Their instinct is to sweep it under the rug as no big deal, but I think it really is a harbinger of what’s to come.”
Peter noted that the Fed has been artificially suppressing interest rates, particularly since the 2008 financial crisis.
And by keeping interest rates artificially low, they have created a bubble that’s much bigger than the one that popped in 2008. And what happened this morning is you could see the air coming out of that bubble, because the market is trying to bring interest rates higher because we have no real savings in this country. We have enormous debt. Everybody is levered up to the max — government, the private sector, business, consumers — because rates have been so low, we’ve borrowed so much money. The market wants interest rates to be higher but the Fed doesn’t want that to happen because the road back to normal interest rates is a very bumpy one because it’s going to take us right through another financial crisis. So, the Fed is trying to keep interest rates artificially low and they almost lost control of it this morning. “
In effect, the Fed created about $50 to $70 billion out of thin air to supply the liquidity that the market needed.
But what happens next time? What happens if we need $100 billion? What happens if we need a trillion?Because eventually, we will. Eventually, the Fed has to choose between destroying the dollar and allowing the market to bring interest rates to a level that makes sense for an economy with this much debt. Then all hell breaks loose because we have a much worse financial crisis than the one we had in ‘o8.”
Peter said as far as the Federal Reserve goes, we are heading toward a recession, but the cure for what ails us is not cutting interest rates. He said we need to go through the recession and higher rates are part of the cleansing process.
But the Federal Reserve has no stomach for doing what’s right, so, they will cut interest rates becuase that’s what the addicts on Wall Street demand. So, we’re not going to have a real recovery. We’re just going to try to maintain this bubble.”
Peter reiterated what he’s been saying for months. The Fed will go back to zero. It might even go negative. It will launch another round of QE. But it won’t work this time.
Who in their right mind would loan the US government money for 30 years — you’re not getting your money back for 30 years — at 2% coupons for the next 30 years, waiting to get repaid?”
Peter touched on recent charges brought against JP Morgan employees relating to the manipulations of the gold price. He said price manipulation isn’t the reason the price of gold is relatively low.
It’s not much higher because too many people don’t understand what’s going on. You know, they have confidence in the Federal Reserve, other central banks. They believe in this bubble. They are as fooled now as they were going into the 2008 financial crisis. The difference was they were bailed out last time. As wrong as all the experts were on Wall Street and in other countries who couldn’t see an obvious crisis coming, when they were blindsided, their pals at the Federal Reserve and other central banks were able to bail them out. It’s not going to work this time. It doesn’t mean the central banks won’t try. But as I said, it won’t succeed. They’re going to destroy the dollar in the process, maybe even bring down the entire fiat monetary system. And gold is already rising. Gold is telling you on the ashes of this old system we’re going to resurrect the gold standard. Because that’s what we had prior to the dollar taking over. We had a much sounder monetary system then. We had a more viable global economy. Once we took the money out of the economy, once we substituted real money for fiat, that was the beginning of these problems and the end of these problems is going to be returning to honest money, which is gold.”
If Powell Is Serious About No More Cuts In 2019, “Expect A Forceful Campaign” To Convince Investors
Commenting on yesterday’s FOMC announcement, BMO’s Jon Hill points out that whereas the dot plot suggests the Fed is now down cutting for 2019, “consensus remains a 1990s-style 75 bp of aggregate easing followed by an on-hold period to assess the impact of the recent moves.” And while the dot plot showed a dramatic schism within the FOMC, with 7 members expecting more rate cuts, while 10 happy with rates either where they are or higher, “in its own way, the Fed has tacitly endorsed this assumption by not shifting to a data-dependent stance this week.”
To be sure, as Hill notes, “it was a formidable communications challenge and given the muted market response to yesterday’s events, Powell can chalk this one up to a win; or at least a non-loss.”
Furthermore, it’s not as if the dot plot is indicative of anything: back in June, the Fed’s Summary of Economic Projections did not expect any rates cuts for 2019; three months later it had already delivered two.
In any case, the degree to which additional 2019 easing is priced in or out in the near-term will be useful in gauging how one might expect policymakers to respond via any coordinated Fed-speak. As such, according to the BMO strategist, “In the event a final 25 bp cut isn’t the default position of core Committee members, then a campaign to dissuade investors from this assumption will begin in earnest.” To be sure, one look at the Fed Funds market shows that while the odds of a December 2019 cut are still well above 50%, they are shrinking fast, with the probability of not change up to 30%.
Of course, the same is true in the other direction, and if the market starts to reflect growing expectations for more than a final quarter-point cut in this ‘fine tuning’ endeavor, that’s an environment in which BMO would look for more intermeeting guidance from Fed officials. “Watch this space.”
Meanwhile, looking at the bond market, the fallout on the rest of the US rates complex from any clarity vis-à-vis the path of policy comes down to the ongoing debate in the shape of the curve; policy-error flattening versus reflationary-steepener.
This dynamic according to Hill, is not new, although it is one which will come back into focus as the competing global ‘uncertainties’ meet the reality of firming domestic data.
All of this contributes to our assumption that the broader tone for the market for the balance of 2019 will be established as we enter the fourth quarter. Our temporary bearish inclinations persist; with the caveat that there is a very real chance the 47 bp selloff in 10s thus far in September might represent the extent of the weakness we’ll see from the pendulum of pessimism’s trip out of the danger zone.
In this case, BMO predicts that the stage would be set for another round of consolidation with 1.80% as the interim focal-point until the time at which there is further clarification on the trade war, geopolitical tensions, Brexit, the dimming global outlook, and the flagging domestic manufacturing sector.
Said differently, if the market fails to stage another foray toward incrementally higher rates after a period of consolidation between now and the October FOMC meeting, it becomes increasingly difficult to envision any such backup given the low-to-negative global rate environment.
In short, the Treasury selling — which we believe was largely a by-product of the record IG issuance at the start of the month as a result of some $100BN in rate locks — has now ended, alongside the scramble to refi investment grade corporate debt.
What if we are wrong? Well, then according to Hill, “even an attempt to reach 2.25 – 2.50% 10s at this point in the policy and economic cycle would presumably be short-lived and met by a round of dip-buying interest from a variety of different investor bases.”
Once again, seeing lots of articles and talking heads mocking bubbles and the bears, which is usually a sign a big bubble is going to burst. The last time we saw this kind of taunting of the bears was three days before the bear market, which we think is on, began in January 2018.
Here’s what we wrote,
Finally, you also see the investing public openly mocking the bears during the later stages of a bull market. We see a lot of that these days. Just check your twitter feed. – GMM, January 23, 2018
1) somehow related to the massive new issuance of Treasuries, which is sucking liquidity out of the markets, as prices are repressed and not allowed to clear –> think, a) rent control, where the excesses have to be cleared through quantities, and b) Le Chatelier’s principle, where, in a dynamic equilibrium, pressure on one variable has to be offset by movement in other variables;
3) though there are still $1.4 trillion of excess reserves in the banking system, it is possible only a few banks hold the bulk and are hoarders. In other words, another top-heavy distribution problem, along with wealth and income, where the few own the much.
Whatever the case, the markets are so distorted now and becoming more so, especially by the false belief that central banks can even now fine-tune a Stradivarius violin. Haha!
We believe quantitative easing and the massive expansion of central bank balance sheets are the financial equivalence of global warming, ie, excessive carbon emissions. Thus, traders and investors should expect more extreme weather market conditions.
Didn’t you see this coming?
To be fair to Adam, we took the headline a bit out of context to make our point. Please read his article here.
Discount The Street
During my days on Wall Street, it was stunning to watch how many would sell their souls and anything else to help them make their year-end bonus. I specifically remember a sales pitch by some bozo about how the Mexican Peso was going to become the next dollar, less than 12 months before it fricking blew! We laughed him out of the office.
This is one reason why Mr. Market is so cold-blooded, doesn’t correctly discount risk, and tends to have a one in every 10,000-year event (high sigma crash) almost every 10 years.
So, folks, when listening to the Street, bubble vision, the market talking heads, and even central bankers and policymakers, take heed the words of the great American author, Upton Sinclair.
Help Stop Civil Asset Forfeiture, Support HB2477
Arizona House Bill 2477 (HB2477) would require prosecutors to establish a higher evidentiary standard for asset forfeiture. The bill also takes on federal forfeiture programs by banning prosecutors from circumventing state laws by passing cases off to the feds in most situations. It passed the House by a unanimous 60 – 0 vote. (learn more here)