Something Wicked This Way Comes. Is it the Fed? Is it the President? Is it the Treasurer?
Make no mistake about it, there’s real fear and panic out there as markets are dislocating to the downside…. But note that on many charts we are showing 2008/2009 like conditions, something that is entirely inconsistent with the earnings and economic data we’re still seeing: It’s almost as if markets are pricing in a financial crisis that has yet to occur.… I see slowing growth and concerns about a coming recession, all of which is true, but I’ve yet to see evidence of a financial crisis. ( Zero Hedge )
Now there is a spooky line. Yes, it is looking like 2008 looked after it was obvious we were entering a financial crisis in that Stearn Bear market when Lehman Bros died like a dinosaur in an extinction event. At least, then we had the nasty, corrupting carcasses of behemoth banks lying around to blame for the market’s stinky behavior; but our banks we are told now are all sound as Sterling. It is almost as if the markets now are pricing in the fear that the Fed’s Great Recovery Rewind is going to take us back into the same recession that their Great Recovery attempted to take us out of. (And, of course, it is!)
The Dow lost 1,655 points, or 6.8 percent, last week. That was the Dow’s worst week of trading since October 2008 during the financial crisis. The S&P 500 also lost 7 percent for the week and is now down 17.8 percent from its record reached earlier in the year, putting it on the brink of a bear market. The Nasdaq Composite Index is now 22 percent below its record reached in August and is in a bear market. (CNBC)
Stocks are heading for the worst month and year in a decade right on Christmas Eve. Yes, the market’s are pricing in something the economic data doesn’t fully support — yet — because investors see the shadow of something wicked coming their way. Santa isn’t just bringing lumps of coal; he’s bringing a coal-eating, petrol-drinking, fire-breathing dragon.
“What’s all the running about everyone?” the little boy asked as the shadow of the great dragon slid over him from behind. “It’s a bright sunny Christmas Eve day! We can still play!”
Or as the revised motto (tag line) on this site now says,
“It was such a Great Recession, we’re heading back for more.”
I attended a holiday gathering for one of my advisor clients on Friday evening. While everyone appeared to be in the spirit of the season, when the conversation eventually turned to the market action, the mood quickly changed. In talking with fellow financial professionals throughout the evening, the theme of the conversations was consistent. To a man, everyone agreed that (a) this was the worst market they’d seen in a VERY long time, (b) the action “felt” like an old-school bear (relentless selling, no lift, no obvious catalysts), and perhaps more importantly, (c) there is more going on here than meets the eye. The latter is a lesson we learned from the 2007-09 financial crisis…. Today, we all know that “forced selling” (fund blowups, margin calls, and a myriad of programmatic systems) can cause markets to collapse into a vacuum as buyers simply stand aside when the algos begin to roll and/or folks “need” to sell at any price. But, on Friday evening, everyone agreed that this market definitely feels different…. As the group said in unison, “there is NO LIFT at all….” Since December 3rd, the market has indeed moved in a straight line, becoming what is referred to as a “waterfall decline” in the process. But, there are no headlines to trigger the moves. No, something else appears to be at work here. And the real problem is no one is really sure what that “something” is. (TalkMarkets)
Make no mistake about it, something wicked this way comes; and if you don’t eat it, it’ll eat you. However, that something wicked is more than just the crazed establishment players I listed in the title; it is the monster these menaces are creating with all their squalid, slimy, filthy, shabby, seedy, wretched, broken-down, decaying, skeevy ideas and their peculiar interactions with each other.
The Fed’s great tradeoff
The stock market will stop going down when the Federal Reserve gets bright enough to realize their dragon-shaped, hot-air balloon ride over Jurassic World, known lightly as “the Everything Bubble,” will only fly as high as the Fed’s burner allows. Less heat, equals lower flight. Actually sucking the hot air out of the balloon equals rapidly lower flight. Until the Fed gets smart enough to comprehend how its own bubble flight works, their balloon ride is going to end down in a land with lots of bity things. Right now, the Fed is flying into cold dark skies, and the scary music is coming from Steven Mnuchin’s weekend missive to America, which indicates the pilots of our economy clearly don’t know how to fly their own balloon!
My belief has always been that the Fed is overconfident. Like all central planners, this consortium of banksters believes it can run the world better than a free market can. The Fed believes it has magically created a recovery that will endure — a balloon that can fly over all troubles without continued bursts of fuel. That means the Fed will do the wrong thing until the downward momentum of the market’s decent is enough to destroy the whole fake economy the Fed has built around the stock market, which the Fed referred to as “a wealth effect,” meaning pump up stocks and everything will follow.
The question that remains is, “When they turn the burner back on, will the downward momentum toward the glooming trees already be so great that the Fed’s balloon will be flapping like a flag until the gondola crashes into the forest before the balloon has time to reflate? Call it “reflation trade.”
Apparently Steven Mnuchin, Trump’s Secretary of the Treasury, is also afraid the Fed is overconfident and has lost control of its long flight out of recession because he just leaped in on Sunday in a major and unsettling way. I just came across the following, which I put in a comment to my last article, “This Bear Ain’t Playin’ Games with the Bulls,” and then decided it merits its own article here.
Here is how close we are to the day of reckoning I’ve been saying would start this year. Think about these emergency calls made by the Chief Treasurer (on a Sunday when he is on vacation, no less) to what is casually known as the “Plunge Protection Team (PPT)” and to many CEOs outside the team and even to the FDIC, and it will send a Crichtonesque shiver up your spine:
“Update: With everyone suddenly freaking out over whether (and why) Mnuchin really made the kind of “liquidity test” call to bank CEOs that was reserved for the depth of the financial crisis, moments ago Mnuchin himself tweeted out details of his Sunday call (from Cabo), the gist of which is that Mnuchin was checking bank liquidity levels for “loans and other market operations” with the CEOs of the 6 largest banks, and even more importantly, on Monday Mnuchin will hold a call with the President’s Working Group Financial Markets, better known as the Plunge Protection Team. In other words, what was expected to be a sleepy Monday half-day session, is about to get a lot more violent.” ( https://www.zerohedge.com/n… )
Apparently, the downward momentum is so severe the Secretary of the Treasury is taking time from his Cabo vacation to rally all hands on deck and try to prevent the crash … on a Sunday, apparently to avoid a possible Christmas-Eve-Day run on the banks on Monday:
“Tomorrow [Monday], the Secretary will convene a call with the President’s Working Group on financial markets, which he chairs. This includes the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Commodities Futures Trading Commission. He has also invited the office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to participate as well. These key regulators will discuss coordination efforts to assure normal market operations.“
And why would there not be “normal market operations?”
Some market participants … questioned why Mnuchin answered a question that no one was asking. Even after recent market losses, a liquidity squeeze or fresh financial crisis hadn’t been on the market’s mind. Mnuchin’s assertion of ample liquidity risked raising doubts…. Even with U.S. stock markets on the skids for weeks, and the federal government in a partial shutdown since Saturday, many market-watchers wondered whether there’s something more systemic going on….
“My initial instinct is this isn’t necessarily a positive thing, because it portrays that there’s worries that there is a bigger, broader issue than what I think is just typical re-positioning toward the end of the year,” said Nathan Thooft, Manulife Asset Management’s head of global asset allocation. (Bloomberg)
So, the national treasurer is calling in the PPT, after he has already called the CEO’s of the nation’s largest banks on Sunday to get a liquidity update. Calling in the PPT after a terrifying day like Friday is something I anticipated, but what I have also anticipated is that the downdraft is likely to be too great for the PPT to accomplish its usual task. Apparently Mnuchin fears it could be too great, too, given his unusual wrangling of the banksters ahead of the PPT conference and his peculiarly worrisome note to the public that he is doing this so we can all know “everything is fine! The banks are liquid. Nothing to see here, People.”
Maybe Munchkin has just been hitting the piña coladas a little hard on his vacation because for some reason he even tweeted that Trump has no plans of firing Fed Chair Jerome Powell when no news had come the White House that he was going to fire Powell.
“Mnuchin isn’t helping,” said Mayra Rodriguez Valladares, a former foreign-exchange analyst for the Federal Reserve Bank of New York. “For him to come out and explain what Trump is expressing is bizarre. It adds to the nervousness.” Rodriguez Valladares, who also conducts training for bankers and regulators through her consulting firm MRV Associates Inc., said the suggestion of Trump firing Powell is unprecedented. “This is really making us look like a very underdeveloped market where the president is telling the central bank what to do,” she said.
Some saw the Treasury’s response as adding to a sense of crisis. “The Secretary of Treasury calling the nation’s top bankers on a Sunday to confirm they have cash to lend. Not exactly confidence inspiring,” said Ian Bremmer, president of the Eurasia Group.
In the very least, you have to say, “If these central-bankster types are so smart, why is this guy letting all the world know in his tweets that he is calling all the major banks to make sure they’re OK?” I’d like to wonder why Munchkin thought we were concerned they might not be liquid or why Munchkin was concerned. His sudden flurry of activity certainly gives the impression he believes the situation is too dire at this point to just leave it all up to the Fed to give its usual hints to key players that routinely cause those key players to bid up markets. That indicates to me the the Secretary of the Treasury believes there is a high risk that this situation in the markets is already out of the Fed’s control. Time for major proactive intervention with the full force of government behind it, including the government-backed FDIC. This sounds like the days just before the big bankster bailouts if anyone remembers those days.
Several analysts said Sunday night that his outreach to the banks and subsequent statement were likely to backfire and drive even more concern.
“Panic feeds panic, and this looks like panic in the administration,” said Diane Swonk, chief economist at Grant Thornton. “Suggesting you might know something that no one else is worried about creates more unease….”
What was different about the statement on Sunday was that it came two days before Christmas, during a government shutdown, and addressed an issue that few had even thought merited concern — access to credit.
As a result, several analysts warned that the outreach to banks could end up generating deeper anxiety. A decade ago, financial firms sharply pulled back from lending amid a financial panic, and federal officials frequently took action on Sundays as a way to try to arrest unease before Asian markets opened. But no signs have emerged of banks facing serious problems today.
“It’s going to raise the question of whether Treasury and Mnuchin know something the markets don’t,” said Brian Gardner, Washington research director at Keefe, Bruyette & Woods, an investment banking firm. (The Chicago Tribune)
Maybe Munchkin is just falling apart because of all the pressure The Donald is putting on him to fix the flailing market. The Donald is reportedly not happy that his number-one bragging point (the Trump Rally in stocks) is falling all apart, and he needs a fixer to fix it as well as someone on whom he can take out his frustrations. The pressures of an erratic and turbulent president could certainly cause something like Munchkin’s obvious performance crisis. Who couldn’t see turmoil like that coming all year?
Trump has been obsessed with the stock market’s performance, asking aides and advisers what could turn the trend around. He has, for now, resorted to blaming publicly and privately the government’s top economic figures.
Those would be the president’s top economic advisors from Goldman Sachs, whom the president chose — choices I was highly critical of from the beginning, choices he should have known better than to have made. I seem to remember another president saying the buck stops with the president. That should be especially true if you have boasted endlessly that you are a superior business leader. Business leadership starts with assembling the right team, and Team Trump is falling apart everywhere.
Consider this weekend’s gyrations alone: First, you have the market’s overwrought response on Friday over the Fed doing EXACTLY what almost everyone in the market believed (just a week ago) the Fed would do, should do, and now did do at the behest of Trump’s anointed and now disparaged Fed chair; then you add to that the resignation of the president’s secretary of defense so shortly after the resignation/firing of his militaristic Chief of Staff; then you add to that the fact that president had two friends turn him down for the Chief of Staff’s position as if they didn’t want to work with him; then you add in the rumors that Trump is thinking of actually firing the Fed chair (whether he can or not, which Mnuchin now denies), and then you add to that the government shutdown that began on Friday (that was going to happen and then wasn’t and now is) over money for a Mexican wall that Mexico didn’t pay for and that congress isn’t going to pay for either. Yeah, maybe Munchkin is feeling the Trump burner.
“No one thought we were at crisis level,” one of these people said. “It’s going to create more of an issue than we had already.”
“If this weren’t the end of December, I would have thought it was April Fools,” added Jared Bernstein, former chief economist to Vice President Joe Biden. “The markets are already nervous enough. It’s like sending out a message saying our space shields can intercept incoming asteroids. Uh, I didn’t know there were any coming our way.”
Given all the floundering about, you may say this market turmoil is all way more than just the Fed’s plans running amok, but I’ll point out that this is how things fly apart in all directions whenever we enter the worst of times. Monday will probably even find something new to add to this toxic brew. You see, that is exactly how the Fed loses control because reality never goes as neatly as planned by the central planners of this world who have far too much confidence in their ability to mastermind and control the world (whether as well-intentioned dragons or evil coconspirators).
Central banks (and numerous large investment strategies) went all-in on secular stagnation. They confidently plowed trillions into the idea. Now they want out and the exit is far smaller than they’d imagined. They lay awake. They’re not controlling the trade anymore; the trade is controlling them.”
- Macron thought he had policy options. Reality was quite different. A decade of failed, painful austerity narrowed his tolerable policy options. Whether or not Brussels has heard the message, Macron has: austerity is dead.
- Draghi believed he would have choices. But years of asset purchases and negative rates failed to produce an expansion sufficiently robust to allow for policy normalization. And now the economy is slowing with rates at -0.40%.
- Powell inherited a legacy of choices, consequences. His predecessors left him with mission impossible. Yet he thought the massive tax stimulus had given him policy options. But reality is quite different. (Zero Hedge)
Reality’s little way of crashing the party with infinite unseen variables is why central planning never works as well as free markets. The planners are never smart enough to control all the variables. They make their plans to take things near the edge, perhaps believing they can scare the markets into sanity, and then shit happens. (Sorry, but what else do you call all the crap that happened this weekend?) It’s like they say about war plans, they are obsolete as soon as the war begins because the enemy has other ideas … even if you were certain you planned for all contingencies.
Put another way: the closer you let things move toward catastrophic failure (even if it is ostensibly to shock investors off of Fed dependency), the more likelihood you will have catastrophic failure even if you have a contingency plan. The best contingency plan is always “safety first”: don’t walk on the edge.
If there is no deeper crash on Monday, just bear in mind the extraordinary efforts of calling all the king’s men in order to avoid it. And, if there is a deeper crash on Monday, just bear in mind all the extraordinary efforts of calling all the king’s men in order to avoid it. Figuring out which caused what will be a forensics nightmare because that’s the way it is when monster mayhem goes wild. The real cause will simply be that this economy was a man-made monstrous creation that shouldn’t have existed in this world in the first place.
The Fed’s history of balloon accidents
The present situation where the Federal Reserve is taking markets to the edge calls to mind the time when Republicans were playing brinksmanship with the nation’s credit rating by walking right to the edge of default. I told my friend Stan, in the articles I call “Letters to Stan,” that the Republicans’ overconfidence would cause them to misstep. “You see,” I told him, “the Republicans KNOW they are not going to actually take the government into default; so they are confident in walking right up to the line to try to scare the Democrats into a compromise. They know default won’t happen. So, they are not afraid of their actions. However, what they are not thinking is that no one else knows they will not default; therefore, well before we actually get to the day of default, some credit agency will downgrade the United State’s credit out of concern that the nation is about to default. The downgrade will happen whether the Republicans carry the government into actual default or not, and the stock market will crash because of it.”
The rest is history.
If you’ve been reading here long, you know I believe the Federal Reserve will carry us over the brink in the same way. Their confidence in their scheme, which is the best I can call it, will cause them to wait until too late to fire up the burner and slow their balloon’s decent into the gaping maws of the dinosaur herds. My thinking is that the Fed is awfully close to the point-of-no-return where they cannot stop contagion — meaning spillover from the Nasdaq, already an established bear market, to other indices, but even more spill-over to Wall Street and Main Street where companies start to go under because of collateral damage from their stock devaluations — something that hits banks the worst — even if the Fed does want to prevent a crash. We saw that happen in the dot-com bust and even more so in the Great Financial Crisis (the GFC or “Great Recession”). One could almost say it is normal for the Fed to go too far with tightening the economy after a period of lax credit.
If you look at each past major economic reconstruction effort by the Fed, they never stop tightening while the economy is still rising, then take a pause and watch for a few months to see what the drift is from all the tightening they’ve done so far. They just keep tightening (keep the fuel shut down) right into a recession, as if they don’t realize the actions they have already taken will continue to lower our altitude for, at least, half a year. In fact, there is typically about that much lag time between any one of their actions and the start of its actual economic impact. They suffer from overconfidence in their ability to make quick changes when they see the economy just start to turn. If they wait until it just starts to turn, it is already way too late.
Some would say the Fed cannot be this dumb; so, it’s a conspiracy. They may be right, and I won’t argue with them on that, but I’d rather just call the board members of the Fed stupid because — if we all start telling them how inept they obviously are in that they cannot see as far into their area of professed expertise as the rest of us can see without their bonafides behind our names — then they have two choices: 1) Bear the disgrace of our continued public scorn over how economically ignorant they are as they lamely try to excuse themselves by telling us their plan failed but no one could have seen that coming (which is why I write here to make it clear that you can see it coming), or 2) correct our bad opinion of them by telling us they are really masterminds of evil genius with a grand scheme behind it all that requires them to look like they are accidentally crashing the global economy over and over. So, I’ll do all I can to make them look like the Keystone Cops that they truly are IF they are really trying to orchestrate a healthy economy as they claim to be.
Right now the disgrace is pouring in from all directions:
So habituated is the market to the constant presence of the Fed’s training wheels, that one week after the op-ed by prominent “hawks” Stanley Druckenmiller and Kevin Warsh urging the Fed to halt its tightening cycle, a chorus of cautions has emerged on Wall Street, warning that the Fed has done a “policy error”, while calls that the Fed may have gone too far in raising borrowing costs are gathering momentum, with some going so far as accusing Powell of being at “peak error” right now. (Zero Hedge)
Indeed, he is in grave error, but the error is foisted upon him by the Fed’s previous policies, which were also a mistake. You cannot solve a debt-based catastrophe like we had in 2008 by expanding the amount of debt an order of magnitude. That just pushes the ultimate payback date forward. The Fed’s first error was in reinflating housing prices and reinflating the corresponding debt bubble necessary to finance homes at those prices and then doing that across the board with auto loans and all corporate debt by luring people into all of that with artificially and abnormally low rates.
Once you do that, you trap people into those rates with no way out when you begin to normalize (raise) rates again. Homeowners cannot resell for what they paid when interest rates move higher but wages do not. They find they are trapped underwater in their own homes. People wanting to trade in a car find they are trapped underwater in their cars. Business cannot refi with new bonds when rates are higher.
It’s insane that the Fed didn’t see this coming and that everyone went along with this program as if it could work just because they trusted the Fed, thinking they must know something we don’t about how they can pull that off. Present market calamity reveals they do not just as I’ve maintained everyone will come to see! There is no Fed magic, just smoke and mirrors. The Fed created a debt trap.
If their first error was in thinking that expanding the bubble into a balloon was a solution, the second error, which gets enacted on Powell’s shift, is believing they can deflate the balloon and not destroy their whole recovery. It was in believing they can raise rates and stop refinancing the government without springing the trap on everyone. Mathematically impossible. The everything bubble (hot-air balloon because it is a very big bubble) became the everything trap as soon as the Fed started raising rates and stops providing government refinancing. We’re all trapped in the gondola together.
Whether by default or design, the Fed has failed spectacularly with every recovery effort they have ever attempted. So, let us raucously herald their failure as our gondola now rakes across the tops of the tallest trees. The entire Federal Reserve Board of Governors obviously cannot see the forest for all the trees, even as it is tearing at their balloon fabric. Therefore, I say the Fed apparently doesn’t know they cannot normalize rates from such long and historic lows, and they are about to experience a hard landing (and all of us with them since we continue to let them pilot the economy). That will put them out of business (gradually) because they will lose credibility when it starts to become clear they can never normalize interest rates again without creating a global catastrophe, just as they created last time with their lax credit and even more lax oversight.
You see, credibility is really all they have to sell because we all know their money is make-believe. It is founded on nothing more than people’s willingness to believe in the Federal Reserve. So, loss of credibility equals loss of all monetary value. That is why it is crucial to the Federal Reserve System’s survival that the president of the United States does nothing that makes the Federal Reserve board look like they are all his pathetic pawns. They must look like they don’t need to be told how to do their jobs. They must look like they, too, are leaders.
When the Federal Reserve does attempt new altitude recovery with more quantitative wheezing or something like it, they will have to run the burner on their balloon so hot to keep their balloon from hitting the ground they will set the balloon on fire. And one thing you don’t want to see is Janet Yellen screaming with her clothes mostly burned off.
The time to beat the establishment is most certainly now or never
You have to eat the establishment before it eats you.
I named my blog The Great Recession Blog because I knew from the get-go the Fed’s recovery was not a sustainable effort. I knew the day would come when they’d finally try to reel back their recovery measures, and all the dinosaurs would break loose. (You can’t keep printing fiat money and feeding it with steroids to build up behemoth banks forever.) Once the Fed undid the effort, they’d take us right back into the same recessionary world they told us they were taking us out of — same in that, without the Fed’s artificial re-inflation, that recessionary world still exists under us like a world time forgot; same in that it still exists because none of our fundamental economic flaws have been righted so it continues to exist for all the same original causes. As I’ve recounted many times here, our economic faults have all been made far and away worse. Thus, we are entering the Great Recession 2.0 (the Jurassic version, if you will.)
I’m just one little writer without much voice and no economic bonafides who has been writing this blog for seven years (and so far still is) for just this time. If I could see these things coming all along and tell of how they would happen, then the Fed is without excuse. The Great Recession Blog was written to lay a trail of articles through the Great Recession and its counterpart, the Great Recovery, to show that you could see from the beginning where the Fed’s flight path was taking us. You can follow the breadcrumbs back even now and see that this crash was entirely foreseeable … and avoidable. And you can see that it will all be repeated again — bailouts and quantitative easing included — unless people wake up and do something to “Beat the Establishment.”
So, with that, I hope you’ll enable me to keep articles like this coming. We are, at the moment when I am writing this, more than a quarter of the way to the minimum financial goal I set with a January deadline. If I am going to continue to wear my eyes out poring over this blog for twenty or more hours every week outside of my day job, I need to know enough people really care about the effort to make it worthwhile. As of the writing of this article we are about a third of the way to that goal in two weeks, but we have only one week to go. (At the present level of total support, I’ll be continuing for $2 an hour. As a writer with no official economic credentials, I’ve got to, at least, hit something approximating minimum wage.)
If we are getting close, however, I’ll keep writing a little longer to see if we can reach that minimum level so I can afford to buy myself new glasses for these weary eyes and soldier on. Either way, I’ll write through January to give those who have given their monthly support at the start of January what they paid for. Maybe a little longer as I like to measure things out in heaping scoops so no one can say I didn’t do all I said I would. Thank you already for those who have stepped up. I’m impressed enough with your generosity that it may fuel a continued effort longer than I think as I kind of lack the heart to let people down who have stepped up.
It’s now or never for me as well as for our economy. If you support my “Beat the Establishment” campaign, I’ll keep shining a bright light on the Fed’s failing balloon and keep doing my small part in the months ahead to slay the dinosaur tyrants that want to dine on the falling middle class: