For the market to work, bad ideas need to fail, and stocks need to go up and down - also known as volatility - for anyone to make any money.
Unfortunately, what's happening right now is regulators and big players tipping the scales and rigging the markets.
And the net effect of all this is strange - and dangerous.
For the market to work, bad ideas need to fail, and stocks need to go up and down - also known as volatility - for anyone to make any money.
Unfortunately, what's happening right now is regulators and big players tipping the scales and rigging the markets.
And the net effect of all this is strange - and dangerous.
The market was expecting nothing from the Fed, and it got nothing from the Fed.
That's more or less exactly what the market wanted.
That didn't stop stocks, which had been rallying nicely, from taking a morning breather ahead of Chair Jerome Powell's announcement. I guess investors wanted to hear it right from the horse's mouth, to make sure that the "nothing" they were counting on was actually official and actually nothing.
The Fed-investor love fest, which has been ongoing throughout the 10-year bull market, is obscuring an alarming truth...
The central bank is caught between a rock and a hard place... and a hard place... and a rock... and another rock - all very pointy and sharp.
That's no exaggeration, and I'll tell you what I mean in a second.
The upcoming 2020 federal election is promising a bevy of "goodies" such as free health care and college, guaranteed jobs, universal basic incomes, and the "Green New Deal."
But these can only be achieved through something called modern monetary theory, or MMT.
Market noise is never-ending - as are worries over and questions about the market.
What to buy? What to sell? What to hold? What will the Fed do? Where are markets headed? When will the next recession hit? Why? Why?
What should I do?
In this increasingly volatile market, nervous investors still look to prompt-reading advisors and pundits who work within the safe and stupefied confines of mainstream consensus.
Market timers and market predictors, too, are everywhere; they always have been and always will be. Some are bulls; some are bears.
Investors are seeking answers - and instant, calming solutions. These "experts" and "systems" are offering just that - most of which is the same.
"Markets rise and fall," the experts say as a chorus, "just be diversified - hold stocks and bonds - and carry on. The economy is strong, employment is high, inflation is low, and the markets will stay the steady course over time."
This all may feel and sound comforting, but so does dope. Their advice might seem to "make good sense," but the data (i.e. objective facts) as to the economy, employment, inflation, and the strength of stocks and bonds suggest otherwise.
So we need simple, blunt guidance. And we need to know how to protect ourselves.
Fortunately, the answer is right in front of us, which is to say, right behind us...
Looking for yield? Be careful what you ask for...
Every slick Wall Street operator is hawking junk bonds and leveraged loans as the ultimate drug for yield-starved investors - those seeking "juicy returns" in an otherwise risk-saturated bond market.
What they'll find is suicide by credit overdose.
I'm not surprised we've come to this point.
Now, those who know me know I'm not a big fan of the U.S. Federal Reserve. Acting as Wall Street's un-official "drug pusher" for decades, it went hog wild post-2008, dispensing low-rate, cheap, and always freshly printed money at grotesque levels.
As a result, today's "stimulus-addicted/Fed-supported" securities markets - thoroughly embroiled in bubbles - have crossed the Rubicon of debt and are now limping toward their own suicide, as you'll see.
But it doesn't have to get you.
You may have seen this news too.
If you, like me, are a member of the Antife (Anti Fed), you may be cursing the day. "Curses!" you shout. "There goes the Fed again! Losing taxpayer money! Our money!"
My friend, Professor Anthony Sanders, finance professor at George Mason University, pointed out to us on Dec. 12 that the Fed just reported it has $66 billion of mark-to-market losses on its balance sheet. Horror of horrors!
My reaction?
Well woop de doo. The Fed doesn't mark to market for a reason. It never sells anything. It will never be forced to sell anything.
The Fed does not need capital to operate. It can – and does – conjure money in and out of existence at will. And eventually, as its bond holdings mature, it always gets paid. Or at least so far, it has always gotten paid. So, marking to market is a nice philosophical exercise, but in practical terms, it's meaningless. It has no impact on the market. It never will have an impact on the market. It should play no role in your thinking about investing or trading.
But boy, are there plenty of reasons to pay attention to the Fed's balance sheet, which is what I do a large part of my work time. I do it so that you don't have to, and mostly because I have come to believe, over 55 years of following markets, that while it might not be the only thing that matters, it sure as hell beats whatever comes second.
First, let's look at this mark-to-market business.
Here's what is critical for you to know...
The Fed started shrinking its balance sheet in October 2017. It euphemistically named the program "balance sheet normalization." I call it "bloodletting," in honor of the medieval medical treatment for disease.
The Fed's Quantitative Easing (QE) program had caused asset markets, including stocks, bonds, housing, and commercial real estate, to become bloated and diseased as prices inflated relentlessly. They floated higher on a sea of the Fed's newly conjured money.
The Fed pumped that money directly into the accounts of the big shots who make the markets, known as "Primary Dealers." The Primary Dealers are appointed by the Fed to be its exclusive correspondents in the execution of monetary policy. They're also responsible for absorbing a significant portion of the Treasury's issuance of new bonds, notes, and bills. They mark that paper up and sell it to investors.
The Fed expanded the money supply by buying securities – U.S. Treasuries, Agencies, and Mortgage-Backed Securities (MBS) – directly from those Primary Dealers.
The dealers used the money to buy Treasury securities from the U.S. government. Since they are trading firms, they also used the cash to buy other bonds, as well as stocks, and occasionally exotic derivatives. Those cash injections helped to ignite and promote animal spirits among hedge funds and other massive leverage speculators, along with more conservative investment institutions. We saw the effect in the long-running big bull market. The policy of QE ultimately carried stock prices to extremes of valuation only seen at modern major market tops.
The Fed stopped QE in late 2014, but the stock market continued its bull run. That was partly because the Fed was still pumping a little money into dealer accounts through its MBS replacement purchase program.
More importantly, in late 2014, the European Central Bank (ECB) started buying all manner of European government and corporate bonds hand over fist in a QE program that essentially took the hand off from the Fed when the Fed left the field. The same big banks that are Fed Primary Dealers also operate in cahoots with the ECB. That's how money printed in Europe by the ECB can instantly show up on Wall Street and in U.S. markets. That helped to keep stock prices inflated and rising.
But the Fed went into reverse in October 2017, and the ECB also tapered its buying and will go to zero purchases this month. Its balance sheet will also begin to shrink. More money will leave the worldwide pool of market liquidity, which is just a fancy way of saying money available for investment.
Our Liquidity Specialist shows you in detail how the Fed is continuing to shrink its balance sheet and how the economy is in danger of being superficially strong.
Find out what this means for you and how you can stay safe in a market going dry...
The Daily Treasury Statement data for the end of August showed some improvement in total tax collections, including a slight uptick in withholding taxes and an even bigger increase in excise taxes.
The numbers suggest that an early summer slowdown has ended. After the expected downward revisions in June and July jobs data, the August uptick in jobs was not a fluke. And the excise tax data suggests strong retail sales.
So, not an altogether bad summer - if you happen to be a politician or government taxman. But what about for investors?
Well surprise, surprise, surprise! Good news is bad news, which is what we've been talking about here all along.
Good economic news, as presaged by the uptick in tax receipts, will encourage the Fed to keep tightening.
And tighten it shall, in two ways: Most importantly (and most destructively), it will drain more money from the banking system. Secondarily, it will continue to rubber-stamp tightening money markets by raising the federal-funds rate.
And that, as I have been shaking my fist at the sky about for months, is really bearish.
The stuff has not hit the fan yet, but it is coming...
Despite all the evidence of the damage it's doing, the Fed is still sticking to its phony numbers.
Bad news for stocks.
But our Lee Adler won't let you be fooled, and he's got all the actual facts and numbers...
Jerome Powell and the central bank will send the U.S. economy hurtling into contraction mode no later than the winter after next.
How can I be so sure of my claim? Well, one very reliable indicator is flashing red.
In fact, it's so dependable that since 1980, it has predicted the advent of every recession, right around a year to 18 months ahead of time.
And right now, it's approaching the critical level.
See, the Fed's raising of short-term rates is causing the yield curve to flatten. From there, it's a short trip to outright inversion. Once it inverts, two-year Treasuries will yield more than 10-year Treasuries.
Once that happens, a major peak in stocks - then a recession - is all but totally certain within the next year and a half.
There have been some media rumblings - trial balloons, if you will - sent up, all hinting that the Federal Reserve might stop or slow the pace of the "normalization" that's going to see $50 billion a month come out of the system before it's done.
That's going to lead to a market cataclysm - sooner, not later - because there simply won't be enough precious liquidity in the markets to sustain the kinds of stock prices we've seen in the era of quantitative easing.
Even if the Fed did slow or even halt the pace of systemic withdrawals of cash from the markets, it's just too late.
We've talked about this snowballing disaster of a monetary policy many times before; I've been screaming from the mountaintops, showing you recommendations for getting into a protective, cash-heavy stance.
And now, it seems, a certain crowd of big market players is getting wise. They've just capped a very busy quarter - a record quarter, in fact - of stock buybacks.
Even by the deeply flawed and misleading Consumer Price Index (CPI), inflation is at the U.S. Federal Reserve's target. By other measures that more accurately portray inflation, it is well above target.
The Fed will not be deterred from continuing to tighten, continuing to remove money from the system, just because of the silliness that "CPI missed expectations."
It's still at least 2%... and it's heating up.
Furthermore, we know beyond a shadow of a doubt that, as the Fed raises the federal funds rate target, it will only stimulate more inflation. The Fed will always be behind the curve, because the Fed is always back there pushing the curve ahead.
Every time it raises the federal funds target rate, the Fed signals to the decision makers in the U.S. economy that it expects more inflation, and consumers and businesses behave accordingly. I showed you the history of that a couple of weeks ago; the charts don't lie.
And the fact is that we really have more - much more - inflation than they're telling us.
This isn't a mistake, it's not a miscalculation.
What I'm going to tell you is probably going to go a fair way toward upending your sense of reality and everything you know to be true, at least as far as the markets go.
Think for a second how much mental energy, how many newspaper column inches, how many magazine articles, how many minutes of airtime are totally devoted to speculating on what the U.S. Federal Reserve's going to do to interest rates.
There are journalists and cable TV pundits who spend entire careers covering the Fed. Every time the Fed's Open Markets Committee meets, it's like time stops, and every breath hinges on, "Will they raise rates? How much? How high?"
By statute, the FOMC circus must happen eight times a year, every five to eight weeks. And it's even more frequent (and more protracted) if you count the media monkey circus surrounding it, the arcane rituals of painstakingly parsing out what the Fed is "telegraphing" or how the markets will "react."
And it's all for nothing. That's right. Nothing. It's a sham...
...because the Fed does not control interest rates. And it hasn't for years now.
So who does control rates? Well, here's where it gets terrifying...
The witless high priests of "Economism" and the greed-happy gurus of Wall Street preach this constantly as an article of faith: Raising interest rates suppresses inflation.
Here's the thing.
These people couldn't be any more wrong if they made the cable talking head circuit and assured us all that the sun would rise in the west tomorrow.
The truth is rising interest rates help trigger inflation. In fact, inflation and lending continue to increase through most of a rising rate cycle. Borrowers and consumers want to stay ahead of inflation by accelerating their borrowing and spending. Of course, that only promotes inflation.
I'm going to prove this - all of this - to you beyond a shadow of a doubt, because I don't want you to get sandbagged by what's coming; the U.S. Federal Reserve is wrong, and that means it will be behind the curve until the very end, just like 2008, just like always.
When it's all said and done, when it's all over but the crying, the Fed will be confronted with the obvious consequences of this faulty thinking. It'll deny it six ways from next Tuesday.
It might even get raked over the coals (or ashes) for it, but that'll be cold comfort to people who didn't listen.
But you, armed with the facts, will be safely in cash, ready to move at your leisure.
So let me show you the proof...
