"Who Will Be Left to Buy?"
Dec 21, 2018 10:09:25 #
"Who Will Be Left to Buy: One Step Closer to Crisis"
by Brian Maher
"The Dow Jones was up some 300 points yesterday when the sirens wailed at 2 o’clock sharp... and Jerome Powell pickled the bomb switch. When the all-clear sounded at 4 p.m., the index was down 352 points. In all, the Dow swung 900 hair-raising points yesterday. Markets emerged from their shelter this morning to take a look around — and survey the damage.
Still shaken, still rattled… they broke under the strain of it all. The Dow Jones hemorrhaged another 464 points today, to 22,859. The S&P fell 39, while the Nasdaq tumbled another 108. 85% of S&P stocks have now suffered a correction of 10% or more. 60% are in bear markets — down at least 20%. And the Nasdaq is now within 2% of a bear market. In all, Wall Street is sunk in its worst December since 1931.
“Now the entire bull market trend is looking to fall apart with a devastating bear market to come,” panics analyst Sven Henrich. “The ghosts of 2007 are all around us,” he warns.
But we ignore the menacing spectral omens for the moment… and return to yesterday. We explained yesterday that the rate hike may have pushed the Fed’s benchmark rate above the “neutral” rate of interest. That is, rates may now depress rather than stimulate. But it was not the rate hike itself that filled the bomb shelters yesterday afternoon. The market had largely anticipated the hike.
It was rather Mr. Powell’s post-announcement statement about the Fed’s balance sheet: "We thought carefully about how to normalize policy and came to the view that we would effectively have the balance sheet runoff on automatic pilot… I think that the runoff of the balance sheet has been smooth and has served its purpose... I don’t see us changing that." The Dow Jones plummeted over 500 points as Mr. Powell spoke.
Former colleague David Stockman explains why: "The clear-and-present danger to the greatest financial bubble in modern history is the fact that Powell affirmed without hesitation that the Fed will proceed — on automatic pilot no less — to drain [its balance sheet]. Since October last, the Federal Reserve has run some $365 billion off its balance sheet. It expects to carry on the business at a $50 billion monthly clip through 2020. "
Thus it appears that David is correct. The Federal Reserve has abandoned its nearly decade-long defense of the stock market. It was up on the rooftops year upon year, manning the flak guns, filling the sky with metal at the first sight of marauders. Now markets feel abandoned — or worse. It’s as if the Fed has thrown aside its guns, turned its coat… and went over to the other side. Now it’s the one dropping the bombs on Wall Street.
Wonders Michael Snyder of The Economic Collapse blog: “Is the Federal Reserve actually TRYING to cause a stock market crash?” More: "It is insanity to raise interest rates when stocks are already crashing, but the Federal Reserve did it anyway… All of the economic numbers tell us that the economy is slowing down, and on Wednesday Fed Chair Jerome Powell even admitted that economic conditions are “softening”... They know that higher rates will slow down the economy even more, but it isn’t as if the Fed were divided on this move. In fact, it was a unanimous v**e to raise rates."
In conclusion: They clearly have an agenda, and that agenda is definitely not about helping the American people. An agenda? But what? Whispers circulate that the unanimous v**e was calculated to deliver a political message... Trump raged and thundered against a possible rate hike, blackening Jerome Powell’s good name in the process. So they intended to read the president a severe lesson in “Fed independence” — to show him who’s boss. We’ve issued our agents urgent instructions to investigate the rumors… and report back immediately.
Meantime, the bombers are closing in on Wall Street again… Fourth-quarter earnings season is underway. Corporations are generally not allowed to conduct stock buybacks ahead of earnings season — lest they be accused of acting on inside information. Buybacks provided much of the helium that has lifted markets to such dizzied heights. Corporate buybacks, in fact, represent the largest source of demand for U.S. stocks.
But we are told that 75% of the S&P will be “under blackout” by Dec. 26. That is, 75% of S&P components will be unable to buy back their own stocks for a good month or so. In conclusion... The Fed has abandoned Wall Street, investors are fleeing for their lives… and 75% of the S&P will soon be unable to buy back their stocks. Who will be left to buy? (And then... free fall. - CP)
Below, Jim Rickards explains how markets are “one step closer to crisis” after yesterday. Read on."
"One Step Closer to Crisis"
By Jim Rickards
"The Fed raised rates another quarter-point yesterday, just as I predicted it would. Markets tumbled as soon as the news broke and the selling accelerated during Jerome Powell’s post-announcement press briefing. His statements weren’t nearly as dovish as markets were hoping for. “Policy at this point does not need to be accommodative,” said Powell today. “It can move to neutral.” But in early October Powell said the Fed was a “long way” from a “neutral” policy rate. Then in November he said the Fed was actually “just below” neutral.
The markets took the correction as dovish, but in fact it was just part of the education of Jay Powell. It would be confusing and a bit reckless for Powell to change tack again and suggest the Fed was back on autopilot with regard to rate hikes. But the Fed is just sticking to the playback. The basic Fed model set up by Janet Yellen and continued by Powell was that the Fed would raise rates four times per year (March, June, September and December), by 0.25% each time, until the fed funds target rate hit 3.75%, at which point the Fed would step back and evaluate the situation.
But despite what they say, the rate hikes had nothing to do with “data” and everything to do with having dry powder for the next recession. The only exception to this clockwork program would be an occasional “pause” if the Fed saw strong disinflation, disorderly market declines or job losses. We’ve certainly had a substantial market decline since October. But obviously Powell doesn’t consider it on the scale to warrant a pause. It seems clear now that the Fed no longer considers supporting financial markets a core responsibility. The endgame is a rate of 3.5% by early 2020. At that point, the Fed may pause to re-evaluate but may keep going. (Long before 2020 there won't be anything left... - CP)
The Fed calls this approach “gradual” but it’s not. There’s a huge difference between a 0.25% rate hike (that’s the Fed’s tempo per hike) starting at 2% versus starting at 6%. In both cases, the hike is 0.25%, but the impact on bond prices and economic activity is much greater when you start with the lower base. There are highly technical reasons for this, having to do with concepts called “duration” and “convexity.” We don’t need to dive into those. Suffice it to say that hikes from a lower base are much more impactful. In short, the Fed’s policy today is a body blow to an economy that’s still recovering from the worst recession since the Great Depression. (It never "recovered", either. - CP)
Other major central banks are either following in the Fed’s footsteps (Bank of England) or preparing to do so in the near future (European Central Bank). Even the money-printing and stock-buying Bank of Japan has acknowledged the central bank’s game can’t go on forever. Leaving China to one side (it’s a political shell game leading to a historic credit crisis), the central banks are either raising rates or getting ready.
If this rate hiking were the only major monetary development in the world, that would create a challenging environment for investors in stocks, bonds, gold and real estate — all interest-sensitive in different ways. But it’s not the only major development. Behind the curtain, central banks are either slowing down the printing presses or actually burning money. This marks the end of quantitative easing (QE) for the Bank of Japan and the ECB and the start of quantitative tightening (QT) in the case of the Bank of England and the Fed.
From 2008–2014, U.S. critics of the Fed complained about rampant money printing under the banner of QE. There was even a popular cartoon that showed Ben Bernanke on the outside of a helicopter with one hand on a strut and the other hand throwing money out of the helicopter with a wild-eyed look on his face. This was a send-up of the infamous “helicopter money” that Bernanke advocated, an idea he nicked from uber-monetarist Milton Friedman.
But instead of Bernanke dangling from a helicopter, picture Jay Powell near a furnace with a shovel and a huge pile of $100 bills. Powell is madly shoveling the money into the furnace, burning it. That’s what reducing the money supply looks like, and that’s what the Fed is doing now. And Powell’s comments yesterday only reinforced market fears that it will continue. “I think that the runoff of the balance sheet has been smooth and has served its purpose,” he said at the press conference. “I don’t see us changing that.”
The Fed increased its balance sheet from $800 billion to $4.4 trillion from 2008–2014 under the policy of QE. Now they’re trying to get back to a reasonable number. It won’t be $800 billion, but the target could be around $2.4 trillion. That’s still a $2 trillion money supply reduction from the 2014 high.
Analysts estimate every $600 billion of balance sheet reduction is roughly equivalent to a 1.0% hike in the fed funds rate. So in addition to the 3.5% of rate hikes from 2015–2020, you can add on another 3.0% of implied rate hikes from QT. A total of 6.5% of rate hikes (3.5% nominal and 3.0% from QT) in five years from a zero base is one of the most extreme examples of monetary tightening in the history of the Fed.
It compares to the Volcker tightening from 1979–1981. Volcker intentionally set out to crush inflation even if it meant a recession (there were two recessions from 1980–1982). In contrast, there is no inflation on the horizon today and the economy is probably heading for a recession without any help from Jay Powell.
The global phenomenon is neatly illustrated in the chart below. This chart combines the QE and QT of the BoE, BoJ, Fed and ECB using colors to show the individual contributions of each central bank.
The Fed’s QE1 (2008), QE2 (2010) and QE3 (2012) stand out clearly in the three blue spikes. The BoE also had three waves of smaller magnitude shown as green waves from 2010–2016. The BoJ started late (in 2011) but has never stopped since, as shown in the red wave. Finally, the gray wave is the ECB. They were also late to the party but made it up in volume.
What’s important about this chart is not where we’ve been but where we’re going. The Fed is already in negative territory (the blue wave below the “0” line starting in 2018). The BoE is neutral but is also ready to go negative. The ECB and BoJ are still positive but trending down sharply; the ECB will go negative in 2019, according to current plans.
The black trend line shows the aggregate of all four central banks. It crashed in 2018 (mostly because of the Fed) and will go negative globally in 2019. Before long, our cartoon of Jay Powell shoveling cash into a furnace will have to be updated to include Mark Carney, Mario D**ghi and Haruhiko Kuroda.
The U.S. has had back-to-back quarters of strong growth. Since April, we’ve seen growth of 4.2% (Q2), 3.5% (Q3) and an estimate of 2.9% (Q4, per the Atlanta Fed). But the trend is pointing down. This trend tends to confirm the view that 2018 growth was a “Trump bump” from the tax cuts that will not be repeated.
Now the Fed has lowered its growth forecast for 2019, from 2.5% to 2.3%. The trend line points to a return to the 2.2% growth that prevailed from 2009–2017. This is exactly what one would expect from the extreme tightening described above. Meanwhile, the QT juggernaut is slowing the economy with or without rate hikes. The market can digest all of this along with their Christmas turkeys."
- http://www.thedailyreckoning/.com
by Brian Maher
"The Dow Jones was up some 300 points yesterday when the sirens wailed at 2 o’clock sharp... and Jerome Powell pickled the bomb switch. When the all-clear sounded at 4 p.m., the index was down 352 points. In all, the Dow swung 900 hair-raising points yesterday. Markets emerged from their shelter this morning to take a look around — and survey the damage.
Still shaken, still rattled… they broke under the strain of it all. The Dow Jones hemorrhaged another 464 points today, to 22,859. The S&P fell 39, while the Nasdaq tumbled another 108. 85% of S&P stocks have now suffered a correction of 10% or more. 60% are in bear markets — down at least 20%. And the Nasdaq is now within 2% of a bear market. In all, Wall Street is sunk in its worst December since 1931.
“Now the entire bull market trend is looking to fall apart with a devastating bear market to come,” panics analyst Sven Henrich. “The ghosts of 2007 are all around us,” he warns.
But we ignore the menacing spectral omens for the moment… and return to yesterday. We explained yesterday that the rate hike may have pushed the Fed’s benchmark rate above the “neutral” rate of interest. That is, rates may now depress rather than stimulate. But it was not the rate hike itself that filled the bomb shelters yesterday afternoon. The market had largely anticipated the hike.
It was rather Mr. Powell’s post-announcement statement about the Fed’s balance sheet: "We thought carefully about how to normalize policy and came to the view that we would effectively have the balance sheet runoff on automatic pilot… I think that the runoff of the balance sheet has been smooth and has served its purpose... I don’t see us changing that." The Dow Jones plummeted over 500 points as Mr. Powell spoke.
Former colleague David Stockman explains why: "The clear-and-present danger to the greatest financial bubble in modern history is the fact that Powell affirmed without hesitation that the Fed will proceed — on automatic pilot no less — to drain [its balance sheet]. Since October last, the Federal Reserve has run some $365 billion off its balance sheet. It expects to carry on the business at a $50 billion monthly clip through 2020. "
Thus it appears that David is correct. The Federal Reserve has abandoned its nearly decade-long defense of the stock market. It was up on the rooftops year upon year, manning the flak guns, filling the sky with metal at the first sight of marauders. Now markets feel abandoned — or worse. It’s as if the Fed has thrown aside its guns, turned its coat… and went over to the other side. Now it’s the one dropping the bombs on Wall Street.
Wonders Michael Snyder of The Economic Collapse blog: “Is the Federal Reserve actually TRYING to cause a stock market crash?” More: "It is insanity to raise interest rates when stocks are already crashing, but the Federal Reserve did it anyway… All of the economic numbers tell us that the economy is slowing down, and on Wednesday Fed Chair Jerome Powell even admitted that economic conditions are “softening”... They know that higher rates will slow down the economy even more, but it isn’t as if the Fed were divided on this move. In fact, it was a unanimous v**e to raise rates."
In conclusion: They clearly have an agenda, and that agenda is definitely not about helping the American people. An agenda? But what? Whispers circulate that the unanimous v**e was calculated to deliver a political message... Trump raged and thundered against a possible rate hike, blackening Jerome Powell’s good name in the process. So they intended to read the president a severe lesson in “Fed independence” — to show him who’s boss. We’ve issued our agents urgent instructions to investigate the rumors… and report back immediately.
Meantime, the bombers are closing in on Wall Street again… Fourth-quarter earnings season is underway. Corporations are generally not allowed to conduct stock buybacks ahead of earnings season — lest they be accused of acting on inside information. Buybacks provided much of the helium that has lifted markets to such dizzied heights. Corporate buybacks, in fact, represent the largest source of demand for U.S. stocks.
But we are told that 75% of the S&P will be “under blackout” by Dec. 26. That is, 75% of S&P components will be unable to buy back their own stocks for a good month or so. In conclusion... The Fed has abandoned Wall Street, investors are fleeing for their lives… and 75% of the S&P will soon be unable to buy back their stocks. Who will be left to buy? (And then... free fall. - CP)
Below, Jim Rickards explains how markets are “one step closer to crisis” after yesterday. Read on."
"One Step Closer to Crisis"
By Jim Rickards
"The Fed raised rates another quarter-point yesterday, just as I predicted it would. Markets tumbled as soon as the news broke and the selling accelerated during Jerome Powell’s post-announcement press briefing. His statements weren’t nearly as dovish as markets were hoping for. “Policy at this point does not need to be accommodative,” said Powell today. “It can move to neutral.” But in early October Powell said the Fed was a “long way” from a “neutral” policy rate. Then in November he said the Fed was actually “just below” neutral.
The markets took the correction as dovish, but in fact it was just part of the education of Jay Powell. It would be confusing and a bit reckless for Powell to change tack again and suggest the Fed was back on autopilot with regard to rate hikes. But the Fed is just sticking to the playback. The basic Fed model set up by Janet Yellen and continued by Powell was that the Fed would raise rates four times per year (March, June, September and December), by 0.25% each time, until the fed funds target rate hit 3.75%, at which point the Fed would step back and evaluate the situation.
But despite what they say, the rate hikes had nothing to do with “data” and everything to do with having dry powder for the next recession. The only exception to this clockwork program would be an occasional “pause” if the Fed saw strong disinflation, disorderly market declines or job losses. We’ve certainly had a substantial market decline since October. But obviously Powell doesn’t consider it on the scale to warrant a pause. It seems clear now that the Fed no longer considers supporting financial markets a core responsibility. The endgame is a rate of 3.5% by early 2020. At that point, the Fed may pause to re-evaluate but may keep going. (Long before 2020 there won't be anything left... - CP)
The Fed calls this approach “gradual” but it’s not. There’s a huge difference between a 0.25% rate hike (that’s the Fed’s tempo per hike) starting at 2% versus starting at 6%. In both cases, the hike is 0.25%, but the impact on bond prices and economic activity is much greater when you start with the lower base. There are highly technical reasons for this, having to do with concepts called “duration” and “convexity.” We don’t need to dive into those. Suffice it to say that hikes from a lower base are much more impactful. In short, the Fed’s policy today is a body blow to an economy that’s still recovering from the worst recession since the Great Depression. (It never "recovered", either. - CP)
Other major central banks are either following in the Fed’s footsteps (Bank of England) or preparing to do so in the near future (European Central Bank). Even the money-printing and stock-buying Bank of Japan has acknowledged the central bank’s game can’t go on forever. Leaving China to one side (it’s a political shell game leading to a historic credit crisis), the central banks are either raising rates or getting ready.
If this rate hiking were the only major monetary development in the world, that would create a challenging environment for investors in stocks, bonds, gold and real estate — all interest-sensitive in different ways. But it’s not the only major development. Behind the curtain, central banks are either slowing down the printing presses or actually burning money. This marks the end of quantitative easing (QE) for the Bank of Japan and the ECB and the start of quantitative tightening (QT) in the case of the Bank of England and the Fed.
From 2008–2014, U.S. critics of the Fed complained about rampant money printing under the banner of QE. There was even a popular cartoon that showed Ben Bernanke on the outside of a helicopter with one hand on a strut and the other hand throwing money out of the helicopter with a wild-eyed look on his face. This was a send-up of the infamous “helicopter money” that Bernanke advocated, an idea he nicked from uber-monetarist Milton Friedman.
But instead of Bernanke dangling from a helicopter, picture Jay Powell near a furnace with a shovel and a huge pile of $100 bills. Powell is madly shoveling the money into the furnace, burning it. That’s what reducing the money supply looks like, and that’s what the Fed is doing now. And Powell’s comments yesterday only reinforced market fears that it will continue. “I think that the runoff of the balance sheet has been smooth and has served its purpose,” he said at the press conference. “I don’t see us changing that.”
The Fed increased its balance sheet from $800 billion to $4.4 trillion from 2008–2014 under the policy of QE. Now they’re trying to get back to a reasonable number. It won’t be $800 billion, but the target could be around $2.4 trillion. That’s still a $2 trillion money supply reduction from the 2014 high.
Analysts estimate every $600 billion of balance sheet reduction is roughly equivalent to a 1.0% hike in the fed funds rate. So in addition to the 3.5% of rate hikes from 2015–2020, you can add on another 3.0% of implied rate hikes from QT. A total of 6.5% of rate hikes (3.5% nominal and 3.0% from QT) in five years from a zero base is one of the most extreme examples of monetary tightening in the history of the Fed.
It compares to the Volcker tightening from 1979–1981. Volcker intentionally set out to crush inflation even if it meant a recession (there were two recessions from 1980–1982). In contrast, there is no inflation on the horizon today and the economy is probably heading for a recession without any help from Jay Powell.
The global phenomenon is neatly illustrated in the chart below. This chart combines the QE and QT of the BoE, BoJ, Fed and ECB using colors to show the individual contributions of each central bank.
The Fed’s QE1 (2008), QE2 (2010) and QE3 (2012) stand out clearly in the three blue spikes. The BoE also had three waves of smaller magnitude shown as green waves from 2010–2016. The BoJ started late (in 2011) but has never stopped since, as shown in the red wave. Finally, the gray wave is the ECB. They were also late to the party but made it up in volume.
What’s important about this chart is not where we’ve been but where we’re going. The Fed is already in negative territory (the blue wave below the “0” line starting in 2018). The BoE is neutral but is also ready to go negative. The ECB and BoJ are still positive but trending down sharply; the ECB will go negative in 2019, according to current plans.
The black trend line shows the aggregate of all four central banks. It crashed in 2018 (mostly because of the Fed) and will go negative globally in 2019. Before long, our cartoon of Jay Powell shoveling cash into a furnace will have to be updated to include Mark Carney, Mario D**ghi and Haruhiko Kuroda.
The U.S. has had back-to-back quarters of strong growth. Since April, we’ve seen growth of 4.2% (Q2), 3.5% (Q3) and an estimate of 2.9% (Q4, per the Atlanta Fed). But the trend is pointing down. This trend tends to confirm the view that 2018 growth was a “Trump bump” from the tax cuts that will not be repeated.
Now the Fed has lowered its growth forecast for 2019, from 2.5% to 2.3%. The trend line points to a return to the 2.2% growth that prevailed from 2009–2017. This is exactly what one would expect from the extreme tightening described above. Meanwhile, the QT juggernaut is slowing the economy with or without rate hikes. The market can digest all of this along with their Christmas turkeys."
- http://www.thedailyreckoning/.com
Dec 21, 2018 10:45:03 #
pafret wrote:
"Who Will Be Left to Buy: One Step Closer to ... (show quote)
Just wait till 2:00 pm today!
The Elite will be on their way to enjoy their
X-mas holiday and the lower class will be left to guide the market into the weekend. They may take advantage of this opportunity if they can beat the Robots that are set to take over buying and selling.
I am betting on automated buyers and sellers that operate on logarithms.
The Elite paid Big, Biggest, Biggity Big, Bucks for these computerized hackers!
Good luck.
Dec 21, 2018 10:46:24 #
This brings to question the whole issue of the Federal Reserve's role in the 2008 bailout of the banking industry, the mortgage market, and the FED low interest rate policy that allowed the banking industry to rebuild their reserves.
Instead of allowing the banks that made bad decisions to fail and be picked up by the more fiscally prudent banks, they rewarded those banks by bailing them out. Instead of putting bankers into jail for fraud, they imposed financial sanctions that were a mere pittance compared to money made by the banks selling fraudulent MBS, and the bonus's they received. (BTW - who kept the majority of the financial fine money assessed by the government? You guessed it. Not those that lost the money in the first place).
By keeping interest rates artificially low for the next 10 years, they penalized the seniors and those who saved money and relied upon the interest on their savings. The low interest rate environment caused all sorts of other misallocation of financial investments in a chase to obtain higher yield. Risk has been mispriced. The Pension Industry has been either loosing reserves because of the low interest rate environment, or buying riskier products to achieve a higher yield in order to stave off bankruptcy.
It's all a f*****g game in which the wealthy, powerful, and well connected profit, while those of more modest means continue to struggle and loose ground.
At some point, the whole financial system will come tumbling down, and I'm sure those in power have made contingency plans.
If I recall correctly, 70% of American do not have $1,000 in cash on hand for emergencies. We are in for deep do-do. In the meantime, the FED will continue with it's boom-bust monetary policy and play God, and the Federal Government will spend money it doesn't have, and grow the deficit. Everyone continues to play musical chairs, but pretty soon the music will stop, and there will be many without a chair.
Instead of allowing the banks that made bad decisions to fail and be picked up by the more fiscally prudent banks, they rewarded those banks by bailing them out. Instead of putting bankers into jail for fraud, they imposed financial sanctions that were a mere pittance compared to money made by the banks selling fraudulent MBS, and the bonus's they received. (BTW - who kept the majority of the financial fine money assessed by the government? You guessed it. Not those that lost the money in the first place).
By keeping interest rates artificially low for the next 10 years, they penalized the seniors and those who saved money and relied upon the interest on their savings. The low interest rate environment caused all sorts of other misallocation of financial investments in a chase to obtain higher yield. Risk has been mispriced. The Pension Industry has been either loosing reserves because of the low interest rate environment, or buying riskier products to achieve a higher yield in order to stave off bankruptcy.
It's all a f*****g game in which the wealthy, powerful, and well connected profit, while those of more modest means continue to struggle and loose ground.
At some point, the whole financial system will come tumbling down, and I'm sure those in power have made contingency plans.
If I recall correctly, 70% of American do not have $1,000 in cash on hand for emergencies. We are in for deep do-do. In the meantime, the FED will continue with it's boom-bust monetary policy and play God, and the Federal Government will spend money it doesn't have, and grow the deficit. Everyone continues to play musical chairs, but pretty soon the music will stop, and there will be many without a chair.
Dec 21, 2018 11:21:45 #
ACP45 wrote:
This brings to question the whole issue of the Fed... (show quote)
You pretty much left no stone unturned there.
I am ready to wish for the worst now, just to get it over with once and for all.
I never did like waiting for a beating to happen as I was growing up. I just stood up and finished it.
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