The destiny of the world is now in the hands of 6 central banks, Fed, ECB, BoE (England), PBOC (China), BoJ (Japan), SNB (Swiss). This in itself bodes extremely badly for the global financial system. This is like putting the villains in charge of the judicial system. For decades these central banks have totally abused their power and taken control of the world monetary system for the benefit of their banker friends and in some cases their private shareholders. Read more...
“If this doesn’t work,” wonders Seema Shah, Principal Global Investors central strategist…
“This” is of course the Federal Reserve’s desperate harum-scarum yesterday afternoon.
Mr. Powell and crew knocked down rates one entire percentage point. The federal funds rate now squats between 0% and 0.25% — zero essentially.
And so as a dog returneth to its vomit… the Federal Reserve returneth to zero.
The scoundrels of Zero Hedge label it part of the “the biggest emergency ‘shock and awe’ bazooka in Fed history.”
But we are not shocked. Nor are we awed.
Our only surprise is the scheduling — our hazard was a return to zero later this week.
Yet the business was so urgent, all hanging in balance… it could not even wait for this week’s formal FOMC confabulation (now canceled).
Not Just Rate Cuts
We were further informed yesterday that quantitative easing (QE) is commencing anew.
The Federal Reserve will purchase “at least” $500 billion of United States Treasuries — and $200 billion of mortgage-backed securities — $700 billion in all.
We are betting high on “at least.” This merely represents the opening installment.
The Federal Reserve is also extending fresh ratlines — our apologies, swap lines — to foreign central banks.
That is intended to maintain dollar liquidity against the global coronavirus delirium presently obtaining.
Greg McBride, Bankrate chief financial analyst, in summary:
The Fed is dusting off the financial crisis playbook, returning to bond buying, coordinating with other global central banks to provide access to U.S. dollar liquidity, cutting interest rates to zero and opening the Fed’s discount window to ensure the flow of credit through banks to consumers and businesses.
“It’s really great for our country,” gushed the president.
But is it? Did yesterday’s “shock and awe” bazooka blast score a hit?
It did, yes. A direct hit — to the wrong side.
Shocked and Awed…
Stock futures went careening last evening, so shocked, so awed were they. They promptly went “limit down.”
The future arrived this morning at 9:30 Eastern. And markets remained shocked and awed…
The Dow Jones plunged nearly 10% from the opening whistle. The S&P and Nasdaq followed in lockstep.
Once again the breakers tripped… and trading was suspended 15 minutes.
“The central banks threw the kitchen sink at it yesterday evening, yet here we are (with deep falls in stock markets),” yelled Societe Generale strategist Kit Juckes.
“This is what panic looks like,” hollered Patrick Healey, president of Caliber Financial Partners.
Yet we are not surprised. Markets can see the beads of perspiration forming about Mr. Powell’s forehead. Markets are flighty birds easily frightened.
And what telegraphs fear more than a “shock-and-awe bazooka”?
The shock and awe deepened throughout the day…
Another “Worst Day Since Black Monday”
We grow weary of repeating it. But the Dow Jones once again suffered its mightiest whaling since Black Monday, 1987.
The index gushed another 2,997 points today to close at 20,188 — giving back another 12.93%.
The S&P lost 325 points, or 11.98%. The Nasdaq, 970 points and 12.32%
And so additional trillions of stock market wealth vanish into the electricity, lost.
Losses accelerated towards day’s end. Why?
Late this afternoon the president said the “worst of the outbreak” could stretch into August.
Fear gauge VIX went skyshooting to 83 today — within shouting distance of its record 90 from October 2008.
And so we return to our opening question:
“If this doesn’t work… what will?”
Alas, the question is easier asked than answered…
“Just Close the Whole Thing up”
One CNBC host even suggests shuttering Wall Street. Shrieks Mr. Scott Wapner:
How are folks supposed to focus on trading stocks when they’re dealing with nervous kids out of school, spouses working from home and scrambling to keep up, all while managing their own anxieties? Just close the whole thing up and start again later. It’s the right thing to do.
It may be the right thing to do or the wrong thing to do. Regardless, it has been done before.
The stock market was suspended 10 days during the panic of 1873 — and four entire months at the outset of the First World War.
Examples abound. Most recently in October 2012 when a hurricane, Sandy by name, closed the market two days.
But now the Federal Reserve confronts a different variety of hurricane…
“Very Serious Trouble”
“The Fed is now in very serious trouble,” gulps Graham Summers of Phoenix Capital — whom we recently introduced to you, our reader.
“Put another way,” he continues…
The Fed has gone truly NUCLEAR with monetary policy… and the market is STILL imploding…
The Fed can do NOTHING to stop this. No amount of rate cuts or stimulus from the Fed will make people want to go out and spend money if the country is on lockdown/facing a health crisis triggered by a pandemic.
The country is indeed verging upon a lockdown of sorts…
The Centers for Disease Control and Prevention has recommended that all sizable gatherings and events be “postponed” for the following eight weeks.
New York, New Jersey and Connecticut — home to a fair number of Americans — have taken aboard its counsel.
All gatherings of 50 persons or greater thus are banned.
We remind you that restaurants frequently entertain crowds exceeding 50. As do other dens of vice including drinking establishments, casinos, theaters, concert halls, ballparks, gymnasiums and houses of worship — to name some.
Houses of ill repute, we assume, must ration admission ruthlessly… else court the wrath of the law.
New Jersey residents are now confined to barracks between 8 p.m. and 5 a.m. All travel is “strongly discouraged,” save in emergency.
Other States Follow
Meantime, Illinois bars and restaurants will close to the public beginning tonight. Their doors will not reopen until March 30.
Delivery and takeout services are available, however, as they are in New York, New Jersey and Connecticut.
Washington state has followed their example. As has the great state of Michigan. As has our own state of Maryland.
Massachusetts has exceeded even CDC’s draconian limit of 50. Gatherings of 25 or more are presently forbidden in this, the cradle of American liberty.
Meantime, over 30 million students in at least 31 states are exiled from the classroom. The Ohio governor has suggested his state’s may not come back until autumn.
Even the Supreme Court of the United States will no longer hear arguments — until early April at the earliest.
Do not forget, six of nine justices are aged 65 or above. And the coronavirus harbors a savage antagonism toward the elderly.
Thus a grateful nation is insured against a potential holocaust of justices.
A Ban on All Air Travel?
And now… rumors are on foot that a complete ban on domestic air travel is under active consideration.
We have assigned our men to investigate.
Regardless, the airlines are suffering damnably. Delta Air Lines claims conditions are worse than even the Sept. 11 afterblow.
“The speed of the demand fall-off is unlike anything we’ve seen,” laments Chief Executive Officer Ed Bastian.
The airline has gutted operations some 40%. And 300 planes are tied down to the tarmacs.
Meantime, all American cruise liners will remain tied up to the piers for 60 days.
A bailout of the air and cruise lines is on the way — depend on it.
So too, perhaps, is a bailout of the American citizen…
$1,000 Check Every Month
Sen. Mitt Romney (R-Utah) proposes to hand every American adult $1,000 per month so long as the coronavirus rages.
Reads a press release under his name:
Every American adult should immediately receive $1,000 to help ensure families and workers can meet their short-term obligations and increase spending in the economy.
Of course, the money must originate somewhere… as the government has none of its own.
In many cases it would amount to lifting money out of a fellow’s back pocket and lowering it into his front pocket.
But crises bring forth ideas that would never get a hearing otherwise. Many are of course lunatic.
Americans would acclimate rapidly to the monthly stipend. Who would take it away from them once the all clear signal goes out?
This is an election year, do not forget, when votes go up for sale. A monthly check can purchase many.
“The Worst Is yet Ahead for Us”
But just when might the coronavirus lose its stranglehold on American life?
“The worst is yet ahead for us,” warns Dr. Anthony Fauci of the National Institutes of Health.
We hope the fellow is mistaken.
We further hope the worst is behind for markets.
But we fear the worst is ahead for the economy.
And so again we ask:
“If this doesn’t work… what will?”
Managing editor, The 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.”
Managing editor The Daily Reckoning
Today we hazard a thumping prediction:
The next round of quantitative easing — official, actual quantitative easing — is fast approaching.
Yes… the Federal Reserve will soon be clearing for emergency action.
When precisely can you expect it? And why the urgency?
Answers shortly. Let us first squint in on Wall Street…
The Bears Win on Points
The Dow Jones took a 28-point flesh wound today. The S&P lost but three points; the Nasdaq, five.
Gold gained $4 today, while 10-year Treasury yields rose ever so slightly — to 1.83%.
A humdrum performance altogether, this day put in.
But when can you expect the next round of authentic quantitative easing… and why so soon?
We must first distinguish between official quantitative easing and its junior shadow, “QE-lite”…
The Difference Between QE and QE-lite
Quantitative easing had a strategic vision. That is, it was intended to stimulate.
And so it stomped mercilessly upon long-term interest rates… and battered them down to nothing.
QE-lite — conversely — lacks all strategic vision.
It is workaday… and technical. It simply fills a leakage somewhere within the financial plumbing.
It consists of mere “open market operations” the Federal Reserve has always conducted.
And it fixes upon short-term rates — unlike quantitative easing. Its mission is therefore limited.
The Birth of QE-lite
The Federal Reserve initiated QE-lite in September, when liquidity ran dry in the short-term lending markets.
The Federal Reserve’s New York crisis management team rounded into action, unfurled the hoses… and gave these markets a good thorough drenching.
They are still hard at the business — and inflating the balance sheet beautifully.
The Federal Reserve’s balance sheet came in at $3.8 trillion in September. Yet it presently expands to $4.07 trillion.
Yesterday alone the New York crew emptied in $81.4 billion of liquidy credit.
Yet we are assured none of it has seeped into the central water lines of the stock exchanges.
Morgan Stanley’s interest rate strategist Matt Hornbach thus informs us:
There is little debate that the Fed is increasing the quantity of money, or Q. However… the additional money lacks a direct transmission mechanism to the equity markets or other long-duration risk assets.
Just so. QE-lite nonetheless expands the Federal Reserve’s balance sheet, as shown. And the balance sheet is the central scene of action.
Is it coincidence the major indexes have established fresh records recently?
“Like a Fourth Rate Cut This Year”
As we noted last week:
The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.
QE-lite is “like a fourth rate cut this year,” affirms Matthew Miskin, John Hancock co-chief investment strategist.
Meantime, Jerome Powell claims QE-lite has patched the financial plumbing. All leaks are wrenched shut.
Yet independent inspectors are far from convinced. Some see not patched leaks — but ongoing hemorrhagings…
James Bianco of Bianco Research:
The big-picture answer is that the repo market is broken. They are essentially medicating the market into submission. But this is not a long-term solution… This is now far bigger than anyone thought this was going to be. I think they’re hoping the market will magically fix itself. I don’t see why it would.
Nor do we.
The Federal Reserve is currently three months deep into these “temporary” open market operations.
And they will run “at least into the second quarter” of 2020… by Mr. Powell’s own admission.
We bet high they will go into the third quarter of 2020. And likely the fourth.
But why have the Federal Reserve’s heroic floods of liquidity failed to fill the pipes?
Here is the likely answer:
It can pump in its liquid. And it has. But it cannot guarantee it sloshes on through to its intended destination.
Clogs may bottle it up.
The Clogs in the System
We first must understand the repo market piping. Explains Reuters:
In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often just overnight, to finance their trading and lending. The next day, borrowers repay the loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds.
Twenty-four banks — or “primary dealers” — run direct lines to the liquidity taps.
That is, they transact directly with the Federal Reserve. From these primary dealers the liquidity goes sluicing out through the repo market.
Yet these banks have evidently chosen to sit on their supplies… rather than lend them to thirsting recipients.
Our minions inform us that over 70 financial institutions presently go without.
Hence the liquidity shortage.
The Bank for International Settlements (BIS) has reached the same conclusion.
BIS fingers four banks in particular. Yet it failed to identify the culprits… for what it is worth to you.
But why are these bloated and hoggish banks refusing to lend as needed?
Bloated and Hoggish Banks
Here is why they decline to put loanable funds on offer:
They can store their hoards at the Federal Reserve instead — where they earn a superior interest.
Bryce Doty, is a senior portfolio manager at Sit Fixed Income. From whom:
The big banks are just hoarding cash. They told the Fed they have more than enough cash in excess reserves to meet regulatory issues, but they prefer having money at the Fed where they can still earn 1.55%, rather than in the repo market.
In addition, elevated post-crisis capital requirements incentivize banks to pile up reserves rather than loan them.
So concludes our brief canvas of the repo market… and its present woes.
Yet we promised a prediction at the outset… that the Federal Reserve will soon undertake the next official round of quantitative easing.
We now gaze into our polished, haze-free crystal sphere for the answer…
Prepare for Imminent “Official” QE
The Federal Reserve will initiate the next official round of quantitative easing — QE4 — before this year runs out.
That is, before Jan. 1, 2020.
This is actually the near-prediction of Credit Suisse analyst Zoltan Pozsar.
Here is the hinge upon which it rests:
Whether or not the Federal Reserve loses control of overnight rates in the weeks ahead.
Mr. Pozsar has toiled for both the New York Federal Reserve and the United States Department of Treasury.
Thus he is exquisitely familiar with the financial plumbing. And this fellow believes the Federal Reserve’s patchwork has failed to plug the leaks.
Repo market funding remains unequal to requirements, he insists. Meantime, regulatory burdens on the primary banks are “shaping up to be a severe binding constraint.”
And so this Pozsar detects a main pipe groaning, rattling and giving… ready to rupture.
He believes the weeks ahead are “shaping up to be the worst in recent memory.” Moreover, he concludes “the markets are not pricing any of this.”
“If we’re right about funding stresses,” he concludes, “the Fed will be doing ‘QE4’ by year-end.”
But let us take this near-prediction, strip its escape clause, challenge its manhood and put steel in its spine:
The Federal Reserve will be doing “QE4” by year-end.
That is our prediction, presented with a wry grin. Let the countdown begin…
Managing editor, The Daily Reckoning
Deutsche Bank maintains a strict dossier on all the world’s asset classes.
Stocks, bonds, real estate, commodities — 38 assets, A through Z — Deutsche Bank has them under ruthless and unshakable surveillance.
Last December’s spywork revealed this arresting conclusion:
93% of all the world’s assets traded negative in 2018.
Not even in the fathomless depths of the Great Depression did so many global assets wallow in red.
But last year is last year. Scroll the calendar one year forward… to today.
What do we find?
We find a full 180-degree turning around.
Each and every asset Deutsche Bank tracks — all 38 — trade positive this year.
Affirms Deutsche Bank’s Craig Nicol:
All 38 assets in its tracking universe have posted positive year-to-date (YTD) returns in both local currency and dollar terms.
To what earthly energy can we ascribe this complete and dramatic reversal?
The answer — the truly shocking answer — in one moment.
We first consider a more immediate reversal…
Trump Sends Stocks Reeling
The Dow Jones went badly backwards this morning, down 400 points. It came back a bit in the afternoon, losing only 280 points by closing whistle.
The S&P and Nasdaq followed parallel routes.
The S&P lost 20 points on the day. The Nasdaq lost 47.
The negative catalyst came issuing out of 1600 Pennsylvania Ave. this morning…
Mr. Trump announced that a trade accord can wait. Wait until when?
Until after the 2020 election is concluded:
In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right… I have no deadline… In some ways, I think it is better to wait until after the election if you want to know the truth.
Wall Street’s trading algorithms plucked the news off the wires… and began to sweat.
Trade-sensitive stocks such as Apple and Caterpillar endured the greatest trouncings today, unsurprisingly.
Equally unsurprisingly, safe haven gold jumped $14 on the day.
And so the merry-go-round takes another spin. Which direction tomorrow takes it… who can say?
But to return to our central question:
Why are all 38 assets Deutsche Bank tracks positive on the year — when 93% of these same assets were negative last year?
Too Obvious for Words
We claimed above that the answer was “truly shocking.” But we merely perpetrated a con to hold your attention.
The answer is obvious to anyone with eyes willing and able to see…
The Federal Reserve was increasing interest rates and trimming its balance sheet in 2018. Last December Jerome Powell announced the business would proceed uninterrupted.
That was when the stock market fell into open and general revolt.
By Christmas Eve… it was a whisker away from “correction.”
And so Jerome Powell dropped his weapons, hoisted his surrender flag… and came out hands in the air.
Wall Street had him.
Safely under lock, safely under key… Powell proceeded to lower rates three instances this year.
What is more, he called a premature halt to the quantitative tightening he had previously declared on “autopilot.”
Who can then be surprised that the Dow Jones industrial average has advanced 4,000 points this year?
Or that the other major indexes have marched with it?
But our tale does not conclude here. Instead, it takes a meandering twist down a side road…
A November to Remember
Rate cuts only partially explain this year’s asset extravaganza. The termination of quantitative tightening only partially explains this year’s asset extravaganza.
Can we credit a general optimism on trade (despite this morning’s blood and thunder)?
Perhaps partially — but only partially.
Whatever trade gives, trade takes back.
The promised trade deal has proved an endless frustration, a pretty plum dangled always beyond reach, a Christmas morning put off again, again and again.
For a full and complete explanation of the year in assets… we must peer deep within Deutsche Bank’s report.
There we will find this chestnut sandwiched within:
November posted some of the year’s loveliest asset gains. November, that is, hoisted all boats on its rising tide.
For the answer we must first revisit September… and the “repo” market.
Just Don’t Call It QE4
Overnight lending rates leapt to 10% as liquidity ran dry — a high multiple of the federal funds rate then prevailing.
The Federal Reserve instantly hosed in emergency liquids to suppress the insurrection.
Mr. Powell declared the operation “temporary.” But on and on it went — into October, into November (and into December).
By November Mr. Powell and his minions at the New York Federal Reserve emptied in some $280 billion of liquidy credit.
They shrieked, howled and fumed that these “open market operations” were in no way quantitative easing.
Yet these activities inflated the Federal Reserve’s balance sheet… precisely as if they were quantitative easing itself.
From its maximum $4.5 trillion enormity, the quantitative tightening of 2018–19 siphoned down the balance sheet to $3.8 trillion.
But along came September… and its temporary open market operations.
By mid-November they reinflated the balance sheet to $4.04 trillion. Let us reintroduce the evidence we initially entered into record Nov. 15:
In all, the Federal Reserve has inflated the balance sheet $293 billion in under three months.
When was the last occasion the Federal Reserve carried on with such frantic fanaticism?
October 2008 — in the wildest psychosis of the financial crisis.
If you seek a thorough explanation for November’s asset surge, here you are.
But perhaps you demand further evidence. Then further evidence you shall have.
Here is the pistol, smoke oozing from its barrel…
The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.
Mainstream displays of lucidity and insight are rare and shocking. But here you have one, by way of CNBC’s Carl Quintanilla.
Dated Nov. 18:
Whether it should be considered QE4 or not, in the eyes of the market it’s just semantics. Markets view any increase in the size of the Fed’s balance sheet as QE and the $250 billion increase in just two months is no doubt helping to lift stock prices.
And the cup runneth over…
Hence November’s outsized influence on assets in general.
Hence we find all 38 asset classes Deutsche Bank tracks positive on the year.
But here is the danger:
The Federal Reserve’s liquidity may be kerosene that ultimately fans a conflagration…
A Potential Inferno
In Bank of America’s telling, Fed support of repo markets raises systemic financial risk.
That is because it allows excess leverage to pile up. If it comes tumbling down, if the system deleverages… it may strike the match on one royal blaze.
Bank of America’s Ralph Axel:
… there may be a situation in which banks want to deleverage quickly, for example during a money run or a liquidation in some market caused by a sudden reassessment of value as in 2008… the Fed’s abundant-reserve regime may carry a new set of risks by supporting… overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market’s ability to accurately price the supply and demand for leverage as asset prices rise.
Meantime, the Federal Reserve pours forth an average $5 billion of flammable liquid each day.
And someone, somewhere, is holding a match…
Managing editor, The Daily Reckoning
Chris Temple, Founder of The National Investor joins me for a look at the US markets and their inability to reach all time highs. This very well could be all part of a longer term topping pattern. We also spend some time discussing the Fed and how divided they are. Making future policy out of the Fed all the more cloudy but quite frankly the Fed is nothing more than market reactive.
Dear Rich Lifer,
Although the U.S. economy continues to grow and add jobs, talk of the dreaded “R” word is on the rise due to a number of worrying signs.
Yes, I’m talking about a “Recession”.
Between the ongoing trade war with China, an inverted yield curve, and the Federal Reserve lowering short-term borrowing costs, investors are starting to get spooked.
A question I get asked a lot is what should retirees do with their money when a recession is looming?
When the market crashed in 2008, an estimated $2.4 trillion disappeared almost overnight from Americans’ 401(k)s and IRAs.
The fear of losing everything to another recession is sending a lot of investors running for the hills.
However, there are steps you can take today to minimize losses during a recession, no matter your age or financial situation.
Here’s a checklist you can follow so that your investments and savings can weather any financial storm.
1. Start tracking your cash flow.
Step one in preparing for a recession is knowing where you stand. The best way to figure this out is by calculating your cash flow, or how much money you have coming in versus going out.
Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty should there be an economic downturn.
If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last.
An easy way to begin tracking cash flow is with free mobile apps, like Mint or Personal Capital. You simply connect your bank accounts to these apps and the software tracks your transactions and categorizes your spending.
This way you know where your money is going each month and you can start setting budget goals or identifying expenses that can easily be cut in the future.
2. Top up your emergency fund.
Your best defense against economic hardship will be a well-funded emergency fund. Rather than rack up high-interest debt, you can tap your savings to cover basic living expenses.
As a general rule-of-thumb, I recommend building an emergency fund of 3-6 months worth of expenses. With talk of a nearing recession, however, it’s best to err on the conservative side.
The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.
If you’re retired, you won’t have to worry about getting laid off, but you’ll still need an adequate amount of accessible cash in case your retirement accounts or pension take a hit.
3. Pay off outstanding debt.
With talk of a recession happening in the next year or so, it’s a good time to start aggressively paying down any bad debts you owe.
Should a recession strike, you’ll want your income going toward monthly living expenses and not paying the bank.
Plus, if you miss too many payments you could end up wrecking your credit score, which will make your life even more challenging when the economy recovers.
Also, whatever you do, don’t dip into your 401(k) to pay off debt, especially if you’re not yet retired. Start with high-interest debt first, like credit cards and build debt payments directly into your budget so you don’t forget.
4. Rebalance your investment portfolio.
Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investments.
If you’re already retired or close to retirement, you’ll want to mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation.
Traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification.
The reason being that retirees are now living longer, which means your portfolio needs more room for growth. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.
5. Manage your 401(k) wisely
If times get really tough, it can be tempting to want to sell or make significant alterations to your 401(k). My advice: don’t touch it.
Most likely, your 401(k) is part of your long-term financial plan, which means economic downturns are part of the deal. You don’t want to jeopardize any long-term gains by panic-selling the moment markets start dropping.
Lastly, if you’re not already maxing out your 401(k) contributions or taking advantage of any employer-match programs, make sure you do. That’s your money to keep.
Finally, understand that recessions are a normal part of the economy. They’re cyclical in nature and notoriously hard to predict. Control what you can by heeding the warning signs and preparing best you can.
To a richer life,
Chris Temple, Founder of The National Investor shares his thoughts on Christine Lagard announced to take the reigns at the ECB and Trump’s more recent nominations for rolls at the Fed. Overall the theme of lower rates seem locked in for a long time. There is also these on going comments regarding currency wars that Trump spurred again today.
“Sit down before fact like a little child,” Thomas Huxley instructed, and “follow humbly wherever and to whatever abyss Nature leads…”
Today we sit down before facts, childlike… and follow humbly wherever and to whatever abyss they lead.
But what if the facts lead straight to the abyss of recession?
Facts 1: April orders for core nondefense capital goods slipped 0.9%.
Facts 2: April orders for durable goods — items expected to endure three years or more — sank 2.1%. Durable goods shipments overall dropped 1.6%… the most since December 2015.
Facts 3: April orders for transportation equipment plunged 5.9%.
Facts 4: April retail sales slipped 0.2%.
Facts 5: The “yield curve” has inverted good and hard — a nearly perfect omen of recession.
Has Recession Already Arrived?
Stack facts 1–5 one atop the other. What can we conclude?
“U.S. recession probably started in the current quarter.”
This is the considered judgment of A. Gary Shilling. Mr. Shilling is a noted economist and financial analyst.
And he gazes into a crystal ball less murky than most.
In the spring of 1969, he was one of only a few analysts who correctly envisioned the recession at year’s end and was almost a lone voice in 1973… the first significant recession since the Great Depression.
But is not the economy still expanding?
Q1 GDP rang in at a hale and hearty 3.2% — after all.
But peer behind the numbers…
Much Less than Meets the Eye
Much of the jauntiness was owing to transitory factors such as inventory accumulation.
Firms squirreled away acorns to jump out ahead of looming tariffs, giving Q1 GDP a good jolt.
But that jolt has come. And that jolt has gone.
Meantime, Q2 GDP figures will come rising from the bureaucratic depths tomorrow morning.
What can you expect from them?
A severe letting down, it appears…
Q2 GDP Estimates Revised Downward
Morgan Stanley has lowered its Q2 GDP forecast from 1.0%… to a sickly 0.6%.
J.P. Morgan has lowered its own sights from 2.25% to 1%.
Meantime, the professional optimists of the Federal Reserve’s Atlanta command ring in at a slender 1.4%.
Miles and miles — all of them — from the first quarter’s 3.2%.
Might these experts botch the actual figure?
They may at that… and it would not be the first instance.
But the weight of evidence here assembled loads the scales in the other direction.
Besides, recessions first appear in the rearview mirror. They are only identified several months to one year post factum… if not longer.
Perhaps the economy has already started going backward, as Mr. A. Gary Shilling suggests.
Or perhaps he has spotted a phantom menace, a shadow, a false bugaboo.
What does the “yield curve” have to say?
The Message of the Yield Curve
The yield curve is simply the difference between short- and long-term interest rates.
Long-term rates normally run higher than short-term rates. This happy condition reflects the structure of time in a healthy market.
The 10-year yield, for example, should run substantially higher than the 3-month yield.
The reason is close by…
The 10-year Treasury yield rises when markets anticipate higher growth — and higher inflation.
Inflation eats away at money tied up in bonds… as a moth eats away at a cardigan.
Bond investors therefore demand greater compensation to hold a 10-year Treasury over a 3-month Treasury.
And the further out in the future, the greater the uncertainty. Thus the greater compensation investors demand for taking the long view.
Compensated, that is, for laying off the sparrow at hand… in exchange for the promise of two in the distant bush.
Time Itself Inverts
But when the 3-month yield and the 10-year yield begin to converge, the yield curve flattens… and time compresses.
When the 10-year yield falls beneath the 3-month yield, the yield curve is said to invert. And in this sense time itself inverts.
The signs that point to the future lead to the past. And vice versa.
In the careening confusion, future and past run right past one another… and end up switching places.
Thus, an inverted yield curve wrecks the market structure of time.
It rewards pursuit of the bird at hand greater than two in the future.
That is, the short-term bondholder is compensated more than the long-term bondholder.
That is, the short-term bondholder is paid more to sacrifice less… and the long-term bondholder paid less to sacrifice more.
That is, something is dreadfully off.
“A Nearly Perfect Omen of Lean Days Ahead”
An inverted yield curve is a nearly perfect omen of lean days ahead. It suggests an economic winter is coming… when investors expect little growth.
Explains Campbell Harvey, partner and senior adviser at Research Affiliates:
When the yield curve inverts, it’s not the time to borrow money to take a vacation to Orlando. It is the time to save, to build a cushion.
An inverted yield curve has accurately forecast all nine U.S. recessions since 1955.
Only once did it yell wolf — in the mid-1960s.
It has also foretold every major stock market calamity for the past 40 years.
The yield curve last inverted in 2007. Prior to 2007, the yield curve last inverted in 1998.
Violent shakings followed each inversion.
History reveals the woeful effects of an inverted yield curve do not manifest for an average 18 months.
And now, in 2019… the doomy portent drifts once again into view.
The Bond Market’s Strongest Signal Since the Financial Crisis
The 3-month and 10-year yield curve inverted in March. It has since straddled the zero line, leaning with the daily headlines.
But this week the inversion has gone steeply negative.
We are informed — reliably — that the yield curve has presently inverted to its deepest point since the financial crisis.
Why is the 3-month versus the 10-year yield curve so all-fired important?
Because that is the section of the yield curve the Federal Reserve tracks closest. It believes this portion gives the truest reading of economic health.
Others give the 10-year versus the 2-year curve a heavier weighting.
But it is the Federal Reserve that sets policy… not others.
Federal fund futures presently offer 86% odds that Mr. Powell will lower interest rates by December… and 60% odds by September.
If recession is not currently underway, we are confident the Federal Reserve’s next rate cut will start the countdown watch.
Come the next rate cut, recession will be three months off — or less.
Why do we crawl so far out upon this tree limb?
President Trump Should Demand Jerome Powell Not Raise Interest Rates
The next rate cut will be the first after a hiking cycle (which commenced in December 2015).
And the past three recessions each followed within 90 days of the first rate cut that ended a hike cycle.
Assume for now the pattern holds.
Assume further the Federal Reserve lowers interest rates later this year.
Add 90 days.
Thus the economy may drop into recession by early next year.
Allow several months for the bean counters at Washington to formally identify and announce it.
You may have just lobbed recession onto the unwanting lap of President Donald John Trump… in time for the furious 2020 election season.
Could the timing be worse for the presidential incumbent?
Mr. Trump has previously attempted to blackjack Jerome Powell into lowering rates.
But if our analysis holds together…
The president should fall upon both knees… and beg Mr. Powell to keep rates right where they are…
Managing editor, The Daily Reckoning
“There is no money in monetary policy.”
Could it be true? Is there no money in monetary policy?
Yesterday we argued the Federal Reserve cannot even define money… much less measure it to any reasonable satisfaction.
Today we venture upon a heresy deeper still — that central bank “monetary” policy has no actual existence.
No money stands beneath it, behind it, beside it.
The emperor is well and truly nude.
Who then actually controls monetary policy today?
The answer may very well lie hidden in the “shadows.”
The details — the shocking details — to follow.
Monetary Policy Is Actually About Credit and Debt
First moneyman par excellence Jeff Snider — author of today’s opening quotation — rams a sharp stake through the heart of the monetary myth:
Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying…
Money as it relates to “monetary” policy is not really money at all. What monetary policy refers to in contemporary terms is something wholly different… When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…
All money is debt-based money in today’s lunatic and preposterous world.
The dollar in your wallet you consider an asset. But only someone else’s previous debt fanned it into existence.
Technically it is a Federal Reserve note. A note is a debt instrument.
None of the foregoing will stagger or flabbergast Daily Reckoning readers.
Money is debt in today’s world. Debt represents a claim upon the future. The Federal Reserve is a vast engine of debt, a menace.
But this Snider fellow strays far beyond the normal run of grievances…
He commits perhaps the grandest heresy in the universes of economics and finance:
That the Federal Reserve and all central banks are largely powerless…
The Central Bank Is Not Central
They are merely men behind curtains… irrelevancies… and the emperor in fact wears no clothing.
Here Snider strips the emperor bare:
The Fed is, largely outside of temporary sentiment, irrelevant. The central bank is not central… The thing people have the most trouble with is the idea that central banks are not central. It flies in the face of everything you have been taught and told your whole life. The media still give these guys every benefit of every doubt, and central bankers (ab)use that privileged platform to perpetuate their myth.
Central banks are not central? The Federal Reserve is irrelevant?
As well argue that gravity is a vicious fiction, that 2 and 2 is 9, that Washington never axed the cherry tree.
Snider further argues that the interest rate the Federal Reserve monkeys — the fed funds rate — is likewise an irrelevancy:
There is absolutely no legitimate reason why anyone should [notice federal funds.] The federal funds market is a nonentity… pocket change… It is the sparest of spare liquidity… Today, federal funds is nothing, an extraneous anachronism.
The Fed’s Target Audience: You
Why then does the Federal Reserve target the fed funds rates?
Because it wants you to believe that it bosses the markets, that its false fireworks are real:
What was decided, essentially, was to keep federal funds as the primary monetary policy focus. The reason? You.
Monetary policy contains no money; it runs entirely on expectations. Therefore, according to this view, what ultimately matters is how you perceive monetary policy…
So the FOMC decided that for the public they would still use federal funds to signal to you their intentions… There is no money in monetary policy; it is entirely psychology.
What about quantitative easing? Was it not about “printing money”
QE accomplished next to nothing….QE’s real purpose was …in trying to manage expectations which central bankers were more than happy to let you believe this was all money printing…
Then you might act in anticipating all that “money printing” was going to have stimulative and even sharp inflationary effects. You might then pull forward purchasing activity, or, if a business, hiring and production, before the expected higher costs arrived.
Blasphemy mounts upon blasphemy!
But if not the central banks… who or what is central?
Who, then, is running monetary policy?
The Shadow Banking System
You will find the answer in the shadows, says Snider — the shadow banking system.
The shadow banking system?
That is the deeply interconnected network of banking institutions that operate outside direct control of central banks.
They include the large banks and their offshore units.
This shadow banking system extends through Europe, the Caribbean and Asia, the world over.
In 2017, the Bank for International Settlements — the central bank of central banks — estimated $13 trillion to $14 trillion dwell within the shadow system.
But this shadow banking system is invisible.
It hides in shadow, leaving only traces of its activity… as a thief leaves traces of his crime.
Only a properly trained sleuth can sniff them out:
No one can directly observe this global [shadow banking] system, what is actually the world’s reserve currency. First of all, it is primarily based offshore from everywhere, therefore outside of official recognition. There are no direct statistics. The term “shadow” is, in this case, perfectly appropriate.
The United States dollar is the coin of this realm.
The shadow system first took shape in the 1950s and ’60s after Bretton Woods placed the dollar at the center of the international monetary system.
It expanded through the 1980s, ’90s… into the early aughts.
And beneath notice, the shadow banking system shouldered the central banks out of the international monetary system. Snider:
“The global money system moved on without central banks bothering to notice.”
Did the Shadow Banking System Cause the Great Financial Crisis?
These shadow banks traded heavily in derivatives and other risky instruments. All without oversight.
Where do asset bubbles come from, asks Snider? “They came from the shadows” is his answer — including the U.S. housing bubble:
Especially from the 1960s forward, and particularly in the 1990s forward, was that as the [shadow banking system] replaced other forms of mediation in global trade. What actually happened was it became a parallel banking system unto itself… not so much that a company in Japan could import goods from Sweden. But so that the banks in Japan or Sweden or Switzerland or anywhere around the world could participate in this [shadow banking] system that at the time was stoking a U.S. housing bubble, while at the same time creating vast bubbles in emerging market[s]…
So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.
Snider argues that the 2008 crisis was not merely a housing crisis. It was rather a crisis of the shadow banking system:
The Great Financial Crisis has been laid at the doorstep of subprime, a bunch of greedy Wall Street bankers insufficiently regulated to have not known any better.
That was just a symptom of the first. The housing bubble itself was more than housing. What was going on in the shadows wasn’t bounded by national borders or geography… The Great Financial Crisis was a [shadow banking] event, nothing less.
Why hasn’t the global economy recovered from the Great Financial Crisis? Might the answer involve the shadow banking system?
Managing editor, The Daily Reckoning