This report was originally published by Brandon Smith at Alt-Market.com
If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.
For example, officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December. The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term. The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year. The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.
This global trend of “fiscal tightening” is yet another piece of evidence indicating that central banks are NOT governed independently from one another, but that they act in concert with each other based on the same marching orders. That said, none of the trend reversals in other central banks compares to the vast shift in policy direction shown by the Federal Reserve.
First came the taper of QE, which almost no one thought would happen. Then came the interest rate hikes, which most analysts both mainstream and alternative said were impossible, and now the Fed is also unwinding its balance sheet of around $4 trillion, and it is unwinding faster than anyone expected.
Now, mainstream economists will say a number of things on this issue — they will point out that many investors simply do not believe the Fed will follow through with this tightening program. They will also say that even if the Fed does continue cutting off the easy money to banks and corporations, there is no doubt that the central bank will intervene in markets once again if the effects are negative. I would say that this is rather delusional thinking based on a dangerous assumption; the assumption that the Fed wants to save markets.
When mainstream economists argue that the Federal Reserve could conceivably keep low interest rates and stimulus going for decades if necessary, they often use the example of the Bank of Japan as some kind of qualifier. Of course, what they fail to mention is that yes, the BOJ has spent decades increasing its balance sheet which now sits at around $4.7 trillion (U.S.), but the Fed exploded its balance sheet to around $4.5 trillion in only eight years. That is to say, the Fed inflated a bubble as large if not larger than the Bank of Japan in less than half the time.
Frankly, the comparison is idiotic. And clearly according to their own admissions, the Fed is not going to be continuing stimulus measures anyway. People cling to this fantasy because they WANT to believe that the easy money party will never end. They are sorely mistaken.
I have been battling this delusion for quite some time. When I predicted that the Fed would taper QE, I received a predominantly negative reaction. The same thing occurred when I predicted the Fed would begin hiking interest rates. Now, I’m finding it rather difficult to break through the narrative that the Fed will intervene before the next crash takes place.
There is something so intoxicating about the notion that central banks will stop at nothing to prop up stock markets and bond markets. It generates an almost crazed cult-like fervor in the investment world; a psychedelic high that makes financial participants think they can fly. Of course, what has really happened is that these people have jumped off the roof of their overpriced condo; they think they are flying but they are really falling like a brick weighted down with stupidity.
Former Fed chairman Janet Yellen upon exiting her position stated:
“If stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?”
“I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”
Yellen also said when asked about high stock prices:
“Well, I don’t want to say too high. But I do want to say high. Price/earnings ratios are near the high end of their historical ranges…”
“Now, is that a bubble or is too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”
Since the middle of last year, the Fed has been calling the stock market overpriced and “vulnerable.” This rhetoric has only become bolder over the past several months. Dallas Fed president Robert Kaplan dismissed concerns over the affect rate hikes might have on markets and hinted at the potential for MORE than the three hikes planned for 2018. The Dow fell 666 points that same day.
New York Fed’s Bill Dudley shrugged off concerns over recent volatility, saying that an equity rout like the one that occurred in recent days “has virtually no consequence for the economic outlook.”
Jerome Powell, the new Fed chairman, has said while taking the chair position that he will continue with the current Fed policy of rate hikes and balance sheet reductions, and reiterated his support for more rate hikes this past week (while the mainstream media hyperfocused on his lip service promise to watch stock behavior closely). This indicates once again that it does not matter who is at the wheel of the Fed, its course has already been set, and the Chairman is simply there to act as the ship’s parrot mascot. The Fed is expected to raise interest rates yet again in March.
Now, all the evidence including the Fed’s surprise balance sheet reduction of $18 billion in January shows that at least for now, the central bank no longer cares about stocks and bonds.
In the meantime, 10 year Treasury Yields are spiking to the ever present danger level of 3% after a hotter than expected inflation report, and the dollar index is plunging. Showing us perhaps the first signs of a potential stagflationary crisis. Bottom line – markets are not long for this world if yields pass 3% and the falling dollar provides yet another excuse for faster interest rate hikes. More rate hikes means eventually cheap loans will become expensive loans.
My question is, if the Fed is not going to feed cheap fiat into banks and corporations to fuel stock buybacks, then WHO is going to buy equities now?
What about corporations? Nope, not going to happen. With corporate debt skyrocketing to levels far beyond that seen just before the 2008 crash, there is no chance that they will be able to sustain stock buybacks without aid from the Fed.
What about retail investors? I doubt it. Retail investors are the primary pillar boosting stocks at this stage in the game, but as we saw during the panic last week, it is unlikely that retail investors will maintain hands strong enough to refrain from selling at the first sign of trouble. They do tend to hastily jump back into markets to buy every dip because for many years this simplistic strategy has worked, but if the Fed continues to back away from stimulus and we seen a few more incidences like the 1,000+ point drops of recent days, investor conditioning will be broken, and blind faith will be replaced by doubt.
What about the American consumer? Will consumer profits boost companies and give them and they stock shares a solid foundation? I can barely write that question without laughing out loud. There was a time (it seems like so long ago) when company innovation and solid business strategies actually meant something when it comes to equities. Those days are over. Now, everything is based on the assumption of central bank intervention, and as I already noted, central banks are pulling the plug on life support.
Beyond that, U.S. consumers are now buried in historic levels of personal debt.
What about the Trump administration’s latest $1.5 trillion infrastructure plan? Will this act as a kind of indirect stimulus program picking up where the Fed left off? Unlikely.
Perhaps if such a plan had been implemented eight years ago in place of the useless bank bailouts and TARP, it might have made a difference. Though, a similar strategy did not work out very well for Herbert Hoover. In fact, many of the Hoover-era infrastructure projects were not paid off for decades after initial construction. Hoover was also a one term Republican president that oversaw the beginning of the Great Depression.
The system is too far into debt and too far gone for infrastructure spending to make any difference in the economic outcome. Add to that the fact that Treasury yields are liable to continue their upward trajectory due to the increased deficit spending, putting more pressure on stocks.
Interestingly, Trump’s budget director has even admitted that the plan will lead to even faster increases in interest rates, and Fed officials have been using this as a partial rationale for why they plan to continue cutting off stimulus measures.
I think anyone with any sense can see the narrative that is building here. The Federal Reserve is going to let markets crumble in 2018. They are going to continue raising interest rates and reducing their balance sheet faster than originally expected. They will not step in when equities crash. And, they don’t really need to. Trump continues to set himself up as the perfect scapegoat for a bubble implosion that had to happen eventually anyway. Now, the central banks can sufficiently avoid any blame.
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Better sooner than later!
Okay. Quit stalling central banks – do it. Let’s let it happen while we’ve some chance of redeeming this country out of the inevitable chaos that’ll ensue. Let’s wash this blackboard, get some new chalk and start over with the lesson we should’ve already learned. You don’t get anything for nothing. Ever. A price must be paid for all things.
Yes. the folks on this site have our money and assets hidden from these bankster scum.
Not all of us have money hidden from banks, as we have living expenses and utility bills. Some of us have tax free muni’s and stocks, because extra income helps. Best to keep low amts in checking/debit and if retired start spending more and buy what you want and travel if you like to, etc. We recently got some new replacements for beds, sofa, computers, printer,etc. By the way, does anyone have a timeline when this crash will take place?
I’ve just bought silver coins and small gold bars for years. It took me time as I am not rich either.
It’s not that they won’t try. They have worked themselves into a corner. High interest rate will kill indebted countries, low interest rates are killing pensions, inflation is close by and fiscal responsibility is a term nobody has heard in years, without laughing. Exactly what can they do? If I were the FED I’d buy an island and hide there.
There is no risk in business anymore. Papa Government is there to bail you out.
Since there is no risk, there is no exercising caution.
Seizing IRA and 401K retirement accounts and replacing the money with treasury bonds will come someday. The question is when?
Brian: I thought most retirees transferred their 401’s and IRA’s into bonds upon retirement. We did same week of 9/11 meltdown, two yrs later he retired. The market took a long time to recover then. Still 401k all T bonds.
What a terrible idea.
During the Crash of 08-09 most IRAs and 401Ks lost between 40- and 50-percent of their value.
When the next Crash comes, these retirement accounts will be wiped out.
Hopefully, this will happen before these accounts are confiscated and turned in worthless treasury bonds.
But really. What’s the difference between a crash and a confiscation. The outcome is still the same.
Let it fail. Isnt that one of the things we have prepped for? We will see how it turns out.
I don’t get it. Why wish for an economic collapse? It isn’t like the banking system collapses and is gone. There is no upside. A collapse is all bad. Except for the Uber rich elitist globalist-Communists, we’re all gonna die. And those who aren’t dead will wish they were.
Store gold and good comfortable American made shoes. Both are important when TSHTF.
Don’t need money to live.
BAHAHAHA Ya Right! Those that hold 90% of the wealth and land reserves are going to crash the system!! Get real, they have us all as wage slaves. Another writer here scaring you into parting with your bad worthless dollars because the sky is falling and we have something we’ll sell to you to “protect you”. from yourself
These “too big to fail institutions” were given literally TRILLIONS of dollars when they got into trouble (bailed out courtesy of the taxpayers – so much for our officials looking out for the citizens first and putting us on the hook for it all). All the while “investors” and bankers were taking 7 and 8 figure bonuses, giving themselves unbelievably massive golden parachutes, many becoming staggeringly rich while their institutions were failing, and so on. Then, to show their gratitude, in the last real estate crash starting in 2008-2009 many bankers and brokerage firms bundled up billions and billions and billions of dollars of worthless mortgages into “securities”, gave them a triple-A rating, and sold them to unsuspecting investors, many of them to foreign markets. It didn’t take the buyers long to learn they had been taken and the securities had basically no value.
A person should know when the financial systems fail it won’t fail for them, it will fail for us, we will be the ones who suffer. They have milked this country dry. This helps explain why we have massive debt at all levels of gov’t, low wages, shrinking middle class, failing pension systems, and money velocity that is almost frozen to name a few. The wealth of this country has been confiscated through a large variety of financial and official mechanisms, and concentrated in the hands of a very small group of people. When things start to fail and looking bad you will see falling asset values such as real estate, housing, and commodities, except for precious metals. If it gets real bad look for gov’t seizure of all privately held gold (even coins), making it illegal for private individuals to accumulate cash, bank holidays, frozen accounts, and even bail-ins. Of course the citizens will be the last to know.
Sure they will???? If they do it will be a good thing then we can rebuild. And hope we do a better job this time.
All I can do at this title is ????
For those clamoring for the “crash” here to go ahead and hurry up and happen, I don’t understand your reasoning. With no faith in paper dollars, you might find impossible to buy gas, food, or really anything retail. Chaos would be the daily routine. Why go to work when riots at going on everywhere, and schools are closed, the police are gone, and water doesn’t come out of the tap, and the power is out? I know that those of you who are prepared would be able to carry on, but what about the masses who are not prepared, that are getting hungry, and irrational? To clamor for chaos is irrational too.