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.
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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.
lot more,,,,,,,,,,,,,
http://www.investmentwatchblog.com/its-not-often-i-get-to-proclaim-the-fed-is-dead-then-watch-the-fed-put-on-the-toe-tag/
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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