Tag Archives: Jerome Powell

The Fed Panics And Gold Soars

First it was the loudly broadcast convening of the Working Group on Financial Markets – aka “the  Plunge Protection Team” – by the PPT’s el Jefe, Steven Mnuchin.  This was followed the “mouse that roared” speech from Fed head, Jerome Powell, hinting that the Fed would moon-walk away from rate hikes.

Today was trial Hindenburg launched by the Wall St Journal suggesting that the Fed was considering curtailing the the FOMC’s balance sheet Weight Watchers program.  The terminology used to describe the Fed’s actions is Orwellian vernacular. “Reserve levels” – as in, “leaving more reserves on the Fed’s balance sheet” – sounds mundane. In plain-speak, this is simply the amount of money the Fed printed and will leave in the financial system or risk crashing the stock market.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession.  I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications but the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike.”

Little did I realize when I wrote that two weeks ago that the assertion would be validated just two weeks later. When this fails to re-stimulate economic activity, the Fed will eventually resume printing money.  Ultimately the market will figure out that it’s a very bad thing that the only thing holding up the stock market is the Fed.

The policy reversal by the Fed reflects panic at the Fed. Nothing reflects “Fed Panic” better than the price of gold:

Powell Is Not An Economist – And The Fed Is Not Tightening Monetary Policy

Fed Head, Jerome Powell, is not an economist. He’s a politician who made a lot of money at the Carlyle Group. He has an undergraduate degree in politics and went to law school. After working for awhile as a lawyer at a big Wall St. firm, Powell migrated to investment banking at Dillon Read. Powell must have built a relationship with Nicholas Brady at Dillon Read, because he jumped from Dillon Read to positions in Brady’s Treasury Department under George H. Bush. From there he took an ill-fated position at Bankers Trust and was somehow connected to the big derivatives scandal that eventually forced BT into the arms of Deutsche Bank. Information about Powell’s role at BT have been cleansed from the internet but he resigned from BT after Proctor & Gamble filed a lawsuit that exposed a large derivatives scandal.

The point of this is that it would be a mistake to analyze anything Powell says in his role as Fed Head as anything other than the regurgitation of previous oral flatulence emitted by Bernanke and Yellen. First and foremost, Powell’s agenda will be to protect the value of private equity investments at firms like the Carlyle Group. In this regard, Powell’s wealth preservation interests should have precluded him from assuming the role of Fed Head. Then again, he’s not an economist. The last Fed Head who was not a trained economist was G. William Miller, appointed by Jimmy Carter in 1978. How well did that work out?

While many “analysts” have looked to statements made by Powell in 2012 that expressed a somewhat “hawkish” stance on monetary policy, it’s more important to watch what the Fed does, not says. Since the balance sheet reduction process was supposed to begin starting in October, the Fed’s balance sheet has been reduced from $4.469 trillion as October 16, 2017 to $4.458 trillion as of February 21. “Qualitative tightening” of just $11 billion. This is well behind the alleged $10 billion per month pace that was established and highly promoted by the Fed, analysts and the financial media.

Powell stated to today that the Fed will continue with “gradual rate hikes.” What does this mean? Over the last two years and two months, the Fed has implemented five quarter-point rate “nudges.” Less than one-half of one percent per year. Since 1954, the Fed Funds rate has averaged around 6%. This would be a “normalized” Fed Funds rate. Based on the current rate of Fed Funds rate “hikes,” it would take six years from December 2015, when the “rate nudges” commenced, to achieve interest rate “normalization.”

But here’s why it will like take a lot longer and may never happen:

The chart above shows the dollar amount of consumer debt that is in delinquency. It was $33.3 billion as of the end of Q3 2017. It is at the same level as it was in Q2 2008. The data is lagged. I have no doubt that is likely now closer to $36 billion, which is where it was in Q3 2008. If anything, we will eventually see “faster-than-gradual” drops in the Fed Funds rate.

With Government, corporate and household debt at all time highs, and with delinquency rates and defaults escalating quickly – especially in auto and credit card debt – the only reason the Fed would continue along the path of tightening monetary policy as laid out – but not remotely adhered to – over two years ago, is if for some reason it wanted blow-up the financial system. Au contraire, hiking rates and shrinking the Fed’s balance sheet is not in the best interests of the Too Big To Fail Banks or the net worth of Jerome Powell.