The Unraveling Will Accelerate

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Since the first news of pandemic in late January, I’ve been discussing potential accelerants to the unraveling of our fragile financial system.

The system appears stable until a catalyst pushes it off the cliff.

Catalysts come in a variety of forms, from the apparently modest “straw that breaks the camel’s back” to a broad awakening that the status quo simply isn’t capable of adapting successfully to new realities.

Financial catalysts tend to result in sudden, cataclysmic collapses in liquidity, solvency and sentiment.

While the Federal Reserve can “fix” liquidity crises by creating currency out of thin air, that doesn’t make bankrupt firms solvent or make employers hire employees.

Once complacent confidence slides into cautious fear, massive liquidity injections to keep the system from crashing are understood as last-ditch desperation.

Social-political catalysts are slower but much more difficult to reverse.

While the media’s attention has been focused on the protests, two other social-political catalysts are gathering momentum:

1. The failure of our education complex to provide workable childcare/learning solutions

2. The hope of a V-shaped recovery in employment collapses.

There is a class dynamic in these potential catalysts that few mainstream pundits follow to the logical conclusion.

When socio-economic distress is limited to the politically powerless working class — for example, the blatant exploitation of gig-economy and contract workers — the power structure can safely ignore the brewing crisis because the distressed workforce has insufficient economic-political power to threaten the rule of the Power Elites.

But when the top 20% of the workforce that accounts for 50% of all consumer spending and 80% of the citizenry’s political voice is in distress, the Power Elites better pay attention.

Nobody in power really cared if lower-income households struggled with juggling childcare and getting to work; but when Mr. and Ms. Technocrat are struggling, suddenly it’s an issue that can’t be ignored.

The same dynamic is also in play in the 21% unemployment that’s accelerating to 25% unemployment. As long as it was the marginal workforce that was losing jobs, the power structure reckoned unemployment was a solution.

But as the unraveling gains momentum, middle-class jobs will start vanishing and unemployment won’t be enough to pay bloated mortgage payments, property tax bills, etc., and the defaults of student loans, credit cards, auto loans and mortgages will start piling up.

As people awaken to the fact that the V-shaped recovery was a fantasy, sentiment will slide from confidence to angst.

The failure of institutions to adapt to new realities will be impossible to deny, and the choices may boil down to opting out (i.e. assemble informal groups of households that pool resources to hire a private tutor for home-schooling their children) to organized revolt (i.e. teachers’ union strikes).

Sclerotic, hidebound institutions optimized for stability and permanent growth are simply not designed to adapt to sudden, rapid change and disruption of permanent growth.

Systems stripped of buffers are fragile, systems stripped of feedback are fragile, systems that optimize doing more of what’s failed spectacularly are fragile, systems that are little more than fractals of incompetence are fragile, systems that rely on the artifice of denial and fantasy are fragile.

Fragile systems break. This is why the unraveling is accelerating.

Regards,

Charles Hugh Smith
for The Daily Reckoning

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Americans Are Getting Out of Dodge

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I want to discuss some of the permanent changes that the national economy is going through. It has to do with what you might call the Great American Exodus. There’s a massive migration out of the big cities. Millions of Americans are fleeing the cities for the suburbs or the country from coast to coast.

There’s hard data to support that claim.

For example, let’s say you want to rent a U-Haul trailer from New York City to the Catskill Mountains, which are not that far away. Or you want to rent a U-Haul trailer from Los Angeles to, maybe Sedona, Arizona.

It’ll cost you much, much more than if you were going the other way. If you went from Sedona to LA, or the Catskills to New York, the price is only about one quarter as much. In other words, you have to pay a 400% premium to get the trailer going out of town, but U-Haul will practically pay you to bring it back in.

And there are shortages. If you’re moving out of your apartment to a house or another apartment outside of the city, try getting movers. I’ve done this recently myself, and know others who have. It was very hard to book moving companies or something as simple as a U-Haul trailer.

So the mass exodus out of cities is a real phenomenon, backed by solid evidence.

This is a shift we probably haven’t seen since the 1930s, when people left the Dust Bowl and moved out to California, looking for jobs in the agricultural industry. That was a mass migration. We’re seeing another one now, except this one’s going in the opposite direction.

And that’s a big problem for the economy because cities are centers of economic activity that contribute a lot to GDP. There are three primary reasons for the exodus.

The first is simple demographics. People talk about millennials as if they’re kids just out of college. But, the oldest millennial is turning 40 in two years. So they’re not kids anymore.  They’re often adults with jobs and families, and a lot of obligations.

Many of them have been living in cities since cities are generally interesting places to live and offer the greatest opportunity. But there’s a natural tendency for people in that demographic, who might have enjoyed the city in their twenties and thirties, to say it’s time to move out to the suburbs when they reach a certain age.

And that’s happening now. So that’s the first factor contributing to the mass migration from cities. The others are far more serious…

The most obvious is the pandemic. Look at New York City. Clearly it was ground zero for the pandemic in the United States. Something like one-third of all U.S. coronavirus fatalities took place in New York City or its immediate surroundings. That’s a highly compressed area.

And people realize that the density of the population, living on top of each other in crowded apartment buildings and offices, taking crowded public transportation, going to concerts and Broadway shows, etc., is like living in a Petri dish.

It’s obviously a lot easier to catch a virus in a crowded subway car than on a country road. So people are saying, “Give me space, and I think my health prospects are a lot better,” and that’s actually correct.

The third factor driving Americans out of cities is the riots.

Do not understate the damage of these riots. I don’t want to veer off into the social aspects or politics of the riots. Everyone’s got their own opinions. And peaceful protest is our constitutional right, which should be supported. If you’re peaceful, you have every right to protest against injustice.

But no one has a right to loot stores and start fires. We shouldn’t have to debate that.

But that’s what happened in large cities throughout America. Minneapolis obviously saw a lot of violence. But New York, Los Angeles, Chicago, Philadelphia, Atlanta, St. Louis, Denver, Portland, Oregon and many other cities suffered similar damage.

And with many calls to defund the police, people who might enjoy city life can see the writing on the wall. Crime rates are already spiking in New York, for example, which will probably get worse. And the NYPD has seen a 400% increase in retirement applications since the riots.

Cities have always been a trade-off. You had high taxes, lots of city noise, crowded conditions and certain levels of crime. But many put up with all those costs and annoyances in exchange for a very lively cultural and intellectual environment, more interesting jobs, interesting people, museums, great restaurants, movies, live shows, Broadway in the case of New York, etc.

But now the trade-offs don’t seem worth it for many. The cultural aspects are gone. Museums are closed. Restaurants are closed. Movie theaters are closed, etc. And crime is going up. So you’ve got all the costs and then some, but none of the benefits. And that’s why people are leaving.

So when you combine demographics, a pandemic that makes city living unattractive and riots, you get a major generational shift that we haven’t seen since the 1930s.

Now, you cannot underestimate the economic impact of this. The cities are where most 80% or more of the population, economic output, job creation, and R&D are centered. And who’s leaving the cities?

It’s the people who can have the option to leave. It’s the talent. It’s the money. It’s the energy. It’s the people that you most want in your cities who have the ability to leave.

And of course, now we have this whole work from home model. So a lot of corporations are saying, we don’t need 10 floors on 53rd and Park Avenue. We can do two floors of shared conference facilities, with a shared receptionist. So the commercial real estate market faces some strong headwinds.

The bottom line is, we’re looking at a substantial drag on economic recovery based on this migration out of the cities. It’s a big story that’s not getting nearly enough coverage.

And this is going to continue. This is something that only happens every two or three generations. You probably have to go back to the baby boom in the late 1940s and early 1950s for something comparable.

But there’s one sector of the economy that is doing well. That’s residential housing because it’s getting hard to find a house in many places. People are even bidding on houses without ever having seen the property.

If you’re looking to invest, you might want to look at suburban real estate and housing.

Regards,

Jim Rickards
for The Daily Reckoning

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Brown Weeds, Not Green Shoots

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Remember “green shoots?”

That was the ubiquitous phrase used by White House officials and TV talking heads in 2009 to describe how the U.S. economy was coming back to life after the 2008 global financial crisis.

The problem was we did not get green shoots, we got brown weeds.

The economy did recover but it was the slowest recovery in U.S. history. After the green shoots theory had been discredited, Treasury Secretary Tim Geithner promised a “recovery summer” in 2010.

That didn’t happen either.

The recovery did continue, but it took years for the stock market to return to the 2017 highs and even longer for unemployment to come down to levels that could be regarded as close to full employment.

Now, in the aftermath of the 2020 pandemic and market crash, the same voices are at it again.

The White House is talking about “pent-up demand” as the economy reopens and consumers flock to stores and restaurants to make up for the lost spending during the March to July pandemic lockdown.

But, the data shows that the “pent-up demand” theory is just as much of a mirage as the green shoots.

Many of the businesses that closed have failed in the meantime. They will never reopen and those lost jobs are never coming back. Even people who kept their jobs are not spending like it’s 2019.

Instead they’re saving at record levels.

Even the “reopening” of the economy is now in doubt. In some cities, the reopening was derailed by riots that left shopping districts in ruins.

In other cities, the reopening was stopped in its tracks by new outbreaks of the virus that led to new lockdowns and strict application of rules on wearing masks and social distancing.

There was a pick-up in retail sales in May, but it has disappeared as fast as it arrived because of the new outbreaks and the extension of the lockdown.

Meanwhile, if you’re trying to understand the economy, pay no attention to the stock market. The stock market is almost completely disconnected from the economy.

That’s partly because of the massive distortions caused by the Fed. But it’s also because the stock market is heavily weighted toward finance and technology.

Both sectors have been relatively unaffected by the pandemic and the resulting economic shock.

The industries that have been hurt are small-and-medium sized businesses in food, travel, resorts, bars, hotels, salons and other bricks-and-mortar or personal service establishments. Pain was also felt in mining, manufacturing and some other sectors.

These are important businesses in the economy, but they’re not nearly as important to major stock market indices as Amazon, Apple, Facebook, Google, Netflix, Microsoft and other mainly digital companies.

If you want to understand the economy, look around your own community to see how many stores are still closed, how many are never reopening, and how much sales are down among the relatively few survivors.

It’s not a pretty picture, and based on the dynamics of the virus it won’t get better anytime soon.

But there’s another primary reason why the economy won’t recover anytime soon. It’s not getting much coverage in the mainstream press, but it should.

It involves a major population shift that only happens once every two or three generations. And it’s happening now.

Regards,

Jim Rickards
for The Daily Reckoning

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The Fed Isn’t a Magic Money Tree

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There seems to be no end to the Federal Reserve’s arrogance. Fed officials believe that through their wise actions, they can eliminate the business cycle, lower unemployment and make society prosperous.

But it’s actually much more limited in what it can do.

All the Fed can reliably do is stop bank runs and limit liquidity panics. It can also fund (or “monetize”) the U.S. federal deficit, as it has done in recent months.

By buying essentially the same amount of U.S. Treasury securities the government has issued, the Fed has taken pressure to fund mammoth federal deficits off of the private sector.

But such actions are not cost-free.

They store up trouble for the future. These actions swell the Fed’s balance sheet, which will limit the Fed’s flexibility and its willingness to tighten policy during the next inflation spike.

The more the Fed intervenes, the harder it is for it to reverse course without causing damage.

By promising the public that it can do anything more than offer dollar liquidity, the Fed is setting up both investors and workers for disappointment.

Yet it’s going to try anyway. And it’ll only undermine its limited reputational capital in the process.

“Yield Curve Control”

The Wall Street Journal recently reported that the Fed is considering implementing “yield curve control” in the Treasury market. This policy hasn’t been used since WWII and the early postwar period.

It essentially funded the war effort. If unleashed today, it wouldn’t be done to support a civilization-saving war effort but to maintain the debt-saturated economy to which we’ve become accustomed.

Here’s how it would work in practice:

The Fed would set a target range, or cap, on yields for Treasury bonds of a specific maturity — say, 3-, 5- or 7-year Treasuries.

It would defend this target by buying unlimited amounts of Treasuries at that yield — however many it took to bring the yield down to its target rate (remember, bond prices and yields move in opposite directions. Buying bonds lowers their yield).

If adopted, the Fed would switch its QE policy from a fixed dollar amount (currently $120 billion per month) to an unknown amount that will depend on supply and demand in the Treasury market.

Yield curve control has been underway in Japan for the past few years. It has proven to not be effective at stimulating the economy, so there’s little reason to expect it would work here.

Here Comes Helicopter Money

We’ve had our fill of quantitative easing over the years, but it’s mostly inflated assets while doing little for overall economic growth.

The quantitative tightening, or QT, process that occurred from early 2018–mid-2019 slowly reversed that process until the Fed ran into a wall of resistance from the markets. Since then, we’ve obviously had another epic wave of QE.

But here’s what’s different about the current round of QE from the QE programs of the past decade:

A much greater proportion of the money the Fed has created to buy bonds will be injected into the real economy through the federal budget. It won’t just be sequestered on Wall Street, where it pumps up asset prices.

As the brand-new U.S. money supply that is currently sitting in the U.S. Treasury’s General Account at the Fed is injected into citizens’ checking accounts through stimulus checks, unemployment insurance, tax refunds, Social Security checks and more, consumers will have plenty of purchasing power.

The Treasury General Account balance is currently $1.5 trillion, which is easily 10 times higher than the historical average. This will be sent out to recipients of federal dollars in the months ahead.

Will the recipients spend it all at once?

No, they won’t. They’ll likely hold precautionary savings in a weak economy. But make no mistake: The cash is there, it will get into consumers’ hands and it will eventually be spent — even if the economy remains sluggish.

It’s like water that’s built up in front of a dam. All it takes is to open the sluices (in this case have the Treasury spend down its cash balance) to inject an unprecedented amount of cash into the economy.

The U.S. job market (and wages) won’t necessarily have to fully recover for a chronic inflation problem to set in, because the tool for the Fed to inject newly printed cash into the economy (through the federal budget) is well established.

That’s a recipe for stagflation.

Turning Money Into a Hot Potato

It involves a chronically high federal deficit, a Fed balance sheet that is expanding with the deficit and private-sector productivity growth that lags the growth in newly printed money.

Historical evidence shows that when government debt and deficits are high, central bank balance sheets are growing rapidly and private-sector productivity growth lags the growth in newly printed money, inflation will be the result.

When the public starts to recognize that supply of a fiat currency is too plentiful today and expects money supply to grow much faster than production of goods and services, then the public will start treating that currency as a hot potato.

This is the psychological part of inflation that’s so difficult for mainstream economists to grasp. It’s nonlinear and unpredictable. This is why Jim Rickards calls inflation a “psychological phenomenon.”

And that brings me to Modern Monetary Theory, or MMT.

MMT Doesn’t Understand Money

Consider this question: Do you hold cash as a store of value solely for the purpose of paying taxes?

Of course not. Thus, legal tender laws do not give fiat money intrinsic value. Fiat money only has value to the extent that its holders believe it can be exchanged for goods and services both now and in the future.

But Modern Monetary Theory (MMT) is ultimately based on the notion that fiat money derives its value from the fact that citizens need it to pay their taxes.

But MMT advocates might be surprised if they survey the public and discover that the public does not, in fact, save money for the sole purpose of paying federal taxes.

The exchange of fiat money for goods in the future is critical. In Chapter 5 of his book Aftermath, titled “Free Money,” Jim identifies the essential problem with MMT:

“The problem with… MMT is not that the theory is wrong as far as it goes; the problem is that it does not go far enough. MMT fails not because of what it says but because of what it ignores. The issue is not whether there is a legal limit on money creation but whether there is a psychological limit.”

Promoters of MMT consider taxation the solution to inflation. If inflation becomes a problem, their solution is to raise taxes, which would drain money out of the economy. But they don’t understand the psychology of inflation.

They focus on the accounting mechanics of dollar creation and downplay how their policy proposals might affect the use of dollars in the real world. I’ve seen no successful real-world case study showing that MMT works.

It’s an abstract theory that is not supported by historical evidence. That’s why detractors often make fun of MMT by calling it “Magic Money Tree.”

The Fed is not a Magic Money Tree today… and it wouldn’t become one even if MMT were officially adopted in the future.

Owning gold and gold-related assets is the best protection against the damage that the Fed and the federal government are doing today and what they’ll do in the future.

The damage isn’t yet obvious, but it will be more noticeable in time.

Regards,

Dan Amoss
for The Daily Reckoning

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These Statues Must Come Down

This post These Statues Must Come Down appeared first on Daily Reckoning.

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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The Fed’s “Big Shift”

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There have been endless announcements by the Fed that they will add this and that to their asset-purchase programs. The media jumped all over these announcements, how the Fed is going to get into the junk bond market and ETFs with hundreds of billions of dollars.

Each time, all kinds of hoopla broke out in the markets with stocks soaring and junk-bond ETFs soaring, and everything soaring — despite the worst economy in memory, despite 30 million people on unemployment insurance, and despite shocking earnings reports heading our way.

The Fed has set up an alphabet soup of programs so far — and it has been buying some of the assets it said it would buy.

In all, the Fed has indirectly monetized about 65% of the government debt it’s taken on since March. But here’s what you might not realize:

The Fed’s monetization of the U.S. debt has slowed to a trickle in recent weeks after the original shock-and-awe spree in March and April, whittling down its purchase programs of Treasuries.

It also has been shedding alphabet-soup assets it had bought in March and April, and cutting back its purchases of mortgage-backed securities (MBS) for the past two months.

And believe it or not, total assets on the Fed’s balance sheet actually shrank by $74 billion last week:

IMG 1

This $74 billion decline in total assets last week was powered by a few factors. First, there was a plunge in “repo” balances. If you weren’t already familiar with the term, you might remember “repo” from late last year when the Fed pumped in trillions in liquidity to liquify the overnight lending markets that were seizing up.

Anyway, a dramatic drop in repo balances partly account for the drop in the Fed’s balance sheet.

Also contributing to the balance sheet decline were foreign central bank liquidity swaps, while some alphabet-soup programs also unwound. And the junk-bond and ETF buying program stalled.

I don’t want to get deep in the weeds on any of these things (it’s all rather technical), but they explain the $74 billion decrease in the Fed’s balance sheet. Now, in basic terms the decrease is little more than a rounding error. It only brought the Fed’s total assets down to a still breath-taking $7.095 trillion.

But there is a big shift happening right now that Wall Street doesn’t seem to understand:

The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities, and businesses, rather than into the financial markets.

These programs include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion), and the Municipal Liquidity Facility ($16 billion).

This is not QE but more like paying businesses and municipalities, and ultimately workers/consumers, to consume. This money is circulating in the economy rather than inflating asset prices.

These types of programs are propping up consumption — not asset prices. That’s a new thing. I don’t think the hyper-inflated markets, which have soared only because the Fed poured $3 trillion into them, are ready for this shift. Again, that’s an important change and a big shift. But it’s not getting any attention.

You can see from the curve that last week’s decline in the balance sheet isn’t an accident, but part of a plan to front-load QE and then back off, rather than let it drag on for years:

IMG 2

Now, the Fed is still offering theoretically huge amounts of repos every day. But it has tweaked the offering terms, so that there is now almost no appetite for them, and what’s left on the balance sheet are older term repos that unwind and are gone.

The repo balances dropped by $88 billion from the prior week to $79 billion, the lowest since September 18:

IMG 3

Meanwhile, the Fed’s “dollar liquidity swap lines” with other central banks had been roughly flat for seven weeks, after the $400 billion surge in early April. But last week some swaps matured and were unwound, and the balance dropped by $92 billion to $352 billion.

Of that drop, $75 billion came from the swap line with the European Central Bank, $9 billion from the Bank of Japan, and $7 billion from the Bank of England (country data via the New York Fed).

With these swaps, the Fed lends newly created dollars to other central banks and takes their domestic currency as collateral. When the swap matures, the Fed gets its dollars back, and the foreign central bank gets its currency back.

This is where much of the media hype has focused on, following the endless announcements by the Fed. The Fed says that these bailout schemes are authorized under Section 13 paragraph 3 of the Federal Reserve Act, as amended by the Dodd-Frank Act. And Powell calls these creatures “thirteen-three facilities.”

Under the program, the Fed creates a Special Purpose Vehicle (SPV) as a limited liability corporation (LLC). The Treasury pads it with taxpayer equity capital. The Fed lends to the SPV with a leverage ratio of 10 to 1. Then it’s off to the races, with the SPV buying up the entire world, or so it would seem, according to the media.

The number of SPVs keeps growing. There are 10 active ones on today’s balance sheet. But in dollar terms, by the Fed standards, they’re small. After an initial burst in early April of $130 billion spread among the first three SPVs, there came a lull, and the overall balance declined. New SPVs were added, but as the balance of the first three SPVs declined, the overall balance also declined until mid-May.

Starting in late May, the new SPVs added enough so that overall balances began rising, and reached $196 billion by June 10. But last week, the overall balance ticked down by $1.6 billion:

There are now three SPVs that route funds into consumption rather than asset purchases: Again, these include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion), and the Municipal Liquidity Facility ($16 billion).

The Fed added $26 billion of Treasury securities during the week, bringing the total to $4.17 trillion. Over the past four weeks, the balance increased in a range between $9 billion in $26 billion, about the same range before the outbreak of bailout mania:

IMG 4

This progression of the Treasury purchases, from front-loading to tapering, is visible in the flattening curve of total Treasuries on the Fed’s balance sheet:

IMG 5

The Fed has cut its purchases of government-backed mortgage-backed securities (“Agency MBS”) after the initial burst. But its MBS trades take one to three months to settle, and the Fed books them after they settle, which creates an erratic pattern. So what we’re seeing today are settled trades from some time ago.

The balance of MBS rose by $83 billion to $1.92 trillion. This includes Agency Commercial Mortgage Backed Securities that the Fed started buying as part of its bailout program. But the balance of these CMBS has remained flat over the past three weeks at $9.1 billion.

For the stock market, a new phase has started. It now has to figure out how to stand on its own swollen and inflated legs in the worst economy in a lifetime, with the worst corporate earnings reports coming its way, while stock prices are ludicrously inflated.

So good luck to Wall Street.

Regards,

Wolf Richter
for The Daily Reckoning

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“There Is a Big Shift Happening”

This post “There Is a Big Shift Happening” appeared first on Daily Reckoning.

“There is a big shift happening.”

Here you have the judgment of old Daily Reckoning hand Wolf Richter.

The “big shift” to which Mr. Richter refers is this:

A big shift in Federal Reserve policy.

But a big shift away from what policy… and toward which policy?

To which we must add our own question:

Is the “big shift” a genuine wheeling around — or merely a brief detour, a fleeting and transient veering?

These are the questions we peer into today.

We first peer in on the central beneficiary of existing Federal Reserve policy — Wall Street.

The Dow Jones gained another 150 points today. The S&P gained another 20 of its own; the Nasdaq, 110.

As is often the case, technology stocks such as Apple, Microsoft, Netflix and Amazon hauled much of the market’s cargo.

But to revisit our central question:

Is the Federal Reserve silently plotting a “big shift” in course?

The Hon. Jerome Hayden Powell appeared before Congress last week…

This he told Congress:

“We” — the Federal Reserve — must “keep our foot on the gas.”

Their foot has been on the gas since March…and heavily on the gas since March.

They collapsed rates clear to zero. They nearly doubled the balance sheet within three months.

Their violent and spasmed pummeling of the gas pedal — in fact — knows no precedent.

The delirious octane flood set Wall Street’s engine racing… and the tachometer to astonishing indications.

In no time whatsoever the stock market was chasing down its February highs. It chases yet.

But the gas pedal came off the floor last week…

The Federal Reserve’s gargantuan balance sheet actually contracted $74 billion on the week.

It was the first weekly winnowing since the crisis commenced — the coronavirus crisis, that is (a fellow must be specific nowadays).

It was also the largest weekly balance sheet shrinkage in 11 years… since May 2009.

In fairness, a deliberate easing off the gas pedal did not cause it. The peculiarities and practicalities of balance book operations did cause it…

$88 billion of “repos” went rolling off the books last week. As $92 billion in foreign central bank “liquidity swaps” likewise went rolling off the books (details below).

Their combined rolling off overmatched — by $74 billion — the Treasuries and mortgage-backed securities that came rolling on.

Hence… the largest weekly balance sheet off-rolling in 11 years.

The stock market has lost some zoom of late. Is it because the hi-test was running low?

Here is a second question, chained to the leg of the first:

Is the Federal Reserve abandoning Wall Street… for Main Street?

Wolf Richter — the aforesaid Wolf Richter — believes:

“There is a big shift happening right now that Wall Street doesn’t seem to understand.”

What precisely constitutes this shift?

The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities and businesses, rather than into the financial markets.

These programs include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion) and the Municipal Liquidity Facility ($16 billion).

How do these programs differ from quantitative easing?

This is not QE but more like paying businesses and municipalities, and ultimately workers/consumers, to consume. This money is circulating in the economy rather than inflating asset prices… These types of programs are propping up consumption — not asset prices. That’s a new thing.

Is Wall Street prepared for this “big shift” of which you write, Mr. Richter?

I don’t think the hyperinflated markets, which have soared only because the Fed poured $3 trillion into them, are ready for this shift. Again, that’s an important change and a big shift. But it’s not getting any attention.

We do not believe the Federal Reserve will walk away from Wall Street.

Yet we have long maintained that authorities would reroute “stimulus” from Wall Street… toward Main Street.

It would go under the banner of “QE for the People” or some such.

The pandemic has merely deepened our conviction.

Millions and millions are idle, unemployed. Many will likely remain idle and unemployed, their jobs permanently erased.

Heaps of businesses nationwide, meantime, may never swing open their doors… or register another sale.

Each extinct business represents one dream permanently dashed.

Are the frustrated and dream-dashed prepared to watch Wall Street prosper beyond avarice — while they wallow?

Legions of unemployed seethed for much of the past decade watching Wall Street prosper in this fashion.

We do not believe they are prepared to seethe another 10 years.

Eventually the pitchforks come out, the barricades are manned, the citadels are stormed.

And elected officials do not wish to be aerated, hanged or guillotined.

They will therefore have a go at QE for the People.

Of course, it too will end in folly. Yet that is a tale for a different day…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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REVEALED: The Fed’s Next Trick

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

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

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

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

And murder is on his mind.

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

And will it pull off the caper?

Answers anon.

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

A Quiet Day on Wall Street

The day counted plus and minus.

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

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

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

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

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

How the Fed Fought WWII

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

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

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

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

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

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

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

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

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

Thus borrowing costs were clamped to tolerable levels.

The Fed Cedes Monetary Policy to the Treasury

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

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

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

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

The monetary base doubled between 1942–45… incidentally.

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

Now come home…

The Fed’s Fighting a New War

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

Thus interest rate policy is… limited.

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

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

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

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

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

The Fed Would Take Direct Control of Interest Rates

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

Yet this you must understand:

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

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

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

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

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

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

Yield curve control.

Targeting Longer-Term Yields

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

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

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

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

And that is lovely because:

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

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

Bottling Borrowing Costs

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

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

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

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

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

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

It’s All About the Yield

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

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

Michael Lebowitz and Jack Scott of Real Investment Advice:

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

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

Is this yield curve control in the offing?

“Whatever It Takes”

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

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

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

Jim Rickards likewise believes yield curve control is coming:

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

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

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

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

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

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

What king ever sought such power?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Goodbye, Free Market

This post Goodbye, Free Market appeared first on Daily Reckoning.

Fremdschämen.

Fremdschämen is a noun of the German language. It translates this way:

Embarrassment for those incapable of feeling embarrassment.

Today we suffer embarrassment for Mr. Jerome Powell and his fellows of the Federal Reserve…

For no action they take lowers their heads in shame… or blushes their cheeks with embarrassment.

Mr. Powell is simply in the hands of Wall Street… and on his knees to Wall Street.

Well does he know the taste of shoeblack.

Yesterday Mr. Powell got a fresh coat on his tongue. Details to follow.

But first, let us look in on his masters…

A Banner Day on Wall Street

Wall Street was in full roar today.

The Dow Jones jumped an additional 582 points. The S&P gained 58 points; the Nasdaq, 169 points of its own.

CNBC, by way of explanation:

Stocks rose on Tuesday as a record jump in retail sales — coupled with positive trial results from a potential coronavirus treatment and hopes of more stimulus — sent market sentiment soaring.

Government number-torturers reported this morning that May retail sales jumped a record 17.7%.

The chronically erring Dow Jones survey of economists had projected a 7.7% increase.

Yet we are not surprised by the surge. April’s numbers were true abominations. But certain economic restrictions were waived in May.

A trampolining back was therefore expected.

Meantime, a medicine named dexamethasone — a widely available medicine — is evidently effective in the treatment of deathly ill coronavirus patients.

It reportedly axed hospital deaths by perhaps one-third.

Thus the market had its spree today. But it merely added to yesterday afternoon’s joys…

Powell Licks Wall Street’s Shoes

The Dow Jones had been off 762 points in early trading yesterday, quaking with coronavirus-related fear.

But then Mr. Powell sank to his knees… and tongued Wall Street’s wingtips…

For the Federal Reserve announced it intends to purchase individual corporate bonds — not merely ETFs.

By its own admission, it will:

Begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.

We will not burden you with the plan’s intricacies. You need only know this:

Yesterday’s announcement “pressed the risk-on button,” as money man Bill Blain styles it…

“Central Banks Are Now de facto Guarantors of the Corporate Bond Market”

Fears about the rising number of reopening coronavirus hotspots and economic threats were superseded by unbounded joy as the Fed announced it will buy secondary market corporate bonds direct[ly] rather than through ETFs, without any need for companies to certify their eligibility. That pressed the risk-on button — and markets recovered.

And so the free market sinks deeper into oblivion:

Central banks are now de facto guarantors of the corporate bond market.

What has all this QE Infinity and ZIRP interest rates created?… Where market prices have become meaningless as a result of financial asset inflation? Where junk bonds are priced like AAA securities, allowing private equity funds to thrive?

I am beginning to wonder if there is any point in thinking about markets any more… Just follow the central banks… don’t think. Just buy.

“Don’t think. Just buy.”

We think the proper advice might rather run this way: “Don’t buy. Just think.”

Yet we do not dispense financial advice.

Picking Winners and Losers

Our own Nomi Prins penetrates to the core of yesterday’s message. Nomi rings dead center when she says:

As if the Fed hasn’t done enough to destroy honest markets, now it plans to start buying individual corporate bonds. It’s just another step closer to the Fed deciding the winners and losers in the market.

Thus the Federal Reserve is a referee who has taken a bribe, a butcher who thumbs the scales, a rogue, a traitor to justice.

A central banker with a conscience might lower his head in shame… and a red flush of embarrassment might stain his cheeks.

Yet Mr. Powell holds his head high and puffs his chest, proud as any peacock.

His cheeks, meantime, are pale.

Yet ours are scarlet — scarlet with embarrassment for the man incapable of embarrassment.

“From Lender of Last Resort to Stockjobber”

The Federal Reserve was originally fashioned to be the “lender of last resort.” Yet that designation is presently a cruel and mocking jest.

It has passed from lender of last resort to stockjobber.

Economist Thomas M. Humphrey is the author of Lender of Last Resort: What It Is, Whence It Came, and Why the Fed Isn’t It.

From which:

While there exists such an entity as the classical lender of last resort (LLR) — the traditional, standard LLR model, to be exact — the Fed has rarely adhered to it… The Fed has deviated from the classical model in so many ways as to make a mockery of the notion that it is an LLR. In short, the Fed may be many things, crisis manager included. But it is not an LLR in the traditional sense of that term.

What is the proper function of the central bank, by Humphrey’s lights?

Six Mandates of Sound Central Banking

As summarized by Wikipedia, a central bank exists to:

(1) protect the money stock instead of saving individual institutions; (2) rescue solvent institutions only; (3) let insolvent institutions default; (4) charge penalty rates; (5) require good collateral; and (6) announce the conditions before a crisis so that the market knows exactly what to expect.

A word of explanation, perhaps, on “penalty rates.”

The central bank should charge interest rates above the market rate.

Otherwise the central bank would be a lender of resort — not the lender of last resort.

A high rate further encourages debtors to retire their debts rapidly… to shake loose the heavy burden as soon as circumstances allowed.

Yet what does the Federal Reserve’s actual record reveal?

(1) “Emphasis on credit (loans) as opposed to money,” (2) “taking junk collateral,” (3) “charging subsidy rates,” (4) “rescuing insolvent firms too big and interconnected to fail,” (5) “extension of loan repayment deadlines,” (6) “no pre-announced commitment.

Professional Incompetence

That is, the Federal Reserve takes sound central banking and knocks it 180 degrees out of phase.

It wars against all six mandates and massively against Nos. 1, 2, 3, 4 and 5.

Imagine a plumber who does not patch leaks but creates leaks… a doctor who does not mend bones but cracks bones… a head shrinker who does not shrink heads but expands heads.

Now you have the flavor of it.

Yet the Federal Reserve’s professional pride is unruffled. It displays no embarrassment, no shame at a job done wrong.

In fact, it believes it is a job done right…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Goodbye, Free Market appeared first on Daily Reckoning.

The Fed’s Forever War Against Savers

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

The war on savers rages into its second decade.

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

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

The only peace terms he will accept are these:

Complete, undiluted and unconditional surrender.

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

Here is yesterday’s dispatch from headquarters:

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

Zero Rates Through at Least 2022

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

We wager rates will remain clamped to zero longer yet.

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

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

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

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

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

As we recently noted:

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

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

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

We simply do not know. Nor does anyone.

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

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

Even Powell himself is nagged by doubts:

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

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

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

Adds Charlie Ripley, senior investment strategist at Allianz:

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

The Federal Reserve’s fears may well prove true…

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

Comparing the 1990, 2001 and 2008 Recessions

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

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

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

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

The Fed Will Keep Buying Ammunition

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

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

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

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

A mere 6%… if you can believe it.

These assets represents ammunition in support of Wall Street.

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

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

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

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

The Market’s Worst Day Since March

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

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

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

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

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

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

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

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

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

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

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

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

But the stock market should take heart:

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

Savers, meantime, must only despair:

The full arsenal of the Federal Reserve is against them…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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