Category Archives: Market Manipulation

Is Fed Pumping Stocks To Keep Pensions Solvent?

The pension crisis is inching closer by the day. @CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon. – Steve Westly, former California controller and CalPERS board member.


In a story buried in the business section of the February 18th NY Times, it was reported that the spending budget passed by Congress included a provision that creates a 16-member bipartisan congressional committee to craft legislation that would provide for the potential bailout of as many as 200 multi-employer” pension plans. Like most State public pension plans most of these multi-employer plans are about to hit the wall of insolvency. A multi-employer plan is a union pension plan that covers employees of union working at different companies.   This minor little detail was not reported anywhere else.

A good friend of mine who works at a public pension did an internal study of all major State pension plans and determined that a 10% or more decline in the stock market for an extended period of time would blow up every single public pension in the country.  “Extended period of time” was defined as more than 3-4 months.  Every pension fund he studied is a monthly net seller of assets in order to fund beneficiary payouts – i.e. the cash contributions from current payees into the fund plus investment returns on capital is not enough to fund current beneficiary payouts.  Think about that for a moment.

As such, State pensions have dramatically ramped up their risk profile and most now invest at least 40-50% of their assets in stocks.  If you include private equity allocations, the overall exposure to equity investments is 70-80%.  CalPERS allocates 50% of its AUM to the stock market; the State of Kentucky  is now at 60%. Historically, pension stock allocations have typically – and prudently – ranged from 25-35%.

The stock market has now experienced three 9-10% drawdowns since August 2015. Assuming the “V” move  higher from the latest market plunge continues, each drawdown has been aggressively and swiftly negated by obvious Fed intervention.  The Fed does not deny this allegation and even subtly alludes to a non-explicit goal of targeting asset prices.

With pensions now 50% or more invested in stocks, it seems pretty obvious that one way to inflate away the looming pension catastrophe is for the Fed to inflate the stock market.  Two weeks ago the Fed reflated its balance sheet by increasing its SOMA holdings with $11 billion in mortgages. The SOMA account is the Fed’s QE account.  An $11 billion SOMA injection to the banks translates into $100 billion in liquidity – through the magic of the fractional banking system – that can be pumped into the stock market.  Who needs retail stool pigeons to chase extreme valuations even higher?

Most, if not all, pensions are quickly reallocating their equity investments for active to passive funds. “Passive” = indexing.  This means that the Fed only has to worry about inflation the broad indices like the Dow, SPX and Nasdaq.  That’s why an increasingly few number of stocks, like AMZN and Boeing, are driving the indices.  There’s still plenty of stocks that continue to decline – GE, for instance.

I laugh and sometime sneer at those who think new Fed Head Jerome Powell will impose monetary discipline by raising interest rates at least up to the real rate of inflation and reduce the Fed’s balance sheet according the schedule as laid out by Yellen.  After all, Powell is heavily invested in Carlyle Group, which  owns many companies that are covered by union pension plans.  He’s incentivized personally  to keep the monetary gerbil running on the wheel.

And better yet, if the Fed can keep the pensions thinly solvent by pumping up the stock market, Congress and State Governments can defer the inevitable taxpayer bailout of public pension funds – for now.

The “Russia Threat” Tragicomedy

I’m still trying to understand how this nation became so deeply embroiled in this idiotic investigation into “he said, she said” about the Russians interfering in U.S. politics.  I can tie it back to the presidential election campaign when Hillary Clinton asserted, during one of the debates, that the Russians hacked her email.  LOL.  As it turns out, we know that is false.

The only real connection to corruption, bribes and Russia is Hillary and her husband.  The connection between millions in donations from a Russian company to Clinton “charitable funds” which paved the way for uranium sales to Russia is definitive.  Where’s the investigation into that?

The Russia situation, like the “war on terror,” is nothing more than a State-sponsored propaganda prop crafted to distract the public’s attention from the massive theft of public wealth.  The elitists are robbing the country blind and the citizens are blinded by fraudulent news reporting.  Every major “respected” news organization, print and television, has been forced to withdraw fabricated stories.  And yet, allegedly educated and “enlightened” people continue patronizing these same news sources.

My good friend, John Titus of Best Evidence video productions, and I were exchanging text messages earlier this week on the insanity that has gripped the U.S.  I wanted to share some quotes from him because they are too insightfully entertaining to keep to myself.

“The slaves [i.e. the public] will debate the merits of the red puppet and the blue puppet all the way to the gas chambers” [Republicans vs. Dems].  Note:  to anyone really paying attention, there’s no difference between Repubs and Dems – they are both controlled only by money and answer only to those who pay for their elections.  Anyone who believes that voting makes a difference is severely mentally challenged.

In reference to Russiagate:  “That story is actually so f–king dumb that I think it’s a national IQ test to see how much broad-daylight theft the criminals can get away with. ‘Can we,’ the criminals must be asking themselves, ‘drain every cent out of people’s bank accounts, 401k plans and pension funds and, in the morning, have CNN blame it on malicious gun-slinging right-wing hacker hobgoblins and still get away with it.’  The answer is most certainly ‘yes.'”

Of course, to that he added:  “Well, to be fair (and balanced), Fox News would undoubtedly fire back with a rash of its own ‘experts’ blaming the crisis on Black Lives Matter and lesbian abortionists for gun control.”

But, What About The Housing Market?

A colleague of mine pointed out that Trump has not been tweeting his flatulence about the economy recently.  This thankful hiatus is after he just passed a tax cuts and a spending budget that is supposed to be stimulative.  As it  turns out, the economy is hitting the headwinds of marginally higher interest rates and a consumer that is bulging from the eyeballs with debt.   Windfall tax rebates to large corporations will not fix this nor will rampant Government deficit spending.

This leads us to the housing market. Mortgage originations were down 5.6% in Q4 from Q3. This is not a result of seasonal bias. Q4 mortgage originations in 2017 were down 26.7% from Q4 2016. One caveat is that the Fed does not breakout the numbers between purchase mortgages and refinancing. But higher rates are starting to affect all mortgage applications. According to the latest data from the Mortgage Bankers Association, mortgage purchase applications dropped 6% two weeks in the row. Declines in purchase apps should not happen moving from January to February, as February is statistically a seasonally stronger month for home sales than January.

Moreover, existing home sales for January were released this morning. To the extent that we can trust the National Association or Realtor’s Seasonally Adjusted Annualized Rate statistical Cuisinart, existing home sales plunged 3.2% in January from December and nearly 5% from January 2018. Decembers headline report was revised lower. I’m sure the King of Spin, Larry Yun, will blame it on “low inventory.”  But this is simply not true:

If Yun’s thesis were true, the chart above would be inverted. Instead, going back to j1998, there is a definitive inverse correlation between inventory and home sales.  Curiously, when attempted to run the numbers to the present, I discovered that the Fed removed the data series I had used to create the chart in in 2015.  Mere coincidence, I’m sure…

The mortgage rate for a 30-yr fixed rate conventional mortgage at Wells Fargo, the  country’s second largest mortgage originator, is now 4.5% with an APR of 4.58%. As recently as September, the rate for a 30yr mortgage was 3.87%. At current rates, the monthly payment for a home purchase with a $400,000 mortgage has increased $187. It may not sound like much, but for many first-time buyers that small jump in monthly payment can mean the difference between buying and not buying.

Since the Fed began printing money and the Government knocked the down payment requirement to 3% on a Government-backed mortgage, homebuyers have based the amount they are willing to pay for a home on determining the highest possible monthly payment the mortgage underwriter will allow. In the example above, the monthly payment on a $400k mortgage at 3.78% is $1,857. At 4.58%, the same payment only “buys” a $363,000 mortgage. This is nearly a 10% decline.

The same math applies to flippers/investment buyers, who pay an even higher rate for an investment purchase. One of the SSJ subscribers is a real estate professional here in Denver. She emailed to tell me that, “it doesn’t take much for interest rates to change Investors ideas.” She has a client who wants to buy an investment home for around $350000. Since investor rate loans are at least a quarter of a point higher than an owner-occupied mortgage, the client’s purchase with 20% down goes up $161 a month from the from the recent jump in mortgage rates. This means he now needs the rent to go up by that much to work on the purchase-decision formula he is using.” I believe that a lot of flippers are going to be stuck with homes they can’t re-sell at the price they paid.

The average price the average-income homebuyer can afford has declined nearly 10% as a result of just a 75 basis point rise in mortgage rates. What happens when rates go up another 50-75 basis points? This fact has not been reflected in the home price data that is released every month from Case-Shiller and from the Government. This is because those surveys have a 3-6 month lag built into the methodology of calculating their respective home price indices.

As it becomes obvious that the price the average potential homebuyer can pay has been reduced from $400k to $363k, it will trigger a price decline cycle similar to 2007-2009. Flippers will be the first to fold just like during the mid-2000’s housing bubble. That housing market crash was triggered by the collapse of subprime lenders, which removed a key source of funding used by flipper and for end-user home purchases from flippers. This time around it will be triggered by a lack of buyers who are able to pay the same price now that they could have paid in September when rates were 80 basis points lower. Soon rates will be 180 basis points higher than in September and home values will be crushed.

The analysis on the housing market above is an excerpt from the latest Short Seller’s Journal,  a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here:   Short Seller’s Journal information.

The Fed’s “Catch 22”

Before diving into the topic, let’s be clear about one thing:  The economic definition of “inflation”  is the increase in money supply relative to the marginal increase of wealth output (GDP) in the economic system for which money supply is created. This is differentiated from “price inflation,” which is “a general rise in prices.”

Money and credit creation in excess of wealth output causes currency devaluation.  It is this currency devaluation that arises from money and credit printing that causes “price inflation.”  More money (and credit) chasing a relatively less amount of “goods.”

Furthermore, the commonly used price inflation reference is the Government’s CPI.  The CPI measurement of inflation has been discredited ad nauseum.  And yet, 99% of analysts, commentators, bloggers, financial media meat-with-mouths, etc uses the CPI as their inflation trophy.   But the CPI has been statistically manipulated to mute price inflation since the early 1970’s, when then-Fed Chairman, Arthur Burns, correctly understood that the currency devaluation that was going to occur after Nixon closed the gold window would have adverse political consequences.  Today, the CPI measurement of price inflation is not even remotely close to the true rise in prices that has occurred over the last 8 years. Over the last 47 years, for that matter.

This notion of rising inflation seems to be the en vogue “economic” discussion now.  But the event that causes the evidence of currency devalution – aka “inflation” – has largely occurred over the past 8 years of global money printing.  If your general basket of expenditures for necessities – like housing, healthcare, food, energy,  and transportation – has risen by a considerable amount more over the last 5-7 years than is reflected in the CPI, ask either the Bureau of Labor Statistics, which publishes the  CPI report – or the moronic analysts who insist erroneously on using the CPI as the cornerstone of their suppositions – why that is the case.

The Fed’s Catch 22 – It’s been estimated that the Treasury will need to sell $1.4 trillion new bonds this year to cover the spending deficit that will result from the tax cuts combined with the record level of Government spending just approved by Congress and Trump. With the dollar declining, foreign Treasury buyers are sitting on significant losses on their Treasury holdings. As an example, since March the dollar has dropped 16% vs. the euro. Add this to falling Treasury bond prices (rising yields), and European holders of Treasuries, especially those who have to sell now for whatever reason, have incurred a large drop in the euro-value of their Treasury bonds. The same math applies to Japanese Treasury bond investors, as the dollar has fallen nearly 9% vs. the yen since March.

One of the primary fundamental factors causing the dollar decline is the continuously deteriorating fiscal condition of the U.S. Government. If the Fed continues hiking interest rates at the same pace – 1.25% in Fed Funds rate hikes over two years – the dollar will continue declining. The pace of the rate hikes is falling drastically behind just the official measurement of inflation (CPI). Imagine the spread between the real rate of inflation (John Williams estimates actual inflation to be at least 6%) and the Fed funds rate, also known as “real interest rates.” Real interest rates using a real measure of inflation are thus quite negative (6% inflation rate minus 1.25% Fed funds = negative 4.75% real rate of interest). As negative real rates widen, it exerts further downward pressure on the value of the dollar.

The Fed could act to halt the falling dollar by hiking rates at a faster pace and actually sticking to its stated balance sheet reduction schedule. But in doing so, the Fed risks sending the economy into a rapid tail-spin. Higher rates and less banking system liquidity will choke-off the demand for the low-cost credit – auto, credit card and mortgage loans – that has been stimulating consumer spending. In fact, I have made the case in recent SSJ issues that the average household is now near its limitations on taking on more debt. Consumer borrowing, and thus consumer spending, will decelerate/decline regardless of the cost of borrowing. We are seeing this show up in retail sales (more on retail sales below) and in stagnating home sales.

As it stands now, based on its reluctance to reduce its balance sheet at the $10 billion per month rate initially set forth by Janet Yellen, it appears that the Fed is fully aware of its Catch 22 predicament. Last week, in response to the nearly 10% plunge in the Dow/SPX, the Fed actually increased its QE holdings by $11 billion. It did this by adding $11 billion in mortgages to its SOMA account (the Fed’s QE balance sheet account). This is an injection of $11 billion in liquidity directly into the banking system. This $11 billion can, theoretically, be leveraged into $99 billion by the banks (based on a 10% reserve ratio). The dollar “saw” this move and dropped over 2.2% in the first four trading days this past week before experiencing a small technical bounce on Friday. The 10-yr Treasury hit 2.93% last week before settling Friday at 2.87%. 2.87% is a four-year high on the 10-yr.

Why Even Pretend There’s A Debt Ceiling Limit?

The current “debt ceiling” has been suspended until March 2019. The current amount of Treasury debt outstanding is $20.681 trillion. It has been estimated that the amount of Treasury outstanding by March 2019 will be as high as $22 trillion. U.S. Government has, for all intents and purposes, operated without a constraint on debt issuance since 2013:

Beginning in 2013, Congress has taken to temporarily suspending the debt limit, rather than raising it directly. The debt limit has now been suspended on five occasions, most recently as part of the Bipartisan Budget Act of 2018, which suspends the debt limit through March 1, 2019. When that suspension expires, the debt limit will be reinstated at a new, higher level.Bipartisan Policy Center

Note that the estimate of $22 trillion in Treasury debt outstanding by March 2019 is just an estimate from the Committee for a Responsible Federal Budget. But the suspension of the debt ceiling gives the Government carte blanche to spend as much as it wants without restraint. In theory, the amount of Treasury debt could me much higher than $22 trillion by March 2019.

Furthermore, based on the track record of Congress and the President since 2013, the debt ceiling will likely be waived once again. Why even bother playing this game? The Treasury debt doubled under Bush II from $5.7 trillion to $11.2 trillion. Under Obama the debt outstanding nearly doubled again. If this pattern simply repeats, the debt will double again under Trump or under Trump + Trump’s successor after four years.

But it will likely more than double. The cost of interest on the Treasury debt in 2017 was $458 billion. This was 11.5% of the Government’s total expenditures in FY 2017. Already in the first four quarters of FY 2018, the Government has spent $174.8 billion in interest expense – a run-rate of $524.4 billio – 12.8% of the Government’s FY 2018 budget . By the end of FY 2018, the total interest expense will be even higher because the amount of debt outstanding will be have increased over the year by at least $1 trillion and probably more.

The question, then, is why even bother with the debt ceiling?  What’s the point of pretending?  The debt ceiling was meant to act as a “brake” on the Government’s fiscal recklessness.  But now it’s so easy to suspend the ceiling it makes no sense to waste time going through the formality of suspending it.  The U.S. is on debt-driven suicide path anyway.

Money that is borrowed behaves exactly like money created (printed) until the borrowed money is repaid and the debt is extinguished.  But the Federal Government, for all intents and purposes has not repaid a dime of the amount borrowed for many decades.  In effect, in addition to the money that has been printed by the Fed, there is another $20.6 trillion of money that has been created by debt issuance and spent just like actual currency printed.

At some point, this de facto dollar devaluation is going to exert brutal and inexorable downward pressure on the value of the US dollar.  Furthermore, at some point, the U.S.’ biggest creditors – like China – are going to say “no mas” to participating in Treasury debt issuance.   That’s when the real fun will begin, especially for those long gold and silver.

Do Bona Fide Financial Markets Still Exist?

Paul Craig Roberts, Dave Kranzler, Michael Hudson

For many decades the Federal Reserve has rigged the bond market by its purchases. And for about a century, central banks have set interest rates (mainly to stabilize their currency’s exchange rate) with collateral effects on securities prices. It appears that in May 2010, August 2015, January/February 2016, and currently in February 2018 the Fed is rigging the stock market by purchasing S&P equity index futures in order to arrest stock market declines driven by fundamentals, and to push prices back up in keeping with a decade of money creation.

No one should find this a surprising suggestion. The Bank of Japan has a long tradition of propping up the Japanese equity market with large purchases of equities. The European Central Bank purchases corporate as well as government bonds. In 1989 Fed governor Robert Heller said that as the Fed already rigs the bond market with purchases, the Fed can also rig the stock market to stop price declines. That is the reason the Plunge Protection Team (PPT) was created in 1987.

Looking at the chart of futures activity on the E-mini S&P 500, we see an uptick in activity on February 2 when the market dropped, with higher increases in future activity last Monday and Tuesday placing Tuesday’s futures activity at about four times the daily average of the previous month. Futures activity last Wednesday and Thursday remained above the average daily activity of the previous month, and Friday’s activity was about three times the previous month’s daily average. The result of this futures activity was to send the market up, because the futures activity was purchases, not sales.

Who would be purchasing S&P equity futures when the market is collapsing from under them? The most likely answer we can come up with is that the Fed is acting for the PPT. The Fed can actually stop a market decline without purchasing a single futures contract. All that has to happen is that a trader recognized as operating for the Fed or PPT enters a futures bid just below the current price. The traders see the bid as the Fed establishing a floor below which it will not let the market fall. Expecting continuing declines to make the bid effective, they front-run the bid, and the hedge funds algorithms pick it up, and up goes the market.

Is there another explanation for the shift in the market from decline to rise? Are retail investors purchasing dips? Not according to this report in Bloomberg — — that last week a record $23.6 billion was removed from the world’s largest ETF, the SPDR S& 500 index fund. Here we see retail investors abandoning the market.

If central banks can produce zero interest rates simultaneously with a massive increase in indebtedness, why can’t they keep equity prices far above the values supported by fundamentals? As central banks have learned that they can rig financial asset prices to the delight of everyone in the market, in what sense does capitalism, free markets, and price discovery exist? Have we entered a new kind of economic system?’s Accounting Pornography

I wrote the following analysis on’s GAAP accounting manipulation for Seeking Alpha… (AMZN) released its earnings on Thursday, February 1st after the market closed. The headline net income number was $3.85/share. This blew away Wall Street’s estimate of $1.85/share, which is a bit peculiar since the traditional “beat the Street” earnings game is accomplished by guiding Wall Street analysts to an earnings consensus that is slightly below the posted result.

The revenue growth rate was truly impressive. For Q4 2018 vs. 2017, revenues jumped 38.2%. For the full year, revenues grew 30.8%. However, without question AMZN’s free 2-day shipping associated with its Prime membership is the driving force behind sales growth. But at what cost? The table below shows AMZN’s revenue growth rate plus cost and operating margins from 2005 – 2007. The data is from AMZN’s 10-k filings.

Cost of fulfillment is the cost of de-stocking an item and getting it to the customer’s doorstep. The fourth line item above shows fulfillment costs over time. As you can see, the cost of fulfillment as a percentage of revenues has doubled since 2006. For every dollar of revenue, AMZN spends nearly 23 cents getting inventory delivered to end-users.

You can read the rest of this article here:   Amazon’s Deceptive Accounting Games

I also publish the Short Seller’s Journal, which is a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here:  Short Seller’s Journal information.

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The Stock Market – Dow And SPX – Could Easily Drop 50%

Jim Rogers stated in an interview with Bloomberg that “the next bear market will be worst in my lifetime,” adding that he didn’t know when that bear market would occur. The stock market has become insanely overvalued. Before last week, several market-top “bells” were ringing loudly. The stock market could easily drop 50% and, by historical metrics, still be overvalued.

Gold, silver and the mining stocks have been pulling back since late January. In fact, I warned my Mining Stock Journal subscribers in the January 25th issue that the sector was getting ready for bank-manipulated take-down. In the latest issue I offered a view on when the next move higher could begin. Mining stocks in relation to the price of gold and silver have become almost as undervalued as they were in December 2015, when the sector bottomed from the 4 1/2-year cyclical correction. In a recent issue I listed my five favorite junior mining stocks.

I was invited to join Elijah Johnson and Eric Dubin on Silver Doctors’ weekly Metals & Markets podcast. We discussed the stock market, precious metals and the Fed’s next policy direction:

I also publish the Short Seller’s Journal, which is a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here:   Short Seller’s Journal information.