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Mr. President, This Is How To Get The Fed To Launch Quantitative Easing

Mr. President, This Is How To Get The Fed To Launch Quantitative Easing

Yesterday, after countless demands that the Fed cut interest rates, Trump finally made his first, long anticipated formal demand that the Fed should pursue “some quantitative easing“:

 · Aug 19, 2019

Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world…

…..The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!

The good news for Trump is that he has now fully figured out that he has the Fed in the palm of his hand, as he demonstrated just hours after Powell’s July 31 rate cut when Trump broke the US-China trade ceasefire and re-escalated trade war, in the process sending rate cut odds soaring. The flowchart logic, as shown below, is quite simple: all Trump has to do is engage in action that threatens to destabilize the global economy and Powell – as he certified during the last FOMC meeting – has to respond by cutting further, until he eventually reaches a point where QE may be the only possible outcome (as we explained previously in “How The Fed Is Now Underwriting Trump’s Trade War, In One Chart“).

Obviously extending the logic of the above diagram to its logical conclusion also lays out the path that Trump must follow if he wishes to force the Fed to launch QE. And just in case it is unclear, it involves a “gray rhino”, an economic war, and negative rates.

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

Are Recessions Inevitable?

Are Recessions Inevitable?

Stocks fell last week following news that the yield curve on Treasury notes had inverted. This means that a short-term Treasury note was paying higher interest rates than long-term Treasury note. An inverted yield curve is widely seen as a sign of an impending recession.

Some economic commentators reacted to the inverted yield curve by parroting the Keynesian propaganda that recessions are an inevitable feature of a free-market economy, whose negative effects can only be mitigated by the Federal Reserve. Like much of the conventional economic wisdom, the idea that recessions are caused by the free market and cured by the Federal Reserve is the exact opposite of the truth.

Interest rates are the price of money. Like all prices, they should be set by the market in order to accurately convey information about economic conditions. When the Federal Reserve lowers interest rates, it distorts those signals. This leads investors and businesses to misjudge the true state of the economy, resulting in misallocations of resources. These misallocations can create an economic boom. However, since the boom is rooted in misperceptions of the true state of the economy, it cannot last. Eventually the Federal Reserve-created bubble bursts, resulting in a recession.

So, recessions are not a feature of the free market. Instead, they are an inevitable result of Congress granting a secretive central bank power to influence the price of money. While monetary policy may be the prime culprit, government tax and regulatory policies also damage the economy. Many regulations, such as the minimum wage and occupational licensing, inflict much harm on the same low-income people that the economic interventionists claim benefit the most from the welfare-regulatory state.

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

Silver prices with explosive upside

Silver prices with explosive upside 

Silver prices have lagged gold prices since 2017 which has pushed the gold-to-silver ratio close to the all-time high. Silver prices are also significantly below what is predicted by our pricing model. We think that the reasons for this subdued performance are transitory and that silver will outperform gold again as the next precious metals cycle continues to rapidly unfold. 

In spring 2017, we introduced a framework for understanding the formation of silver prices (Silver price framework: Both money and a commodity, March 9, 2017). In this report we are going to use this framework to analyze the recent performance of silver and give an outlook for where we think silver is heading over the coming months. In our framework piece, we concluded that silver is both money (store of value) and an input commodity and thus the impact of both industrial and monetary demand needs to be taken into consideration:

  • On the one hand, silver is a counterparty-risk-free form of money where replacement costs set the lower boundary for prices – the same energy proof of value that underlies gold prices. Thus, silver should be impacted by the same drivers as gold prices: Real-interest rate expectations, central bank policy, and longer-dated energy prices.
  • On the other hand, silver is a commodity with extensive industrial applications. Hence, changes in industrial activity should impact the price of silver as well.

In our framework note, we also discussed the two main reasons why we think that silver tends to outperform gold in bull markets and underperform in bear markets:

  • Because the value of global silver stocks is much smaller than that of global gold stocks – which is the result of silver being used in industrial applications – a rise in monetary demand for silver has a disproportionally large effect. In other words, when demand for metals increases as an alternative to fiat currency, there is simply less silver around to change hands.

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

Economic Storm Trump Will be Blamed For Because of Bad Advisers

Economic Storm Trump Will be Blamed For Because of Bad Advisers 

There is a very Dark Cloud hovering over the world economy and at the center of this cloud lies not just Europe, but Germany – the strongest economy holding up all of Europe. The German manufacturing sector is in freefall. Trump will be blamed calling this the result of his Trade War. It is probably too late to get him to even understand that his advisers are old-school and completely wrong with respect to trade. Their obsession with currency movements is what they taught back in school during the 1930s. My advice to China, let the yuan float and Trump will quickly see that China has been supporting its currency, not suppressing it.

Manufacturing indicators have deteriorated globally, yet in a very disproportionate manner. Trump will be blamed for this and his badgering the Fed to lower interest rates is also a fool’s game. Nobody looks at the elderly who were told to save for retirement and you will live off the interest. Their house values were undermined in the 2007-2009 New York Banker’s Mortgage-Backed scam that blew up the world economy from which we have been unable to fully recover. The younger generation cannot afford to buy a house as they are saddled with student loans thanks to the Clintons for degrees that are worthless as 65% cannot find jobs in what they have degrees for these days.

The insanity of those in power knows no boundary when it comes to stupidity around the world. All they have is interest rates and after more than 10 years of excessively low to negative interest rates failing to stimulate the economy in Europe, what do they do? They argue that all physical money must be eliminated because people are hoarding cash and thus defeat their lower interest rates policy.

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

This Is The Same Pattern The Fed Followed Before The Great Depression

This Is The Same Pattern The Fed Followed Before The Great Depression

There is immense confusion surrounding July’s Federal Reserve meeting and the rather insane aftermath that has been spurred on in the trade war. The Fed’s latest rate decision of a mere .25 bps cut was seen as “disappointing”, this was then followed by Jerome Powell’s public statements making it clear that this was only a mid-year “adjustment”, and that it was not the beginning of a rate cutting cycle and certainly not the beginning of renewed QE. This shocked the investment world, which was expecting far more accommodation from the Fed after 7 months of built up expectations that the central bank was about to unleash the stimulus punch bowl again.

The question that very few people are asking, though, is why didn’t they? What is stopping them? Everyone from daytraders to the president wants them to do it, yet they continue to keep liquidity conditions tight. In fact, they even dumped another $36 billion in assets from their balance sheet in July. Why?

Keep in mind that the latest Fed decision does two things: First, it is an indirect admission that the U.S. is entering recession territory. Second, it is also an admission that the Fed doesn’t plan to do anything about it, at least, not until it’s too late. In other words, all those people who thought the central bank was about to kick the can on the current crash in economic fundamentals were wrong. As I have been predicting for many months, the Fed has no intention of trying to delay the effects of negative conditions any longer. The crash is now a reality that the mainstream will have to accept.

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

Powell Rate Cut Unleashes Volatility Tsunami

Powell Rate Cut Unleashes Volatility Tsunami

It wasn’t supposed to work this way.

In the rate cut playbook envisioned by Trump, Powell’s July 31st rate cut was supposed to send stocks higher while crushing the dollar. However, when the FOMC announce a “mid-cycle”, 25bps cut, the outcome was not only a surge in the dollar but also a surge in volatility not seen so far this year.

The sequence of events is familiar to all by now: at first, Powell’s rate cut spooked the market which had been expected either a 50bps cut, or an explicit promise of an easing cycle. It got neither, and neither did Trump, who the very next day realized that with the Fed now explicitly focusing on global uncertainties, read trade war, as a catalyst for future rate cuts as demonstrated by the following infamous chart

…. decided to escalate the trade war with China by announcing 10% tariffs on the remaining $300BN in Chinese imports, sending stocks and bond yields plunging, and the market pricing in as much as 100bps of more rate cuts in 12 months, forcing Powell to cut far more than just another 25bps or so as the Fed Chair suggested in the July FOMC meeting.

China immediately retaliated by devaluing the Yuan below 7.00 for the first time since 2008 and halting US ag imports, which in turn prompted the US Treasury to declare China a currency manipulator. Meanwhile, China’s yuan devaluation means the White House is set to unveil even higher tariffs, resulting in an even weaker yuan, and so on, in a toxic feedback loop that may soon escalate the trade and currency war into an all-out shooting war.

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

Can the Fed really Control the Economy?

Can the Fed really Control the Economy? 

QUESTION: This whirligig talk of whether the Fed cuts rates by 25 or 50 basis points is carnival-level absurdity. Does the Fed have the “pretense of knowledge,” as F.A. Hayek, said, that they can regulate the economy like turning up or down the thermostat? I know you don’t agree with this, Martin, but then, Wall St. trades on daily sentiment not ideology.

TM

ANSWER: I understand the theory, but where it is seriously flawed is the idea that people will borrow simply because you lower rates. More than 10 years of Quantitative Easing, which has failed, answers that question. The way the Fed was originally designed allowed it to stimulate the economy by purchasing corporate paper directly, which placed it in a better management position. Buying only government paper from banks who in turn hoard the money fails. As Larry Summers admitted, they have NEVER been able to predict a recession even once.

The Fed lowered rates during every recession to no avail just as the ECB has moved to negative rates without success. The central banks are trapped and they are quietly asking for help from the politicians which will never happen.

Peter Schiff On Today’s Sell Off: The Fed Is “Lying”, Rates Are Going Back To 0%, Gold Is Going To $2,000

Peter Schiff On Today’s Sell Off: The Fed Is “Lying”, Rates Are Going Back To 0%, Gold Is Going To $2,000

On a day where it looks as though the Fed’s bullshit “magic potion” may finally be wearing off on the stock market, Peter Schiff joined Chris Irons on the Quoth the Raven Podcast to speak about today’s market move: what it means, whether it can continue and how he would position himself going forward.

Schiff began by talking about the trade war between China and the United States escalating. He talked about why he believes the US dollar was weakening on Monday and why he believes the dollar will continue to weaken for the foreseeable future. 

“We’ve been in a recession,” Schiff says.

“The election of Trump just delayed the inevitable for a little,” he continued. 

“My thinking is the market was going down regardless of the cut they got,” he said, talking about last week’s rate cut. 

“You can’t say the dollar is strong when it’s lost $30 against gold in one trading day. Gold tells you we have a weak dollar.

He continued, talking about Jerome Powell’s press conference last week:

“Powell contradicted himself several times, which is something that you do when you’re lying. The Fed is not telling the truth.” 

Schiff predicts that interest rates are going back to 0% and that the Fed will start QE yet again.

“Powell’s trying to pretend it’s because of concerns about the overseas economy. It is really the US economy that is driving the Fed. That’s why this is just the first step on the road back to zero. And you know, it was a mistake when the Fed went back to zero the last time; it’s going to be an even bigger mistake when they do it next time. And they’re also going to go back to quantitative easing. 

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

If The Federal Reserve Cuts Interest Rates Now, It Will Be An Admission That A Recession Is Coming

If The Federal Reserve Cuts Interest Rates Now, It Will Be An Admission That A Recession Is Coming

So there is a lot of buzz that the Federal Reserve is about to cut interest rates – and it might actually happen.  We’ll see.  But if it does happen, it will directly contradict the carefully crafted narrative about the economy that the Federal Reserve has been perpetuating all this time.  Fed Chair Jerome Powell has repeatedly insisted that the U.S. economy is in great shape even when there has been a tremendous amount of evidence indicating otherwise.  And of course President Trump has been repeatedly telling us that this is “the greatest economy in the history of our country”, but now he is loudly calling for the Federal Reserve to cut interest rates as well.  Something doesn’t seem to add up here.  If the U.S. economy really was “booming”, there is no way that the Fed should cut interest rates.  Right now interest rates are already low by historical standards, and theoretically it is during the “boom” times that interest rates should be normalized.  But if the U.S. economy is actually slowing down and heading into a recession, then a rate cut would make perfect sense.  And if that is the reality of what we are facing, then the economic optimists have been proven dead wrong, and people like me that have been warning of an economic slowdown have been proven right.

If the talking heads on television are correct, we’ll probably see a rate cut.  In fact, apparently there are some people that are even pushing “for a 50 basis point cut”

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

The Fed Should Hike Interest Rates, Not Cut Them

The Fed Should Hike Interest Rates, Not Cut Them

Illustration by Robert A. Di Ieso|, Jr.; Source photograph by Andrew Harrer/Bloomberg

In the runup to the Federal Reserve’s Open Market Committee meetings on July 30 and July 31, policy makers are debating the value of what would normally be considered unorthodox policy actions. The consequences of the Fed’s actions in the next week—the U.S. central bank is expected to cut interest rates by a quarter of a percentage point—could be with us for much longer than we think, culminating in the next recession and increasing the risk to financial stability.

In the meantime, the Fed could be delivering yet another sugar high to the economy that doesn’t address underlying structural problems created by powerful demographic forces that are constraining output and depressing prices. 

By almost every measure, policy makers should be considering another rate hike, not a rate cut, in anticipation of potential economic overheating from looming limitations on output. Instead, debate has been focused on the need to take preemptive action to avoid a potential slowdown. 

An abrupt shift in thinking was set in motion last December when, after raising overnight rates by a quarter of a percentage point, Fed Chairman Jerome Powell signaled more hikes would come and that balance-sheet reduction was on “autopilot.” Alarmed by the market tantrum that ensued, Fed policy makers began a mop-up campaign that included the Fed’s now-famous “pivot” to patience.

While the Fed has more than succeeded in stabilizing markets, the ensuing liquidity-driven rally in various markets has boosted asset prices, including stocks, bonds, precious metals, energy, and even cryptocurrencies. 

As Europe faces prospects that negative rates might become a long-term fixture in the euro region, concerns are mounting in the U.S. that a global slide toward negative yields could infect the market for Treasury securities, should the U.S. slip into a recession. These concerns are well founded.

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

Blain’s Morning Porridge – July 29th 2019

 Blain’s Morning Porridge  – July 29th 2019

“I’ve seen things you people wouldn’t believe. Attack ships on fire off the shoulder of Orion. I watched C-beams glitter in the dark near the Tannhäuser Gate. All those moments will be lost in time, like tears in rain. Time to die.”  

The UK is a curious place.  Boris Johnson’s feel-good drive and the numerous plots being arrayed against him, received rather less attention over the weekend than the Minister for the 18th Century’s rather ponderous style guide.  Jacob Rees-Mogg, Esquire, has banned a host of words, outlawed clichés, demands double spaces after full-stops, insisted on imperial measures (Kilometers, Kilos and grams are banned), and has made the incorrect use of apostrophes a capital offence.  Readers will know my grasp of punctuation, spelling and grammar is nebulous at best – so if I disappear suddenly you can assume the Extreme Grammar-Nazi wing of the Conservative Party has got me!

Back in the real world, this week is largely about tomorrow.  Worry not about what’s going on in Hong Kong, the Gulf, or even how bad European economic data might be.  The only real question is what will the US Federal Reserve do?  It’s not a question of will they ease rates, but by how much- 20% change they may go for 50 bp!  

Perhaps the question should be – why ease rates at all? 

It may be the depths of a thin summer, but a 25 bp cut will be enough to please the market.  The economy won’t change because of a quarter point reduction in ridiculously low rates, but stocks will rally and the market will be properly ecstatic!  Donald Trump will tweet to his followers about what a great job he’s doing and how its confirmed by the strength of the stock market.  That is a sh*t reason for cutting rates.  It worries me the Fed is prepared to pander to Trump and the stock market. 

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

Weekly Commentary: Fanning the Flames

Weekly Commentary: Fanning the Flames

The Federal Reserve abandoned “data dependent” – at least for next week’s FOMC meeting. December futures imply a 1.78% Fed funds rate, up six bps for the week but still 62 bps below today’s 2.40% effective rate. Unless the Federal Reserve has completely caved to the markets, the Committee statement and Chairman Powell’s press conference should emphasize its commitment to “data dependent” and the possibility of a second-half recovery in growth momentum. By the reaction to Draghi’s marginally less than super-duper dovishness, markets will not be overjoyed if the Fed attempts walking back its “an ounce of prevention…” “insurance” rate cut cycle. 

For posterity, I’ll document the data backdrop heading into what is widely believed to be the beginning of a series of cuts. Second quarter GDP was reported at a stronger-than-expected 2.1% rate, down from Q1’s 3.1% but ahead of the 1.8% consensus forecast. Personal Consumption bounced back strongly, jumping to a 4.3% annual rate from Q1’s 0.9%. It’s worth noting there have been only four stronger quarters of Personal Consumption growth over the past 13 years. 

Personal Income increased 5.4% annualized, down from Q1’s 6.1% – but strong nonetheless. Employee Compensation expanded 4.7% annualized. Receipts on Assets (Interest Income and Dividend Income) increased 9.0% annualized, more than reversing Q1’s 6.1% annualized contraction. Overall Disposable Income increased an annualized 4.9%, up from Q1’s 4.8% and Q4 ‘18’s 4.2%.

Government Spending jumped to a 5.0% annualized growth rate (Q1 2.9%), led by a 7.9% annualized expansion in federal government expenditures (strongest reading since Q2 ’09). With federal deficit spending near 4.5% of GDP, fiscal stimulus has become a powerful force in the real economy.  

Dropping 5.2%, Exports were a drag on growth. Reversing Q1’s 6.2% growth rate, Gross Private Investment declined 5.5% annualized. Non-Residential Fixed Investment declined 0.6%, with Residential Investment down 1.5%.

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

End Game

End Game

Well, here we are. All roads have led to here. The combustion case outlined in April, the technical target zone outlined in January of 2018. Trade wars, 20% correction in between, Fed capitulation in response, slowing growth data, inverted yield curves, political volatility, deficit and debt expansion, buybacks. All the big themes that have dominated the landscape in recent memory, they all have led us to here: Record market highs and high complacency into a historic Fed meeting where once again a new easing cycle begins.

Like flies drawn to a light investors have ignored everything that may be construed as negative as the market’s primary price discovery mechanism, central banks, are once again embarking on a global easing cycle from the lowest bound tightening cycle ever. By far. Many central banks such as the BOJ and ECB have never normalized, the Fed barely raising rates before capitulating once again to macro and market reality:

What’s the end game here? I have to ask given the larger backdrop:

Central banks 2009-2018:
We will print $20 trillion & cut rates to nothing & that will reach our inflation goals.

Central banks 2019: Ok, none of that worked so let’s print more & cut rates again. Trust us we know what we’re doing.

What has all this produced? For one the slowest recovery on record, but also the longest expansion. But this expansion has come at a very steep price as artificial low rates have led to massive record debt expansion, $250 trillion in global debt:

The world is sitting on over $13 trillion in negative yielding debt, corporate debt ballooned to all time highs is keeping zombie companies afloat, the desperate search for yield is forcing pension funds into riskier assets, 100 year bonds, BBB rated credit is the largest component of debt markets, everything is distorted and the desperate search for yield has produced another market bubble.

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

The Fed’s Dangerous Game: A Fourth Round of Stimulus in a Single Growth Cycle

The Fed’s Dangerous Game: A Fourth Round of Stimulus in a Single Growth Cycle

The longer the signals in capital markets go haywire under the influence of “monetary stimulus,” the bigger is the cumulative economic cost. That is one big reason why this fourth Fed stimulus — in the present already-longest (but lowest-growth) of super-long business cycles — is so dangerous.

True, there is nothing new about the Fed imparting stimulus well into a business cycle expansion with the intention of combating a threat of recession. Think of 1927, 1962, 1967, 1985, 1988, 1995, and 1998.

This time, though, we’ve seen it four times (2010/11, 2012/13, 2016/17, 2019) in a single cycle. That is a record. Normally, a jump in recorded goods and services inflation, or concerns about rampant speculation, have trumped the inclination to stimulate after one — or at most two — episodes of stimulus.

Also we should recognize that the length of time during which capital-market signaling remains haywire, is only one of several variables determining the overall economic cost of monetary “stimulus.” But it is a very important one.

Haywire signaling is not just a matter of interest rates being artificially low. Alongside this there is extensive mis-pricing of risk capital. Some of this is related to the flourishing of speculative hypotheses freed from the normal constraints (operative under sound money) of rational cynicism. Enterprises at the center of such stories enjoy super-favorable conditions for raising capital.

There are also the giant carry trades into high-yielding debt, long-maturity bonds, high-interest currencies, and illiquid assets, driven by some combination of hunger for yield and super-confidence in trend extrapolation. In consequence, premiums for credit risk, currency risk, illiquidity, and term risk, are artificially low. Meanwhile a boom in financial engineering — the camouflaging of leverage to produce high momentum gains — adds to the overall distortion of market signals.

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

For The First Time In 6 Years, No Central Bank Is Hiking

For The First Time In 6 Years, No Central Bank Is Hiking

The global central bank experiment with renormalization is officially over.

After roughly half the world’s central banks hiked rates at least once in 2018, the major central banks have returned to easing mode, and as the chart below shows, for the first time since 2013, not a single central bank is hiking rates.

Commenting on the violent reversal away from tightening financial conditions which emerged following the Q4 2018 selloff, Goldman’s Jan Hatzius writes that “The FOMC looks set to cut the funds rate next week, the ECB today sent a strong signal that action in September is likely, and China has resumed easing policy after a spring pause. With global growth running at a below-trend rate of 2¾%—down from about 4% a year ago—a synchronized tilt towards easing looks like a natural response to a weaker outlook.”

Yet even Goldman can’t help but ask just why the Fed is rushing to commence the first easing cycle in years, pointing out that “the US economy is in decent shape, with a tight labor market, inflation close to target and— in our forecast— growth running a little above 2% both this year and next. We are modestly above consensus because we expect the negative inventory cycle to end and final demand to continue growing robustly on the back of easier financial conditions.”

This, according to the Goldman economist, should limit Fed easing to two 25bp insurance cuts, one next week and another in September, although the bank, which until very recently did not expect any rate cuts at all, fails to justify just why the Fed is doing what it is about to do, unless of course Powell is merely folding to Trump pressure.

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

Olduvai IV: Courage
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