This report was originally published by Brandon Smith at Alt-Market.com
Ever since the credit and equities crash of 2008, Americans have been bombarded relentlessly with the narrative that our economy is “in recovery”. For some people, simply hearing this ad nauseam is enough to stave off any concerns they may have for the economy. For some of us, however, it’s just not enough. We need concrete data that actually supports the notion, and for years, we have seen none.
In fact, we have heard from officials at the Federal Reserve that the exact opposite is true. They have admitted that the so-called recovery has been fiat driven, and that there is a danger that when the Fed finally stops artificially propping up the economy with constant stimulus and near zero interest rates, the whole farce might come tumbling down.
For example, Richard Fisher, former head of the Dallas Federal Reserve, admitted a few years ago that the U.S. central bank has made its business the manipulation of the stock market to the upside:
What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.
It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.
I’m not surprised that almost every index you can look at … was down significantly.
Fisher went on to hint at the impending danger (though his predicted drop is overly conservative in my view), saying, “I was warning my colleagues, don’t go wobbly if we have a 10-20% correction at some point…. Everybody you talk to … has been warning that these markets are heavily priced.”
One might claim that this is simply one Fed member’s point of view. But it was recently revealed that in 2012, Jerome Powell made the same point in a Fed meeting, the minutes of which have only just now been released (emphasis ours).
I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.
First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?
When it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.
Keep in mind, that Jerome Powell is now the CHAIRMAN of the Federal Reserve. In 2012, he was well aware of the exact effects that the removal of stimulus (which includes low interest rates) would have on the false recovery in stock markets. He continues…
My third concern — and others have touched on it as well — is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.
When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month — it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.
I think we are actually at a point of encouraging risk-taking, and that should give us pause.
Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.
If Powell was fully conscious in 2012 of what would happen in markets due to the Fed’s balance sheet reductions, the question is, will he be honest about it now? My suspicion is that he will not, given that his very first interaction with the American public after becoming head of the Fed was to regurgitate the same nonsensical talking points that we heard from Janet Yellen for years. The mainstream media is desperately attempting to suggest that Powell may “surprise investors” with a change in rate hike policies and the reduction of balance sheet, but so far the markets are not buying this.
Powell’s first day as Chairman was greeted with the sharpest drop in U.S. equities in years. Yellen’s parting gift to investors in January was an $18 billion reduction in the Fed balance sheet, $6 billion more than the Fed originally claimed would occur. It is clear to me that just as stocks climbed in direct correlation to the Fed balance sheet, so too will they fall in direct correlation to the Fed balance sheet. Only a week after the balance sheet was cut more than expected, stocks fell by nearly 10%.
So, the question now is, will Powell continue this trend of rate hikes and balance sheet reductions, being that he is recorded as knowing what the results will be? I believe that this is exactly what he will do. Why? Because the Fed’s goal is the deliberate controlled demolition not only of U.S. markets but also U.S. debt instruments and the dollar.
If I am wrong, then Powell, knowing the threat, will reverse rate hike policies and stop dumping the balance sheet in an effort to prop up the system. If I am right, then we will see Powell continue these policies over the course of 2018 and allow the system to implode.
How will this influence the price of gold? Well, in the near term we could see a measured decline or a stagnant metals market as we have seen so far this month. That said, when the real equities crisis kicks in, expect metals to skyrocket as investors rush to safety. The psychology of the markets will come into play far more than fundamentals for a time. One must account for willful ignorance and how long it can be maintained before facts take over.
There are a few major factors that come into play in terms of interest rate hikes and the balance sheet, including the fact that corporate debt is now at levels far beyond that held just before the crash of 2008. We are also witnessing the highest consumer debt levels in history, while personal savings have plunged.
Treasury yields are also spiking to 10 year highs, decoupling from stocks and suggesting that balance sheet reductions might be contributing to a flight from equities.
Stock buybacks, fueled by low interest rates, have helped pump up stocks for years. However, most companies are prohibited from buybacks right before they report their earnings. Without buybacks this past week, we have seen what happens – complete market mayhem. If this is what takes place in a month of reduced buybacks, what will happen when interest rates are raised high enough to make borrowing capital from the Fed prohibitive (ie, too expensive)?
What does all this translate into? The reality that there is NO MECHANISM within our economy that is buoyant enough to keep markets afloat when the Fed backs away. Nearly everyone is in massive debt, there is no one left to buy at the level needed except the Fed.
We are only standing at the beginning of this apparent new trend in equities, but it will be interesting to see what the reaction will be within the system as the Fed continues hiking rates and reducing the balance sheet. Will the beginning of every month in 2018 be met with a brand new storm of selling and panic? It’s hard to say. However, the math certainly does not support a bull market through the rest of this year.
In the meantime, it is likely that blind faith in positive returns will spark intermittent buying events in the short term, and unaware investors (and algorithms) will see this as vindication that buying will always be the answer. But, these buying events so far seem to be met with even more severe downturns. It will not take very many Fed meetings to discern whether or not the central bank will continue to back up stocks. To me, it appears that the decision to pull the plug has already been made.
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Thank you for these articles, Brandon!
I keep warning my ignorant bluepilled friends about the impending financial disaster that is to come. But they’re too BUSY in the rat race with bills (mortgage, tuition, kids, medical, etc.) to even think of a “historic stock market crash in 2018.”
And here’s the biggest shocker: They’re totally oblivious to current events going on around the world, let alone in their own back yards.
When the shit hits the fan full speed in the US, it will be a rude awakening especially for those in dense urban areas. Many (if possible) will head for Canada or Mexico instead of being bystanders in the battle between the NWO and the pockets of 2A resistance scattered throughout the country.
I’m very worried about the coming race war that We The People are being manipulated into by the Ziopress. This will be much worse than the Great Depression.
Here is how you need to deal with them…
No news here. The FED ALWAYS triggers a recession in the first year of the New President’s administration. Reagan’s recession began after one year also. Hope this one starts soon. Late in the year and there may not be time to reignite the economy before 2016.
But I suspect that the Retards would like to get through the midterms first. That would be a real stretch. Not sure they can do that. BTW, I pointed this out prior to TRUMP’S election, which I also predicted at the bottom of his run, near the end, when almost everyone believed that Hillary would win.
Yeah, it’s all in the archives !!! 🙂
Brandon called it ‘willful ignorance’. I see it in those who call themselves ‘conservatives’, ‘patriots’, ‘liberty advocates’. Their blindness will result in suffering of Biblical proportion.
Get your cartoon references correct 🙂
You got the Wimpy (not Whimpy) Factor wrong and it is not in reverse.
Wimpy’s famous line was “I’d gladly pay you Tuesday for a hamburger today…”
And that’s exactly what all the foolishness has been about for the last 20 years in earnest (and the last 100 or so in general)
“I’d gladly pay you some Tuesday (really never) for 21 Trillion hamburgers Today.”
… in the USA during the 1930’s:
Families were in tact. Fathers lived with mothers, and the children almost always were their own. Stepparents were not the norm. Adoption was unusual, and when it did happen, the adopted kids were usually the same race as the adoptive couple.
Today families are a mess.
Add to that, drugs. If the collapse really happens, people won’t be able to get drugs. That will drive them to suicide and murder.
During the 1930’s depression, Hitler came to power in Germany. Germans were starving. Hitler gave the Germans twelve years of prosperity. It is noteworthy that both Germany and Japan were manufacturing and exporting fine cars.
Yep and the FED RESERVE was to blame! I have read the death toll from the depression to be around 13 million people. Oh but the goos fake claim of 6 million gets all the press huh? I guess instead of the quote “The poor will always be with you” should be “The stupid will always be with you”.
6 million was always an impossible figure, as the total population of them in Europe was about 5 million. And many of those either left Europe or survived.
We might as well be in a depression right now. Plenty of drugs out there.
The current condition of the family is THE root cause of many of our issues in this country. It is rare for a couple to be together…me and my first wife have been together 25 years strong and it is only getting better. Grown daughters fear God, fear me, and respect themselves and others.
I correct other kids when I see them get out of line, don’t give a hoot who’s kids they are.
Everyone has a label: ADD, ADHD, Anxiety issues, depressed, OCD, left handed, whatever. The left has successfully wussified the country. Leave your balls at home honey, you don’t need them out in the real world. Now get to work so we can go in debt.
Geez I need shot.
BCA: I agree. It truly seems that all of the good and desirable things and values and morals and traditions, etc are flat out GONE! The average person/”family” is not really worth a god damn anymore and that is very concerning.
Going to need plenty of PPT to keep the drive alive. This Fed Chair shows little desire for PPT. So, let the market thrive or fall on it’s own accord. If it crashes and burns then that is what it must do.
My Grandmother grew up on a small farm in rural Missouri during the Depression. She told me that farmers helped each other and helped strangers too when they could. She also said they did without on many occasions. Not so sure the same type of attitude and patience exist today, but we might find out.
Yet the unemployed rate is said to be in the single digits. The federal minimum wage has held firm at $7.25 an hour for nine years indicating a new reality called priced out of existence. A more subtle method of thinning the herd.
There is no money in the stock market. Stock options have removed all of it to build those big houses on the hill. When we baby boomers start to retire there won’t be anything left !
Whether it is Jerome Powell or some other cause, the economy of this country is going to fail/fall. The simple truth is that there needs to be a culling. Odd isn’t it? How both the elites and most here on this site think the same in that regard? Too, both groups are actively working to survive in some manner. It’s going to be all those in-between those 2 groups that will be the grist for the mill of collapse.
with almost negative interest rates for a decade, where else can you invest other than the stock market to make a return? now would be the perfect time for the powers to reset values to further cripple what is left of the middle class. their sole goal is for 2 classes, peasants and rulers. why else would they encourage the invasion of so many uneducated, poverty stricken, unhealthy peasants other than to accustom us to such living standards. wages have stagnated for decades, the cost of living rising double/triple digits and government handouts are almost necessary to raise a kid. it was easier for them to reduce our standard of living, than raise the world to our high level. I have received many negative comments about my theory for the last decade, but open your eyes and see the results occurring in all western societies. globalism requires every country and slave working citizen to live equally for it to succeed.
Brandon Smith’s latest 1,000+ word example of an illogical fallacy. Is Brandon aware of the way things actually work?
You have to know that this economy is under control because no one can read another’s mind. There is no arbitrary action/reaction; there is only reaction to premeditated action by the FED.
This whole system is a game being played by the bankers while we are watched to amuse themselves as we move about on the board built by them. There day will come and seems to be approaching quickly.