United States Still Going Bananas

You see, it’s not a Trump thing. It’s an ‘America is so hopelessly indebted (as are other developed economies) that they have no choice now’ thing.

However, the election shakes out – most likely Democrat president and congress, Republican senate – the stock market is cheering two things in my opinion. It is cheering US dollar compromising fiscal stimulus (Fed prints, politicians spend) and the coming of more US dollar compromising monetary policy (Fed prints, Fed monetizes bonds AKA debt, Fed screws with any other esoteric tool it can get its hands on in the age of MMT TMM, AKA Total Market Manipulation).

I have a still profitable position against the Euro that is about to tick un-profitable this morning. That was my hedge against a firming US dollar, which is the anti-market to the US stock market especially, but also to many global markets because I am long US and global stocks. I may have to pull back to hedging stocks (including gold stocks) with high cash levels. So says the ongoing inflationary operation.

I had projected an A-B-C bear market bounce in Uncle Buck, just to keep the macro honest and put a spook into market bulls. But it appears – due to the joy breaking out everywhere – that I will have been wrong about ‘C’. That’s what this breakdown below support (now short-term resistance) says, anyway.

dxy market

We are going bananas not because Trump is/was just another politician when it comes to the modern American tradition of debt-leveraged inflation to disenfranchise the middle and poor and enrich the already spectacularly wealthy. We are going bananas because Continue reading "United States Still Going Bananas"

Let's Move Forward, Not Back

Since the beginning of the coronavirus crisis, the Federal Reserve has probably done more to try to ease the financial pain of businesses, consumers, and institutions than just about any other organization on earth with their monetary policy. It’s lowered interest rates, purchased trillions of dollars of assets – some of which, like corporate bonds, it’s never bought before – eased bank capital requirements, and increased existing or created new lending programs to help Americans weather the storm and get back on their feet.

Now the president of the Minneapolis Fed and a current voting member of the Fed’s monetary policy committee is calling on people to suffer a few more weeks in quarantine in order to get the virus under control and the economy back on an upward trajectory – as if it weren’t on that already.

“If we were to lock down really hard, I know I hate to even suggest it. People will be frustrated by it,” Neel Kashkari told CBS’s Face the Nation program. “But if we were to lock down hard for a month or six weeks, we could get the case count down so that our testing and our contact tracing was actually enough to control it the way that it's happening in the Northeast right now. That’s the only way we’re really going to have a real robust economic recovery.”

“Now, if we don't do that and we just have this raging virus spreading throughout the country with flare-ups and local lockdowns for the next year or two, which is entirely possible, we're going to see many, many more business bankruptcies, small businesses, big businesses, and that's going to take a lot of time to recover from to rebuild those businesses and then to bring workers back in and re-engage them in the workforce. That's going to be a much slower recovery for all of us.”

If we take his advice and do another “hard lockdown” for six weeks or a month, how many more businesses will fail, and how many more people will be laid off or lose their jobs permanently in the meantime? Continue reading "Let's Move Forward, Not Back"

Disconnect? What Disconnect?

Over the past few weeks, the financial news media has been marveling at what it calls the “disconnect” between stock prices and the economy. Economic and health statistics are likely to go from bad – 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths – to worse – a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office’s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.

But is there really a disconnect? Does the economy – now largely controlled by the Federal Reserve and the U.S. Treasury Department – still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What’s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it’s the Fed’s job to rescue equity investors any time stock prices correct, never mind what’s going on in the economy. Now that we’re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into Continue reading "Disconnect? What Disconnect?"

Will The Fed Buy Stocks Next?

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its “dual” Congressional mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (that’s federal government math for you).

Powell has added putting a floor under stock prices, which usually has come to mean when the market reaches correction territory (i.e., prices fall by about 10%). When stocks reach that threshold, count on the Fed to cut interest rates or loosen monetary policy in order to restore order and investor confidence. So far in his tenure, the Powell Fed has been pretty successful in that regard. Even when overall economic conditions (GDP growth and unemployment) provide no justification for lowering rates, the Fed has stepped in to prop up the market.

Now, however, the current panic selling over the coronavirus has tested the Fed’s ability to wave its magic wand and restore peace to the market. As we know, the Fed’s recent decision to make an emergency 50 basis-point cut in the federal funds rate three weeks before its next scheduled meeting proved to be a dud. Investor confidence has now been so spooked by the uncertainty created by the virus that the rate cut caused barely a blip, and stock prices continued to tank.

Moreover, despite the market begging for the Fed to cut rates, Powell only opened himself up to criticism for actually delivering. The cut was either too small, some critics said, or a cut would have no effect in such a situation, so why bother doing it, others said. Yet the market consensus now seems to believe that another 50 basis-point cut is already baked in the cake when the Fed meets on March 17-18. But market anxiety being what it is, there’s no assurance that that will have any effect, either.

Already, many so-called experts are calling for some form of fiscal stimulus, as opposed to monetary stimulus, such as a Continue reading "Will The Fed Buy Stocks Next?"

QE or Not QE: The Consequences Are The Same

It may look, swim and quack like one, but Federal Reserve Chair Jerome Powell insists that the Fed’s recent reinflation of its balance sheet past the $4 trillion mark isn’t quantitative easing. Oh no, he says, just because the Fed’s portfolio recently rebounded to $4.175 trillion at the middle of January, up from a six-year low of $3.76 trillion since the beginning of September, doesn’t mean that the Fed is back to its old QE ways, which had pushed the Fed’s balance sheet to a steady $4.5 trillion between 2014 and 2018 when it started to shrink.

But QE by any other name is still QE.

At least one voting member of the Fed’s monetary policy committee has expressed some concern about the recent boost in the Fed’s balance sheet – more than $400 billion in just the past four months.

“The Fed balance sheet is not free and growing the balance sheet has costs,” Robert Kaplan, the president of the Dallas Fed, told reporters at a recent Economic Club of New York event, according to the Wall Street Journal. “Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets. [That’s Fed-speak for a bubble]. I’m sympathetic to that concern.”

For the past 12 years, ever since the financial crisis in 2008, the Fed has swollen the size of its balance sheet – its holdings of U.S. Treasury and government-insured mortgage-backed securities – from less than $1 trillion to more than four times that. Its first burst of bond-buying took place in 2008, during the depths of the meltdown when its portfolio more than doubled in less than a year. It then gradually increased to more than $3 trillion over the next five years, at which time QE took it to $4.5 trillion, where it held steady until 2018, when the Fed started to allow its holdings to run off as they matured, until its recent policy U-turn.

And what was the direct result of all that buying? Continue reading "QE or Not QE: The Consequences Are The Same"