These Statues Must Come Down

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Today we enter into the revolutionary spirit of the times… topple idols… and haul down statues.

We will be declared subversive. We will be denounced as vandalous. The establishment will yell blue murder and demand our immediate arrest.

Yet justice is with us.

For we bring low the authors of destruction, of human inequality, of wickedness itself.

Which icons, which statues come crashing down today?

You will have your answer shortly. First to the site of a famously iconic statue — the statue of a fearsome bull…

Pandemic Fears Grip Wall Street

Faces were taut on Wall Street today… and nerves in tatters.

An uprising of the coronavirus is the evident cause. It presently lays siege to the Sunshine State. Explains CNBC:

The major averages hit their lows of the day after Florida said its confirmed cases jumped by 5,508 on Tuesday, a record, and now total 109,014. The state also said its positivity rate rose to 15.91% from 10.82%.

To Florida we must add fresh insurrections in California, Arizona, Texas and others.

“We’re going to eclipse the totals in April, so we’ll eclipse 37,000 diagnosed infections a day.”

That is the warning of former Food and Drug Administration Commissioner Dr. Scott Gottlieb.

And so the stock market took a severe fright today…

The Dow Jones plunged 710 points by closing whistle.

The S&P shed 81 points today; the Nasdaq 222.

And so the V-shaped recovery goes on ice.

But the stock market is not our central concern today. For a mad passion seizes us… and we are hot for mischief.

Central Bank Theory

Before we shatter icons, before we pull down statues… let us identify the source of our heat…

Central banks run on this primary theory:

Higher interest rates encourage saving and discourage consumer spending.

Low rates, meantime, coax bashful dollars out of wallets… and into consumer goods.

Why save money — after all — if it merely rots down in your wallet?

And consumer spending is the engine of inflation. There must be inflation, we are told.

Without inflation we risk deflation. And deflation is the great bugaboo of economics.

Under deflation, consumers cling to their cash in anticipation of lower prices tomorrow.

Before long the entire economy is trapped in the vortex of deflation… and the wolf of depression soon snarls at the door.

Central banks therefore pursue low interest rates — and a moderate dose of inflation — with a zeal verging upon mania.

But do their theories hold together?

The Magic 4%

Bank of America recently hauled central bank policy in for interrogation…

It released a report bearing this title: “Stagnation, Stagflation or Elevation.” Here is the question it pursued:

Do low interest rates truly spark consumption — and inflation?

The answer is yes, concedes the report — but only to a point. Below that point rates do not encourage spending. They encourage hoarding instead.

Low interest rates, meantime, do not yield inflation. They rather yield deflation.

What is that point of separation between spending and hoarding, between inflation and deflation?

Four percent.

Interest rates beneath 4% do not bring out more consumption. They store in more savings.

And rates beneath 4% do not yield inflation — but deflation.

The Vicious Cycle

Reports Bank of America:

As low growth and inflation make low-risk-asset income scarce (e.g., from government bonds), households are forced to reduce consumption and increase savings in order to meet retirement goals.

Forced saving further depresses demand in a vicious cycle.

And the lower rates slip beneath 4%, the more people save — and the less they spend.

We might remind you that rates presently stand scarcely above zero.

The iconoclasts of Zero Hedge in summary:

[Bank of America] shows that while lower rates indeed stimulate spending and lead to lower savings, this effect peaks at around 4% and then goes negative. In fact, the lower yields — and rates — drop below 4% — not to mention to 0% or below — the lower the propensity to spend and the higher the savings rate!…

And so the Federal Reserve is the snake devouring its tail, the man who shoots a hole in his foot, the goalkeep who rifles the ball into his own net.

That is, the Federal Reserve is its own saboteur.

It digs and digs in the belief it is digging its way up. Yet in reality it is digging its way down:

It demonstrates without a shadow of doubt that hyper-easy monetary policy is not inflationary but is deflationary. Which is catastrophic for central banks, who publicly state that the only reason they are pursuing ultra easy monetary policy, which includes QE and negative rates, is not to goose the market higher (even though by now we all know that’s the real reason) but to stimulate inflation.

And the cycle it has begun is truly vicious:

This means that the lower (and more negative) central banks push rates, the lower (not higher) the spending, the higher (not lower) the savings rate, the lower the inflation, the higher the disinflation (or outright deflation), which in turn forces central banks to cut rates even more, to add QE, yield curve control, buy junk bonds, buy ETFs or pursue any of a host of other monetary policies that are even more devastating to consumer psychology, forcing even more savings, resulting in even more disinflation, causing even more intervention by central banks in what is without doubt the most diabolical feedback loop of modern monetary policy and economics.

Said otherwise, monetary easing is deflationary. Let that sink in.

We have let it sink in. And it penetrated clear through to the marrows.

Scarlet Sins

And so today we are out to yank down the statues of those who have perpetuated “the most diabolical feedback loop of modern monetary policy and economics.”

Wall Street erected the statues.

The artificially low interest rates the Federal Reserve has chased — after all — inflated the stock market to dimensions grotesque and obscene.

But their economic sins are scarlet… and of the mortal category.

And so we come now to the bronze statue of Alan Greenspan, stately, regal, august…

Down Comes “The Maestro”

“The Maestro” is chiseled into its pedestal.

At once we seize our canister of spray paint… and graffiti “Traitor” over the inscription.

That is because Mr. Greenspan once exalted the gold standard and the golden handcuffs it placed upon central bankers.

Yet when he directed the central bank of the United States, he slipped the cuffs…

He tinkered interest rates downward against his own earlier advice.

He engineered two manias — the technology mania and the housing mania — earning him the applause of Wall Street and title of Maestro.

Both of his creations came tearfully to grief.

And so we string a chain around Mr. Greenspan’s cold metal wrist, hitch the other end to our bumper… and flatten the accelerator.

Down he comes with a mighty and rapturous thud.

Thus Mr. Alan Greenspan’s is the first statue to topple. Central bankers everywhere moan in sorrow, decrying our wanton vandalism.

“Helicopter Ben” Is Next

Next we come to “Helicopter” Ben Bernanke. This fellow’s pedestal bears the dedication: “The Courage to Act.”

We reach once again for our spray can. We improve the inscription with “Coward.”

Come the crash…

Mr. Bernanke could have allowed the profound imbalances within the financial system to correct — as they would have under honest capitalism.

The pain would have proved acute. But the pain would most likely have proven brief.

A newer, healthier economy… erected on surer footings… would have risen upon the wreckage of the old.

Yet Mr. Bernanke lacked the courage to let the free market take its natural course.

He instead pummeled rates to zero, devised quantitative easing… and inflated the greatest stock bubble market in history.

For his crimes against economics, his statue too comes crashing down today.

Even Janet Yellen?

Now, what is this? A rare statue of a female — Ms. Janet Yellen, next in line after Bernanke.

She is honored for being “The First Female Chairperson in the History of the Federal Reserve.”

This we cannot dispute. Yet she perpetuated Mr. Bernanke’s economic vandalism.

She did not believe another financial crisis would befall us “in our lifetimes,” she declared in retirement.

And so today we razz her prophecy, in red spray-paint upon her pedestal:

“We Must All Be Dead.”

Yet we are highly gallant. We are therefore loath to rip down the statue of a woman. Yet we yield to an egalitarian impulse…

We cannot discriminate on the basis of gender. Down Janet Yellen comes in the customary manner. And with the customary clank.

Powell’s Day Will Come

Mr. Jerome Powell is still on duty. His statue has therefore yet to be dedicated. That day will come of course.

He will be depicted upon a galloping horse, in the manner of Napoleon.

He will be credited with saving the United States economy at its darkest moment since the Great Depression.

And so we will be there with our spray paint, our chain… and our pickup truck…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Blame the Baby Boomers

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History will probably record that America’s Baby Boom generation threw one helluva party; Gen X was left with the sorry task of cleanup crew; and the Millennials ended up squatting in the repossessed haunted party-house when it was all over. On behalf of the Boomers, let me try to explain and apologize.

We came along at the end of history’s earlier biggest trauma, the Second World War, following the hard stumble of the Great Depression — which, by the way, for those of you unsure of chronology, followed the First World War, an epic, purposeless slaughter that utterly demoralized Western civilization. What a set-up for my parents’ generation.

My stepfather, the man who raised me, was an interesting, specimen of that gen. Fresh out of college in Boston, he joined the army, became a lieutenant, and by-and-by found himself trapped in the German offensive through the Ardennes Forest, known as the Battle of the Bulge.

Shaped by War

Unlike some WW2 vets, he was willing to talk about his experiences. His most vivid memory was the difference between the sound of American and German machine guns. Ours went rat-a-tat-tat, theirs went zzzzzzzap, he said, like you couldn’t even detect the interval between the bullets coming at you. It scared the hell out of his men, not a few of whom were cut to pieces.

My stepfather merely caught several chunks of shrapnel in his arm and thigh, and was still on the scene when Germany finally surrendered in May, 1945. He was awarded a silver star for valor, but never bragged on it. (My mother barely participated in my upbringing, but that’s another story.)

He went straight to New York City when it was over. His gen’s victory dance was to get straight to work in the economic bonanza just revving up — because the war had happened elsewhere and all our stuff was intact, ready to re-start, to make and sell anything under the sun to the shattered rest-of-the-world, and lend them money to buy it — quite an opportunity for young men highly disciplined and regimented from their recent travails of war.

My stepfather became a classic Mad Man, as in the TV series, working in media, publishing, and PR, a hard-drinking cohort of mostly military vets who would knock down three martinis over lunch with clients (a nearly inconceivable feat, actually, when you think about it), but that showed what the war had done to the soldiers who survived.

He died from it at barely sixty, and from smoking two packs of Camel straights a day, another habit of battle.

Bacchanal

We Boomer boys had his war as movies and comic books: Sergeant Rock and John Wayne on the beach at Iwo! We had all the fruits of that postwar bonanza. We had Disneyland, the 1964 World’s Fair, the Carousel-of-Progress, and Rock Around the Clock. We eventually had a war of our own, Vietnam, but it was optional for college kids.

I declined to go get my rear end shot off, of course.

You have no idea what a fantastic bacchanal college was in the 1960s unless you were there. Let the sunshine in!

The great anti-war protests gave us a chance to pretend we were serious, but, believe me, it was much more about finding someone to hook-up with at the teach-ins and the street marches.

The birth control pill was a fabulous novelty. We ignored the side-effects — especially the social side effects that led later on to an epidemic of divorces and broken families.

When you are a young man, sex is at least half of what you think of minute-by-minute. I was on a campus where all you saw were waves of nubile, joggling breasts coming at you beneath those sheer peasant blouses (which, you understand, suggests that the women were in on it, too, being every bit as incited by their own frisky hormones).

Personally, I was not altogether on board with the hippie program, though I let my hair grow. A lot about it gave me the creeps — the lurid posters of Hindu gods with elephant heads, the dumb-ass “Hey, man,” lingo, the neurotic sharing of everything from clothing to money, the wooly armpits, the ghastly organic cuisine.

I mostly eschewed drugs, never dropped acid, and smoked pot infrequently due to a chastening episode of frightening paranoia early on. Anyway, after Charlie Manson’s caper, the whole thing lost its luster and by the early 1970s there wasn’t much left but sideburns, and by then many of us were in an office of some kind.

Boomers Never Should Have Been Allowed Near Wall Street

Which is probably where things really went off the rails. The Boomers should never have been allowed in those offices, especially the ones within ten miles of Wall Street. That’s where the cleverest among us came up with the signal innovations that have now wrecked the world. The coronavirus is a very bad thing, for sure.

Nobody knows yet just how deeply the effects of coronavirus will cut through daily life in the weeks and months ahead. The potential for disorder isn’t tiny, looking at the current situation, at least in terms of broken business relationships and the flow of vital goods.

We’re the hunkering-in-place stage of the crisis. Be prepared for plenty of action when the hunkering ends and the hungering begins.

But as bad as it may turn out to be, it’s really nothing compared to the long-term, deliberate wickedness that engineered the so-called financialized economy — a supernatural matrix of something-for-nothing swindles and frauds that purported to replace actual work that produced things of value.

The great lesson of the age was lost: the virtual is not a substitute for the authentic.

Into the Black Hole

And now the Boomer geniuses of finance are scrambling frantically to hurl imaginary money into the black hole they have opened with their own reckless wizardry.

But black holes are nothing like ordinary holes. They are unfillable. They just suck everything into a cosmic vacuum that resembles something like death — which, in its implacable mystery, may just be a door to a new disposition of things, the next life, the next reality.

Of course, not all of us Boomers worked on Wall Street or in its annexes, but we did more or less go along with all that wickedness because we never really made any earnest effort to stop it. The Dodd-Frank bill? Don’t make me laugh.

Maybe it’s just impossible to apologize for the mess we left behind after the party we enjoyed.

I’m not a Christian in any formal sense, but perhaps only that kind of fathomless, unconditional forgiveness might avail. I am sincerely sorry.

Regards,

James Howard Kunstler
for The Daily Reckoning

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Bloodbath!

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Here is the butcher’s bill:

The Dow Jones Industrial Average — down 1,031 points today…

The S&P 500 — down 112 points…

The Nasdaq Composite — down 355 points.

CNBC, by way of explanation:

Monday’s moves came as investors watch developments surrounding the coronavirus outbreak that was first reported in China but has spread rapidly in other countries especially South Korea and Italy, which reported a spike in the number of confirmed cases in recent days.

South Korea raised its coronavirus alert to the “highest level” over the weekend, with the latest spike in numbers bringing the total infected to more than 750 — making it the country with the most cases outside mainland China.

Meanwhile, outside of Asia, Italy has been the worst affected country so far, with more than 130 reported cases and three deaths.

Gold, meantime, was up nearly $30 today as investors fled for safety.

But late in the day someone — or something — jettisoned out some $3 billion of gold futures.

Thus, gold ended up gaining only $14 by closing whistle.

Who… or what… emptied all that paper gold into the market?

We do not know at this point. But we have put our top men on the case.

What about Treasuries? How did 10-year Treasury yields act today?

They dropped to 1.356% this afternoon — and so fell within hailing distance of their record lows. Only in July 2016 were 10-year yields lower, at 1.318%.

One more slip on the ladder… and “look out below.”

This is according to Mr. Ian Lyngen, BMO Capital’s director of U.S. rates strategy:

The most important number in the U.S. Treasury market has become 1.3180% — the all-time record-low yield mark set in the aftermath of Brexit. If that level is breached, look out below.

We will indeed — look out below, that is.

And what is this crossing our vision on a downward heading?

It is the 30-year Treasury yield.

The 30-year Treasury yield did plummet to record lows today — to an anorexic 1.814%.

Not in its entire history has the 30-year Treasury bond offered such a slender yield.

Impossible — but there you have it.

Have markets lost their nerve… or recovered covered their senses?

If they have lost their nerve, upcoming Federal Reserve easing will likely stiffen their spines.

We are supremely confident it is coming. In fact…

Former president of the Federal Reserve Bank of Minneapolis — Narayana Kocherlakota — presently urges his former mates to cut rates 25-50 basis points without delay.

They should not wait for their March meeting to “deal with this clear and pressing danger.”

We allow for the possibility…

With today’s whaling, both Dow Jones and S&P have handed back all their gains since Jan. 1.

And the worst of the bloodspill is not over, argues Opportunistic Trader CEO Larry Benedict:

“The second-largest economy in the world is completely shut down. People aren’t totally pricing that in. It seems like there’s much more to come.”

This fellow believes the stock market may be entering a 10–15% “correction.”

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

And so today it served its high and moral purpose.

The intelligent investor — says the shade of Benjamin Graham — “is a realist who sells to optimists and buys from pessimists.”

Lately the realists have been selling to the optimists. That is, selling to the lemmings…

Thus The Seattle Times informs us:

“Mom and Pop Are on Epic Stock Buying Spree With Free Trades.”

More from which:

Small investors are back. In a big way.

Their fingerprints are on Apple’s staggering rally. They piled into Tesla as it tripled, and turned speculative fliers like Virgin Galactic into some of the most heavily traded shares in the country…

U.S. households are turning more optimistic on the stock market. According to the latest sentiment reading from The Conference Board, the share of respondents expecting stocks to rise in the next year advanced to 43.1% in January, the highest since October 2018.

Online trading platforms that offer free trading have sugared the “deal”… and called the lemmings closer to the cliff.

The Times cites Sundial president Jason Goepfert:

When you take a bull market and juice it with zero commission trading, we can expect it to generate interest among retail acco‌unts. That, it did. Retail traders have become manic.

Few are manic today we hazard.

Buy when there’s blood in the streets, argues the old market wheeze.

Here is your chance.

Do you have the nerve?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Bigger Isn’t Better

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

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

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

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

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

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

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

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

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

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

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

And that’s what we’ve seen.

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

But it’s not just JPM.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Fed Gets Blindsided… Again

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How did the banks grade?

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

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

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

Basically, the Fed was blindsided… Again.

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

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

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

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

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Wall Street Falls for the Ruse

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The president has spoken…

A China trade accord can jolly well wait until next year’s election is done, he announced yesterday.

While the president spoke, the United States House of Representatives legislated…

China is allegedly roughhousing its Uighur (wee-gr) Muslim minority.

The House has passed legislation that denounces the inhumanity… and sanctions certain Chinese officials for their villainous participation.

Beijing is unamused — toweringly unamused.

Swift retaliation it has promised if the Uighur Intervention and Global Humanitarian Unified Response Act of 2019 assumes force of law.

In brief, neither party presently negotiates from goodwill.

Meantime, the Dec. 15 deadline draws near.

On that date fresh tariffs enter effect — absent a resolution.

Given the mutual asperity presently prevailing… a resolution is far from certain.

Is it any wonder the stock market turned in losses three consecutive sessions?

Thus today was the ideal occasion for a lovely trade rumor… a gorgeous sprig of catnip to excite, vivify and invigorate the animal spirits.

Global Times editor Hu Xijin, late yesterday:

I predict there is a high probability that President Trump or a senior U.S. official will openly say in a few hours that China-U.S. trade talks have made a big progress in order to pump up the U.S. stock markets. They’ve been doing this a lot.

You may hand that man a Gurkha Royal Courtesan cigar. His forecast rang dead center…

Word crossed the wires at 4:06 this morning, coming by way of Bloomberg:

The U.S. and China are moving closer to agreeing on the amount of tariffs that would be rolled back in a phase-one trade deal despite tensions over Hong Kong and Xinjiang, people familiar with the talks said… Recent U.S. legislation seeking to sanction Chinese officials over human rights issues in Hong Kong and Xinjiang is unlikely to impact the talks, one person familiar with Beijing’s thinking said.

The rumor’s source requested anonymity. But the scalawags at Zero Hedge point a razzing finger at Mr. Larry Kudlow:

There were naturally questions about the Bloomberg piece: like why does an “unknown” source who “thinks” the deal is imminent take precedence, when very known people, i.e., the U.S. president and [senior trade official] Wilbur Ross, both said a deal may not happen for almost a year… or why was this “respected” Larry Kudlow source so terrified to give his name on the record if everything checks out?

Mr. Kudlow is of course the president’s senior economic adviser — and professional optimist.

We confess it: We trust the rumor no further than we could heave a horse by its tail.

It claims, for example, “U.S. legislation seeking to sanction Chinese officials… is unlikely to impact the talks.”

But would you shake the hand of a man preparing to stab you with the other?

And we might remind you: The Chinese are notoriously sensitive to slights.

But the computer algorithms running Wall Street are gullible dupes. They will fall for anything…

Jilted 100 times by false promises, they salivated, swooned and fell for the 101st.

It is time to buy, they concluded… and set to work.

S&P futures jumped immediately on Bloomberg’s “news.” And the Dow Jones opened the day 200 points to the good.

The president did his own part to meet Mr. Hu’s overnight prediction… and goose the stock market.

Trade talks were “going very well,” he claimed this morning — one day after suggesting a deal could go on ice until next year’s election is decided.

The computers chose to believe this morning’s comments. The market leaked some steam towards the end of the day, it is true.

But the Dow Jones still posted a 147-point gain. The S&P came out 19 points ahead; the Nasdaq, 46.

But we come now to this question:

What happens to the stock market if Dec. 15 passes without a trade deal?

Won’t the same computer algorithms that pushed stocks up today… pull them down?

We suspect strongly that they will.

But by how much?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Why Powell Might NOT Cut Rates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As Ed Keon, chief investment strategist at QMA explains:

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

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

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

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

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

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

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

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

Enjoy it while you can.

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

Regards,

Nomi Prins
for The Daily Reckoning

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The War of Stocks and Bonds

This post The War of Stocks and Bonds appeared first on Daily Reckoning.

Jerome Powell dangled the morsel yesterday — rate cuts are on the way.

And like Pavlov’s famously conditioned dogs, Wall Street heard the opening bell this morning… and began drooling.

The major indexes were instantly up and away.

They lost momentum after the president intimated he may take a swing at Iran for downing a U.S. drone.

“You’ll soon find out” was his response when asked if the U.S. would retaliate.

The bulls nonetheless won the day…

The Dow Jones was up 249 points at closing whistle. The S&P gained 28; the Nasdaq, 64 points.

Gold, meantime, went skyshooting $44.50 today — $44.50!

Combine the prospects of vastcentral bank easing with possible fireworks in the Persian Gulf… and you have your answer.

What about the bond market?

Stocks vs. Bonds

The bellwether 10-year Treasury slipped to 1.98% this morning… its lowest point since the 2016 election.

And so the infinitely expanding gulf between stock market and bond market widens further yet.

One vision is bright, cheery, trusting. The other is dark, dour… and morose.

One of these markets will be proven right. One will be proven wrong.

Our money is on the bond market.

We have furnished ample evidence that recession is likely on tap within three months of the next rate cut.

Here analyst Sven Henrich reinforces our deep faith in the calendar of misfortune:

Every single time the Fed cut rates when unemployment was below 4%, a recession immediately ensued & unemployment shot to 67%. Again: Every. single. time.

We remind you:

The United States unemployment rate presently stands at 3.6% — the lowest in 50 years.

“A Gorgeously Wrapped Gift Box Containing a Time Bomb”

An unemployment rate below 4% is a false prize, a sugar-coated poison… a gorgeously wrapped gift box containing a time bomb.

Unemployment previously slipped beneath 4% in April 2000 — at the peak of the dot-com delirium.

The economy was in recession by March 2001.

Prior to 2000, unemployment had previously fallen below 4% in December 1969.

The economy was sunk in recession shortly thereafter.

The pattern stretches to the 1950s.

The proof, clear as gin… and equally as stiff:

Chart

And unemployment often bottoms nine months before recession’s onset… according to the National Bureau of Economic Research.

Meantime, it is 10 years into the present economic “expansion.” Next month will establish a record.

A Very Strange Expansion

An expanding economy is generally a time of surplus.

It is a time to store in reserves, to squirrel away acorns, to save against the rainy day — the inevitable rainy day.

These savings will see you through.

But during this economic expansion, during this season of bounty… the United States has only sunk deeper into debt.

The cupboards are empty.

Trillion-dollar annual deficits are presently in sight.

The national debt rises to $22.3 trillion — some 105% of GDP.

And interest payments on the debt alone will likely eclipse defense spending by 2025.

Come the inevitable recession, Uncle Samuel will plunge even deeper into debt.

That is, he will reach even further into the future… to rob it for our benefit today.

Deficits may double — or more.

How is the business at all sustainable?

But it’s not only a doddering old uncle going under the water…

The Corporate Debt Bomb

Corporations have loaded themselves to the gunwales with cheap debt — cheap debt coming by way of the Federal Reserve.

First-quarter nonfinancial corporate debt increased to $9.93 trillion. That is a record.

And this we learn from the Treasury Department:

Today’s nonfinancial corporate debt-to-GDP ratio is the highest since 1947… when records began.

And here we spot a straw swaying menacingly in the wind…

Fitch informs us nearly $10 billion of high-yield corporate bonds have already defaulted in the second quarter — double the amount of first-quarter defaults.

Warns Troy Gayeski, co-chief investment officer at SkyBridge Capital:

“Whatever the cause [of the next recession] may be, the acute point of pain will be in corporate credit.”

Depends on it.

Finally we come to the fabulously and grotesquely indebted American consumer…

Consumers Drowning in Debt

Total U.S. consumer debt notched $14 trillion in the first quarter — exceeding the roughly $13 trillion before the financial crisis.

Twenty-three percent of Americans claim that life’s essentials — food, rent, utilities — constitute the bulk of their credit card purchases.

And 60% of Americans hold less than $1,000 in savings.

How will they keep up come the next recession? How will they meet their debts?

They already groan under the load — and the economy is still expanding.

Meantime, the cost of a middle-class lifestyle has surged 30% over the past two decades.

But Pew Research reports the average American worker wields no more purchasing power today… than he did 40 years ago.

That is, he has jogged in place 40 years.

Utter and Complete Failure

The past 10 years of central bank intervention on a grand and heroic scale have worked little benefit.

The coming recession will bring yet more intervention— on an even grander and more heroic scale.

But why should we expect it to yield any difference whatsoever?

For the overall view, we turn to Mr. Sven Henrich:

The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought you record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round… The new global rate-cutting cycle begins anew before the last one ever ended. Brace yourselves, as no one, absolutely no one, can know how this will turn out…

We are witnessing a historic unraveling here. Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong… Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?…

All the distortions of 10 years of cheap money, debt, wealth inequality, zombie companies, negative debt… will all be further exacerbated by hapless and scared central bankers whose only solution to failure is to embark on the same cheap money train again. All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences. But since they are not elected by the people and face zero consequences for failure, they don’t have to consider the collateral damage they inflict.

Unfortunately, the rest of us do…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The War of Stocks and Bonds appeared first on Daily Reckoning.

About Today’s Jobs Report…

This post About Today’s Jobs Report… appeared first on Daily Reckoning.

The May unemployment report came rolling from the United States Department of Labor this morning.

In the highly technical vernacular of the trade… it was a “miss.”

And not by a nose, not by a hair, not by a whisker.

Economists as a group divined 175,000 May jobs.

What was the actual number?

Seventy-five thousand — fully 100,000 beneath consensus — and the lousiest figure since February.

Each one of 77 Wall Street analysts — each one — heaved up a greater estimate.

But unlike February, they cannot foist blame upon winter weather or a government shutdown.

Thus our faith in experts staggers yet again… and fast approaches our faith in weathermen, crystal gazers, salesmen of pre-owned automobiles and congressmen of the United States.

But our faith in the lunacy of the existing financial system is infinitely confirmed…

Wall Street vs. Main Street

In a healthful and functioning order, the stock market is a plausible approximation of prevailing economic conditions.

A poor unemployment report should send panicked shudders through the stock market.

It indicates a wobbled economy. Rough business is likely ahead. And companies can expect a reduced profit.

Stocks should — in consequence — fall tumbling on the news.

But ours is not a healthful and functioning order. It is rather an Alice in Wonderland order.

Up is down. Down is up. Good news is bad news.

And bad news is good news…

Bad news for Main Street is good news for Wall Street, that is.

Wall Street thrives on Main Street’s bad news as doctors thrive on fractured legs… as dentists thrive on toothaches… as embalmers thrive on murders.

And this morning’s jobs report constitutes good news for Wall Street.

It merely forms additional evidence the Federal Reserve will be slashing interest rates soon.

And low interest rates are the helium that lifted stocks to such gaudy and obscene heights lo these many years.

Stocks Soar on Today’s Weak Jobs Report

The Dow Jones was so heavily floored by this morning’s jobs report it went up 300 points by 11 a.m.

The other major indexes were similarly flabbergasted.

The S&P was up 35 points and the Nasdaq up 130 by the same 11 a.m.

All three indexes composed themselves somewhat by day’s end.

The Dow Jones ended the day 263 points in green territory. The S&P gained 30 points, while the Nasdaq added 126.

Yet as we documented Wednesday, the economy is going backward… and recessionary warnings flash in all directions.

Meantime, all reasonable estimates place second-quarter GDP growth under 2%.

But because the Federal Reserve promises yet additional levitating gases, the stock market has record heights once again in view.

“The Disconnect Between the Economy and Stocks is at Record Highs”

Thus the gentlemen of Zero Hedge declare, “The disconnect between the economy and stocks is at record highs.”

JJ Kinahan — chief market strategist at TD Ameritrade — here affirms the “bad news is good news” theory:

The market’s got a conundrum here. That’s a bad report. Just on the report itself, I think people would want to sell the market. However, the fact that it really makes the case for a rate cut, I think is why you’re seeing the market hang in there.

Affirms Mike Loewengart — vice president of investment strategy at E-Trade:

This is the type of [jobs report] the doves will really take to as it supports the argument for cutting rates beyond politics or trade issues…

Luke Tilley, chief economist at Wilmington Trust, adds:

I think that this is a true slowdown in hiring right now… The market signals are obviously screaming for the Fed to reduce rates.

Wall Street has Jerome Powell by the ear.

When Wall Street screams for lower interest rates, lower interest rates it will have.

Odds of Rate Cuts Approach 100%

The market presently gives 84% odds that the Federal Reserve will cut rates at least 25 basis points by July. By September those odds increase to 95%.

By January, they rise to 99%… with the heaviest betting on two rate cuts.

Investors further expect at least three rate cuts by next June.

But as we have detailed at length… you can expect recession within three months of the inevitable rate cut — whenever it may fall.

Yes, the next destination is recession.

The route may twist, the route may meander, the route may even temporarily turn back on itself.

But it terminates in recession nonetheless.

The “New Normal”

The No. 2 man at the Federal Reserve would nonetheless have us put away all talk of recession.

Mr. John Williams insists diminished growth is merely the “new normal”:

I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.

But with the highest respect to Mr. Williams… why shouldn’t we expect more?

The United States government borrowed in excess of $10 trillion over the prior decade.

$10 trillion is plenty handsome. Yet that $10 trillion of debt yielded only $3 trillion of real GDP.

Or to switch the figures some, the nation’s debt increases roughly $100 billion per month.

But GDP only increases some $40 billion per month.

We have gotten plenty of buck, that is. But not half so much bang to go with it.

The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.

The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.

But a decade into the current expansion… the Treasury is depleted.

Trillion-dollar deficits extend to the horizon.

And the debt-to-GDP ratio is projected at 115% within three years.

Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.

It is a bleak calculus — growing debt twinned with sagging growth.

The Mills of the Gods 

As we have argued previously, time equalizes as nothing else.

Scales balance, that which goes up comes down, that which goes down comes up…

The mighty fall, mountains crumble, the meek inherit the Earth.

We suspect strongly that stock market and economy will meet again on fair ground.

We further suspect it is stock market that will fall to the level of economy. Not the other way.

The mills of the gods may grind slowly, as Greek philosopher Sextus Empiricus noted.

But as he warned…

They grind exceedingly fine…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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A Glimpse of the Future

This post A Glimpse of the Future appeared first on Daily Reckoning.

Any simpleton can recognize an unfolding calamity…

The two trains about to collide, the twister racing for the schoolhouse, the betrayed lover with a finger on the trigger.

But you require a wider vision to perceive the chains of disaster coming together… link by fateful link…

When a conductor gets his signals crossed, when the winds take a fatal shift, when someone takes the first bite of forbidden fruit.

Today we attempt a wider view of future calamity presently taking shape.

But first to a future calamity in its own right — the stock market.

Global Growth Drags on Stocks

Once again, the global economy throws a darkened shadow over Wall Street.

We learn today that Chinese industrial profits have fallen 14% year over year — their largest fall since 2011.

Meantime, European Central Bank (ECB) President Mario Draghi has drawn a dark sketch of the eurozone.

Mr. Draghi cited “weakness in world trade” and a “weakening growth picture.”

The ECB recently downgraded its 2019 eurozone GDP forecast from 1.7% to 1.1%.

The Dow Jones gave back 32 points on the day. The S&P lost 13, the Nasdaq 48.

By way of explanation Ed Yardeni, president and chief investment strategist at Yardeni Research:

There’s lots of angst about global economic growth. That’s understandable because it has been slowing significantly since early 2018. Furthermore, we can all observe that ultra-easy monetary and debt-financed fiscal policies aren’t as stimulative as policymakers have been hoping.

Yes, Mr. Yardeni. We can all observe that ultra-easy monetary and debt-financed fiscal policies aren’t as stimulative as policymakers have been hoping.

Except, perhaps, for the policymakers themselves.

Failure is only indication that they need to double, triple or quadruple existing ultra-easy monetary and debt-financed fiscal policies.

As said Wittgenstein:

“Nothing is so difficult as not deceiving one’s self.”

But we lift our gaze from the roiling present… and face the distant horizon.

A Vision of Coming Recession 

What do we spot?

Unsurprisingly, a scene of coming recession…

The present expansion is the second longest in United States history.

If the economy can peg along until July, it will be crowned the longest expansion in United States history.

But the signs of age are creeping in, like rust on a chassis…

Growth has been trending wrong two consecutive quarters — and going on three.

Even the eternally optimistic Atlanta wing of the Federal Reserve projects first-quarter GDP to expand at 1.5%.

JPMorgan Chase seers project the same 1.5% — but even that is subject to “downside risk.”

The reasons are close at hand…

Housing prices are the softest in four years, manufacturing plumbs 21-month lows, retail stores are closing at alarming rates (5,279 year to date), the American consumer languishes under record levels of debt.

And the yield curve has inverted — a recession indicator of supreme accuracy.

Looking out beyond these pristine shores, we also find the global economy wobbling on its axis.

As suggested above, China and Europe all go on unsteady legs. Japan is similarly afflicted.

Meantime, the Federal Reserve has just executed perhaps its most dramatic retreat in its history.

It has essentially guaranteed no rate hikes on the year. As recently as December it had penciled in two.

Would it throw up the sponge if it were confident in the future?

But the Federal Reserve has conceded defeat to a superior and determined foe — the stock market.

Jerome Powell ran his white flag up the pole in late December, after the market raged against his promises of additional tightening.

We are forced to conclude that the Federal Reserve cannot lift interest rates much above the present 2.50%… or restore its balance sheet to levels approaching pre-2008 levels.

That is, the economy cannot withstand interest rates that are still historically low. And the stock market will roar in protest if rates rise only slightly.

The “Real” Interest Rate

But the “real” interest rate — the nominal rate minus the inflation rate — is even lower than face value suggests.

Thus we find the real fed funds rate not 2.50%, but as low as 0.25%.

By way of comparison…

The real fed funds rate scaled 2.75% when the Federal Reserve’s last tightening cycle concluded in 2006.

And 4% when the previous cycle ended in 2000.

But sticking to the nominal rate, history argues convincingly that rates between 4% and 5% are required to beat back recession.

Only with that much “dry powder” can the Federal Reserve cut enough to lift the economy from its wallows.

But when recession does besiege us — this year, next year or the year following — the Federal Reserve will scarcely be at half-strength.

Imagine a one-armed gladiator battling in the arena… or a flyweight taking on the heavyweight champion of the world.

And so the Federal Reserve is in an awful bind…

It must raise rates to build its steam against the next recession. But it cannot raise rates above present levels without bringing the Furies crashing down upon it.

A conundrum to ponder of a blue day.

But we now return our binoculars to the purple horizon…

Recession in Fall 2020 Could Sink Trump

The next presidential election falls in November 2020 — 1.5 years from today.

Given the present drift, the economy may well be sunk in recession by that time.

Recessions are notoriously poor portents for incumbent presidents.

Since the Civil War the economy was in recession eight occasions during presidential election season.

These years were 1876, 1884, 1896, 1920, 1932, 1960, 1980… and 2008.

In all eight instances — all eight — the opposition party was voted in.

If the economy plunges into recession by next fall, could the sitting president defy the odds?

It would not be the first time.

But every man’s luck has its limits. Eventually the gods plot against him.

And recall the Federal Reserve will likely enter the next recession with barely a half barrel of steam.

Recession will roll over it like a thundering locomotive over a rat.

And the cries will go out:

“Capitalism has failed yet again!”… “This is all Donald Trump’s fault!”… “It is time to reclaim the economy for the people!”

At this point our vision of the future begins.

Part II tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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