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In December, Jerome Powell confirmed that he is going to implement a financial reset.

That reset will crash stocks.

We know this because the Fed didn’t even HINT at tapering its Quantitative Tightening program at this latest Fed FOMC despite stocks staging the worst December since the Great Depression.

This tells us that the Powell Fed is going to normalize the Fed’s balance sheet no matter what. And THAT is the real issue for the financial markets (the withdrawal of liquidity) NOT rate hikes/cuts.

This is what the market is reacting to. Stocks now know that the era of easy money is over. The Fed is being run by a man who doesn’t see it has his job to create/sustain asset bubbles.

And that is why The Fed Has Confirmed It Will Crash Stocks

In December, Jerome Powell confirmed that he is going to implement a financial reset.

That reset will crash stocks.

We know this because the Fed didn’t even HINT at tapering its Quantitative Tightening program at this latest Fed FOMC despite stocks staging the worst December since the Great Depression.

This is what the market is reacting to. Stocks now know that the era of easy money is over. The Fed is being run by a man who doesn’t see it has his job to create/sustain asset bubbles.

And that is why we are going to crash.

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

Bear Markets, Fed Mistakes, and Quick Shots from John

January 4, 2019

Bear Markets, Fed Mistakes, and Quick Shots from John

Powell Was Right but the Fed Is Wrong
Time for an Emergency Fed Meeting
Living on Island Time
Quick Shots from the Frontline

A winters day,
In a deep and dark December…

“Wait, it doesn’t feel like winter. It’s not deep and dark, and it’s actually warm, and the sun is shining. ~~Toto~~Shane, I don’t think we’re in ~~Kansas~~ Texas anymore.”

Yes, we have actually moved from Texas to a new location. I’ll explain why and where below. But first, we really do have to follow up last week’s letter. Today, we’ll address several things, so think of this as my year-end “Quick Shots from the Frontline.” It will be more like a personal, from the heart, fireside chat. (Trigger warning: I will be taking off my politically correct gloves. Naming names and pointing fingers. Just Uncle John telling it like it is.)

This letter may run a little longer, but next week I promise to get back to the typical 3,000 or so words. Today is just you and I having a conversation. Pick up your favorite beverage (for me, it’s a glass of coffee or tea now), sit back, and let’s chew on the world.

Powell Was Right but the Fed Is Wrong

Last week. I argued Jerome Powell did the right thing by raising rates a mere 25 basis points. He forcefully declared the Fed’s independence from the market and politicians for the first time since Volcker. Greenspan, Bernanke, and, in particular, Yellen all gave the markets a “put” option—basically a third unofficial mandate to make sure that asset prices keep rising. Now, of course, that’s not the way they would express it, but that is, in fact, what they did.

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

Kass: “Don’t Blame Powell For The Mess He’s Left To Clean Up”

December 30, 2018

Kass: “Don’t Blame Powell For The Mess He’s Left To Clean Up”

Do we want to be Japan?

“I need the Fed to shut up. I don’t trust the Fed at all. I don’t trust Jay Powell at all. Jay said everything that caused a tremendous selloff. You have got to start recognizing how powerful his words are.”
— Jim “El Capitan” Cramer, CNBC, on Thursday

I am in respectful disagreement with the condemnation of Fed policy by Jim Cramer and others.

To begin with, before criticizing the Jerome Powell-led Federal Reserve, market participants would be wise to look at where the stock market has come from and how equities are still valued.

The hue and cry about the recent market downdraft and the Fed are particularly revealing in light of the fact that even after the most recent downturn the market is up 13% since 2017, 23% since 2016, 34% since 2014, and 111% since 2010.

Powell only recently has brought rates to a neutral level (in real terms, adjusted for inflation), causing investors to freak out. That says a lot about both market participants and the underlying fragility of the domestic and global economies, as they, too, have become addicted to low rates. (Europe is nearing recession even though interest rates are near zero.)

Powell should continue doing the right thing, but slowly and carefully. A garden-variety recession is fine. A move down in equities is fine. Those things are normal and part of a functioning capitalistic economy. It is amazing and unhealthy that market participants seem to forget this cleansing role.

The challenge to the Fed chairman is how exactly to do the right thing, to thread the needle. This is not his fault. But any patient addicted to drugs must be weaned off of them slowly and methodically. Cold turkey will just kill the patient.

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

Trump Is Considering Firing Fed Chair Powell

December 22, 2018

Trump Is Considering Firing Fed Chair Powell

if amid the barrage of negative news hitting the market this quarter there has been one outstanding item which would have sent it sharply (even) lower, that would be a flashing red headline – or a tweet from the president – announcing that Trump has fired Fed Chair Jerome Powell.

And while to many such an act would seem unthinkable, even from someone as unorthodox and unpredictable as Trump, it now appears that’s precisely the outcome the market will have to worry about next as Bloomberg reports that the president has discussed firing Federal Reserve Chairman Jerome Powell “as his frustration with the central bank chief intensified following this week’s interest-rate increase and months of stock-market losses”, citing four people familiar with the matter.

While advisors in Trump’s inner circle have rightfully warned him that firing Powell would be a “disastrous move” for stock prices, and instead are “hoping that the president’s latest bout of anger will dissipate over the holidays”, the sources reveal that the president – who is facing the imminent departure of two of his closest advisors, chief of staff Kelly and secretary of defense Mattis – has talked privately about firing Powell many times in the past few days.

Still, even Trump likely realizes that any attempt to push out Powell would have a devastating effect on the one barometer of his presidency he holds dearest to his heart – the stock market – and not only that, but terminating the Fed chair would likely send a shockwave across global financial markets, resulting in a collapse of risk asset prices and undermining investor confidence in the central bank’s ability to guide the economy without political interference.

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

The US will become a neo-feudal nation

December 22, 2018

The US will become a neo-feudal nation

The Western world is heading for the next big social and economic crisis. America’s hegemony is waning and its establishment is fighting among themselves. To uphold American supremacy, President Trump and his administration are trying to reshape the nation into a neo-feudal society with a new relationship between the President (sovereign), the financial elite (fief holders, the privileged vassals) and the people (subjects performing socage). If the country is doing well, the population lives in relative stability and the leader is loved. The US is facing a demographic decline and a rapid replacement with migrants from Central America and Africa. This internal development will have profound effects on social stability and economic prosperity. The US can only be a superpower if the country is stable and the nation supports the establishment.

Jerome Powell, the head of the FED, is derailing Trump’s stimulus programme by increasing the interest rate and reducing the federal reserve balance sheet. The actions of the FED result in a drop in stock prices and the increase in the cost of debt servicing for the highly indebted US corporations. The US is now the world’s largest oil consumer and producer thanks to its shale oil industry. However even with the oil price around $70 the industry has lost more than it earned. A high interest rate and a low oil price make the industry vulnerable.

The president has said clearly that he does not like what the FED is doing. The FED has to revise its decisions, otherwise Jerome Powell will be dismissed as envisioned by Section 10 of the Federal Act. The FED will have to reconsider its policies so as to enable the stock market to make another push up next year. However, investors should be careful.

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

Weekly Commentary: Powell Federal Reserve Lowers “Fed Put” Strike Price

December 22, 2018

Weekly Commentary: Powell Federal Reserve Lowers “Fed Put” Strike Price

I have little confidence history will get this right. Today’s overwhelming consensus view holds that Powell this week committed a major policy blunder. After his early-October “we’re a long way from neutral” “rookie mistake”, he has followed with a rate increase right in the throes of a stock market sell-off, Credit market instability and mounting global and domestic economic risk. He stated the Fed’s balance sheet runoff was stuck on autopilot, even as stunned market participants fret illiquidity. Moreover, Powell disappointed skittish markets heading right into December quadruple-witch options expiration – in the face of an impending government shutdown. How times have changed.

There was irony in Alan Greenspan joining Bloomberg’s Tom Keene Wednesday for live coverage of the FOMC policy decision. It was, after all, the original “Greenspan put” that morphed over Bernanke’s and Yellen’s terms into the interminable “Fed put.” Markets this week were desperate for confirmation that the Powell Fed would uphold the tradition of pacifying the markets and, when needed, invoking the Federal Reserve backstop. Markets were prepared to begrudgingly tolerate a rate increase. But the marketplace demanded evidence – an explicit signal – that the FOMC recognized the gravity of market developments and was prepared to intervene. Chairman Powell didn’t share the markets’ agenda.

Our Federal Reserve Chairman should be commended. Under extraordinary pressure, Mr. Powell and the FOMC didn’t buckle.

Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment.

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

The Neutral Interest Rate Myth

December 13, 2018

THE NEUTRAL INTEREST RATE MYTH

In his speech to the Economic Club of New York on November 28 2018, the Federal Reserve Board Chairman Jerome Powell said that the US central bank’s policy interest rate is just below the neutral rate. This prompted many commentators to suggest that a tighter interest rate stance of the Fed is likely coming to an end. At the end of October the fed funds rate target stood at 2.25%.

It is widely held that by means of suitable monetary policies the US central bank can navigate the economy towards a growth path of economic stability and prosperity. The key ingredient in achieving this is price stability. Most experts are of the view that what prevents the attainment of price stability are the fluctuations of the federal funds rate around the neutral rate of interest.

The neutral rate, it is held, is one that is consistent with stable prices and a balanced economy. What is required is Fed policy makers successfully targeting the federal funds rate towards the neutral interest rate.

The Swedish economist Knut Wicksell articulated this framework of thinking in late 19^th century, which has its origins in the 18^th century writings of British economist Henry Thornton.

The Neutral Interest Rate Framework

According to Wicksell, there is a certain rate of interest on loans, which is neutral in respect to commodity prices, and tend neither to raise nor to lower them.

According to this view, the main source of economic instability is the variance between the money market interest rate and the neutral rate.

If the money market rate falls below the neutral rate, investment will exceed saving implying that aggregate demand will be greater than aggregate supply.

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

Chairman Powell Talks Out of Both Sides of His Mouth

December 3, 2018

Chairman Powell Talks Out of Both Sides of His Mouth

jerome powell talks rates

In a speech on Wednesday, Federal Reserve Chairman Jerome Powell stated that he had a “neutral” outlook on rates. According to a CNBC article, he was quoted:

Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.

But CNBC notes that, as recently as October, Powell’s was indicating that rates were “a long way from neutral.” Could the change in tone simply be public relations damage control?

It’s important to note that rates may still be “low” by historical standards, but only if you include 35+ years of interest rate history. However, if you look at just this century, rates are headed towards the highest levels since 2007 (see chart below). And keep in mind there’s a good chance that we’ll see one more rate hike in December, as the Fed has alluded to in their November meeting statement.

rates on a rise

In response to Powell’s “neutral” language, the Dow Jones jumped 617 points. This represents its biggest one-day gain since this March, according to CNBC. Of course, the Dow has rebounded two other times since October 3, only to lose those gains each time.

Another strange part of Powell’s statement was the indication that the Fed’s “neutral” rates were “neither speeding up nor slowing down growth.” His analysis is odd, because CPI inflation has been on the rise for the last several years (see red arrow):

FRED cpi

And yet, the Dow jump and Powell’s “neutral rate” statement oddities somehow aren’t the strangest items from Wednesday’s speech.

Seems the Fed Want to “Have It Both Ways”

The Fed issued a stark warning about a potential trifecta that could impact the economy. Their warning reads:

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

DiMartino Booth: The Fraying Of The Fed’s Fragile Narrative

December 3, 2018

DiMartino Booth: The Fraying Of The Fed’s Fragile Narrative

Former Dallas Fed official Danielle DiMartino Booth joins the show just as Chairman Jay Powell faces his first major challenge: will he keep raising rates as promised now that autos, housing, employment, and even tech stocks look soft? And if not, will he effectively signal that the US economy is in big trouble?

“I’m most concerned about the bottom line evaluations in the corporate debt market…these bring back memories of the sub-prime credit crisis…”

“The corporate bond market has doubled since 2007. It is over 9 $trillion. Subprime loans were 3 trillion… The Fed should be calling out potential financial stability risks. That is the unspoken third mandate.“

View image on Twitter

It looks like the US credit market is about to hit the wall. US wall of maturity is around 2020 to 2022, acc to calculations by SRP.

“Apparently in six weeks we have come “worlds apart from neutral” to “Just under” and that is when markets really, really took off.”

“The Fed could engineer a soft landing, but it is a rare occurrence and as Powell is learning, there is a lagged effect in terms of when those interest rate hikes are put in and when they show up in the economy.”

“Powell is trying to broadcast that he is truly data dependent…‘if the data change, I’m going to change with the data.'”

“…look across energy, manufacturing, real estate & construction, leisure & hospitality states…jobless claims across all of these sectors have turned up. It is a weakening economy…”

“If the economy is truly slowing, then top line growth will slow, earnings expectations will be ratcheted down going into 2019. Those are things that the stock market will not like.”

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

Weekly Commentary: Framework for Monitoring Financial Stability

December 1, 2018

Weekly Commentary: Framework for Monitoring Financial Stability

Upon the public release of Jerome Powell’s Wednesday speech came the Bloomberg headline: “Powell: No Preset Policy Path, Rates ‘Just Below’ Neutral Range.” When the Fed Chairman began his presentation to the New York Economic Club just minutes later, the Dow had already surged 460 points. From Powell’s prepared comments: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.” When he read his speech, he used “range,” as opposed to “broad range” of estimates.

Equities responded to the Chairman’s seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, “We may go past neutral, but we’re a long way from neutral at this point, probably,” back on the third of October. Powell’s choice of language was viewed consistent with the ‘much closer’ to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday’s speech: “Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC.”

The “neutral rate” framework is problematic. Back in early October, the Fed was almost three years into its “tightening” cycle (first rate increase in December 2015). Yet the Atlanta Fed GDP Forecast was signaling 4% growth; consumer confidence was near decade highs; manufacturing indices were near multi-year highs; corporate Credit conditions remained quite loose; and WTI crude had just surpassed $75 a barrel.
…click on the above link to read the rest of the article…

Competing Mortgage Headlines: Rates Barely Move vs Rates Surge Lower on Powell

December 1, 2018

Competing Mortgage Headlines: Rates Barely Move vs Rates Surge Lower on Powell

Freddie Mac says “mortgage rates barely move” but Mortgage News Daily says “rates surge lower”

Mortgage News Daily and Freddie Mac offer conflicting reports on the bond market reaction Jerome Powell’s speech yesterday.

Mortgage News Daily says Mortgage Rates Surge Lower

Mortgage rates surged lower today, falling at the fastest single-day pace in more than a year. In order to see the average lender offer lower rates, you’d need to go back to October 2nd at least. For many lenders, it would be a few weeks before that. Granted, this merely restores rates to what had been 7-year highs at the time, but you know what they say about journeys of 1000 steps and what not…

Much of the improvement was driven by an ongoing reaction to a speech by Fed Chair Powell from yesterday.

Surge Defined

A surge is 9 basis points.

Freddie Mac says rates fell 13 basis points. But note the dates.

Freddie Mac posts mortgage data weekly, on Thursdays. Thus, the data is stale. After that table was posted Freddie Mac offered a different opinion.

Mortgage Rates Barely Move

Freddie Mac says Mortgage Rates Barely Move.

November 29, 2018

Mortgage rates stabilized the last couple of months as interest rate sensitive sectors such as new auto and home sales softened the outlook for the economy. Homebuyers pounced on the stability in rates as purchase mortgage applications increased, which indicates that despite higher mortgage rates this year there are buyers on the fence waiting for the right time to buy.

Ignore that galling bit of propaganda about homebuyers pouncing on rate stability as if buyers are coming back. They aren’t. Let’s step back and put this alleged surge into perspective.

Zero Reaction

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

The Federal Punch Bowl Removal Agency

November 30, 2018

The Federal Punch Bowl Removal Agency

US Money Supply and Credit Growth Continue to Slow Down

Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell’s speech was regarded as dovish. If it actually was, then it was a really bad idea to buy stocks because of it.

Jerome Powell: a new species of US central banker – a seemingly normal human being in public that transforms into the dollar-dissolving vampire bat Ptenochirus Iagori Powelli when it believes it is unobserved.

We say this for two reasons: for one thing, the Fed is reactive and when it moves from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.

In this case it seems more likely that Mr. Powell has tempered his views on tightening after contemplating the complaints piling up in his inbox and looking at a recent chart of 5-year inflation breakevens. After all, there is no evidence of an imminent recession yet, even though a few noteworthy pockets of economic weakness have recently emerged (weakness in the housing sector is particularly glaring).

Recall that the last easing cycle began with a rate cut in August 2007. This first rate cut was book-ended by a double top in the SPX in July and October. Thereafter the stock market collapsed in the second-worst bear market of the past century – while the Fed concurrently cut rates all the way to zero (and eventually beyond, in the form of QE).

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

Don’t Get Distracted By The Trump/Fed Soap Opera – The Crash Will Continue

November 28, 2018

Don’t Get Distracted By The Trump/Fed Soap Opera – The Crash Will Continue

At the beginning of 2018 I wrote extensively on what was likely to happen under the administration of Jerome Powell, the new Federal Reserve Chairman. In my article ‘New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018‘, published in February, I predicted that the Fed would continue interest rate increases and balance sheet cuts throughout the year and they would knowingly initiate a crash in equities.

To be clear, this was not a very popular sentiment at the time, just as it wasn’t popular when I predicted in 2015 that the Fed would launch interest rate hikes instead of going to negative rates in order to start a catalyst for economic crisis. The problem some people have with this concept is that they just can’t fathom that the central bank would deliberately crash the system. They desperately cling to the notion that the Fed and other central banks want to keep the machine rolling forward at any cost. This is simply not true.

The claim is that the banking elites are “required” to keep the system propped up in a state of reanimation because they are reliant on the system to provide capital and thus “influence.” The people that assert this argument don’t seem to understand how central banks operate.

As most liberty activists should know by now, central banks are essentially a legally protected counterfeiting scheme. Using fractional reserve banking at a ratio that is secret, central banks create their own capital from thin air, and they can infuse capital into international banks at will when it suits their purposes. There is no “profit motive” for the banking syndicate.

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

Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

November 22, 2018

Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

hawkish fed meeting

Round and round we go, where the hawkish Fed stops, nobody knows…

There was a bit of tension in the markets last week. This tension stemmed from a prediction that the federal funds rate would be well on its way to a decade high even if the Fed did nothing at their November meeting.

Well, that concern has been justified. In a statement issued after the meeting, the Fed kept their funds rate at 2 – 2.25%, the same range after their September meeting.

But nothing in their statement indicated changes in their plan for another rate hike in December and three more in 2019.

In fact, a CNBC article points to a quarter point increase in December. Assuming this happens, that would send the funds rate to its highest since 2008 (see chart below):

us fed funds rate

The primary credit rate remained steady at 2.75%, according to the Fed statement. That is, until December’s anticipated rate hike.

Another CNBC article published just before the meeting statement was released had a telling statement (emphasis ours):

In recent weeks, financial markets have been gripped by worry and volatility, and some analysts think that in its statement Thursday the Fed may take note of that anxiety as a potential risk to economic growth.

The “No comment” response by the Fed didn’t seem to acknowledge this anxiety.

But the market sure seems to be in a state of worry. Since October 3rd, the Dow Jones has lost 1,566 points as this is written (even after modest recovery).

And the Yield Curve Keeps Flattening

In July, the Fed stopped highlighting the yield curve as an indicator of an imminent recession. Instead, they swept it under the rug.

But according to Patti Domm, the market is still paying attention to it:

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

Steen Jakobsen: The Four Horsemen Portend A Painful Reckoning

November 14, 2018

Steen Jakobsen: The Four Horsemen Portend A Painful Reckoning

Even the US is now ‘swimming naked’

Steen Jacobsen, Chief Economist and Chief Investment Officer of Saxo Bank sees economic slowdown ahead.

Specifically, his “Four Horseman” indicators: the drivers of economic growth, are all flashing red.

Jacobsen believes that the central banks will continue their liquidity tightening efforts for as long as they can get away with (i.e., until the financial markets start toppling over). In his opinion, they eased way too much for way too long; and the malinvestment and zombification that resulted needs to clear the system — and it will likely do so more violently and painful than the central banks will like:

I like to make things simple. Right now we have the Four Horsemen: the four drivers of the global economy. They are the quantity of money, which is falling; the price of money, which is rising; the price of energy,which is a tax on consumers and is rising; and globalization/productivity, which is falling.

So, if you look at the economy as a black box, I really don’t know what happens inside of it. But I can observe what goes into the black box: it’s these four things.

Globalization / productivity, we know that’s all about Trump, trade war and the likes. It’s not exactly improving; it’s actually worsening.

As for the quantity of money, a lot of people argue with me that the Central Banks are still expanding their balance sheets, but the fact of the matter is that the QT in terms of the U.S has been reducing the Federal Reserve balance sheet. And we have a stealth reduction of the balance sheet in terms of the Bank of Japan. The EBC would love to cut and is publicly committed to doing so. The Bank of England is doing its first hike. So the quantity of money is falling.

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

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