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How Dumb Is the Fed?

Bent and Distorted

POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.

They’re not the best map readers, that much is known for certain. [PT]

[O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.

“Momentum” stocks like Tesla, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue. We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets. […]

Once the hopeful souls who’ve driven bellwethers such as Tesla and Amazon into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

If you believe the newspapers, the Fed has begun a “tightening cycle.” It is on course to raise its key interest rate, little by little, in quarter-point increments.

It must know that this is a perilous thing to do. After so much market manipulation over such a long period, prices all up and down the capital structure – from junk bonds to quality stocks and solid real estate – have been bent and distorted.

After all, that was the idea: drive up the price of stocks and bonds by driving down interest rates. People would be forced to spend or invest their money rather than save it. And higher financial asset prices would make the rich feel even richer.

…click on the above link to read the rest of the article…

Fed Chair Janet Yellen Warns Congress: US Debt Trajectory Is Unsustainable

Fed Chair Janet Yellen Warns Congress: US Debt Trajectory Is Unsustainable

During her tesimony this morning, Fed Chair Janet Yellen urged Congress to take into account the growth trajectory of the federal debt when making decisions about spending and taxation.

She said lawmakers need to work toward achieving “sustainability of this debt path over time,”

“Let me state in the strongest possible terms that I agree” the U.S. federal debt trend is unsustainable, may hurt productivity, and living standards of Americans.

Of course she is correct, but we do not remember her being so forthright during the last few years of President Obama’s reign as he doubled the national debt?

As a reminder, the Congressional Budget Office estimated last month the national debt could reach 91% of gross domestic product by 2027. Lawmakers are weighing major fiscal policy changes, including tax cuts, changes to health care and infrastructure spending, that could drive deficits higher in the coming years. Furthermore, at the cuirrent spending/taxation rates, debt/GDP expected to hit 150% by 2047 if the current government spending picture remains unchanged.

…click on the above link to read the rest of the article…

Janet Yellen: False Prophet of Prosperity

Janet Yellen: False Prophet of Prosperity

Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.” Yellen’s statement should send shivers down our spines, as there are few more reliable signals of an impending recession, or worse, than when so-called “experts” proclaim that we are in an era of unending prosperity.

For instance, in the years leading up to the 2008 market meltdown, then-Fed Chair Ben Bernanke repeatedly denied the existence of a housing bubble. In February 2007, Bernanke not only denied that “sluggishness” in the housing market would affect the general economy, but predicted that the economy would expand in 2007 and 2008. Of course, instead of years of economic growth, 2007 and 2008 were marked by a market meltdown whose effects are still being felt.

Yellen’s happy talk ignores a number of signs that the economy is on the verge of another crisis. In recent months, the US has experienced a decline in economic growth and the value of the dollar. The only economic statistic showing a positive trend is the unemployment rate — and that is only because the official unemployment rate does not count those who have given up looking for work. The real unemployment rate is at least 50 percent higher than the manipulated “official” rate.

A recent Treasury Department report’s called for rolling back of bank regulations could further destabilize the economy. This seems counterintuitive, as rolling back regulations usually contributes to economic growth. However, rolling back bank regulations without ending subsidies like deposit insurance that create a moral hazard that incentivizes banks to engage in risky business practices could cause banks to resume the unsound lending practices that were a major contributor to the growth, and collapse, of the housing bubble.

…click on the above link to read the rest of the article…

Why Quantitative Tightening Will Fail

Why Quantitative Tightening Will Fail

After nine years of unconventional quantitative easing (QE) policy the Federal Reserve is now setting out on a new path for quantitative tightening (QT).

QE was a policy of money printing. The Fed did this by buying bonds from the big banks. The banks would then deliver bonds to the Fed, and the Fed would in turn pay them with money from thin air. QT takes a different approach.

Instead, the Fed will set out policy that allows the old bonds to mature, while not buy new ones from the banks. That way the money will shrink the balance sheets ahead of any potential crisis.

For years leaders at the Federal Reserve have been rolling over the balance sheet to keep it at $4.5 trillion.

Here’s what the Fed wants you to believe.

The Fed wants you to think that QT will not have any impact. Fed leadership speaks in code and has a word for this which you’ll hear called “background.” The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face – and it will have a big impact.

…click on the above link to read the rest of the article…

Yes, Ms. Yellen…There Will Be Another Financial Crisis

Yes, Ms. Yellen…There Will Be Another Financial Crisis

Janet Yellen, Federal Reserve Chair, recently stated;

“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.” 

That is a pretty bold statement to make considering that every one of her predecessors failed to predict the negative consequences of their actions.

Will there will be another “Financial Crisis” in our lifetimes?  

Yes, it is virtually guaranteed.

The previous “crisis” wasn’t about just “an asset gone bad,” but rather the systemic shock caused by a “freeze” in the credit markets when Lehman Brothers filed for bankruptcy. Counterparties evaporated, banks froze lending and the credit market ceased to function.

Credit, not the stock market, is the “lifeblood” of the economy.

Of course, it is all good now because the Federal Reserve says so with Ms. Yellen placing a great amount of faith in the Federal Reserve’s own carefully constructing, and recently released results, of “bank stress tests.” Interestingly, EVERY bank passed with flying colors. In other words, the Millennial generation has now passed the baton of “Everybody Gets A Trophy” to the banking sector.

“Test results released by the Federal Reserve show that the 34 institutions under scrutiny have enough capital to make it through the two scenarios regulators posed — one akin to the financial crisis and another entailing a shallower downturn.

Under the scenarios, the banks tested ‘would experience substantial losses.’ However, in total, the institutions ‘could continue lending to businesses and households, thanks to the capital built up by the sector following the financial crisis.’

In the most severe scenario, bank losses are projected to be $493 billion. In the less severe, the losses were put at $322 billion.”

…click on the above link to read the rest of the article…

The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious

The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious

I have written on the subject of the Federal Reserve’s deliberate sabotage of the U.S. economy many times in the past. In fact, I even once referred to the Fed as an “economic suicide bomber.” I still believe the label fits perfectly, and the Fed’s recent actions I think directly confirm my accusations.

Back in 2015, when I predicted that the central bankers would shift gears dramatically into a program of consistent interest rate hikes and that they would begin cutting off stimulus to the U.S. financial sector and more specifically stock markets, almost no one wanted to hear it. The crowd-think at that time was that the Fed would inevitably move to negative interest rates, and that raising rates was simply “impossible.”

Many analysts, even in the liberty movement, quickly adopted this theory without question. Why? Because of a core assumption that is simply false; the assumption that the Federal Reserve’s goal is to maintain the U.S. economy at all costs or at least maintain the illusion that the economy is stable. They assume that the U.S. economy is indispensable to the globalists and that the U.S. dollar is an unassailable tool in their arsenal. Therefore, the Fed would never deliberately undermine the American fiscal structure because without it “they lose their golden goose.”

This is, of course, foolish nonsense.

Since its initial inception from 1913-1916, the Federal Reserve has been responsible for the loss of 98% of the dollar’s buying power. Idiot analysts in the mainstream argue that this statistic is not as bad as it seems because “people have been collecting interest” on their cash while the dollar’s value has been dropping, and this somehow negates or outweighs any losses in purchasing power. These guys are so dumb they don’t even realize the underlying black hole in their own argument.

…click on the above link to read the rest of the article…

Why the Fed Will Fail Once Again

Why the Fed Will Fail Once Again

[Ed. Note: Jim Rickards’ latest New York Times bestseller, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, is out now. Learn how to get your free copy – HERE. This vital book transcends rhetoric from the Federal Reserve to prepare you for what you should be watching now.]

John Maynard Keynes once wrote, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Truer words were never spoken, although if you updated Keynes today, the quote would begin with “practical women” to take account of Fed Chair Janet Yellen. The “defunct economist” in question would be William Phillips, inventor of the Phillips curve, who died in 1975.

In its simplest form, the Phillips curve is a single-equation model that describes an inverse relationship between inflation and unemployment. As unemployment declines, inflation goes up, and vice versa. The equation was put forward in an academic paper in 1958 and was considered a useful guide to policy in the 1960s and early 1970s.

By the mid-1970s the Phillips curve broke down. The U.S. had high unemployment and high inflation at the same time, something called “stagflation.” Milton Friedman advanced the idea that the Phillips curve could only be valid in the short run because inflation in the long run is always determined by money supply.

Economists began to tweak the original equation to add factors — some of which were not empirical at all but model-based. It became a mess of models based on models, none of which bore any particular relationship to reality. By the early 1980s, the Phillips curve was no longer taken seriously even by academics and seemed buried once and for all. RIP.

…click on the above link to read the rest of the article…

How The Fed Helps The US Spy On Foreign Governments

How The Fed Helps The US Spy On Foreign Governments

It’s widely known that the Federal Reserve has been tasked by Congress with a “dual mandate” to maintain stable consumer-goods prices, low unemployment and – oh yes – buoyant equity prices. However, as Reuters revealed on Monday, the central bank has another legally binding obligation that might upset some of its clients: Helping the US intelligence community spy on foreign governments.

Some 250 foreign central banks and governments keep $3.3 trillion of their assets at the Federal Reserve Bank of New York. It is this little-known custodial role, which we have however highlighted frequently to show the true change in foreign holdings of US paper, that allows US intelligence agencies to leverage information about activity in certain accounts.

Specifically, senior officials from the Treasury and other government departments have turned to these otherwise confidential accounts several times a year to analyze the asset holdings of the central banks of Russia, China, Iraq, Turkey, Yemen, Libya and others, according to more than a dozen current and former senior Fed and Treasury officials who spoke with Reuters.

It was not immediately clear how the “confidential” information differs from the public, except that it likely breaks down the holdings by source nation. The Reuters report surfaced at a time when the value of assets held by the central bank is rapidly expanding as foreign reserve managers scoop up US Treasurys at an aggressive clip, something we first highlighted in February when concerns emerged that foreigners were selling based on data from the delayed Treasury International Capital report.

The terms of the Fed’s custodial agreements stipulate that it can share information with US government entities on a “need to know” basis. Ironically, the service was advertised in a 2015 slide presentation as “safe and confidential,” according to Reuters. However, the “need to know” standard is easily circumvented as the central bank has conveniently avoided creating a working definition of “need to know.”

…click on the above link to read the rest of the article…

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

[Ed. Note: Jim Rickards’ latest New York Times bestseller, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, is out now. Learn how to get your free copy – HERE. This vital book transcends rhetoric from the Federal Reserve to prepare you for what you should be watching now.]

The Federal Reserve is now setting out on a new path for quantitative tightening (QT) after nine years of unconventional quantitative (QE) easing policy. It is the evil twin of QE which was used to ease monetary conditions when interest rates were already zero.

First, it is important to examine QE and QT in a broader context of the Fed’s overall policy toolkit. Understanding the many tools the Fed has, which of them they’re using and what the impacts are will allow you to distinguish between what the Fed thinks versus what actually happens.

We have a heavily manipulated system. For years, if not decades, monetary policy has been flipping back and forth between how the economy actually works and what the Fed believes works.

QE was a policy of printing money by buying securities from primary dealers and to ease monetary conditions when interest rates were at zero. QT takes a different approach.

In QT, the Fed will “sell” securities to the primary dealers, take the money, and make it disappear. This is an attempt to ultimately reduce the money supply and implement a policy of tightening money.

There’s a bit of a twist to that selling. Today the Fed’s balance sheet stands at $4.5 trillion. It started at $800 billion in 2008 and has increased over five times that since the crisis. Now they’re going to try to get the balance sheet back to normal levels.

…click on the above link to read the rest of the article…

The Three Headed Debt Monster That’s Going to Ravage the Economy

“The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath

Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent.

In short, investors were simultaneously anticipating inflation and deflation.  Naturally, this is a gross oversimplification.  But it does make the point that something peculiar is going on with these markets.

Clear thinking and simple logic won’t make heads or tails of things.  For example, late Wednesday and then into Thursday the reverse happened.  Gold gave back practically all $13 per ounce it had gained on Tuesday, while the yield on the 10-Year Treasury note climbed back up to 2.19 percent.  What to make of it?

Gold and treasury yields have been inversely correlated for some time. This is probably due to inflation expectations driving expectations about interest rate policy – click to enlarge.

With a little imagination one can conceive of where the money’s coming from to buy Treasury bonds.  More than likely, it has something to do with central bank intervention into credit markets.  Though, the Federal Reserve is not the only culprit.

If you recall, the Federal Reserve’s quantitative easing program concluded in late 2014.  The Fed even says it plans to start shrinking its balance sheet later this year.  So if the Fed’s not the source of liquidity for Treasury purchases, who is?

…click on the above link to read the rest of the article…

Why The Markets Are Overdue For A Gigantic Bust

r.classen/Shutterstock

Why The Markets Are Overdue For A Gigantic Bust

It’s just not possible to print our way to prosperity
Let me begin with a caveat: confirmation bias is an ever-present risk for an analyst such as myself.

If you’re not familiar with the term, ‘confirmation bias’ suggests that once we’ve invested time and emotional energy into developing a worldview, we’ll then seek information to confirm that view.

After writing about the economy for so many years, I’m now so convinced that we can’t print our way to prosperity that I find myself seeing signs confirming this view everywhere, every single day. So that’s the danger to be aware of when listening to me.  I’m going to keep repeating this mantra and Im going to keep finding data that supports this view.

Based on lots of historical inputs, I have concluded that Printing money out of thin air can engineer lots of things, including asset price bubbles and the redistribution of wealth from the masses to the elites.  But it cannot print up real prosperity.

As much as I try, I simply cannot jump on the bandwagon that says that printing up money out of thin air has any long-term utility for an economy. It’s just too clear to me that doing so presents plenty of dangers, due to what we might call ‘economic gravity’: What goes up, must also come down.

Which brings us to this chart:

The 200 bubble blown by Greenspan was bad, the next one by Bernanke was horrible, but this one by Yellen may well prove fatal.  At least to entire financial markets, large institutions, and a few sovereigns.

It’s essential to note that more than two-thirds of the net worth tracked in the above chart is now comprised of ‘financial assets.’  That is, paper claims on real things.

…click on the above link to read the rest of the article…

Dear Fed, It’s Not “Really Hard to Spot Bubbles”

Dear Fed, It’s Not “Really Hard to Spot Bubbles”

Here are some visual aids to help the Fed spot the housing bubble.

Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”

But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.

Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.

“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”

So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.

What’s hard to predict accurately is when they’ll burst.

…click on the above link to read the rest of the article…

 

The Federal Reserve Is Destroying America

The Federal Reserve Is Destroying America

And wait until you hear what they’re getting away with now

Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people.  Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.

But they’re destroying America.  They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.

One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet.  To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.

But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other.  They both rest upon an impossibility.  Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.

I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world.  It must be immense.

I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected.  “This is what we do,” they probably said to each other and their followers.  “This is what we’ve always done.  Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”

…click on the above link to read the rest of the article…

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

A “prudent” Fed (and China’s “National Team”) have spurred a risk-on rally, as RBC’s head of cross-asset strategy Charlie McElligott notes the market’s ‘Pavolovian’ response to Fed’s ‘dovish hints’ contained within the Minutes – despite simultaneously staying ‘on message’ with hiking / tapering commentary – prompts a “QE of old” response: stocks and Treasuries bid, while the USD faded.

China further perpetuates the ‘risk rally’ via apparent market interventions:

1.       Intervention in FX markets to strengthen the Yuan overnight, with speculation of a number of Chinese banks selling Dollars in the onshore market overnight which drove the Yuan higher.

2.       Chinese “National Team” stock market inventions as well, with sharp-turns higher off of an initially weaker equities opening and again-weaker industrial metals.   Major reversals off lows saw nearly all domestic markets close at highs (Shanghai Prop +2.8%), while Hong Kong’s Hang Seng closed at highs since July 2015, with Chinese real estate developers leading.

Initial (and expected) ‘sell the news’ on the snoozer OPEC outcome, as they extend the output cut 9 months per expectations—which disappointed the ‘bullish surprise’ camp which anticipated more OPEC-‘gaming’ of the market, thinking it was possible for a deeper-cut in conjunction with the consensus extension.

This move lower in crude is notable if it were to escalate the current rollover in ‘inflation expectations’ (10Y BE’s below 200dma) which continue to show as the largest price drivers of risk-assets and major rates markets currently per the QI factor PCA model—although should be noted that both SPX and HYG (US HY proxy) are both deeply OUT OF REGIME with low r-squareds / low explanatory power.

Due to my much-discussed “Chinese deleveraging / Fed tightening / ECB pivoting ‘less dovish’” trifecta, we are seeing good buying in cash USTs and receiving in swaps (strong 5Y auction as well) keeping rates pinned despite the ongoing risk-asset rally.

…click on the above link to read the rest of the article…

In Emerging Markets, It’s Time To Dump Most Central Banks, And Their Currencies Too

In Emerging Markets, It’s Time To Dump Most Central Banks, And Their Currencies Too

On March 16th, the New York Times carried reportage by Peter S. Goodman, Keith Bradsher and Neil Gough, which was titled “The Fed Acts. Workers in Mexico and Merchants in Malaysia Suffer.” The theme of their extensive reportage is that U.S. monetary policy is the elephant in the room. It is the elephant that swings exchange rates and capital flows to and fro in emerging-market countries, causing considerable pain.

The real problem that all of the countries mentioned in the New York Times reportage face is the fact that they have central banks that issue half-baked local currencies. Although widespread today, central banks are relatively new institutional arrangements. In 1900, there were only 18 central banks in the world. By 1940, the number had grown to 40. Today, there are over 150.

Before the rise of central banking the world was dominated by unified currency areas, or blocs, the largest of which was the sterling bloc. As early as 1937, the great Austrian economist Friedrich von Hayek warned that the central banking fad, if it continued, would lead to currency chaos and the spread of banking crises. His forebodings were justified. With the proliferation of central banking and independent local currencies, currency and banking crises have engulfed the international financial system with ever-increasing severity and frequency. What to do?

The obvious answer is for vulnerable emerging-market countries to do away with their central banks and domestic currencies, replacing them with a sound foreign currency. Panama is a prime example of the benefits from employing this type of monetary system. Since 1904, it has used the U.S. dollar as its official currency. Panama’s dollarized economy is, therefore, officially part of the world’s largest currency bloc.

The results of Panama’s dollarized monetary system and internationally integrated banking system have been excellent (see accompanying table).

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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