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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written by guvna , February 15, 2018
hey, what's some good ideas for SHTF type store of value if say using vehicle as accom etc. Not guns or ammo, gold or jewels, fuel capacity/storage limited.
any opinions?
silver is an option i am already considering but maybe some other easily tradeable, small/valuable items that'll be popular in a country like oz.
cheers
written by cdr , February 15, 2018
I believe the Fed is more likely than not to continue with balance sheet reduction and raising rates without regard to the level of the equity markets. I strongly suspect the rapidly rising 10 year rate is evidence of the Fed ending long rate manipulation (Twist remnant) via the end of reinvestment to keep rates low.
Having said that, after 9+ years of financial manipulation in the US, I need to be convinced by action rather than informed opinion ... even if that informed opinion is my own. The odds are some form of normalization is around the corner, or possible has already actually started.
If rates keep rising and at more than at an infinitesimal rate and if the balance sheet reduces at the announced rate or faster, I will relent and agree. Historically, in recent terms, the long rates have risen rapidly, over and over again. then slowly ratcheted down. I'm waiting to see if this is another fake out.
Any central bank dumb enough to consider negative rates may be a good thing 'someday' or be in the same cabal as central banks that actively employ negative rates and openly monetized sovereign debt is not one to be believed automatically.
written by Craig Mouldey , February 15, 2018
The world had the potential to be better. Sadly, as new generations are born, the old suffering and lessons are forgotten. Those of the great depression and their children were careful about saving and not getting into debt. When items were damaged they were repaired, not thrown out. Now, it is the throw away society. Young adults want everything new and they want it now. The west has a bloated bureaucracy and a major expenditure on the military. While doing this, the good jobs went away and the infrastructure started falling apart. Everything now is undertaken on more debt. As the currency values start to drop they have to be supported by higher interest rates to make that currency more attractive. This makes the interest payments on the debt impossible to handle.
Repudiating the debt won't happen. Ending the international banking cabal won't happen. Cutting the bloated bureaucracy and military won't happen. Not unless it is forced on us. Get ready to be very poor on a life threatening level.
written by Average Joe , February 15, 2018
Spot on. I don't think many of the kids and traders alive today have gone though a period of interest rate hikes let alone a recession that brings stagflation. no bailouts just bail in's to protect the banking system if it gets that bad. The fed will protect bonds by raising interest rates like they did in the early 80's if necessary. The federal criminals will cut intitlements if necessary. They didn't build a big police state for nothing.
written by Ya'aqov ben Ya'aqov , February 15, 2018
guvna,
consider alcohol as viable commodity of barter. Hard liquor like bourbon, vodka et.al possess a very long shelf life (25+ years or longer) if stored in a reasonably controlled environment & is a top 5 barter item on nearly every prepper's list, right behind PM's & ammo.
However it's preferable to purchase it in the plastic bottles for practicality & portability purposes.
written by Who's asking? , February 15, 2018
@ Ya'aqov
I respectfully disagree. Alcohol is a luxury during a terminal event. People will be wanting to survive first with the necessities (food, water, shelter, medicine, clothing, toiletries...) long before they want alcohol. It is a common misconception in prepping that having a pile of alcohol will be useful.
During a real economic/societal crash, see how many people are willing to actually trade you food, water, or precious metals for alcohol. Methinks it will be close to zero.
On the other hand, if you want an outside-the-box item of value to have for barter, how about condoms? I'll let you think that one through ;)
written by MJS , February 15, 2018
I think a lot of investors have the impression(right or wrong),
that all this money that big corps. have sitting overseas will come flooding back to the US now that the capital gains tax was lowered. And that will be the stimulus that takes the Feds place to prop up the stock market. We'll have to see
how that works out at least after the next rate hike.
written by 123XYZ , February 15, 2018
@Ya'aqov
I said alcohol too
written by Anon1 , February 15, 2018
You must have to put up with a lot of abuse Brandon. What you are trying to do is very difficult. It is all rigged as the 666 point fall showed. There is strong and well organised opposition to the truth on all forums. The media is controlled. Guess you could count abuse as complimentary because you must be getting close to the truth for people to attack so strongly. The people running things are very patient but they will make their move in due course. Keep up the good work!
written by Brandon Smith , February 15, 2018
@MJS
It is doubtful that cash flows will reverse into the US while the dollar is falling precipitously (at least until the dollar becomes so worthless that it loses world reserve status, then they will ALL come flooding back into the US). Better to keep forex investments overseas and in stronger currencies. Also, the vast majority of manufacturing is overseas and so cash flows will go where manufacturing is prevalent (i.e. China). Corporations that operate in multiple countries have multiple tax codes to deal with. Parking their money in the US does not necessarily save them from taxation in Europe, for instance.
The tax cuts are essentially a one off event that generates around a trillion dollars in capital, but consider for a moment that corporations are perhaps trillions or quadrillions in debt due to derivatives exposure and borrowing constantly from the fed to support stock buybacks. Will that tax cut actually go back into the US main street economy, or will it simply be eaten up by previous debt obligations?
The market rallies based on false psychology, nothing more. And as we saw last week, when that psychology shifts, months worth of gains can disappear in a couple of days. I am not impressed by Trump's tax cut, nor by the latest rally. All the factors that caused the 10% drop last week are still in play. Expect more thousand point per day drops in the near term.
written by Brandon Smith , February 15, 2018
@Anon
Stock market ticker trackers know nothing. I don't take anything they say seriously. In fact I find them amusing. People who actually believe that a rally in stocks indicates a healthy economy despite all fundamental evidence to the contrary are village idiots, and deserve our pity. The rest are Fed trolls getting paid minimum wage to harass analysts and they tend to get booted off this site, so their efforts are wasted.
written by Ya'aqov ben Ya'aqov , February 15, 2018
Who's asking?
You're ignorant of history. Alcohol (like many other commodities) is used a currency when the State issued currency is in it's death throes. It is not necessarily desired for personal consumption.
Recall that during the Ruble collapse the Russian government paid it's soldiers in vodka.
written by Ya'aqov ben Ya'aqov , February 15, 2018
Not so that the Russian government could deploy a drunken army, but so that the soldiers could in turn use it as a currency to acquire need staples in the marketplace. Merchants accepted vodka as currency payment. Many still do even today.
written by Seen2013 , February 15, 2018
Can't finalize a government-banking public-private merger publicly without a crisis to justify it even though it's been a public-private merger since its founding.
written by guvna , February 16, 2018
(who downvoted my question,sorry mfka),this is alt-market ja
anyway thanks for some ideas, i do have some booze, nicotine, tea anyway, just looking for ideas of small, light valuable items maybe around $100 each, wanna put excess cash to best use as don't expect it will stay best option mid-term
written by bill2 , February 16, 2018
Would be interesting to hear your thoughts what you think is going to happen after the crash.
Great work man as always.
written by Renewed , February 16, 2018
Another inexpensive item that has been used as currency centuries ago is Salt. Easy to store, and an item we use every day!
written by Boomer , February 16, 2018
Hi Brandon, I want to first off thank you for all the research and information you pass on to us. I have been following you for about 1&1/2 years now and always look forward to your articles. I have a question...a year ago, it looked like the crash would happen in the summer months of 2017. What has changed or what is different from last year, that makes it look pretty certain it will happen sometime this year?
written by Brandon Smith , February 16, 2018
@Boomer
The Fed is raising interest rates on a regular basis and dumping their balance sheet. The Fed's rate increases have a cumulative effect, and in 2017 they had only just been initiated. It is not a coincidence that the Fed cut way more than expected from their balance sheet in January and less than a week after the report is released we witness a 10% market drop, the largest in years. Watch what happens after the next balance sheet report and the rate hike in March. I would bet we see more volatility in markets.
written by Doc Raydio , February 17, 2018
Alcohol is addictive like heroin and tobacco. Remember that there are MANY functioning alcoholics. You would be truly amazed how many people you know hit the bottle daily, and would go through very severe withdrawal symptoms without it. As long as they have something to barter for their drug of choice; no problem. After that, things can get ugly fast. If the desperate know that you have what they need, you might find yourself in an unpleasant predicament. Best to keep the knowledge of your supplies a well guarded secret (true about anything that is valuable as a barter item).
written by 9/11 was an inside Job! , February 17, 2018
Jail the Bankers and Deep state Illuminati hoes!
written by JamesVC , February 22, 2018
Nice article again.
One comment though, your comparison between BOJ 4.7 and FED 4.5 balance sheet in half the time isnt quite fair. The USA economy is about 4 times that of the Japan economy as well, thus a relatively higher balance sheet would be normal in that case relatively speaking
written by Brandon Smith , February 22, 2018
@James
The size of GDP is relative to how GDP is calculated. GDP is not necessarily calculated the same in Japan as it is in the U.S. For example, Obamacare is counted as a positive towards GDP in the U.S. Therefore, GDP is not the best factor to base relative debt burden on.
If you are suggesting that the Fed balance sheet can handle 4 times that of the BOJ, I would say you are incorrect, and the fact that the Fed is dumping their balance sheet at $4.5 trillion supports my assertions. Otherwise, why wouldn't they simply continue building their balance sheet?
written by JamesVC , February 23, 2018
Thanks for your reply.
I agree size of GDP is relative to how it is calculated.
I also agree that the calculation is not necessarily (in fact very likely) not the same for the USA as for Japan.
However, whether its 4x or 3x or something else, I assume you agree with me that the USA's GDP (or economy) is quite a bit bigger than Japan's GDP (economy). Therefore, it would be logical (this doesnt mean right or justified as I am on the same page with you), that debts would also be higher in *absolute* terms. Especially in a system where as you suggest central banks are working together or at least following a similar plan.
So, it doesnt mean the FED's balance sheet can handle 4x more as the BOJ, but it would be likely to handle much more than 1x. I.e. you are always sharp with your analyses, I dont think its best to compare absolute figures in this case thats all?
That the FED is dumping their balance sheet now at $ 4.5 trillion could be because they cant go further, or a lot of other reasons. Such as that now is the time for the reversal as indicated by your analysis of BIC etc and that now it is at 4.5 trillion rather than a possible 5 or 5.5. We have seen that this theater has been going on longer (and higher debts not thought of to be even possible) than most anticipated.
written by Brandon Smith , February 23, 2018
@James
I don't necessarily agree that GDP is the best way to compare the U.S. and Japan as far as the debt load they can handle. In fact, with Japan's far larger manufacturing base, I would say they might have a MORE flexible economy that the U.S.
My point is, the Fed accumulated the SAME amount of debt in half the time of Japan. Japan is hinting at tapering now, and the Fed has tapered already. When mainstream economists (in their desperation) suggest that the Fed could stimulate for the same amount of years as Japan has, they do not take into account the SPEED at which Japan stimulated versus the Fed. They should be comparing figures, yet they do not.
written by Richo , February 24, 2018
All of the following suggested barter items, alcohol, salt, tobacco, etc. can be produced in North America. One item that is a type of addictive substance can not be produced here. This is coffee. It can not be produced in any quantity in America, and like chocolate, has been used as a currency in war.
