn because of their faith in eventual Fed “saves,” the Fed has lost control. And that’s not what the Fed wants.

The COVID-19 pandemic is actually a godsend to the Fed.

To reestablish control, the Fed must let the current euphoric faith in its “guarantee” to rescue markets crash to Earth.

The Fed’s foolish but not stupid. They understand speculative bubbles always pop, so the COVID-19 pandemic is just the excuse they needed to let the air out of the current grossly unsustainable bubble.

All bubbles pop. That leaves the Fed with an unsavory choice: Either be viewed as responsible for the bubble bursting or engineer some fall guy to take the blame and give the Fed cover for its incompetence.

It’s also instructive to note, as many have, that the Fed enters this global recession with very little policy ammo.

Interest rates are so near zero already that a couple of rate cuts will do very little good in the real economy.

Panicky punters expect the Fed to blow its wad on saving their hides, but what would that leave the Fed for the real recession that’s just getting underway? Nothing. If the Fed starts cutting now, it’ll have nothing left.

Would the Fed be so shortsighted and stupid as to blow their last ammo just to save speculatively insane punters from the inevitable bursting of a moral hazard-driven bubble?

In a word, no.

What about the possibility of negative interest rates?

Japan and Europe have effectively proven that negative interest rates do essentially nothing to boost spending in the real economy.

All negative interest rates accomplished was further boosting speculative bubbles and wealth inequality, which threatens to destabilize the social order — something the Fed cannot control.

The reality is the COVID-19 pandemic promises to be much more consequential than the run-of-the-mill financial excesses of the past 20 years, but we already know one important thing:

All bubbles pop.

We also know this: The greater the excesses, speculative euphoria and moral hazard, the greater the reversal.


Charles Hugh Smith
for The Daily Reckoning

The post Why the Fed Won’t Save the Market 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:


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…


Brian Maher
Managing editor, The Daily Reckoning

The post Jerome Powell Confesses appeared first on Daily Reckoning.

“If There’s a Recession, Don’t Worry”

This post “If There’s a Recession, Don’t Worry” appeared first on Daily Reckoning.

“Pride goeth before destruction,” warns the Book of Proverbs… “and a haughty spirit before a fall.”

The Federal Reserve might keep this biblical reproach close by…

For as one Federal Reserve magnifico boasted recently — pridefully and haughtily:

“If there’s a recession, don’t worry.”

Don’t worry, that is, because “the Fed is very powerful.”

This information we gathered through our vast web of spies…

Dispatch From a Banking Conference in Puerto Rico

The Federal Reserve hosted a recent banking conference on the Caribbean island of Puerto Rico.

Old Daily Reckoning hand and “sovereign man” Simon Black dispatched an agent to listen in… who wired back the transcript.

Says Simon, via his man in San Juan:

One very senior Fed official… told the audience, “If there’s a recession, don’t worry,” because “the Fed is very powerful” and has all the tools it needs to support the economy.

To which instruments of power does this grandee refer?

We have no specific information. But interest rates cannot be among them…

The Fed Has Limited “Strategic Depth” to Fight Recession

History argues the Federal Reserve requires rates of 4% or 5% to vanquish a recessionary foe.

Only these elevated rates give it the “space” to slash rates sufficiently — to zero if necessary.

But today’s federal funds rate ranges only between 1.50% and 1.75%.

Thus the central bank’s last trench line — the zero bound — lies dangerously close in back of it.

That is, the Federal Reserve presently lacks the strategic depth to mount a successful rate-based defense… and wear down the enemy in its protracted meat grinder.

Should the enemy puncture the Fed’s shallow defenses, the vast rear is currently open to it. And recession would have the entire economy in siege.

What weapons, then, might remain in the Federal Reserve’s arsenal?

Additional quantitative easing? Perhaps “forward guidance”? They are on hand, yes.

But what about negative interest rates, previously confined to the drawing board? Why make the zero bound your last line of defense?

Why not stretch the barbed wire behind it, lay down mines… and dig additional trenches in negative territory?

Negative rates would deepen and stiffen the defense, their boosters argue.

Three Full Percentage Points!

Former Federal Reserve Field Marshal Ben Bernanke insists these are formidable anti-recession armaments. He sets great store by them, in fact.

Quantitative easing, forward guidance and negative interest rates — combine them one with the other, says this strategic genius…

And they equal three full percentage points of rate cuts. Three full percentage points!

By his lights then, today’s federal funds rate is not as low as 1.50% — but as high as 4.75%.

That is… the Federal Reserve presently enjoys nearly all the strategic depth required to fight back recession.

We suppose these are the weapons our anonymous central banker has in mind — those that render the central bank “very powerful.”

But we are not half so convinced. We see not an impregnable defense… but a Maginot Line, vulnerable to a superior strategy.

We envision a flanking attack, with enemy armor snaking its way through the Ardennes, bypassing the forts.

We further envision a thrust through the Moselle Valley… and into the defenseless economic interior.

The Fed’s Weak Defenses

Place no faith in the Federal Reserve’s Maginot Line, argues Jim Rickards:

Here’s the actual record…

QE2 and QE3 did not stimulate the economy at all; this has been the weakest economic expansion in U.S. history. All QE did was create asset bubbles in stocks, bonds and real estate that have yet to deflate (if we’re lucky) or crash (if we’re not).

Meanwhile, negative interest rates do not encourage people to spend as Bernanke expects. Instead, people save more to make up for what the bank is confiscating as “negative” interest. That hurts growth and pushes the Fed even further away from its inflation target.

What about “forward guidance”?

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.

So every single one of Bernanke’s claims is dubious. There’s just no realistic basis to argue that these combined policies are equal to three percentage points of additional rate cuts.

Fighting the Last War

Generals prepare to fight the last war, it is often argued. We suppose central bankers prepare to fight the last crisis.

Meantime, the relentless enemy is preparing to wage the next recession. It learns, it adapts. It originates new tactics, new weapons… new strategies.

It bypasses Maginot Lines.

And so we expect the next recession to catch our hidebound central bankers unaware… facing straight ahead while the tanks roll in from their flank.

But we expect a new war plan to emerge from the next recession, once all existing defenses are flat.

The New Wonder Weapon

At its center will be the wonder weapon of Modern Monetary Theory, or MMT.

Up it will go in its Enola Gay… and the fiscal authorities will unload it high above Main Street.

Cash will come raining down upon the unsuspecting residents below, like so much confetti.

They will then vanish into stores, into restaurants, into theaters to disgorge their newfound bounty.

The secondhand recipients of this bounty will proceed to exchange it for autos, boats and houses.

The third-hand recipients will in turn send the money on its way, fanning out in greater circles yet.

The entire economy would soon be on the jump… and recession thrown headlong into rout, permanent and humiliating rout.

But this super-weapon packs greater wallop yet…

Everything for Everyone

It can furnish the wherewithal for a “Green New Deal,” universal health care, free college for all… and guaranteed employment.

If John is unemployed, if Jane cannot meet tuition, if Joe lacks health care… then simply print the money to make them whole.

Send it marching off for duty in the general economy, where it will make all shortages good.

MMT says unemployment, for example, is direct evidence that money is overtight.

Print enough and you have the problem licked.

But didn’t the government print money like bedlamites after the financial crisis? How can money possibly be tight?

Ah, but QE’s trillions were funneled off into credit markets, where they liquified the financial system.

They did not enter the Main Street economy. That is why inflation never got its start.

But with MMT, the money goes straight from the print press to the Treasury.

It can then be spent into public circulation — on a New Deal, for example. Green, red, blue, purple or pink… the choice is yours.

Or for free college, universal Medicare… jobs for all.

But you raise an objection. MMT is a cooking recipe for massive inflation, you say… even hyperinflation.

Inflation? No Problem

Yes, but the MMT crowd has anticipated your objection and meets you head on.

They actually agree with you. They agree MMT could cause a general inflation, possibly even a hyperinflation.

In fact, inflation is the one limiting factor they recognize, the one potential monkey wrench jamming the gears.

But they have the solution: taxation.

If inflation begins to bubble, to gurgle, the government can simply drain the excess dollars out of the system.

Under MMT the economy is the tub. Taxation is the drain.

Under the theory, in fact, stifling inflation is taxation’s central purpose. It is not to raise revenue.

“Ignoring It Would Be Foolish”

Is the theory crackpot? Yes, we are convinced it is.

But desperate times invite desperate measures. And when recession rolls on through the Federal Reserve’s defenses… desperate measures we will see.

We cannot say when of course. Nonetheless…

“[It] is coming,” warns analyst Kevin Muir. “Ignoring it would be foolish.”

Yet these are foolish times…  inhabited by foolish people.

Do you require proof?

Simply recall the recent counsel of a senior Federal Reserve official:

“If there’s a recession, don’t worry.”


Brian Maher
Managing editor The Daily Reckoning

The post “If There’s a Recession, Don’t Worry” 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:


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.


Brian Maher
Managing editor, The Daily Reckoning

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