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The Powell Helium Pump
The stock market has gone “Roman Candle” since Fed Chairman, Jerome Powell, gave a speech that was interpreted as a precursor to the Fed softening its stance on monetary policy. Not that intermittent quarter-point Fed Funds rate nudges higher or a barely negligible decline in the Fed’s balance sheet should be considered “tight” money policy.
Credible measures of price inflation, like the John Williams Shadowstats.com Alternative measure, which shows the rate of inflation using the methodology in place in 1990, show inflation at 6%. The Chapwood Index measures inflation using the cost of 500 items on which most Americans spend their after-tax income. The index is calculated for major metro areas and has inflation averaging 10% (The John Williams measure which uses 1980 Government methodology also shows the current inflation at 10%).
Using the most lenient measure above – 6% current inflation – real interest rates are negative 3.5% (real rate of interest = Fed Funds – real inflation). The “neutral” interest rate would reset the Fed Funds rate to 6%. In other words, the Fed should be targeting a much higher Fed Funds rate.
So, if the economy is booming, as Trump exclaims daily while beating his chest – and as echoed by the hand-puppets in the mainstream media – why is the Fed relaxing its stance on monetary policy? The huge jump in employment, per the December jobs report, should have triggered an inter- FOMC meeting rate hike to prevent the economy from “over-heating.”
In truth, the economy is not “booming” and the employment report was outright fraudulent. The BLS revised lower several prior periods’ employment gains and shifted the gains into December. The revisions are not published until the annual benchmark revision, on which no one reports (other than John Williams). Not only will you never hear or read this fact from the mainstream financial media and Wall Street analysts, most if not all of them are likely unaware of the BLS recalculations.
The housing market is deteriorating quickly. Housing and all the related economic activity connected to homebuilding and home resales represents at least 20% of GDP. And the housing market is not going to improve anytime soon. According to a survey by Fannie Mae, most Americans think it’s a bad time to buy a home even with the large decline in interest rates recently.
Several other mainstream measures of economic activity are showing rapid deterioration: factor orders, industrial production, manufacturing, real retail sales, freight rates etc. Moreover, the average household is loaded up its eyeballs with debt of all flavors and is sitting on a near-record low savings rate. Corporate debt levels are at all-time highs. In truth the economy is on the precipice of going into a tailspin.
The stock market is the only “evidence” to which Trump and the Fed can point as evidence that the economy is “strong.” Unfortunately, over the last decade, the stock market has become an insidious propaganda tool, used and manipulated for political expediency. The stock market can be loosely controlled by the Fed using monetary policy.
The stock market can be directly controlled by the Working Group on Financial Markets – a subsidiary of the Treasury mandated by a Reagan Executive Order in 1988 – using the Exchange Stabilization Fund. Note: anyone who believes the Exchange Stabilization fund and the Working Group are conspiracy theories lacks knowledge of history and is ignorant of easily verifiable facts.
Trump referred to the stock market as a “big fat ugly bubble” in 2016 when he was running for President with the Dow at 17,000. If it was a visually unaesthetic sight back then, what should it labelled now when it almost hit 27,000 in 2018? Trump blamed the recent decline in stock prices on the Fed. Worse, Trump has put inexorable political pressure on the Fed to loosen monetary policy and stop nudging rates higher. Note that this debate never covers the topic of “relative valuation…”
The weekend before Christmas, after a gut-wrenching sell-off in the stock market, the Secretary of Treasury graciously interrupted his vacation in Mexico to place a call to a group of Wall Street bank CEOs to lobby for help with the stock market. The Treasury Secretary is part of the Working Group on Financial Markets. The call to the bank CEOs was choreographically followed-up by the stock market-friendly speech from Powell, who is also a member of the Working Group.
The PPT combo-punch jolted the hedge fund algos like a sonic boom. The S&P 500 has shot up 10.8% in the ten trading days since Christmas. It has clawed back 56% of the amount its decline between early September and Christmas Eve.
In reality, the speech was not a “put” because a “put” implies the installation of a safety net beneath the stock market to stop the descent. Rather, the speech should be called, “Powell’s Helium Pump.” This is because the actions by Mnuchin and Powell were specifically crafted with the intent to drive the stock market higher. It’s worked for a week, but will it work long term? History resoundingly says, “no.”
Make no mistake, this nothing more than a temporary respite from what is going to be a brutal bear market. The vertical move in stocks was triggered by official intervention. It has stimulated manic short-covering by the hedge fund computer algorithms and panic buying by obtuse retail investors.
Investors are not used to two-way price discovery in the stock market, which was removed by the Federal Reserve and the Government in late 2008. Many money managers and retail investors were not around for the 2007-2009 bear market. Most were not around for the 2000 tech crash and very few were part of the 1987 stock crash.
The market’s Pied Pipers have already declared the resumption of the bull market, Dennis Gartman being among the most prominent. More likely, at some point when it’s least expected, the bottom will once again fall away from the stock market and the various indices will head toward lower lows.
In the context of well-heeled Wall Street veterans, like Leon Cooperman, crying like babies about the hedge fund algos when the stock market was spiraling lower, I’m having difficulty finding anyone whining about the behavior of the computerized buy-programs with the stock market reaching for the moon.
Welcome To 2019: Declining Stocks, A Falling Dollar And Rising Gold / Silver Prices
The stock market has become the United States’ “sacred cow.” For some reason stock prices have become synonymous with economic growth and prosperity. In truth, the stock market is nothing more than a reflection of the inflation/currency devaluation caused by the Fed’s money printing and lascivious enablement of rampant credit creation. 99% of all households have not experienced the rising prosperity and wealth of the upper 1%. The Fed’s own wealth distribution statistics support this assertion.
It’s been amusing to watch Trump transition from tagging the previous Administration with creating a “big fat ugly stock bubble” – with the Dow at 17,000 – to threats of firing the Fed Chairman for “allowing” the stock market to decline, with the Dow falling from 26,000 to 23,000. If the stock market was big fat ugly bubble in 2016, what is it now?
If the Fed pulls back from its interest rate “nudges” and liquidity tightening policy, the dollar will sell-off, gold will elevate in price rapidly and the Trump Government will find it significantly more difficult to finance its massive deficit-spending fiscal policy. Welcome to 2019…
SBTV, produced by Silver Bullion in Singapore, invited me onto their podcast to discuss the Fed, the economy and, of course, gold and silver:
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If you are interested in ideas for taking advantage of the inevitable systemic reset that will hit the U.S. financial and economic system, check out either of these newsletters: Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.
A Quiet Bull Move In Gold, Silver And Mining Stocks
Silver is up 12.4% since November 11th, gold is up 9.3% since August 15th. But the GDX mining stock ETF is up 21.4 % since September 11th. GDX is actually up 71% since mid- January 2016. By comparison, the SPX is up just 34% over the same time period (Jan 19th, 2016).
There’s a quiet bull market unfolding in the precious metals sector. But don’t expect to hear about it on CNBC, Bloomberg TV or Fox Business – or the NY Times, Wall Street Journal and Barron’s, for that matter.
My colleague Trevor Hall interviewed precious metals analyst and newsletter purveyor, David Erfle to get his take on what to expect in 2019 for the sector and a couple of his favorite stocks (download this on your favorite app here: Mining Stock Daily):
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I discuss my outlook for the precious metals and mining stocks in my latest Mining Stock Journal, released to subscribers last night. I also present a list of large and mid-cap mining stocks that should outperform the market for at least a few months, including ideas for using call options. You can learn more about the Mining Stock Journal here: Mining Stock Journal information.
Mining Stock Daily’s 2019 Outlook For Precious Metals
A quiet bull market in mining stocks is underway. The GDX ETF closed trading on New Year’s Eve up 2.37%. Through Monday, the GDX has risen 20% since hitting a 52-week low close of $17.57 on September 11, 2018. In popular parlance, GDX is now in a “bull market.”
We expect that a significant bull move will occur and a significant amount of capital will pull out of “risk assets” and move into physical gold and silver for wealth preservation/flight-to-safety.
Click on the image below to hear the short and sweet 2019 inaugural Mining Stock Daily Podcast:
Mining Stock Daily is produced by Clear Creek Digital and the Mining Stock Journal.
“The Establishment Will Never Say No to a War”
It’s time to end the absurd “war on terror.” What exactly is the U.S. Government fighting? Hillary Clinton asserted that pulling out of Syria would “put our national security as grave risk.” Huh? I see the U.S. military terrorizing the citizens of the countries occupied by U.S. forces all over the world. I have yet to see a Syrian military jet fly beyond the Middle East airspace looking to drop bombs on anything deemed “a threat to national security interests.”
“…Washington never learns this lesson, cannot relinquish the imperial temptation, even as it has bankrupted us, killed and maimed thousands of young Americans, and turned us into a country that commits war crimes. If you want to understand why we have a resurgence of populism and why a patently unfit person like Trump became president, it’s because most Americans know when their government refuses to do what its people want.” (Andrew Sullivan, New York Magazine)
“War is peace. Freedom is slavery. Ignorance is strength.” (George Orwell, 1984). There’s a lot of concepts embodied in that Orwell quote. If Orwell had titled his novel, “2018” instead of “1984,” the timing of his prophetic narrative would have been perfect.
“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist.”
That quote by President Eisenhower never gets old with me. Unfortunately, the U.S. military industrial complex has become Eisenhower’s nightmarish warning incarnate. We are living and breathing the business of war to the extent that its trappings now adorn even professional and collegiate sporting events. I never thought I would see it, but Fox News and CNN now are on the same page with respect to the use of militarism and U.S. imperialism.
This commentary written by Andrew Sullivan for the New Yorg Magazine’s Intelligencer is a must-read for putting the U.S. “war on terror” in proper perspective. The Afghanistan and Middle East imperialistic campaigns are Viet Nam on steroids. When George W took office, the Defense budget was $380 billion. By Q3 2018 it hit $785 billion. Most of this spending has been a gross transfer of wealth from the public to the companies that supply weapons and services to the Department of Defense. Just ask Jeff Bezos and Eric Schmidt, who both sit on a little-known, defense technology advisory board. Both CEO’s companies rake in $100 of millions in revenues from supplying services to the Deep State.
“Neoconservatism, it seems, never dies. It just mutates constantly to find new ways to intervene, to perpetuate forever wars, to send more young Americans to die in countries that don’t want them amid populations that try to kill them. If you want the most recent proof of that, look at Yemen, where the Saudi policy of mass civilian deaths in a Sunni war on Shiites is backed by American arms and U.S. It’s also backed by American troops on the ground — in a secret war conducted by Green Berets that was concealed from Congress…”
PLEASE CLICK HERE TO READ THE REST OF “The Establishment Will Never Say No to a War”
The Fed’s Frankenstein
“Commentators keep asking why the Fed can’t raise rates if the economy is so strong? They still don’t realize that the economy was never strong. They confuse a bubble for strength. Without 0% rates and QE the bubble can’t survive. But a return to those policies kills the dollar” – Peter Schiff on Twitter
I made that same argument about the Fed funds rate, the dollar and why the Fed has to keep “nudging” the Fed funds rate higher in a podcast conversation with James Anderson at Silver Doctors last week.
Yesterday’s 1000-point spike up in the Dow may have been the largest one-day point gain in Dow, but it was far from the largest percentage point gain. The two largest percentage point gains occurred in October 2008: a 11.08% gain on October 13, 2008 and a 10.88% gain on October 28, 2008. Those two days took the Dow just above 9,000. A little more than four months later, the Dow closed at 6,626. Yesterday’s market action was nothing more than evidence that the Fed’s Frankenstein has gone off the chain…
Despite official prevention efforts, two-way price discovery has been introduced to the stock market. The Establishment, lazy, entitled and fattened-up on the 10-year stock bubble, has gone into convulsions over the possibility that the stock market will do anything but move higher. The Wall Street Journal published an article blaming the Christmas Eve stock market massacre on the algos. Even well-seasoned market veterans like Leon Cooperman were whining about the two-way price action and the role of HFT-driven hedge fund algorithm trading. Where were these cries of distress when the market was driven relentlessly higher by QE-armed algos over the last 10-years?
Some chart “experts” have labeled the market “extremely oversold.” But the stock market has been extremely overbought for the better part of the last 8 years. By what measure is the market “extremely oversold” in this context? Looking at a monthly chart of the SPX going back to 1999, the MACD was at it’s most extreme overbought by far at the beginning of 2018.
But the current sell-off has barely moved the needle on the monthly MACD. It’s nice to draw symmetrical geometric shapes and lines which are fit to charts ex post facto (i.e. Monday morning armchair QB). But the fundamentals beneath historically overvalued financial assets are cratering very rapidly.
The drop in stocks since early October has done little to correct the extreme condition of overvaluation – aka “the bubble.” Using real numbers to calculate preferred valuation ratios used by “analysts,” rather than manipulated Government GDP/inflation and phony GAAP numbers used by these “analysts,” the overvalued condition of the stock market the most extreme in history.
A coordinated Central Bank-engineered bounce is to be expected and certainly there’s extreme political pressure in the U.S. for this. But more intervention preventing true price discovery merely defers the inevitable rather than fixing the underlying systemic problems. Furthermore, as evidence of the market’s reaction on Monday after reports hit the tape that the Treasury Secretary (head of the Working Group Group on Financial Markets) was convening the CEO’s of the six biggest banks to discuss the market sell-off, official intervention serves only to signal to the markets that something is profoundly wrong with the system, contrary to official propaganda.
Wednesday’s 1000-point price-spike reflects a completely dysfunctional stock market. Just like the big moves in October 2008, it also foreshadows a much steeper sell-off coming. The story did not end well for Shelley’s Frankenstein. Neither will it end well for the Fed’s creature. It’s going to get a lot more painful for those who have been conditioned to believe that stocks only rise in price.
Stocks Have A Long Way To Fall
“Once the Treasury Secretary starts to pump the stock market, you know there’s a problem” – James Anderson, Silver Doctors / SD Bullion
The Central Bank money printing and artificial suppression of interest rates over the last 10 years did a good job of deferring the financial and economic crisis that hit in 2008. But this “treatment” served only to cover up the problems. It did not directly address and fix the problems. In fact, the monetary and fiscal policies implemented globally stimulated a record level of debt and derivative issuance at a rate that far exceeded the nominal growth rate in GDP. The markets are telling us that the system has once again exceeded the limits in its ability to “support” the amount of liabilities accumulated over the last 10 years.
Silver Doctor’s James Anderson invited me onto his podcast to discuss the Fed, the stock market, the U.S. dollar, housing, Tesla/Elon Musk and, of course, gold. There’s a humorously edited video clip featuring Elon Musk at the end (it’s hilarious):
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If you are interested in ideas for taking advantage of the inevitable systemic reset that will hit the U.S. financial and economic system, check out either of these newsletters: Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.
The Financial System Is Becoming Increasingly Unstable
Bloomberg posted an article this morning describing the Collateralized Loan Obligation market as “Wall Street’s Billionaire Machine.” But I seem to recall that the CLO market was one of the financial nuclear bombs that blew up and triggered the financial system de facto collapse in 2008. Well, it’s back – with a vengeance. Of course the taxpayers were once again sold a bill of goods never delivered when it was promised that the Dodd-Frank farce legislation would “protect” the system from the re-development of these financial weapons of mass destruction…
Bank stocks are in a bear market now and there’s a reason for that. Many of you have probably seen leveraged loan ETF charts that look like this:
The chart above shows an ETF operated by Blackstone that invests in senior secured leveraged loans. Typically these loans fund private equity leveraged buyouts. But any highly leveraged company with a junk bond credit rating is a Wall Street candidate for this type of loan.
What you’re seeing in the chart above is the beginning of an investor stampede out of this asset class. This asset flourishes in the type of money environment – Central Bank money printing and interest rate intervention – that has existed for the last 10 years. The loans carry a higher rate of interest than an investment grade corporate bank loan. This appeals to pensions and insurance companies, which need to find the highest risk-adjusted interest bearing investments possible. I like to call these: “c’mon in the water is fine” loans. These are the type of loans that get magically transformed in to CLO’s – like lead into gold – at least the for Wall Street scammers who do the transforming.
As I’ve mentioned previously, credit market investors tend to be more risk-averse than equity players. They also scrutinize financial fundamentals more closely. To this end, bank debt investors are the most conservative. They also get to see the non-public financials of the companies to which they lend. That chart above reflects the onset of fear of in the leveraged bank debt market. It means that these investors likely have been seeing negative trends in corporate financials develop.
When I showed that chart to a colleague of mine earlier this week, his response was: “it looks like parts of the stressed financial system are breaking at the same time – dominoes are falling.” He was referencing the leveraged loan, investment grade and high yield debt markets. The latter two had been showing signs of breaking down well before the leveraged loan market started to crater. Investors have been pulling pulling billions out of all three segments of the credit market. The deteriorating financial condition of corporate America is spreading its wings. This is part of the reason the volatility in the stock market has ramped up recently.
Bank stocks are in a bear market and bank liquidity is drying up – There’s a massive liquidity crisis developing and the chart of SRLN reflects that. The sell-off in the housing stocks – down over 30% since the end of January foreshadowed this, just like the sell-off in homebuilders preceded the onset of the last financial crisis. This time it will be worse. This crisis is beyond the banking crisis 10 years ago. It’s everything. You do not want to be a creditor or own stocks going forward.
Looks like the Spanish philosopher, George Santayana, was correct: We did not learn from the past and now we’re condemned to repeat it.
It’s Lose-Lose For The Fed And For Everyone
A friend asked me today what I thought Powell should do. I said, “the system is screwed. It ultimately doesn’t matter what anyone does. The money printing, credit creation and artificially low interest rates over the last 10 years has fueled the most egregious misallocation of capital in history of the universe.”
Eventually the Fed/Central Banks will print trillions more – 10x more than the last time around. If they don’t this thing collapses. It won’t matter if interest rates are zero or 10%. You can’t force economic activity if there’s no demand and you’ve devalued the currency by printing it until its worth next to nothing and people are toting around piles of cash in a wheelbarrow worth more than the mountain of $100 bills inside the wheelbarrow.
The price of oil is down another $3.50 today to $46.50. That reflects a global economy that is cratering, including and especially in the U.S. Most people will listen to the perma-bullish Wall Streeters, money managers and meat-with-mouths on bubblevision preach “hope.”
Anyone who can remove their retirement funds from their 401k or IRA and doesn’t is an idiot. Anyone thinking about selling their home but is waiting for the market to “climb out of this small valley in the market” will regret not selling now.
Forget Powell. What can you do? There is no asset that stands on equal footing with gold. You either own it or you do not.
“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” – George Bernard Shaw
The Housing Market Is Sliding Down The Wall It Hit In Late August
A couple of my subscribers emailed me expressing frustration over the fact that their recent homebuilder puts are either not moving higher or losing value despite the sell-off in the overall stock market. There’s two factors. First, the homebuilder sector has dropped well over 30% since late January. To an extent there may be some seller’s fatigue. At some point there will be short term rally that could generate at 15-25% bounce in the sector. I believe that rally will occur from a lower level on the DJUSHB currently, but it’s always a risk if you are short.
The second factor is the abrupt move in the 10yr Treasury yield from 3.25% down to 2.85%. This move occurred in four weeks. This is a big move in that period of time. Hedge fund algos are programmed to buy homebuilders when interest rates drop on the premise that lower rates stimulate home sales. It’s really that simplistically knee-jerk. That’s why the Dow can fall 400 points and the homebuilders remain flat or even move higher (stocks fall and the money flows into Treasuries which drives yields lower and homebuilders higher). Since the stock market began dropping in late October, the DJUSHB has moved from 595 to as high as 683 intra-day on November 28th. I’m surprised it didn’t bounce over 700. The move from 595 to a high-close of 686 on November 29th. This is nearly a 15% bounce. The DJUSHB closed at 643 this past Friday, down 5.6% from the 686 close.
But lower rates in the current context are not going to be a benefit for home sales. The mini-crash in the 10yr yield, combined with the flat yield curve, reflects a weak economy growing weaker. Potential homebuyers, in conjunction with the tightening credit market discussed above, are going to find it hard to qualify for a mortgage. Many no longer have the ability to make even a 3% down payment. Two weeks ago on Friday, when the stock market began to tank, the DJUSHB was up as much 14 points from Friday’s close. The DJUSHB closed down 8 points (1.2%) for the day. This was with the 10yr yield closing at its lowest yield since August 31st. On that day, the DJUSHB closed at 768. With the DJUSHB at 661, it’s 14% below where it was trading the last time the 10yr hit 2.85%.
Reinforcing my assertions above about the financial condition of prospective middle class homebuyers, The U of Michigan released its December consumer sentiment index on Friday. While the overall index was flat vs November, the future expectations component (the “hope” index) fell to its lowest level since December 2017. However, the homebuying conditions index fell to its lowest in 10 years. Recall that the homebuilders sentiment index for November plunged.
The graph below shows what’s going with builders in terms of actual economics. The chart plots the ratio of homebuilding permits to completions. Permits can be a fluff number because a homebuilder does not have put up much money to file a building permit. But completions reflects both demand and a homebuilder’s willingness to build spec homes (homes without buyer orders). A falling ratio indicates falling demand from buyers, rising order cancellation rates and risk aversion from homebuilders.
Another indication of the air flowing out of the housing bubble is the bidding war indicator. A subscriber sent me an article from the Seattle Times on the stunning drop in multiple bids for the same home across the country in the previously hottest bubble areas. In February 2018 in Seattle, for instance, 81.4% of listed homes had multiple bids. By November that number plunged to 21.5%, the lowest percentage of multiple bids on homes for sale in the history of the metric (Redfin began tracking this data in 2011). Other cities that made the top-10 list by Redfin include Boston, L.A., San Diego, Washington DC, Denver, Portland, Austin – all included in any list of the hottest bubble markets over the last 5 years.
The bottom line: We may have just seen the first real bear market counter-trend rally in the builders when the DJUSHB jumped 15% over three months. If the 10yr continues to drift lower, we might see one more push higher.
The above commentary is an excerpt from a recent Short Seller’s Journal. The latest issue has a short idea related to new housing starts that has at least 50% downside. To learn more about this newsletter, click here: Short Seller’s Journal information