A Loose Relationship

The Dow Jones Industrial Average made another concerted run at the elusive 27,000 milestone over the last several weeks.  But, as of this writing, the index has stalled out short of this psychosomatic barrier.  By our estimation, this is for the best.

 

Since early 2018 the DJIA has gone nowhere, albeit in interesting ways… [PT]

 

While not always apparent, the stock market generally maintains a loose connection to the underlying economy. Over long multi-decade periods, as measured by the price-to-earnings (P/E) ratio, it will undulate between stages when it is cheap and stages when it is dear. Eventually, however, the stock market reverts towards its mean P/E ratio – always overshooting and undershooting as it cycles about.

One of the unintended consequences of fiscal and monetary intervention is that it distorts this relationship. Stimulus intended to juice the economy has the effect of juicing financial markets. Sometimes these inflationary policies have the effect of completely disconnecting the stock market from the economy.

For example, Venezuela’s Caracas Stock Exchange, Stock Market Index, has soared almost 36,000 percent in the past year alone.  Yet no one, save President Nicolás Maduro, would point to the booming Caracas Stock Exchange as an indication of a healthy and sound economy. In truth, the Caracas Stock Exchange is a barometer of the country’s insane economic policies.

 

Venezuela’s hyperinflation-driven stock market. Note: adjusted for the three 1 for 1,000 reverse splits of the index since early 2014, its 21st century low (established in 2002) was 0.000008 points. [PT]

 

While we are at it, here is the most recent update of the VEF (bolivar) to USD black (read: free) market exchange rate – this chart shows the unadjusted rate, but in August 2018 five zeros were actually shaved off (a 1 for 100,000 “reverse split” of the currency). The exchange rate is therefore actually 6,572 new bolivares per USD. If one adjusts the 2010 low of about 8 VEF per USD accordingly, it was 0.00008 VEF per USD. This is why the stock market has soared in VEF terms despite a free-fall in Venezuela’s economic output. [PT]

 

Hence, after a decade long bull market in U.S. stocks, one that has pushed the P/E ratio to nosebleed levels, we find comfort and relief in a sideways or falling stock market. Perhaps the U.S. stock market is not entirely rigged after all.  Perhaps it is only partially rigged.

Still, we have some reservations…

 

Devising a System of Chaos

When Alan Greenspan first executed the “Greenspan put” following the 1987 Black Monday crash, financial markets were well positioned for this centrally coordinated intervention. Interest rates, after peaking out in 1981, were still high. The yield on the 10-Year Treasury note was about 9 percent. There was plenty of room for borrowing costs to fall.

The mechanics of the Greenspan put are extraordinarily simple.  When the stock market drops by about 20 percent, the Fed intervenes by lowering the federal funds rate. This typically results in a negative real yield, and an abundance of cheap credit.

 

1987, DJIA daily and the 10-year Treasury note yield: birth of the so-called “Greenspan put” [PT]

 

This tactic has a twofold effect of observable market distortions. First, the burst of liquidity puts an elevated floor under how far the stock market falls – the put option effect. Second, the interest rate cuts inflate bond prices, as bond prices move inversely to interest rates.

As of the late 1980s, thanks to the Greenspan put, the Fed has been running an implicit program of counter-cyclical stock market monetary stimulus. Ben Bernanke then ratcheted up the Fed’s extreme intervention in financial markets via quantitative easing in the aftermath of the financial crisis of 2008-2009. That was when things really went nuts.

If you recall, QE involves creating money from nothing and lending it to the Treasury.  It has also involved bailing out the big banks by inter alia swapping fake money for toxic mortgage backed securities. During the next stock market crash, QE will likely involve conjuring fake money into existence and plowing it into the S&P 500 or into shares of government-preferred companies.

As you can see, U.S. financial markets have been rigged for at least three decades.  But what do you expect in a fake money system where expediency takes priority?  One expedient after another, year after year, decade after decade, has devised a system of chaos.

 

Fed Chair Powell’s Plan to Pickle the Economy

Ben Bernanke, and later Janet Yellen, said these unconventional QE policies were temporary; that the Fed’s massive balance sheet expansion would one day be normalized.  Similarly, when Richard Nixon suspended convertibility of the dollar into gold on August 15, 1971, he said it was a temporary measure.

But once a cucumber becomes a pickle, it can never be a cucumber again.  Indeed, financial markets have been pickled over to no end.  What’s more, Fed Chair Powell’s efforts to un-pickle QE were met with howls from the President, Wall Street, and Larry Kudlow.

 

Cucumbers living in jars… once pickled, they can no longer be induced to revert to their previous state. [PT]

 

These howls still continue even as Powell has reversed course and declared that unconventional policies are now the new normal.  Just this week, in reference to the Fed, Trump tweeted the following assessment:

 

“They don’t have a clue!”

 

Meanwhile, Powell, a man of expedience, is mixing up a new batch of brine to further pickle financial markets. A capital investment dearth?  Add more cider vinegar. Retail earnings slump? Mix in more salt.

 

Jerome Powell, the new pickler-in-chief [PT]

 

No doubt, the central planners have taken us to this place of absurdity – and when the economy cracks, and GDP dumps, and the stock market slumps, Powell, with Trump egging him on, will bathe the financial markets in brine. Remember, this is the expedient thing to do.

The ultimate result, however, is that it will pickle U.S. financial, economic, and social systems all the way over to Venezuela. By all honest accounts, we are doomed.

 

Charts and data by: stockcharts, Bloomberg, dolartoday.com, acting-man.com

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Fed Chair Powell’s Plan to Pickle the Economy”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Repo Quake – A Primer
      Chaos in Overnight Funding Markets Most of our readers are probably aware that there were recently quite large spikes in repo rates. The events were inter alia chronicled at Zerohedge here and here. The issue is fairly complex, as there are many different drivers at play, but we will try to provide a brief explanation.   There have been two spikes in the overnight general collateral rate – one at the end of 2018, which was a first warning shot, and the one of last week,...
  • Curious Events in Risk-Free Collateral-Land - Precious Metals Supply and Demand
      Liquidity Shortage Last week the price of gold rose $28, and silver $0.53. But the prices of the metals was not the big news last week. The price of repo — a repurchase agreement, to sell and repurchase a treasuries — skyrocketed. Banks were thirsty for liquidity, and only cash can quench it.   Last week's “oops” moment in repo land as the overnight general collateral rate briefly soared to 10% (we will soon publish a detailed summary of the sequence of events that...
  • The Inexorable Final Collapse
      Groping in the Dark This week central planners pursued their primary mission with steadfast conviction. They planned. They prodded. They prearranged tomorrow to save us from ourselves. Some also grubbed a little graft for their trouble. Other central planners took to debasing the dollar to price fix the federal funds rate within a narrow band of tolerance.  What in the world do they think they are doing?   Central planning committee in the analysis and forecasting phase......
  • Elizabeth Warren’s Plans to MAGA
      21st Century Hooverville There are places in Los Angeles where, although the sun always shines, they haven’t seen a ray of light in over 100-years.  There’s a half square mile of urban decay centered on the Union Rescue Mission at 545 South San Pedro Street, where depravity, chaos, addiction, insanity and archaic diseases multiply and ricochet about like metastatic cancer.   One of LA's modern-day Hoovervilles in San Pedro Street...  In 2015 it was reported that Union...
  • The System Scrapes By - Precious Metals Supply and Demand
      An Accident in Waiting The price of gold dropped $20, and silver 43 cents. For reference, $20 was once worth just about an ounce of gold. Dollar was a unit of measure, a weight of gold equal to 1/20.67 ounce of fine gold.   A gold certificate from the time when the dollar still represented a fixed weight of gold [PT]   Today, it is an irredeemable currency, defined not as a unit of weight but as a unit of central bank liability which is backed by government debt,...
  • Zugzwang - Precious Metals Supply and Demand
      Respectable and Not so Respectable Assets The price of gold went up 8 bucks, and the price of silver went up a penny last week. These were not among the capital assets that could be liquidated for greater quantities of consumer goods last week. Nor were equities.   A respectable, mother-in-law-proof speculation: the 10-year US treasury note. [PT]   However, the consumer goods stockpile stored in treasury bonds (to extend our half sarcastic, half tongue-in-cheek...
  • Fed Chair Powell’s Inescapable Contradiction
      Under the Influence   “This feels very sustainable.”  – Federal Reserve Chairman Jerome Powell, October 8, 2019   Understandable confusion... [PT]   Conflict and contradiction.  These were two of the main themes reverberating around the world of centralized monetary planning this week. On Tuesday, for instance, a novel and contradictory central banker parlance – “reserve management purposes” – was birthed into existence by Fed Chair Jay...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!