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The Fed candidly admitted today’s soaring inflation is not what it had in mind, though it certainly is exactly what I’ve had in mind:
At a news conference after the Fed’s statment [sic.] was released, Chairman Jerome Powell said he expects that inflation will be short-lived but acknowledged that it has run hotter than the Fed anticipated and could remain persistently hot.MarketWatch
The [resulting market] decline put the Dow Jones Industrial Average … on track to close below its 50-day moving average for the first time since March 3.
Meanwhile, the S&P remains hunkered near that 4200 level that has acted like a magnet to its highs and lows; while the bond market decided perhaps it should take inflation seriously again after all, with yields immediately spiking six basis points post-Powell, which put yields ten basis points above where the 10-year started the week:
Of course, the Elliott Wave people will say the market’s plunge within minutes of Powell’s comments had nothing to do with what Powell said or specifically with his admission that inflation may be just a tad more exciting than what the Fed anticipated and may be just, well, “persistent” — the new word that quickly replaced “transitory.” Because, by Elliott Wave Theory, market sentiment does not respond to the economic and monetary realities around it.
Nevertheless, as anticipated, the Fed said it will be holding its accelerator foot down to the floor for many months ahead (Fed dot plot says into 2023), apparently to see if it can get that inflation to run hotter still because surely the Fed could not be doing all this “money printing” (a.k.a. quantitative easing) just to fund the federal government’s massive debt rollover requirements or just to keep utterly dependent stock and bond market bubbles floating.
Whatever the Fed’s reasons, we know it certainly is not burning up the money presses because banks need more money in their reserves in order to build up a hotter reverse-repo crisis now that the economy is failing to soak up all the liquidity the Fed is creating.
Or, as ZH put it more precisely,
[The] Fed is holding rates at zero and buying $120 billion in bonds every month in the face of 17.4% export price inflation, 11.3% import price inflation, 6.6% producer price inflation, 5% consumer price inflation, [with] over 15 million Americans on government dole, over 9 million job openings for Americans, record high stock prices, record low homebuyer sentiment, [while] banks are puking excess cash back to The Fed at record levels.Zero Hedge
What could go wrong with keeping the accelerator floored for many more months as we fly through those curves in the road? Makes sense to everyone, right?
The Fed, as I’ve said it would do for the past year, has trapped itself between a rock and a hard place, and it is just now starting to see that, once again, this is not quite the situation it believed it would find itself in. (Just as the Fed once believed tightening would be as boring as watching paint dry (then, oops, stock crash and repo crisis). Tightening was supposed to leave us in a world that would never have another financial crisis during the Fed Head’s lifetime. (Oops again. Maybe Yellen meant her life as Fed Chair; she now has a different life as US treasurer.) Maybe Gramma Yellen just thought she wouldn’t live long enough to see the roaring 20’s for a second time.) The Fed never seems to have a workable end game for any of its big-think programs. Yet, people keep trusting it and thinking it is smart.
This time, the Fed has, on one side, created so much dependency on FedMed throughout the economy, including just about every market out there — stocks, bonds, housing, you name it — that it cannot end the drugs without creating massive withdrawal in all markets at the same time — the catastrophic collapse of the Everything Bubble. On the other side, the Fed’s Big Giant Head now has to admit he didn’t expect inflation to run this hot and that the intensity of the heat and the rate at which it is rising indicates inflation may run hotter and longer than the Fed’s earlier “transitory” guess. That means, if the Fed keeps pouring on the fuel, it risks cooking the everything bubble until everything explodes.
We’ve never experienced what that looks like either. (I would suggest likely a lot worse than the inflations of the seventies when there was no Everything Bubble to burst into tiny bubbles as we whine.)
To what degree are Fed FOMC members changing their minds as to how hot inflation is running? Here is the “dot plot” that shows when those with a vote on the FOMC believed the Fed would make its adjustments in interest rates back in March, and where they placed the likelihood of adjustments now. Each dot represents the view of one committee member as to what level the Fed’s interest target will have to reach in each year on the chart:
You can see that what has happened with consumer inflation since March has significantly changed where voting members believe interest targets will have to be set in 2023. The median dot in June is now two typical rate hikes above where March’s median dot was. The unusual and widening dispersion of dots also indicates there is now a lot less certainty between members as to where the Fed needs to be or what is going to happen with inflation. (Won’t they be surprised when the hot inflationary summer ahead puts even more heat beneath their feet?)
Nevertheless, the Fed is still not planning to raise interest rates before 2023. So, that means two more years of running pedal to the metal. The Fed obviously is a little slow on the uptake to realize their antiquated steamer is already careening over the edge of every inflation curve. Why? Because they dare not admit it. Admitting it and backing off on the fuel would crash all markets.
(Reminder that I’ll be covering my many reasons for thinking inflation is not going to be anywhere near as transitory as the Fed needs it to be in my upcoming Patron Post.)
The S&P 500 failed a breakthrough on Thursday and tucked its head back below its 4200 ceiling again, where it has remained rangebound for weeks. Job news on the economic front that many analysts toasted as great could not lift sentiment out of the doldrums on Thursday, nor could it stop Netflix from making its first death cross in more than two years. Falling below its 200-day moving average is generally regarded as a sign that a stock is trending down for the longer term.
The market’s response to Thursday’s employment news further reveals the degree to which inflation concerns are tugging downward on market sentiment. While the good news about jobs gave a jolt of lift to stocks in the opening hours, as it was digested, investors appeared to be figuring out that good news would be bad news for stock prices because a rebounding job market could add additional inflationary pressures as companies are being pressed to pay higher wages to attract people back to work. Inflationary pressures, in turn, will pressure the Fed to turn down its massive money-pumping engines, which have pressured a major flow of new cash into stocks and bonds at a rate of $120-billion a month for a year now.
The present employment situation is great for labor, thanks to the government stimulus checks, because the ease with which people can remain out of the workforce empowers them to press corporations to boost pay in order to attract them back in. For the past decade, labor has lost out to profits being shared solely with shareholders. Labor has seen little real gain in wages while shareholders have seen massive gains due to the almost direct flow of Fed money into stocks and bonds as the cheap debt has financed stock buybacks in record amounts for years. Finally, some of those profits are now being pressured toward labor as many in the labor force hold back until jobs pay more than they are making on unemployment.
The Fed throws a surprise monkey wrench
The biggest damper on the Thursday stock market was a surprise move by the Fed. Chairman Powell of the Us People’s Bank has been saying for months and said again as recently as a week or two ago that the Fed is not even beginning to start to think about talking about reducing its stimulus programs. However, rapidly rising inflation and a reverse repo crisis seem to have forced the Fed rather abruptly from not even thinking about starting to talk about tapering QE to having already decided to take a baby step.
This is the very scenario I laid out for both the reverse repo crisis and inflationary pressures in my last two articles:
The Fed announced it will start selling off some of the corporate bonds it has been buying. This sounds like a fairly harmless breath in the direction of financial tightening that avoids touching government bonds. As I recently argued, the Fed cannot stop funding the government directly:
The Fed’s absolutely massive reverse repo operations (used this month to extract half a trillion dollars in cash money out of the system!), done at the same time the Fed is creating money in the system, leave us with no question that the Fed is directly financing the government and monetizing its debt at whatever level the government demands (with almost no restraint on the government’s part for its role).
Since it does reduce the Fed’s balance sheet, it comes close to the Fed announcing it will be reversing its QE (bond buying) in what amounts to a small ongoing amount of QT (bond selling), but it doesn’t quite go there since it leaves the Fed’ government bond buying still fully in play. Still, the Fed wispered, and the market cringed a little.
Notice how the Fed is still not hinting it will stop soaking up government bonds, fitting with my earlier argument:
While all astute and honest people knew the Fed was financing the government debt for years, the Fed USED TO be able to somewhat reasonably argue it was not buying treasuries illegally to finance the government but that it only bought treasuries as a way of setting monetary policy.
It clearly does not need them for monetary policy now that it is selling off bonds and certainly not with interest rates plunging to the zero bound, and real rates creeping negative.
That argument vanished completely this month because the Fed’s purchases of treasures are now actually driving monetary reality totally out of whack from the Fed’s own stated policy goals.
As Wolf Richter wrote,
It’s a crazy situation the Fed backed into as tsunami of liquidity goes haywire, banking system strains under $4 trillion in reserves.… With these reverse repos, the Fed is selling Treasury securities to counterparties and is taking their cash, thereby massively draining liquidity from the market – the opposite effect of QE…. Even as liquidity is going haywire, and as the Fed trying to deal with it via reverse repos, the Fed is still buying about $120 billion per month in Treasury securities and mortgage-backed securities, thereby adding liquidity.… This liquidity-haywire situation appears to be an emergency that needs to be addressed now.Wolf Street
Well, maybe this seemingly rushed decision to start selling off its corporate bonds is the Fed’s is the Fed’s way of testing the waters for that kind of emergency action without touching what it is doing in government bonds. The Fed normally begins hinting at changes like this months in advance. It doesn’t just drop them out of the blue. So, the announcement does have an urgent look to it. The Fed claims it has nothing to do with monetary policy, and perhaps it doesn’t for it certainly would be inadequate to the task; yet, even the New York Times notes,
It was important for the Fed to signal that this was not a monetary policy action. The Fed’s policy-setting Open Market Committee is also buying huge amounts of government-backed bonds, but those purchases are different, meant to foster stronger economic conditions by keeping markets chugging and holding down borrowing costs. Markets are on edge as officials tiptoe toward thinking about when and how to slow that program.NYT
Why was it so important for the Fed to make clear this announcement had nothing to do with monetary policy? Because, regardless of how small the amount of money is in the grand scheme of things, it unsettled markets on Thursday. The Fed even had to assure investors that the sale will be “gradual and orderly.” The Fed’s caution is evidence of just how much it realizes the stock market sits on a hair trigger when it comes to even a hint of tightening.
The central bank will aim to minimize the potential effect on markets by factoring in daily liquidity and trading conditions for exchange-traded funds and corporate bonds, it said in a statement.Reuters
Here is what I think is the takeaway on this: Patrick Leary, a senior trader at Incapital got it right when he noted that the Fed’s action, minor as it was, helped pave the way for the discussion about tapering out of its monetary policy “accommodation,” as they like to call it.
“This is one little step and a good way to test the waters in terms of what the market reaction is going to be,” said Leary.Financial Times
The market shuddered enough to show its sensitivity in this area, carefully scripted as the message was to assuage all concern.
Elliott waves off inflation risks as Fed flinches
While the market shudders every time the Fed even brings up the fact that it is not yet talking about tightening, one particular Elliott wave theorist has been criticizing my claim that inflation will have the power this year to kill the bull market.
While more and more opinion pieces are being presented in the written and television media about how inflation is about to kill our stock market, I will tell you that I am quite unconcerned about the common refrains from the peanut gallery. In my humble opinion, this is a bull market which likely has much further to run in the coming year or two. And, I base my perspective on my objective, mathematically derived Elliott Wave analysisSeeking Alpha
Yet, Thursday’s announcement by the Fed and corresponding market response illustrates the first one of two likely pathways by which I said inflation will kill the market: 1) It will either force the Fed to tighten much earlier than it has said it would, or 2) it will tear the value out of the dollar and push up bond yields to compensate for inflation, which will change the equity-risk premium on stocks. (The amount by which stocks need to outperform the yields on government bonds in order to compensate for the higher risk of stocks.)
Inflation gets built into bond yields by the bond market, and stocks become less attractive as yields reprice upward to compensate for soaring inflation.
It looks like Fed flinched and jolted into a touch of QT, sending Thursday’s shiver through the stock market. So, the inflation story of mine that my self-appointed nemesis is criticizing has fledged and is starting to fly.
This same Elliott Wave theorist has finally admitted he was dead wrong on the S&P 500 (represented by the SPX) bounding off 4200 into a new rally:
My last public article on my short-term expectation in the SPX was clearly incorrect, and was our first “miss” in quite some time. But, as I said, it is simply impossible for me to be right 100% of the time.
In fact, the S&P held solidly below his prediction that 4200 would be the new floor off which the market would rally. Instead, 4200 became the S&P’s ceiling for a month and a half!
That doesn’t stop him from claiming his approach provides valuable
contrast to all the other articles you likely read which continue to warn you about the common “belief” that inflation is the boogie man that is about to kill our stock market:
And then he quotes one of my own comments about how he missed his prediction that claimed the S&P would bounce right off of 4200 into a new rally due to inflation concerns:
“[The S&P] keeps pounding its head against that barrier but not really busting through, because inflation concerns keep grabbing its butt like a junkyard dog pulling someone down off the fence he’s trying to scale.”
Though he believes my inflation argument is a boogieman, my claim about inflation holding the market down held true against his for a month and half during which the S&P got no lift. In spite of that fail on his part, the author is still striking out against my prediction that inflation will gnaw away at the market until it finally kills it with his new claim for a rally:
I am still looking for the market to rally up to the 4350-4440SPX region…. And, the manner in which we rally over the coming month will tell me where the ideal target resides within that next target region.
While I wouldn’t be too surprised if the market does rally that much, it doesn’t defeat the inflation argument at all. I don’t expect the bull won’t fight the bear, but I do doubt his upper target for this summer:
I think we will see another pullback, which we may want to now consider as a “June Swoon.” How long that swoon will last is something of which I am not yet certain, but I highly doubt it is going to last until November. Rather, the higher probability suggests that after that bout of weakness from the 4350+ region, we will likely continue to rally into the fall time-frame and attack the 4600SPX region I am still expecting to be struck in 2021.
That I doubt. I’ll note his now uncertain-sounding June beliefs have revised his view to look a lot more like mine than his original statement of a decisive rally off of 4200. While week’s Friday close may even make it look like his hope for hitting 4350 in June before the swoon is already proving right, I see it much different from a longer-term perspective.
The market stalled overnight after Thursday’s flop back below 4200 with futures going down slightly more as investors waited with bated breath for the government’s Friday jobs report from which they would divine the risks of inflation. Many were expecting an excelling jobs report, and they wrote that such a report would increase pressure on the Fed to taper its QE even faster. In that case, the market was expected to fall further as it did upon Thursday’s strong employment report by ADP.
I didn’t join that bandwagon, even though I do believe inflation is the market’s linch pin at this point. What they got on Friday, however, was the best lackluster jobs report the market could hope for — one in that Goldilocks zone of contentment that says the economy isn’t cratering but that it is also not nearly strong enough to cause the Fed to start rolling trimming back on its all-out quantitative easing.
The report hit the market’s sweet spot, and so the S&P climbed back up above 4200 and may climb further until it gets the next big bad inflationary news.
That is exactly why I think this jobs report will will ultimately prove bad for the Fed by keeping inflationary pressures in the Fed’s blind spot. You see, the Fed and most economists are looking for full employment to be the sign of enduring inflationary pressures, but in reality inflation is being driven hot right now, as I’ve said would be the case for the past year, by serious shortages during a time of abundant cash — cash the Fed is creating and shortages the Fed is fostering.
I say that because low unemployment actually means the US will remain sub-par in production for longer. That will result in continuing shortages and maybe deeper shortages, but the Fed only sees stalling employment numbers right now as justification for pouring on the cash fuel for longer. That fuel, however is exactly the chemistry needed to keep heating the inflationary inferno, not just because, as many think, more money equals more inflation, but because more money via government aid enables the labor force to stay unemployed longer, which suppresses production and increases wage pressure to entice workers back into the job market! It is self-defeating.
The stock market believes along with the Fed low employment will keep inflation down by reducing spending power, but it won’t so long as the Fed and feds keep supplying goodly amounts of cash stimulus to the unemployed! It actually means inflation will burn hotter as shortages undercut the economy even more. What we have is STAGFLATION — inflation in the context of a totally stagnant (i.e., unproductive) economy.
Here you can see stagflation at work:
What you see is that, even with the Fed pouring on new money as fuel at a rate of 120-billion a month, which is 50% greater than QE3, business activity is now actually falling. Hugely diminished returns on that investment.
The economy as measured in gross domestic product, which I pointed out an article or two back, is not rising back to the level it would have been at without the COVIDcrisis; yet, population keeps growing. Investors and economists and market analysts are all focusing on how fast GDP has risen upward from the hole it fell into during the COVID closures, but production (the very thing GDP measures) still remains well below where it was headed pre-crisis. It takes a steady GDP rise just to keep up with population growth. Here’s a graph I shared earlier that shows where we are compared to where we had been heading prior to the latest crisis as well as the previous crisis.
We’ve taken two major steps down without recovering to our former trend, which means there is less for everyone, so prices are rising.
In this newly developing stagflation environment, the Fed will keep dumping on fuel even though it has shown signs that it is getting nervous about that in the chatter by Fed leaders and in its move this week to start selling off its corporate bonds (while it continues to buy up huge amounts of government bonds).
As Bloomberg’s Chris Antsey notes, the Fed’s leadership “is likely to see this report as a modest improvement but not near the “substantial further progress” on employment required to taper its bond-buying program. While inflation is now topping the central bank’s 2% goal, jobs remain not really close to the goal.”Zero Hedge
That jobs obsession is the Fed’s Achilles heal. A strong jobs report on Friday would have strengthened the hand of those on the Fed who are now openly worrying that it may be time to start talking about tapering QE sooner than later, but the weak report will lead to overconfidence in their ability to keep pouring on the cash fuel.
A strong payroll report Friday would give more ammunition for folks calling for earlier QE tapering. In a sense, policy normalization has already started after the Fed announced plans to wind down its emergency corporate-credit facility. From that perspective, the peak of liquidity is near.Zero Hedge
The longer the Fed waits to remove its “accommodation” to the market, the more it will have to pull a hard stop when it becomes clear inflation has the upper hand.
The Fed has faked itself out
Today’s jobs report makes it likely the Fed finds all the excuse it needs to stay in the dollar-dimishing game longer, believing inflation will keep its head down because the lower jobs will keep wages from rising.
The Fed has its eye on the wrong gauges. In real fact, the smaller-than-expected increase in payrolls is likely because those who are supported by Fed largesse are holding out for higher wages before they make the leap back into the economy. Companies, as a result, face more pressure to raise wages.
This won’t be the first time the Fed was blind to the trap it has put itself in. We all remember the Repocalypse where the Fed learned the hard way it can never rewind its QE without collapsing the QE-dependent recovery it spent years engineering. Now inflation is pressing in quickly due to too much QE in the face of severe shortages while continuing Fed support for the unemployed will only make keep production down with ample incentive not to work.
As you can see below, the labor-force participation rate never came close to recovering; and, with today’s numbers, it is falling back off again:
While only half of the pre-COVID work force that became unemployed has returned to work, the number of people looking for work has fallen off. These are people who either reported they were not looking for work or were unavailable to take a job if offered. Perhaps some simply want their old job back, but it is gone:
7.9 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic.Zero Hedge
So, regardless of what happens to the stock market in June, inflation will rapidly gain the upper hand with the Fed’s full support because the Fed can’t see it coming. The Fed will keep throwing money to the masses via the federal government until it is too late, and that day may come sooner than you think. Inflation WILL kill this market — either by forcing the Fed to tighten sooner than the market has been led to expect or by ravaging everything — unless some asteroid of a black swan like COVID swoops down and takes it out first.
(More on how inflation has built just since my last article will be out shortly in my next article.)
All those economists who went along with the Fed’s inflation-is-temporary-and-going-per-plan narrative are stunned by the data they now see coming in. They shouldn’t be, as it was predicable. However, they will need to get bigger charts to make room for it. Notice where the last ten data points for the increase in inflationary surprises are located (look up to the far, top right corner of the chart):
The chart shows U.S. inflation data surprises at their highest in the 20-year history of the series, said strategist Jim Reid, referring to a note by equity strategist Parag Thatte. The last 10 data points were “almost off the chart,” he noted.MarketWatch
So much for the high inflation print in April being due to “base effects.” The surprise index reveals whether inflationary data is higher or lower than economist expected. It’s hard to claim that the base effect from last year’s COVIDcrisis resulted in more surprises to economists, given those economists were all trying to claim inflation was going to rise due to a base effect before April’s hot print. How can you surprise experts who are expecting the base effect when every one of them knows exactly where the base was last year? If you’re going to claim an effect due to the base — the starting point — there is no surprise at what that starting point was … only at where you ended up.
Comparisons with year-ago price levels depressed due to the pandemic — were also anticipated to spur a run of hot inflation numbers. Those were all among reasons the Federal Reserve had assured it would look at rising inflation as “transitory,” or likely to fade.
A “surprise,” however, means inflation flew in well above the expected “base effect!”
Reid wrote, “these were surely all known about before the last several data prints and could have been factored into forecasts. That they weren’t suggests that the transitory forces are more powerful than economists imagined or that there is more widespread inflation than they previously believed.”
First of all, prices a year ago were not depressed. They just didn’t rise much, so any talk of the base effect is meaningless. April’s 4.2% rise YoY is still a 4.2% rise in one year, regardless of what the year before did. It’s not like inflation has a mind to say, “Oh, I need to make up for last year.” It is what it is.
Stock market coughs up a hairball
Once again, we saw the market choking today on this news, turning from green to red with the S&P rebounding, again, off its 45-day ceiling of 4200. It keeps pounding its head against that barrier but not really busting through because inflation concerns keep grabbing its butt like a junkyard dog pulling someone down off the fence he’s trying to scale.
Reid noted how extraordinary the overall run of inflation surprises has been. As the chart shows, surprises during the 2007-2009 recession were sharply negative and didn’t overshoot afterward. During the pandemic, inflation didn’t undershoot [exactly], but is now “overshooting massively.… The fact that we’re seeing an overwhelming positive beat on U.S. inflation surprises in recent times must surely reduce the confidence to some degree of those expecting it to be transitory.“
A Reverse Repocalypse in the Making?
Behind the scenes of this monetary deluge, the Fed’s essential response to the overnight reverse repo crisis keeps soaring higher, meaning the Fed is having to suck more and more money out of bank reserves. This is the reverse of the repo-crisis problem back in 2019 where bank reserves were starving, and the Fed was having to add more and more money overnight to hold interest down on interbank loans.
A reverse repo crisis indicates too much money is sloshing around in reserves. The Fed is now sucking out nearly half a trillion dollars and rolling that over every night, and is escalating to a higher level each night!
As for the immediate market implications they are even more ominous: either the Fed will have to hike the IOER or rates will soon go negative.ZH
In other words, without this Fed interference we would be entering the bizarre netherworld where banks pay other banks to take extra cash off their hands. Interest On Excess Reserves (IOER) is money the Fed pays to banks to hold more cash in reserves than what the Fed mandates. The interest is offered as an incentive not to loan against the money (which would make it mandatory reserves) when too much money is floating around. “Excess reserves” are money banks are not required to hold in their Federal Reserve Bank account to back up loans, meaning they either are not making or cannot make as many loans as their reserves would allow.
Why would the Fed keep adding money into the system to soak up treasuries and finance the government just to suck it back out the other end? Oh, wait. That question answers itself.
Why would banks not want to keep excess money? Who can ever have more money than they want? Well, it’s not that banks want less money. It’s that they don’t want to hold locked in reserves during times of high inflation. Banks that are expecting high inflation are more concerned with preserving capital than building on it and do not want to hold excess money in reserves that will inflate away in value unless the Fed pays them more money (in IOER) to keep those reserves there. When all the banks have excess reserves, they can’t find other banks who want to exchange their cash for something that compensates better for inflation.
They may even loan their excess reserves to other banks at a slight negative interest rate, if they can find takers, because they think they will lose more in inflation during that same period by holding on to it. So, they’ll trade it for a treasury and pay a little more than the treasury is worth. They’ll pay someone a little to hold the cash just to reduce their losses. If they cannot find another bank that wants to loan them something for cash, they obviously have to pay even more interest to offload their surplus, which they might do if they think inflation is going to be even worse.
That’s when the Fed steps in to avoid a negative-interest spiral — the opposite of the positive-interest whirlwind that hit during the Repocalypse. The Fed can either offer enough interest on excess reserves to offset the inflation banks fear or can trade them interest-bearing treasuries on loan (reverse-repo loans). The pile-up in reserves happens because banks can’t loan out money fast enough because consumers and businesses have as much cash as they care to spend are not as hungry for loans. The system starts backing up.
In short, banks not wanting to sit on cash that is quickly losing value have no one to loan it to because of weak loan demand even at low interest rates; so, they are starting to send money back to the FED for low-interest treasuries that are no risk because the Fed promises to buy them back at a premium down the road.
A key artery of global financial markets may be telling the Federal Reserve that enough is enough. Demand for an overnight funding through the Federal Reserve Bank of New York’s overnight reverse repo program (RRP) has begun to flirt with recent records highs, after almost no one used it for months…. The Fed’s reverse repo program lets eligible firms, like banks and money-market mutual-funds, park large amounts of cash overnight at the Fed in exchange for a small return, which lately has fallen to about 0.06%…. “Why are they going to the Fed?” asked Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities … despite its dwindling returns.MarketWatch
Skyrm’s answer to his question is that Fed QE has hit the steep downside of the diminishing-returns curve to where it is worse than ineffective. (Remember my articles last year warning “The Fed is Dead?”)
This time, Skyrm views high demand for the Fed’s low-return reverse repo facility as a sign that the central bank’s roughly year-old $120 billion-a-month bond-buying program no longer works as intended by adding liquidity to financial markets, and should be scaled back.
If the Fed wants to maintain its 0-0.25% fundamental interest rate and avoid negative interest that the banks are pushing into being, it has to soak up the slop, or banks will go lower just to avoid an even worse hit from inflation. this is the kind of thing I was talking about when I wrote recently that the Fed is going to increasingly find its hand is being forced.
According to Skyrm,
“On March 17, a little over two months ago, there was no volume at the Fed’s RRP window. Nothing. Today, it was almost $400 billion! How do you go from zero to $400 billion in two months? Not only was today’s activity at the RRP one of the largest ever, it was also THE largest non-quarter-end, non-year-end print. There’s an incredible amount of cash in the Repo market right now! Clearly, the Fed took too much collateral out of the market – or – added too much cash. The market is distorted from too much QE and hopefully QE tapering will be announced in June.“ZH
The repo expert sees this coming month as the pressing deadline for the Fed to announce tapering! If the Fed doesn’t act by then, this inflationary whirlwind could build into a fiery tornado.
Of course, if the Fed were to take his advice and announce it is tapering QE, the stock market would crash in a taper tantrum. As I wrote in my last article, the Fed is increasingly being squeezed between a damned-if-you-do and damned-if-don’t situation where it will be forced to deal with inflation, or inflation will do its own ravaging. The knot they’ve tied is rapidly tightening around their own necks.
I’m not saying nothing else can do the job before inflation fully gets here, just that the kind of inflation I’ve been writing about certainly will do it if nothing else does. That’s what terrifies the market and for a very good reason that may not be the first one that comes to some investors’ minds.
Many talk about the “risk premium” of investing in stocks. As inflation rises, bond yields rise to offset what will be lost to inflation. As bond yields rise, stocks become less competitive.
That’s a problem, but it’s not the big problem. Not this time.
The big problem is that we all know where the money for stocks is coming from — the Federal reserve and the US government by borrowing and distributing the money the Fed prints. So, the big problem is the Fed.
The Fed is getting tangled in a mess of its own making
Having made the case in a number of previous articles that high inflation is now already a given, it won’t be long before the Fed is caught in a trap where it needs to continue creating money in order to keep the market rising and to keep stimulating the economy, but it won’t be able to because it will be blocked by the inflation monsters it is creating. That’s why we hear the Fed talking incessantly about how inflation is “transitory” right now. The Fed NEEDS to have all investors believe that the rapidly dawning period of inflation will be short so it can be ignored. The Fed needs the market to believe it CAN and WILL keep printing money.
However, the Fed is just fooling itself. The longer it claims inflation is temporary so that it can ignore the rapidly rising numbers, the more inflation will move out of control because the Fed and the federal government keep the money printing and the armored cars for transporting it to the masses running around the clock. (Figuratively speaking, of course.)
The Fed may fool itself to its (and our) longterm harm, but it is not likely to fool the market much longer because the inflationary numbers will be coming in too high for the market to ignore. We saw that on Wednesday in how the market responded to news of the highest inflation in years — a number annualized at 4.2% in April, which is well below the level of inflation we’re about to see this summer. That’s just the wind-up for the strike-out pitch.
How inflation will fight the Fed and win
The danger inflation imposes is that, if it rises as high as I am certain it is going to rise (double digits), then the Fed will be forced to raise its interest targets because the market will shove interest up regardless, making the Fed look dumb for claiming an interest target it cannot hold. The Fed won’t be able to what it takes to hold interest down without creating massively greater inflation through its creation of new money.
However, it is not just that the bond vigilantes will wrest control of interest out of the Fed’s hands, it’s that the stock market will force the Fed to deal with inflation by fearing it whether the Fed says it should or not. Consumers will also press congress to press the Fed to deal with inflation. The longer it delays, the more massively the Fed will have to raise interest rates, just as Paul Volker did in the 80’s to get inflation under control.
This conundrum is starting to materialize now at a time when the stock market is at absurdly perilous heights. Faint realizations of inflation are no longer so faint, which is why the market is running out of momentum. Investors are starting to believe the Fed will lose control of interest rates. Investors are starting to doubt the Fed’s words of confidence.
Of course, to crash, momentum has to turn downward, and that won’t likely happen until the market is certain the Fed is going to lose control; but that can happen slowly at first and then quickly as it did in 2018.
Inflation is a time bomb on the Fed’s back. My thesis is that every month now the Fed is going to find it harder and harder to maintain the illusion that it can keep creating money, pumping it into mom-and-pop investor hands (retail investors, the Robinhood crowed, etc.) through government stimulus programs (at the government’s demand) and keep trying to maintain low interest to pump money into the stock market via corporate stock buybacks funded on loans. Inflation will crush easy money. It rule. The Fed can rule over it, but only by taking away money and crashing markets that are utterly dependent on that money.
The plate spinner is starting to lose control of all the plates it has to keep twirling on the ends of little sticks. Today’s action in the market shows the market is starting to pay attention to the clatter of falling plates as inflation shows up worse than investors feared. The real fear — the deep paralyzing fear that is only now being foreshadowed — is not competition from rising bond yields (certain as that is to come) but that inflation will become hot enough that the Fed will be forced to turn off all of its go juice.
Inflation has the power to suddenly turn market sentiment on its head because, well, follow the money back to where it is coming from.
Stocks headed sharply lower as inflation jitters percolated again, following a report showing U.S. inflation in the year to April rose at its fastest pace in about 13 years, amid the recovery from the COVID pandemic.MarketWatch
Inflation jitters will become inflation panic when it becomes clear that the rise to 4.2 is not just a blip but the first step on the consumer side of many steps to come. Hopefully none of my readers were paying much attention to economists who were forecasting a meager 3.6%.
“Inflation destroys wealth. Period,” said Patrick Leary, head of trading at Incapital, in an interview with MarketWatch. “We see inflation showing up in markets. If it’s indeed transitory, markets can live with it. But if it’s not transitory, that’s when it is going to become troubling for stocks.”
The destruction of wealth is one concern, but the bigger concern, I believe, is the loss of the Amazon-scale, easy-money stream into the market. This is why the market went up when the jobs report was truly horrible. The report of slackening employment eased feelings of concern about inflation causing the Fed to turn off the flow. Its why the market plunged today on solid news to the contrary of higher inflation than many were expecting.
The Fed’s hand may soon be forced by reality; and if you’ve been reading here — particularly the Patron Posts that focused intensively on inflation, you’ve had a good idea of what is coming. One won’t have to wait until the Fed tightens to stop inflation, however; one only has to wait until stock investors become convinced the Fed will have to tighten, regardless of what the Fed claims to assure investors it won’t.
As MarketWatch noted yesterday,
Tuesday is looking dicey for stocks, notably the technology space, as inflation jitters continue to ripple across markets. The sector has been bearing the brunt of concerns that higher inflation may prompt an early end to the Federal Reserve’s COVID-19 pandemic-driven accommodative stance. After last week’s downside jobs surprise, some fear Wednesday’s consumer price data could also deliver a nasty shock.
The market is top-heavy and jittery under its own load to such an extent that it will crash if it merely believes the Fed will be forced to tighten. That’s why it jolted as a foreshock today, but it wasn’t a shock at all if you’ve been reading here. It was expected.
Inflation is the “worst-case scenario” for this ticking-time-bomb market full of complacent investors, warns our call of the day from Thomas H. Kee Jr., president and chief executive of Stock Traders Daily and portfolio manager at Equity Logic.
And here’s the key:
“Arguably, the ONLY reason stimulus has even been possible is because there has been no inflation. If inflation comes back, all of the safeguards investors have been given (free money from stimulus) will be dissolved and won’t be able to come back to save the day,” Kee told MarketWatch…. He said recent jobs data indeed suggest price rises will be “more serious than previously thought….”
“The declines can be much worse than 25% and if the FOMC [Federal Open Market Committee] is handcuffed because of inflation, the swift bounce back that investors have been used to will not happen either,” said Kee. “The fair value multiple on the SPX SPX (^GSPC) is not 30 – [to] 35x. It’s more like 15x….”
What would bring that down to earth is the return of natural-risk perceptions among investors — severely lacking right now. “They have been given free money by the government, stimulus programs are in full effect, and investors don’t perceive any risk at all. That is the most dangerous thing!” Kee said….
“When the big buyer is not there … that is when natural perceptions of risk come back, and if that happens … watch out below!!”
You see, rising inflation has the power to cut the Fed off at the knees. The kind of inflation I’ve been writing about can suck the mojo right out of the Fed, and that is why Powell is already doing his best to convince financial markets that the Fed wants higher inflation and convince them that the higher inflation it wants is temporary before it even begins.
Notes Lance Roberts,
There is no way this bull market doesn’t end very badly. We all know that is the reality of this liquidity-fueled market, but we keep investing for “Fear Of Missing Out.”Seeking Alpha
How much does all that stimulus money from Fed and Feds pouring into the market create the cashflow that made the past year’s insanity possible?
Over the past 5-MONTHS, more money has poured into the equity markets than in the last 12-YEARS combined.
Do the math and ask yourself what happens if the money HAS to be turned off because inflation forces the Fed to stop creating to much new money in an environment of to few goods due to previous COVID-shutdown shortages and the continuing problems they’ve set up.
And, if you don’t think the market is precariously riding high on easy money, look at how much it is rising on rising margin debt (money owed to brokers):
When the Fed is pressed hard to raise interest rates and stop printing money, brokers aren’t going to be so free in lending money. Right now, it’s easy money at almost free rates. More to the point, though, when the market does start coming down because of concerns about the Fed cutting off easy money, all that margin debt starts unwinding in a hurry as people are forced to sell assets and reduce their margin debt.
As you can also see, huge, rapid spikes like this in market debt tend to happen right before severe crashes:
In the short term, fundamentals do not matter. However, in the long term, they matter a lot.
Sentiment can cause investors to overlook economic fundamentals for a long time, but a sudden change in perception of fundamentals long overlooked in an environment of high margin debt and bring a rapid correction of one’s frame of reference.
Currently, investors are overlooking fundamentals on the expectation the economy and earnings will improve to justify the market overvaluation.
That is not likely to happen. Even if it does, perception of the financial landscape (the core value of of money) has been far too optimistic in most circles, as seen by the shock today; but you could see this coming from a year away.
The Fed talks as though it still doesn’t see what is coming, but that’s the same Fed that talked about how easy tightening was going to be. It appears it had no idea that it didn’t have an exit plan that wouldn’t send sentiment sharply south and crash the market. Yet, that, too, could be seen from years away by those who were not worshipping at the feet of Father Fed.
When, or if, expectations of recovery are disappointed, the market will begin to reprice itself for its intrinsic value. Given that the market is currently trading more than twice the level of underlying economic growth, which is where corporate profits come from, such suggests a significant risk.
That’s why the Dow fell 682 points (2%) today, and the S&P fell 2.14% and the NASDAQ, 368 points (2.67%). There wasn’t much of a safe space to be found in stocks.
Don’t tell me inflation doesn’t matter to this market. Worst day in six months. More on this in another Patron Post.
Now let me, once again, do the kind of corrective reporting I said was going to be essential at this time. First, the fake news:
One big reason for the acceleration was base effects – at this time a year ago, the economy was hit with the worst of the Covid pandemic and inflation was unusually low.CNBC
That isn’t accurate. As I said in my last Patron Post, wherein I also laid out the statistical facts and source to back up my statement,
Food prices and many other prices rose like they normally do last March, in spite of the pandemic. In fact, after March, they rose worse than normal with every month in the remainder of 2020 coming in between 3.5% and 4% on an annualized basis.“Inflation Tsunami Sirens Are Screaming!“
I noted in particular one economist who said groceries and fuel were now just making up for last time:
So, like groceries, gas is catching up to get back to where we would actually expect it to be….
What predominantly happened last year was that fuel prices plummeted due to nothing being transported and lack of vacationing and lack of commuting, but groceries? Come on!
“Catching up” may be true for gas if you look back to where prices were in 2018, but it’s total horse manure when you embrace groceries in the comment. Groceries have no catching up to do whatsoever. The average rate of inflation for food for all of 2020 was 3.4%, which compares to rates that 0.3%-2.5% for every year going back until 2011 where the average for the year was. 3.6%.
And while overall inflation was less than normal for April through June last year, what does that have to do with this year? [Overall] prices still rose last year; so, it is NOT as if you are comparing to an anomalous year where overall prices fell in those months, meaning some of this year’s gain was just making up for last year’s unusual loss. Then you could truthfully say there was a base effect.
So, inflation is coming in much hotter than the Fed led people to believe; and, as my recent Patron Posts have laid out, there is plenty more inflation already baked in on the producer side that will certainly be passed through. I noted you could expect to see that starting to show up on the consumer side now, and you just did. It’s going to be an inflation-hot summer, which can sour sentiment, so stocks won’t take well to that. To be sure, there is a lot of testosterone still determined to press stocks up no matter what, but a hot and humid summer will zap that sentiment, as it did today; and it will keep zapping it no matter what the charts readers are prognosticating based on current sentimental trends. Trends can change quickly in the face of facts if the facts crash in with enough vigor. I think high inflation is the much-feared fact that can break through by stopping the Fed’s plans from moving forward.
If the Fed does keep moving forward with the same kind of blind ignorance and stubborn resolve to prove itself right that led it to keep pursuing its economic tightening regime (as I claimed it would do for too long in 2018, contrary to good judgment), it will really be making things worse for itself and harder to tame. I think that is not unlikely.
“There are people who think the Fed is not just behind the curve, they’re maybe missing the point and by the time they start to play catch up, it’s too late,” Wall Street veteran Art Cashin said WednesdayCNBC
As one economist noted,
“We doubt this report will change the view of officials that inflationary pressures are ‘largely transitory,‘” wrote Michael Pearce, senior U.S. economist at Capital Economics. “It’s just that there’s a lot more ‘transitory’ than they were expecting.”CNBC
Indeed. A lot more. What will they do when they run out of a fake base effect to blame it on?
This past week we got to observe Fed Chair Jerome Powell and the US stock market and the US bond market do everything I said they would do in their complicated shuffle of ships-and-icebergs:
“I’m sure many helium-headed stock investors believe the lilly-livered Fed will turn tail and run from its goal of letting inflation rise as soon as bonds begin to clobber stocks more seriously…. I believe the Fed is more committed than ever to raising inflation as it has been saying it wanted to do for years.”“Stocks in Bondage but Fed Not Fazed“
While bond yields had already begun to rise and compete against stocks, the Fed stayed the course, iceberg dead ahead. As a result, longterm bond interest rose even more because the Fed did nothing to jawbone the idea of increasing its bond-buying QE to take interest rates back down (which it accomplishes by purchasing US government bonds from banks to take them off the market, putting them on its own balance sheet).
You see, the Fed is — I believe — caught in its own catch-22. Usually, to lower interest (in order to stimulate the economy and hit the higher inflation number the Fed says it is targeting), the Fed would buy more bonds; however, buying bonds and adding them to its balance sheet tends to create more money in the system, and the bond market is already afraid of rising inflation because much of the new money is now going into the hands of average people. (This game only worked when all new money was going into the stock market.)
As a result, aiming for higher inflation by purchasing more bonds will cause the reinvigorated bond vigilantes to up their demand on bond yields to cover inflation, making it impossible to lower longterm yields by purchasing bonds.
The Fed’s old game isn’t working like it used to. My prediction for this March’s meeting of the Fed minds was that the Fed would do nothing because it is stuck. Or, as I put it,
The Fed, having realized way too late that it cannot ever unwind its balance sheet, may be reluctant to return to the full-on QE it formerly hoped it could actually unwind now that it knows it cannot…. The Fed doesn’t want to go higher faster than it already is if it can avoid it….
The Fed simply can’t stop; but, even at a rate of climb matching former periods of QE, bond interest rates have been rising vigorously, rather than sinking as they used to during former QE…. [Thus,] those interest rates will keep rising because the Fed clearly is not soaking up bonds fast enough to keep interest down even with the present strong QE support…. The bond vigilantes have the Federales encircled!
The Fed is caught between the rocks and an iceberg
… and that’s a hard place to be.
The Fed doesn’t want to do more QE anyway, but they also cannot do less. Thus, as Sven Henrich agrees below, the Fed can’t stop, and it has no end-game:
Henrich, noted as I do, that the Bond vigilantes did not let up from hammering the Fed over its decision at the FOMC meeting:
First let’s be clear Jay Powell’s maestro performance appears very much challenged at the time of this writing as the bond market appears to be openly challenging the Fed by producing new highs in yields:Northman Trader
As I was arguing, the Fed cannot stop interest rates from rising, even if it were to buy more bonds. Henrich illustrated that with the following graph:
That’s the bond market equivalent of dropping the hammer on the Fed’s happy narrative and risking losing the new [stock] market highs that ensued on the heels of Powell’s comments yesterday. Failed highs on charts never look pretty and risk a reversion trade of size especially as tech is once again under pressure in overnight following the renewed rise in yields.
Although the stock market actually shot up right after Powell’s press conference and bond rates relaxed for the remainder of the day, making it look like I was going to be wrong about rising bond rates killing the stock market in the weeks ahead, I can tell you with candor I had no concern. I felt completely confident the day’s moves would the very next day prove to be nothing more than a knee-jerk reaction of investors hitting the hopium, and both stock and bond investors would see the light with clearer heads by the next day. They did.
As one commentator on Seeking Alpha summarized that day and what would ensue, stocks shot up because …
the Fed gave the equity market exactly what it wanted, lower for as long as possible. Unfortunately, the bond market doesn’t seem as pleased, which will be horrible news for the stock market. Rising rates are crushing growth and technology stocks, and soon the rest of the market will follow because there are very few if any “cheap” sectors left in the market.Mott Capital, Seeking Alpha
A force to be reckoned with
The NASDAQ has struggled excruciatingly against the backdrop of rising bond rates, and, after a week or so of reprieve earlier this month, it reverted back to that downtrend as a result of the past week’s FOMC meeting:
As Sven notes, what the NASDAQ does, as the former leader of the stock market, is now critical if it cannot continue to lead, as its failed recovery attempt indicates:
Because, like in 2000, if you lose tech you may eventually lose the entire market even though the market may pretend tech is no longer important.… And be clear: $SPX, $DJIA and $RUT making new highs while $NDX is clearly not is an important sign of divergence:
In 2000, that took six months or so to play out. However, we MAY have seen the start of the rest of the market capitulating at the end of the week as the Dow and S&P both, in my opinion, seemed to realize the bond vigilantes are serious and are in the game to stay. The Dow plunged pretty significantly on Thursday and Friday as cooler heads digested the Fed meeting.
MarketWatch, reported the end-of-week event this way:
Zero Hedge reported it this way:
It’s been a familiar pattern for most of the past year: Newbie investors chasing upside in single stocks as professional money managers position for more trouble. This month, the sentiment gap between these groups has all but disappeared.
Blame that on a selloff in tech high-fliers popular among amateur investors and a widening rotation into value names.
You can dream all you want, as many do, about how the volatility of the last couple of weeks is just a rotation from growth stocks into value stocks; but I think we have a much bigger change in play here, and the downdraft of the leaders (the tech stocks that dominate the NASDAQ) will suck the overall market down like a sinking ship takes down swimmers that are too near its disappearing hull.
Or, as Barclay’s phrased it in more technical terms:
The equity selloff had a larger impact on retail investors as large-cap tech/growth stocks which generally overlap with retail favorites took a bigger hit, relative to other sectors….
A sinking ship drowns all life boats
That is the gist of it. The downdraft in the wake of the hugely overbought tech stocks that are sinking is a much bigger flow than is likely to be offset by the buoyancy of prices in value stocks. That is, in part, because some of the outflow from tech will now go into higher-yielding, safer bonds now that bonds are waking up from their decadal sleep (not to be mistaken with bond funds that are full of lower-yielding bonds at this point, so may lose investor money — one of the major weirdnesses of the supposedly safe-haven yet highly speculative bond market).
How deeply the rising yields in bonds will tear into the stock market at this point, I won’t say because there are so many government and Fed stimulus lifeboats floating around that would normally cause the stock market to rise.
So, we’re caught in a complex interplay of competing forces. It’s not going to be an easy course to predict or navigate, but my primary thesis is that Fed effectiveness is falling apart because the costs of its interventions (interest and inflation) are weighing heavily against the benefits. (In other words, the Law of Diminishing returns is on the downside of its curve now for the benefits of Fed stimulus actions.)
ZH, in the article above, referred to this interplay between stocks and bonds as
a sea-change from a long-term pattern
You see, it is not just bond competition that is syphoning money out of stocks, but that new dynamic between bonds and stocks is also having its own impact on the risk appetite (i.e., sentiment) of the newbie players that came to dominate the stock market in 2020 — the Reddit Raiders and the Robinhood crowd:
As bullish sentiment among retail traders faded during a rout, so did newbie traders’ participation. As yields rose and the Nasdaq 100 plunged into a correction, retail traders stepped back and trading activity among institutional investors topped retail for the first time since May 2020.
Also, as I noted in my earlier articles, bond yields aren’t likely to swamp stocks with too much savagery until the ten-year hits 2%.
The newbies may regroup after they figure out what is happening here and the cheerleaders like Dave Portnoy take them on new adventures into value stocks; however, we’ve seen many times in history how the worst market crashes happen on the backs of the newbies as the older “smart money” sells into their vain, testosterone-fueled enthusiasm (sentiment) and lets them take the losses.
I’ve warned before about how often the ecstatic newcomers, who have bragged about how easy they suddenly discovered it was to make big money in stocks, become the ready stooges the smart money sells to on the way out the back door. That’s how “old money” gets to be old money.
The treasury’s ship is breaking apart
Yields are rising, prices are falling. One of the areas that Powell was completely silent about — vocally silent about by stating the Fed will wait to deal with it later — is a Fed restraint on banks called SLR, which controls how much of a bank’s reserves can be held in treasuries.
To support all the COVID stimulus last year, the Fed removed the restraint last April, but that moratorium on the restraint, is set to expire this month, and that is where the sell-off in treasuries resulted in falling prices for existing bonds — a.k.a, rising yields on all bonds — back in February:
A chaotic selloff in the Treasuries market was spurred by a massive exodus from popular trades, heightened by liquidity concerns that could inflict more pain in coming days. The exodus happened at a time when traders were already worried about the imminent disappearance of a support beam for the market — a regulatory exemption that has allowed banks to accumulate more U.S. bonds.
Treasury futures open interest across a range of maturities sank by a huge amount Thursday: the equivalent of $50 billion of 10-year notes. It didn’t help that this coincided with the Treasury Department selling $62 billion of seven-year notes, an auction that proved to be a disaster….
Back in April, the Federal Reserve tweaked its rules to exempt Treasuries from banks’ supplementary leverage ratios — allowing them to expand their balance sheets with U.S. debt. But that relief ends March 31 and what happens next is something of a mystery.“A $50 Billion Unwind Fueled Treasuries’ Rout. It Has Room to Run“
For now, the Fed chose to keep it a mystery; but this is where the bond vigilantes have, as I said in my last article, their guns in the Fed’s back. The noted disaster in treasury auctions will become much worse down the road if the Fed allows the SLR moratorium they have in place to end in March.
First, banks will be forced to sell treasuries at the same time the federal government is emptying its massive Fed bank account of money in the form of stimulus checks. The confluence of these two large cash flows could create a lot of monetary turbulence, which could become even more disorderly than what we’ve already seen:
“It wasn’t an orderly selloff and certainly didn’t appear to be driven by any obvious fundamental continuation or extension of the reflation thesis,” wrote NatWest Markets strategist Blake Gwinn
Later, if the federal government’s big infrastructure stimulus programs are approved, the government will no longer have those banks that just tried to reduce their bond holdings to sell bonds to in order to fund the programs. The Fed may, then, have to suddenly reverse itself on the SLR moratorium, and the Fed doesn’t like losing face that way, even though it keeps losing face in major ways as it did with its original unwinding of its balance sheet and the 2018 stock crash and 2019 repo crisis pileup that it created until it fully reversed course.
In short, it’s all getting more complicated, and the Fed’s ability to navigate is being constrained. To put it in blunt but appropriate terms, the Fed is the market’s bitch right now. When the Fed finally does raise its interest targets, it will be merely to try to get back to looking like it controls the financial market, instead of the market controlling it. It will, in other words, just be matching its targets to what the marketplace has already done.
Or, as another Seeking Alpha commentator called it,
If the Fed wants to hold yields down, they will have to actually do something. They did not follow this course. They made numerous statements, but any actual action was missing from the pronouncements. Words alone were not enough to hold rates intact, as I suggested would likely be the case.Seeking Alpha
The commentator applied the same metaphor I did in my article last week:
Pretty tough to control the crowd with words when the rest of the boys have a loaded pistol near at hand.
The fact that things are not responding to mere Fedspeak and are even doing the opposite of what Fedspeak is intended to accomplish is, I think, partially why the Fed put off dealing with the SLR situation … twice. It didn’t want the news about that to upset what was already considered a nearly impossible situation for Powell’s announcements last week.
I think an even greater factor is that the Fed is reluctant to take action that it will likely have to reverse, making itself look even more incompetent, just as it had to do to end the Repocalypse it created.
I posit the SLR situation is serious enough and difficult enough that the Fed decided it merited a meeting of its own and an announcement of its own, or it would overshadow anything the Fed did and announced last week.
As noted in the Newsmax article, US treasures saw record low demand in a recent auction of seven-year bonds. They’ll see much lower demand if banks are no longer buying due to the reinstatement of SLR restrictions AND the resulting offloading of those treasuries the banks already have at the same time. So, the Fed needs to massage this through … or keep the SLR moratorium in place for a much longer time as the government looks to be needing more banks to buy for the foreseeable future, not less.
While the Fed may want to end its SLR moratorium, doing so could crash the bond market, which is far bigger than the stock market but which would also crash the stock market by sending longterm yields soaring, making bonds all the more competitive to stocks.
(Falling bond prices means the same thing as those who already own bonds or who want to issue new bonds having to offer higher yields to investors. One can also look at it this way: when bond prices plummet, it becomes more attractive for people to take money out of stocks in order to scoop up bonds — existing or new issuance — at bargain prices.)
Rising bond yields are damaging to stocks for a number of other reasons as well:
It may be dawning upon the markets what the costs of higher interest rates will do to not just the yields of Treasuries, but the yields of mortgages, corporate borrowing, bank loans and other credit-related instruments. The price to pay for higher yields is not just confined to the Treasury markets, I can assure you.
Even so …
For whatever reason – and it certainly may be because they simply have no idea how dire the consequences would be, it now appears that there is a full-court press by the administration and Democrat politicians to not renew the SLR and unless the Fed steps in and overrides this, brace for impact as banks will have no choice but to dump tens of billions of holdings into the open market sparking the next full-blown crash as first yields soar and then all high-duration stocks, i.e., growth names, crater.Zero Hedge
As always, the Fed has no end game
As Sven said, “What’s the end game here?” (And as I’ve often said, “The Fed has no end game.” The Fed just keeps boxing itself in tighter with all of its interventions.
Back in February,
the selling was triggered after a U.S. auction of seven-year bonds saw record low demand. The bid-to-cover ratio — a gauge of investor interest — came in at 2.04, well below the recent average of 2.35. That sent five-year yields surging through 0.75%, a crucial technical level watched by investors as a signal that any bond selloff could worsen.“A $50 Billion Unwind Fueled Treasuries’ Rout. It Has Room to Run“
The Fed’s solution for all the market distortions that are starting to gang up against it has been either to attempt to back away from its interventions and then fail at backing away from its interventions so it has to jump right back to more of the same … or to kick the can further down the road, which avoids the unresolvable problems for now at the cost of making them worse in the future.
The bind the Fed is in is getting outwardly and obviously dangerous:
The yield spike sent traders scurrying to manage their positions…. Preliminary open interest in Treasury futures across the curve — a measure of outstanding positions — collapsed by an amount equivalent to $50 billion in benchmark 10-year notes.
As Fed interventions pile up, so does the difficulty of managing their side effects.
“We think that a steep decline in market depth contributed to the outsized moves in yields,” wrote JPMorgan Chase & Co. strategist Jay Barry…. Bond traders were already on edge as they waited for Fed guidance ahead of next month’s expiry of a regulation that has encouraged banks to buy Treasuries [the SLR moratorium]. Neither Powell nor Randal Quarles, the vice chair for supervision, gave an answer as to whether the measure would be extended, which likely helped extend a clearing of positions in the swaps market.
That was all written in late February, and the Fed made the same punt this past week.
Credit Suisse strategist Zoltan Pozsar said clarity on this situation is one of the things needed to calm long-term Treasury yields.
Investors didn’t get that … again … in March, and so the treasury sell-off picked up pace after the March meeting.
Treasury tightens the Fed’s room to navigate
And the challenge isn’t being made any easier by former Fed chair Janet Yellen, now the US treasurer.
The Fed attempts to maintain control of various rates (including inflation, unemployment and long-term interest rates) through its monetary policy decisions. In the past, poor choices arguably led to both the dot-com bubble and the Great Recession….
Powell has to balance economic recovery and employment against market bubbles and excessive inflation. That’s a lot of balls in the air… What if one drops…?
Enter Treasury Secretary Janet Yellen, who just threw a big monkey wrench in Powell’s plans to maintain any semblance of tight control over rates….
The Treasury is planning to “unleash what Credit Suisse Group AG analyst Zoltan Pozsar calls a ‘tsunami’ of reserves into the financial system and on to the Fed’s balance sheet….”
Excess money supply causes inflation. And the official cash balance sheet at the Treasury is about to fall by hundreds of billions of dollars as they flood the market with cash
For the present round of stimulus, you see, the government has already borrowed all the money it needs, which it has started pumping out as cash into the hand’s of ordinary “consumers” — you and me. Yet, it’s future programs, such as the much-talked-about infrastructure programs, will require even more borrowing.
Last summer, the Wall Street Journal noted,
When bubbles burst or markets spiral downward, the Fed suddenly comes around to the idea that markets aren’t so rational and self-correcting and that it is the Fed’s job to second-guess them by lending copiously when nobody else will.
In essence, the Fed has adopted a strategy that works like a one-way ratchet, providing a floor for stock and bond prices but never a ceiling. The result in part has been a series of financial crises, each requiring a bigger bailout than the last. But when the storm finally passes and it’s time to begin sopping up all that emergency credit, the Fed inevitably caves in to pressure from Wall Street, the White House, business leaders and unions and conjures up some rationalization for keeping the party going.
Testifying Tuesday before the Senate Banking Committee, Fed Chair Jerome H. Powell was pressed on that very point by Sen. Patrick J. Toomey (R-Pa.), who asked why the Fed was continuing to intervene in credit markets that are working just fine.
“If market functioning continues to improve, then we’re happy to slow or even stop the purchases,” Powell replied, never mentioning the possibility of selling off the bonds already bought.
What Powell knows better than anyone is that the moment the Fed makes any such announcement, it will trigger a sharp sell-off by investors who have become addicted to monetary stimulus.WSJ
On and on the market dysfunction goes, and I’m not saying the party is going to suddenly come to an end. I’m just saying that the Fed’s number of problems that it is managing is getting endlessly bigger with each intervention, and the Fed is appearing to do, as I said last spring would be the case in the present crisis, worse and worse at keeping all the plates spinning.
I don’t expect any market is going to give up quickly here, but clearly the fight is on in the bond market between Feds and vigilantes and between the bond market and the stock market, which is all to say, it’s looking, so far, exactly like I expected it would look after the Fed’s March meeting.
The chaos will continue until things fall apart
The stock market will be the last to see it coming, so probably the first to break. The bond market seems to have already seen, at least, one major iceberg dead ahead — inflation.
Short-term interest rates are likely to fall due to Yellen’s treasury dumping so much cash from the government’s bank account into the bank accounts of all tax payers this month, while longterm yields continue to rise due to inflation expectations from all that cash, steepening the yield curve. At short end of the yield curve, some analysts even expect short-term rates to go negative again.
The complications are everywhere. As I noted in my last article,
The market is raising interest on its own. The Fed won’t be thinking about increasing interest to cool inflation. It will be thinking about how to keep interest down and let inflation run a little hot.
That is exactly what we saw play out at the Fed’s March meeting and its aftermath. Even as the Fed kept a solid aim on allowing more inflation as the core of its meeting press statement, it saw longterm interest rates shoot up the day after the statement due to fear of inflation.
The purpose of letting inflation run hot isn’t supposedly for inflation’s sake! It’s to allow longer stimulation of the economy via low interest rates for longer. Instead, the Fed’s announcement caused interest rates to rise; so, nothing gained. That’s exactly what being stuck looks like!
Many, including Goldman Sachs, thought the Fed, at its March meeting last week, would hint at earlier interest-rate increases than it had been indicating. It did not. It held firm, as I was certain it would do, but to no avail. As I wrote at the start of the week,
A world bloated on debt has no stomach for even marginally higher interest.
We saw at Jerome Powell’s press conference following this past week’s March meeting of the Federal Open Market Committee, which attempts to steer the entire US economy under Fed monetary management, that the Fed did not shrink from its plan of creating more inflation at all.
However, we also saw that the bond vigilantes did not shrink from unloading their guns into Powell’s backside …
as 10-year TSY yields briefly touched 1.75% this morning in the wake of Wednesday’s FOMC…. As a reminder, Bank of America warned that 10-year yields at 1.75% was the level where correlations between risky assets and rates begin to change empirically, and 10-year yields above that level could become a headwind for the equity complex.Zero Hedge
I also noted in my last article,
It looks like we are entering those times I said were coming when the plate spinner can’t keep everything spinning and up in the air…. Nevertheless, I expect at this week’s Fed meeting, Powell will tell everyone that he hasn’t any concern about inflation or interest, but just remember he’s got a gun in his back.
As I figured, Powell was completely sanguine about inflation, but the markets (both stocks and bonds) reacted strongly, and the aftershocks are still playing through. Concluded Newsmax:
Negative short-term interest rates could be only the tip of the iceberg. We just might be looking at the end of what Bloomberg called “the everything bubble….” Powell and Yellen might be steering the U.S. economy straight into the iceberg.Newsmax
We might, indeed, see the end of the Everything Bubble. Behold the Titanic. Behold the iceberg.
And now for something totally ridiculous
I’ll close with this complexly ditzy comment of the week about the FOMC meeting and Powell’s press conference where the credit for lame ignorance goes to Crazy Cramer:
Man, Powell is such a hitter. He is relentless in his desire to help the underclass in this country. More than anyone. It’s truly incredible… and joyous!— Jim Cramer (@jimcramer) March 17, 2021
You have to be both dishonest and retarded to believe that. As Henrich points out, what the Fed has done for the past decade for the underclass looks exactly like this:
Only Cramer could say something so stupid and so sold out to Wall Street. Joyous times, indeed, for Cramer and his cohorts at the top.
“Remember that the market is a forward-looking indicator. Ideally, it is pricing in the gains of the next six to 18 months.”(Seeking Alpha)
Famous last words again and again. That sunny advice about today’s overpriced market was repeated again about a week ago. It is the same excuse that was routinely deployed at the beginning of this rally back in April and May and especially in June and July as the market recovered most of its losses in spite of all the gloom. “These prices are justified,” they said, “because the all-wise market looks forward six months or more, and by the start of 2020, the economy will have almost completely recovered.”
Everyone was claiming summer’s steep climb in stock values were justified because of the V-shaped recovery that was going to take place. Here we are a year later, and I’ll say what I said then:
“Poppycock,” said I said in essence. “The market is not forward looking at all; it is forward fantasizing.” I claimed the market was pricing in ridiculous dreams that were floated on hope and denial. It has been going up ever since. The frustrating part is that the market’s cheerleaders keep using the same justification, and no one calls them on it.
We are now at that point in time that was used last summer to justify the stock market pricing in a full recovery by early 2021, yet we still have unemployment and permanent Main Street business closures that are worse than the Great Recession. Those closures assure most of the remaining jobs are never coming back. Returning to full employment is a totally different challenge when you are talking permanently shuttered businesses versus recovering from temporary layoffs in businesses that kept running but at a reduced level, which can rehire when the economy comes back.
Early last summer, I said about half of the jobs would snap back quickly during “reopening,” but the ones that didn’t would show us the level of permanent damage from our global economic lockdown because those would be due to the businesses that offered those jobs being gone for good. That would be the reason for (the reality behind) the plateau you would see.
You can now see the recovery flattened months ago. In fact, unemployment is getting worse again. So, that scenario I presented is exactly what played out. About half the jobs were lost for good. Replacing them requires creating entirely new businesses, not just getting existing ones back up to speed. They are not just layoffs; they are businesses that got entirely flushed by am economic tsunami.
No truth penetrates this denial
How long can financial writers keep using the same excuse to justify new stock gains on top of the gains they already used that rationale for now that the future the stock market was supposedly wisely foreseeing has been proven wrong? Yet, there it was again about week ago. “The market is not overpriced and has room to run because it is forward looking.”
Now, you might say, “We’re getting there. By twelve months we’ll be there. And they did say six to twelve months forward looking.” Actually, I mostly remember hearing “March of 2021” or “Q1 of 2021.” Regardless, we’ve already stopped getting there. The unemployment numbers we continue to have are so bad that we would normally call them the worst recession since the Great Depression. And we’re not longer getting anywhere but worse.
So, how do you justify still more stock-market gains, as Mr. Eternal Sunshine above did, with the same flamboyent claim of a V-shaped recovery that we were told would be fully in place by this month? Here we are with the Dow having climbed another 6,000 points since the end of July. Has the market been pricing in a second full recovery since July?
It’s blatant self-deception that continues because we can’t handle the truth. The truth is that more than 90% of New York restaurants were still unable to pay rent as of the start of 2021. In fact, the number that could not pay rent grew every month during the last half of 2020. It didn’t get better. It got worse!
The truth is that thousands of restaurants in New York have already said they will never reopen. Many of those that are left are entirely dependent on government aid in one form or another.
“Ah, but that’s New York,” you say. “The city is now post-apocalyptic anyway. What do you expect from a city in a state with a womanizing governor with no economic sense who lies about the deaths of old people to cover his COVID failures?”
Fair enough, but that truth, while seen at its worst in New York City is true on a smaller scale across the country
So, let’s look more broadly:
8 Million More Living In Poverty, 9 Million Small Businesses In Danger Of Closing, 10 Million Behind On RentThe Economic Collapse Blog
“But that’s Michael Snyder,” you say. “He probably ran through school as a kid pulling fire alarms just for fun. He always sounds panicked.”
Ah, but there are plenty of solid facts behind his headline. While the rich are getting richer all over again, the Federal Reserve says America has 10-million fewer employed people than there were a year ago. Most of us are not feeling that pain because we have been under general anesthesia in the form of government and Fed welfare, which has actually pumped up the personal bank accounts of many of the unemployed; but what you have to see is that they are now dependent on that welfare for the long term.
You have to wonder how long the government can maintain these extraordinary gifts of money now that bond investors are getting nervous, which is causing the cost of federal debt to rise. You have to wonder how long landlords and banks can survive the forbearance laws that are helping keep the bank accounts of the forcefully unemployed flush. Even with all of that, more than 8,000,000 Americans fell into poverty in just the last six months.
The truth is that one-third of all small businesses in the US say they won’t survive the year without more government support. That is a lot of shuttered businesses lining the streets of your town by year’s end. Apparently, the market is pricing in hot air, not reality.
The truth is that 10,000,000 renters are behind in their payments, too, totaling $30 billion in value.
Airport travel remains down 60%.
The truth by the broadest measure — the old standard of GDP — is that the economy that was predicted to have fully recovered by this March is not only far below where the trend line was headed before COVID, but we haven’t even caught up to the same level we were at right before the COVID lockdowns began.
That line looks pretty badly broken to me … a year after all of this began. So, on the one hand, we still hear about the world the stock market believes in –the world most financial writers actually think is real — and, on the other hand, there is the world as it is — the badly busted line above, which looks far more severe and deeply damaging than the comparatively gentle dip of the Great Recession at the left end of the graph.
It’s hard for me to even imagine how anyone could believe in the world that the market’s champions believe in. It defies all sensibility to my mind. I think the world has gone insane. I’ve been saying recently the market was more precariously perched than at any time in history — totally out of touch with the broken line shown above. Now, at last, the the supposedly wise market seems to be getting schooled a little by some competition from the bond vigilantes.
Those in the NYSE pit will have a lot of cleaning up to do when the market finally catches on to and catches down to reality because reality isn’t about to catch up to it! I’ve held that line consistently, and I see no reason to revise my thinking.
The faint heartbeat of this week’s jobs report did not keep the stock market from trying to scramble back up to its record heights. The surging and plunging and scrambling for cash and closing of gates at Robinhood did not stop the rise either.
Robinhood became a broken arrow
Let’s just say market mania rose to such heights that stress fractures started to appear even in the most successful parts of the market of late. Robinhood became a victim of its own rapid success just over a week ago and had to limit stock trading due to a cash crisis:
Hours after saying there was “no liquidity problem,” Robinhood (RBNHD) drew on credit lines of $500M-$600M to meet lending requirements and separately raised $1B in emergency funding to avoid having to place further limits on trades, NYT reports … as users take their money elsewhere…. Other brokerages appear to be giving similar reasons for the Thursday halt, attributing growing financial pressure as opposed to the shadowy motivations claimed by the retail bros…. Webull CEO Anthony Denier told Yahoo Finance. “It wasn’t our choice. Our clearing firm gave us a call and said we’re going to have to stop allowing you from opening positions due to high volatility.”Seeking Alpha
Gamestop stopped up
Much of Robinhood’s market fever heated up around the trading of a little company called Gamestop. The nueveau riche retail speculator crowd on a Reddit trading conversation decided to gang up on the big boys who were shorting the stock and spike the value of little Gametstop’s stock solely because so many big-name investors were shorting it. It was a case of T-Rex facing death by a thousand velociraptors.
The retailers learned they had enough power in numbers to game Gamestock and force a short squeeze upon the mammoth institutional investors who were shorting the stock, forcing them to keep buying more of it to keep their positions open, causing the price to rise more quickly, causing themselves to have to buy even more in a feedback loop until they ran themselves out of ability to run.
The Robinhooders and Reddit vigilantes enjoyed a feeding frenzy.
Institutional investors are worried. No sooner had Citadel forked over billions of dollars to help staunch the bleeding of Melvin Capital — a relatively obscure hedge fund whose short on video game retailer GameStop was subject to a massive short squeeze — than Wall Street wags started whispering: “This is a contagion event.” And by Wednesday, when a slew of heavily shorted names were still soaring and the Dow ended the day down more than 600 points, one top manager told Institutional Investor that “every long-short hedge fund in the world is getting killed … Retail investors on a now-famous Reddit forum, WallStreetBets, [tried to] orchestrate a short squeeze on the name — which wasn’t hard, given that 140 percent of its shares had been sold short.Institutional Investor
It’s all fun and games now. The magical market mutated its own mania in COVID 2020 by divorcing itself completely from any thought of economic reality. It came untethered to such extent that there is nothing left but a speculators’ circus as the young investors of the retail crowd learn they can cut their teeth on the old folks and chew them up and make a lot of money before spitting them out. Therefore how much the company they are playing with is making in profits or ever can make is entirely irrelevant. All that matters is how it is being played or can be played as a piece on the game board. In this case it was the Gamestop board where a nearly worthless game piece became worth a fortune for a fleeting maniacal moment in time.
What damage this kind of daydream trading may do to individual companies and, thereby, to the economy, and to the market itself is irrelevant. It’s eat or be eaten. The crowd that is moving the market has learned the market is mostly a rigged game anyway (not a place to actually buy and own) and that, with social media to coordinate their efforts, they are lighter on their feet and more coordinated to where they can out-maneuver the larger dinosaurs.
Shorting stocks is nothing but casino activity anyway, so who can waste time feeling sorry for the primordial giant hedge hogs and others institutions that have been around for a long time when the young crowd finally figures out the game, deploys its own familiar technology and decides to eat dinosaur for dinner?
That, however, doesn’t mean this won’t at some point soon become devastating when the little guys who are large in number discover the dinosaurs still have game and fight back or when the whole market blows up because the feeding frenzy doesn’t care about fundamentals in the slightest but just about who is going to do what next to whom and how to get them to do it faster.
We’ve, thus, market’s end time I said we would soon reach if stocks continued to rise above such basic fundamentals during the COVID era as sales and revenue. At first corporations and their investors agreed upon tricked-up earnings from fancy accounting to lay in their fantasy flight plans. Then they inflated earnings for YEARS by stock buybacks because earnings are quoted “per share,” and buybacks reduce the number of outstanding shares. Finally, the sudden stripping away of corporate taxes in the Trump era made earnings that were again looking weak suddenly look great again, but that wasn’t because business was improving; it was just because the bottom line exploded due to fewer taxes being taken out. So, throughout the past decade earnings were not rising because business (the economy) was thriving but because they were distributed over fewer and fewer shares and calculated by fancier and fancier means.
No one cared. No one cares still.
All that mattered was that the headline numbers kept getting better for years. So, the market soared far above the economy. Eventually, the Robinhood and Reddit crowd said, “Let’s tear all the tethers loose. Real economics haven’t meant diddly squat to this market for a long time now anyway, so let’s not even pretend to care about earnings, let alone sales and revenue or where the COVIDcrash is taking the world economically. Let’s bet this thing to the moon, regardless of the economic reality we are in.”
The Reddit raiders
It works like this: First the call goes out:
“Want to cause a margin call on Maplelane Capital. All the info you need is here,” it said, adding a screen shot listing all of Maplelane’s put options, which included other names like GSX Techedu, iRobot, and National Beverage Corp — also shorts of Melvin’s.
Then the Reddit readers and raiders all pile in on a coordinated trade. Gaming the market is no big deal with the SEC rules committee because its all games now. It’s no big deal on the ethics side either because …
Maplelane … was a hot, relatively new fund whose founder came out of a prominent firm shut down as a result of the insider trading scandals that rocked the hedge fund world a decade ago.
Garbage in, garbage out, garbage back in again, and now garbage back out again. So, how cares?
“The short squeezes are causing major pain,” said another hedge fund short seller earlier this week. “It will trickle over to the long books soon.”
Well, the hedgehogs, care, but who cares about them? They mostly thrive on the failures of business anyway. So a few hedgehogs go out of business in a matter of weeks. Who will miss these prickly little beasts?
Now, maybe Maplelane’s founder was not one of the inside traders from the previous generation that he emerged from, but just a lucky escapee of an earlier scandalous hedge fund. I don’t really care. It seems to me like half of them are scandalous anyway.
The hedge funds have all been playing their own short trading games that have nothing to do nearly all of the time with owning a business because it’s doing well. They have nothing to do with that quaint idea that the stock market exists in America so that Americans can buy interest in businesses they would like to have a share in because those businesses are profitable. They are just the oldest or near-oldest of the institutional gamers. You can always, of course, go back further; but they are the ones where gaming the market proliferated. Now they are being out-gamed. Who cares?
Does anyone even remember the old-fashioned idea of “buy Coke stock because people will be drinking Coca-Cola for decades to come, and you can own a share of the dividends?” I don’t think so. Maybe Warren Buffett, the oldest of the old. He’s almost quaint now, too, though he may be the last one standing because he’s the last one of size that makes any sense, and the senseless shall ultimately perish of their own foolishness.
Please! I maka me laugh! So charming is the old idea that a market exists as a place to buy ownership in a strong business to add to your retirement … or to buy a weak business, knowing you can strengthen it, not short it, Buffett style. When fools and their greed run the world, it may be everyone perishes. Whether or not even the likes of Warren Buffett can survive this buffet of gambling games is hard to say.
End times may be near. The final stage I said earlier this year we would soon enter is where bankrupt companies trade as trillion-dollar chips in the Wall Street casino because business names are nothing anymore but place holders on the trading boards. Their actual business doesn’t matter at all. All that matters is what the odds are that the other players are going to bet in a certain direction and whether or not you can game the other players.
Nearly bankrupt Gamestop just won’t stop
We just saw a 3% one-day plunge in the S&P bouncing right back to big gains, and that happened on the day the Federal Reserve said it was going to keep the money stops all the way out for months if not years to come. It happened even though no important economic/business data was released that day because data doesn’t matter any more than the Fed’s promised moves matter anymore. No one is even paying attention.
The market is shuddering but still rising. It shudders because the Reddit raiders are exploiting weak points they can find in a totally flawed, long-rigged system, which is outraging the old riggers as they have to figure out the new rules of the game.
Greed overwhelmed fear…. Market professionals watched drop-jawed, as day-traders more than doubled the price of a moth-eaten video game retailer, Gamestop, during the Thursday session. A $3.5-billion hedge fund, Maplelane Capital, lost a third of its value shorting Gamestop in January.Asia Times
So, the Reddit raiders took a nearly penniless stock to record highs and tapped energy out of numerous other stocks in the process so the market overall fell off a cliff while nearly worthless Gamestop became the game of the century! It had nothing to do with what Gamestop was worth. It happened because the Reddit crowd said, “Let’s eat the people who are shorting this failing company” and because Elon Musk tweeted, essentially, “I’m in!” Musk is the mania maverick. So, the race was on.
The day traders liberated from their brick-and-mortar jobs by the Covid-19 pandemic have become a legion of army ants, swarming into whatever stock Elon Musk might have mentioned in a tweet. Gamestop now has a market capitalization of $24 billion, against projected 2021 earnings of negative $126 million. There’s no rational calculation involved.
Nope. All it takes is a Musk mention. Just gaming on Gamestop in a market that has become nothing but hedging fund and games anyway. It was a great day to be an owner of the failing company IF you could sell the stock during that brief point where it teetered near the top of its dizzy trade. You could make bank that day by owning a failing company or by being the person who got it to such dismal business results. It pays to bet on a loser and pays to be the loser!
And it doesn’t pay to bet against [short} a failing company because losers become winners in the casino of trillion-dollar chips that have little or no intrinsic value. The other players will see many are shorting the failing company and put the squeeze play on them. The numbers are on their side. 140% of Gamestop’s stocks were owned during this short squeeze. How is that even allowable? Even possible?
The answer is as this has long been a rigged market. So, who cares if you own more than 100% of what there is to be owned? So long as the players are all having fun and some of are making bank, who cares? It’s all in the matrix, and the market matrix has been rigged for years. It is just that game has now reached maniacal levels — the very levels I said it was going to reach soon if it did not catch down to the economy during the COVID crisis but continued to rise in spite of reality.
This is what that looks like. And it will likely keep rising and spinning further out of control until the system blows apart under its own centrifugal force from years of its gaming itself by design … by greed. With all the shivering in the market today, it’s looking like that day could be close.
“It’s terrible because you’ve got me sitting here, taking short pain caused by these guys, still half-way rooting for them!” one hedge fund manager at a short-biased fund said in a direct message on Twitter. “That’s the state of affairs.”Institutional Investor
Of course, because how can you not root for the wily young team that is simply out-maneuvering the old bastards? It’s so funny to watch the old farts fall on their fat faces. It’s all just a game anyway.
That’s the state of affairs due to years of pretending business matters by allowing non-GAAP accounting measures, rigging share values via buybacks, pumping in vast quantities of new money from the Fed that serves only the richest of markets, cutting taxes for the rich on corporate income so corporate income can look like it grew again, etc. In the end, you have the fat bastards laughing at how they’re being beaten.
They’re all game stocks now.
It’s flashmob finance
And all of the above does not even get into the whole bots and algos game I’ve long written about, where each algorithm learns how the others work and how to cast bets in order to game the other algos. The article above just talks about human-level gaming. Add the algo’s rhythms, and no one has a clue how to dance to the music. Not a single sole knows what is going on beneath the surface of this mess because even the algo designers don’t know how their own algorithms have reprogrammed themselves!
As with the new human gamers of Gamestop (No, please, stop!), the algos don’t care in the slightest about the real economic (business) value of a company. They care only about how they can game the other machines. They are programmed to analyze what works to jigger up prices or jigger them down and make money by selling at the high and buying back at the low.
No one who uses the algos cares so long as the wheels are all spinning to make money. It’s all algos underneath, celebrity headlines on top, and flash mobs in the middle:
With celebrities pumping cryptocurrencies, and flash mobs engineering massive coordinated short squeezes … the stock market acts like a penny stock, declining by 14%, then rallying by 28%, then declining by 34%, then rallying by 66%.Newsletter Collector
Until the day the miserable machine breaks.
Here’s an example of the celebrity cultish silliness that has emerged: During this same timeframe …
Bitcoin’s value jumped more than 20% … on Friday after Elon Musk changed his personal Twitter bio to #bitcoin.
That’s all it took. “Elon’s in, I’m in!” How easy is it for Elon to rig a market. Buy a pocketful of bitcoins one day. Tweet “#bitcoin” at the end of the day. Sell out the next. (Not saying he did that, but it sounds like a sure bet in the crypto casino when star power is all power.)
He did the same thing with Gamestop, by just tweeting “Gamestonk!” Etsy also leaped 9% when Elon merely tweeted that he “likes” it. We probably all heard how Musk sent Signal Advance stocks skyrocketing 1,100% in about a day when he said people should use Signal (an encryption app), and he wasn’t even talking about the electrical components company that his followers ran for! Eleven times gains in stock value just about overnight based on a mere misunderstanding! That is today’s market. Totally, encryptically insane.
So, there are no brains here — just sheep. Just cult followers worshipping at the altar of Musk. Trump or Musk, pick your cult. So long as they are= rich and infamous, we will follow. So, what does any of it matter?
As if we need further examples of Muck mania, CD Projekt skyrocketed as soon as Musk tweeted that new Teslas will be able to play the game because … after all, everyone needs a car that plays games just like everyone needs a stock market that can’t stop with the games. It’s all games everywhere, and it stonks.
Trillion-dollar trading chips
Speaking of Elon Musk (sounds like a cologne) and Tesla, we come back to those trillion-dollar chips. While Tesla isn’t technically bankrupt (unlike Gamestop), that is only a matter of relativity … relatively speaking. After all Tesla finally managed to post a profit for the first time in 2020 (of $721 million). The previous year it lost more than that much ($862 million). In fact, it lost money in all previous years, going back to 2006.
There is just one technicality to its supposed rise to profitability during the past year. It only managed its first annual profit due to $1.58 billion in regulatory credits purchased from Tesla by other automakers, meaning those automakers that are actually making profits must offset their own failures to meet government regulatory emission/fuel standards by giving some money to Tesla. They are essentially buying carbon credits. So, Tesla still hasn’t made a dime off of selling cars. It is selling the concept of a minimal ecological footprint.
While Tesla’s new Model S “Plaid” aims to scream off the proaction line as the first production 0-60 MPH-in-under-2-seconds car in history and to become the world’s first fully self-driving car this year, Tesla can’ seem to drive itself to profitability without the government mandating other companies give it money when they don’t do as well at meeting emission and fuel standards as the government demands.
Actual profitability from cars not withstanding, Tesla’s stock has taken off higher and faster than one of Musk’s Space-X rockets from merely becoming America’s most valuable (but least profitable) automaker in January of 2020 (at a market cap of $86 billion) to becoming the most valuable automaker in the world by the middle of the year (at $206 billion) to having a market value at the end of 2020 that is greater than the next nine (profitable) automakers combined.
With a market cap in January 2021 that reached $880 billion, Tesla is pretty darn close to a trillion-dollar company; but it has, yet, to actually see anything but losses from actual auto sales. It came pretty close to fulfilling my prediction about a year ago that market lunacy, if it continued as it was going at the start of the year, would lift us to where a basically broke company is trading as a trillion-dollar chip in the Wall Street casino.
With most automakers now aiming for largely-electric or entirely-electric fleets by 2025, we don’t know if Tesla will ever become a profitable automaker because its margins will fall to competition, but it has sure been a profitable stock, having rocketed upward more than a thousand percent since the start of 2020. It pays to be the Robinhood/Reddit guru. Musk may not be able to sell a car at a profit, but he can sure sell the concept of a car as the market’s prophet.
[My next Patron Post will dig deeper into this market mania to show just how deeply disturbing the widening madness is to some of the older or bigger players as they finally see how detached from reality the market they’ve made has become. Like attempts at nuclear fusion reactors, creating trillion-dollar chips on the market boards out of empty place holders may be too unstable in terms of market price reactions to hold together long.]
Every couple of months, I bring us up to date on how the economy has changed, and the last couple of month have taken us predictably back into economic decline, following a summer burst of subnormal passableness that never got us out of the crater we fell into last spring.Read the remainder of this entry »
The following article comes with a surprising revelation — possibly an alarming revelation — at the end. Something big is happening at the Fed — the largest movement of “cash” in history. I don’t know what to make of it, because the Fed has been completely silent about it, and the mainstream financial press has missed it entirely. Crickets.
I published this article as a Patron Post exclusively for those who kindly support me at the $5 level or above before I knew anything about the big money moves that suddenly appeared in Fed data. I found those moves right after researching for this article. Because they prove the article’s theme, I added them after publication. (Patrons may want to make sure they’ve read the latest additions.)
Because these addenda may have great importance, given the scale of monetary change and the total quite on the Fed’s part about it, I promised all readers I’d share this article later with everyone for free and write another Patron Post just for patrons, but they got it days ahead of others because they support this site. I am, however, about helping as many people as possible, so here it is.
I’ve left the article below unchanged in substance, except for the updates at the end, but you’ll grasp the importance better if you don’t jump to the ending:
When I proclaimed last spring “The Fed is Dead,” I clarified, of course, that the Fed is dead in terms of its ability to single-handedly raise the stock market or the economy. In October, a former Fed head agreed:
While not nearly as provocative as his mid-2019 op-ed, in which former NY Fed president and Goldman partner Bill Dudley urged the Fed to crash the market to prevent a Trump re-election, which had the dramatic effect of a loud fart in a crowded room as countless “serious” pundits did everything they could to avoid discussing the fact that a former Fed official admitted that the central bank is i) more powerful than the president and ii) can arbitrarily manipulate markets at will … Bill Dudley took to his favorite media outlet … and in a Bloomberg op-ed … was forced to “explain” that the Fed is not bluffing when it begs Congress to inject trillions into the economy because – you see – after a decade of the Fed doing just that and enabling the terminal political dysfunction and polarity observed in US politics, the Fed no longer can do it.
As Dudley puts it, while no “central bank wants to admit that it’s out of firepower… unfortunately, the U.S. Federal Reserve is very near that point. This means America’s future prosperity depends more than ever on the government’s spending plans — something the president and Congress must recognize.”Zero Hedge
That is exactly what I stated last spring when I was probably the first to starkly state “the Fed is dead” while everyone else continued to believe the Fed could still single-handedly lift stocks and stimulate the economy. A few months later, ZH joined me in laying out how dead the Fed was. Now, I’m joined by a former Fed head.
That is why we have, ever since, seen the Fed dithering about doing anything apart from a joint fiscal operation with the US government. Simply put, the Fed is not leaping at the opportunity to prove, as it demonstrated last March, that in can no longer lift the stock market in any sustainable way on its own.
After all, every time the US economy needed a quick sugar high, it was not Congress but the Fed that stepped in to inject trillions in liquidity, or cut rates, or both, and since this calmed markets, it remove all political incentive and desire to take the difficult and in most cases, unpopular political decisions that would have created a Congressional tradition of passing fiscal stimulus when the need arose, in the process helping the economy not the markets.
The path is now more difficult because the Fed must convince congress to take action by holding itself out of the game until congress does add its own force. This, we are seeing again, as the Fed remains aloof while congress now dithers over whether to pass another stimulus bill, same in size as the bailout bills that were first passed during the Great Recession.
As I noted from the start of the Fed’s efforts, over which I began this blog, and as ZH says it also noted back then …
While Dudley will never admit any of this, he at least concedes something else we have said for the past 11 years: by pulling demand from the future by cutting rates and injecting liquidity, the Fed has merely doomed the economy to even more pain in the future. Note – not the market, which is at all time highs – but the economy, as even Dudley admits. This is how Dudley hopes to convince Congress that after doing everything to push stocks up, even if it meant zero impact for the economy, it no longer can do even that:
Dudley states without equivocation,
There’s always something more that the Fed can do. It can push down longer-term interest rates by buying more Treasury and mortgage-backed securities, or by committing to keep buying for a longer period of time. It can…. But this misses a crucial point. Even if the Fed did more — much more — it would not provide much additional support to the economy.
David Stockman has also long said that for the next go-around, which is now this go-around, the Fed is out of dry powder. Dudley lays out why that is in specific detail:
Interest rates are already about as low as they can go, and financial conditions are extremely accommodative. Stock prices are high, investors are demanding very little added yield to take on credit risk, and a weak dollar is supporting U.S. exports. The rate on a 30-year mortgage stands at about 3%. If the Fed managed to push that down by another 0.5 percentage point, what difference would it make? Hardly any. The housing market is already doing very well.
Even Dudley now gets how doing all of that over the past ten years just pulled our future buying power forward so that we don’t have any buying power left now that we have hit a true crisis:
… the stimulus provided by lower interest rates inevitably wears off. Cutting interest rates boosts the economy by bringing future activity into the present: Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing. The only way to keep things going is to lower interest rates further — until, that is, they hit their lower bound, which in the U.S. is zero.
I always said the Fed would learn that lesson too late. That’s why I’ve written my blog all these years to keep making it clear that this could be seen coming for the day when it finally got here. My hope has been that the Fed won’t get away with saying, “No one could have seen this coming.”
Rather, everyone should have seen it coming. If you use up all your stimulus powder pulling future buying power into the present to goose the present even when you are claiming the economy is basically strong, you have no reserve capacity left when you really need it.
Dudley even states that it is now inevitable that future returns on stocks will be lower, not higher, because there is no push or pull left to get the prices up.
In other words, in a world in which stocks must rise every year to boost the net worth of the average (if not median) American, the Fed has set the seeds for the next market crash.
That doesn’t mean there won’t be some temporary goosing that gives the market a nudge up here or there by extraordinary means, but the economy will not rise to support such valuations for years, and the free money from the Fed to keep squeezing things upward along a climbing path is increasingly is not easily doable now that it requires getting Republicans and Democrats to agree on stimulus and has some serious downside effects at this point in the diminishing-returns curve, which I can lay out in very simple, easy-to-understand terms below.
In terms of the agreement problem, if Democrats take the senate in January, there could be one more partial year of successful goosing because the government will become unrestrained in adding its full fiscal muscle to all the Fed can do.
The problem with the diminishing-returns curve, however, was already laid in and is essentially now unsolvable because the Fed made sure the economy and stock market are both fully addicted to full-on Fed stimulus all the time, as even Dudly now says:
When interest rates stay low for long enough, the policy can even become counterproductive. In the U.S., monetary stimulus has already pushed bond and stock prices to such high levels that future returns will necessarily be lower…. As a result, people will have to save more to reach their objectives, be they a secure retirement or sending their kids to college. That leaves less money to spend.
Save? How do you do that when savings offer zero interest? You longer you save, the more you lose … just to inflation. The Fed has made certain of that; but now it is caught in a trap because, as I also noted this year, we are finally entering a time when inflation could go up.
For years, I’ve completely avoided saying inflation was any risk for the year on this blog, always maintaining inflation would go nowhere each. year because money was not circulating in the mainstream economy. This year, however, I moved off of that position because getting the government involved means finally pushing money into the hands of the masses where it can rapidly cause general inflation.
So long as the government only pushes enough mass money to replace what people are not making due to unemployment, inflation may not be a problem; but if they yield to the new realization of their powers too far in the present environment, it will quickly become a problem because COVID shuts down a lot of production and transportation and even retail, resulting in too much money chasing too few goods, which is the classic formula for high general inflation.
The alternative way of looking at that is that, if the Fed and government both realize this, the inflation problem curtails how much support they can and will give, which can leave the utterly dependent stock market flailing and the economy stuck in the mire. In that case, you get moderate stagflation as the government tries not to spin the tires while powering through the mud, getting occasional tire spin (which is the inflation-no-growth part).
Dudley seems to recognize that his savings plan cannot possibly work because the Fed has cut itself off for good from the option to return to taking interest rates where they need to be in order to keep ahead of inflation:
Low returns will eventually take a toll. State and local pension funds, for example, will fall even shorter of what’s need [sic.] to cover their obligations. To make up the difference, officials will either have to raise taxes or cut benefits for pensioners. Either action will leave people poorer, depressing consumer spending and economic growth.
This brings us into exactly the catch-22 situation I’ve said throughout writing my blog the Fed’s solution to the Great Recession would lead to. I’ve noted from the outset, the Fed’s Great Recovery program was an “unsustainable” program, so it ultimately does not lead to real recovery, but only to eternal dependence.
You cannot lower interest rates forever; but the catch-22 is that, once you create an economy that is dependent on low interest because raising interest will crash businesses and individuals under all the debt your years of low interest enticed them into, then you have to keep going with low interest. You have to starve savers who need to save because low interest no longer is enough even to support overinflated stock prices. The Fed, I always said, was boxing itself (and the nation and the world with it) into a corner.
With that, Dudley (as I predicted last spring you would find to be the case) cries out to congress to supply the additional fire power necessary to sustain this Ponzi scheme a little longer:
What to do? No doubt, Fed officials should still commit to using all their tools to the fullest. But they should also make it abundantly clear that monetary policy can provide only limited additional support to the economy. It’s up to legislators and the White House to give the economy what it needs — and right now, that means considerably greater fiscal stimulus.
Therefore, as the Fed sits this week to decide what on earth to do, you can expect its actions, besides holding the present line of continued support forever, will be something that comes in cooperation with federal government support. With the additional muscle of nearly a trillion dollars in government support being co-concidered this week, the joint action of Fed and feds can move the market again if they can get to the point of cooperating, which I think they will realize they must do.
Without that combined force, any Fed action is likely to effect only a brief market bump, and then the next big market move will most likely be the Santa Claws plunge that claws back the November rally and the bump. With joint action, Santa may be all cherry-nosed one more time.
We are past the days when the Fed can move mountains on its own and achieve anything more than a reflexive bump — if that. That is the new paradigm to understand — the new financial environment for which the groundwork was laid throughout the Great Recovery.
UPDATE 1: Something is seriously wrong at the Fed. Do you want some SOLID PROOF of just HOW DEAD THE FED IS?
HERE IT IS:
The Fed and/or its members banks MASSIVELY increased cash money supply (M1) in the last two weeks of November, and you probably didn’t even know it happened! No one even noticed. And what did stocks do? They essentially held flat along the same ceiling throughout the time of this monetary mainlining.
Expanding that graph out, it looks like this with the last two weeks being the final almost-straight leap at the end, steeper than ever seen:
That is a massive amount of new cash money — historically massive — done almost covertly in the quickest burst ever — and yet it did not even cause the stock market to blink! The value of the dollar barely changed its slow decent (so far), and bonds barely budged.
Here is what the US stock market did from the time when M1 money supply skyrocketed:
You’ve seen graphs of the Fed’s increase in its balance sheet over the years with its huge jolts of QE. The graph above (and especially the one below) of actual M1 money supply are a little different. They show how little all of that QE actually impacted total “cash” money (M1 money supply) — the stuff that actually circulates on Main Street and in your home — over those same years. You see only a steady rise, no big jolts from QE.
That, as I pointed out all along the way, was because much of the Fed’s new money creation was locked in reserves or just circulated in financial assets. Because it never moved into the general economy it created no inflation.
All of that changed with COVID. The government finally stepped in because the Fed was unable to accomplish anything for weeks in March, as the article I referenced in my lead laid out. With the government finally joining in, M1 (cash) money supply skyrocketed (the first big surge in the graphs above) because the government put the money directly into consumer’s pockets and into business payrolls. Still no inflation because they were mostly making up for money lost due to unemployment.
The graphs, however, make it clear why inflation under the new regime could become a much more serious problem than the limp moves seen over all the years of the Great Recovery, the difference being how fast the Fed’s QE is now converting into cash (which means coins, bills, checking accounts and other demand deposits that can be immediately spent) — the most liquid form of money:
You can see the balance sheet over that same time period (the differences made by QE) and can see no big difference has happened in the last month:
Why have stocks not skyrocketed during this latest huge cash expansion? It may in part be because the federal government has not yet joined the Fed in the stimulus effort as it did when it added its muscle to the shover earlier in the year when stocks soared. All market eyes are on what the government is going to do this week, proof the Fed is now impotent in the stock market, until the government adds its muscle.
More importantly, why did such an enormous surge in money supply happen in the last two weeks of November with no financial articles being written about it and no statements from the Fed about it? What is going on behind the scenes at the Fed and/or US treasury right now?
It’s a little bit alarming in that it looks like something serious is breaking down behind the scenes. Maybe it is just due to the Fed implementing policy approved last spring with funds that remained unspent, but it all happened without a sound. The Fed’s policy notice subsequent to its November meeting contains no explanation, and the Fed likes to claim transparency.
The Fed did not increase QE or cut interest rates at its November meeting. Powell mentioned no policy changes at all in his presser. Yet, the burst in “cash” money supply after that meeting is unprecedented. Such a big rise in M1 without any increase in QE or cut in interest rates would indicate existing less-liquid money was suddenly turned into cash, but M2 didn’t change much.
Was cash jolt for emergency reasons? The Fed completely eliminated reserve requirements back in March as a COVID response, allowing banks to use reserves at will for emergency cash management, which is why the Fed requires banks hold reserves … so they can be deployed during dire times. (See: “Federal Reserve Eliminates Reserve Requirements.”) So, my first thought was that banks suddenly had have a massive need for emergency cash and moved money from reserves into circulation, but the Fed’s graphs indicate reserves plunged earlier in the year when the reserve ratio was eliminated, but that they have started recovering since then:
I’ve consulted economic discussions to see if I can find anything about this rapid increase in M1, and I have written to other financial writers, but I have found nothing but guesses. I did glean, though, that the M1 money supply shot up without the velocity of money rising. That, too, is a bit odd, but it indicates the money is being parked away somewhere where it is not circulating, except that stock and bond prices have barely budged, so it’s not going there. They would have to change a lot in order to absorb so much money and remove it from circulation by keeping it in financial circles. Plus buying stocks just makes the cash money someone else’s cash as you take the less liquid stock asset, and the cash you traded for it sits until someone else figures out what to do with it.
I’m still trying to dig out what is happening; but, as I say, I can’t find any reportage on it other than the data/graph that shows it happened. I’ve put in an information request with the Fed to find out how they explain this large anomaly, and I’ll let you know if I hear anything useful back.
UPDATE 2: The Fed has spoken, and it did nothing this week — nothing that lifted the market, no change of substance in any of its policies. It did as I thought it would and continued to wait until the federal government does something because The knows but does not want to prove it cannot move markets or the economy without the government’s muscle working alongside of it, just as I and ZH and Dudley have said. So, it sat on its hands at the last two meetings, waiting for the feds to join it.
The market barely budged in response to Fed insignificant actions, but that is big response of its own. Over the past decade, the market has been extremely attentive to the Fed and always slavering for more support. The fact that it barely moved, closing almost flat with its opening, is yet another indicator the Fed is losing its mojo. (Fed and feds when they apply their muscle synchronously, however, remain a strong force for the time being.)
Since the last update, I’ve done more research on other Fed programs, but there is no explanation for the big shift in money supply in those numerous programs either:
The Fed’s Special Purpose Vehicles are just idling on standby. Five of them go out of existence at the end of the year thanks to US Treasury Secretary Steven Mnuchin, who says they are not needed anymore (the PMCCF, SMCCF, MLF, MSLP, and TALF programs).
Fed corporate bond purchases are almost dead (down in hundreds of millions, nowhere near even one billion). Corporate bond ETFs have been out completely since July.
All Fed Repos have been cleared off the balance sheet — as in zilch. That, too, happened back in July and has remained near zero since.
Central-bank liquidity swaps have drained to almost nothing. Those exchanged liquid dollars to foreign central banks for their US treasuries. They are down to less than $10 billion per month — small potatoes on the Fed’s multi-trillion-dollar balance sheet.
And, as shown in the graph above, the rate of QE hasn’t changed since its first expansion at the start of the pandemic ($80 billions in US treasuries per month plus $40 billion in those dastardly mortgage-backed securities — a QE rate 50% higher than QE3). In fact, I think it backed off on its MBS purchases. The only change the Fed made in its December meeting this week was to clarify its present QE rate will continue until inflation hits and holds at the Fed’s target and the unemployment gets back down to where the Fed wants it. It also said that amount of QE could go up if needed, but that is not something the Fed sees happening unless the pandemic becomes much worse.
So, where has all the money gone? Looking over the Fed’s balance sheet, I could see no moves that cone close to that amount in those weeks. Be vigilant for inflation because big shifts into money’s most liquid form can create huge inflation IF we wind up with too much money in the hands of actual consumers or business operating accounts chasing too few goods. The cash is there, but where is there? I’m still looking for it.