This article was published by The McAlvany Intelligence Advisor on Friday, December 28, 2018:
Less than three weeks ago, this writer opined here [at The McAlvany Intelligence Advisor] that the root cause of the selloff on Wall Street then was the deliberate intentional stalling of the economy by the Federal Reserve:
Who is the real culprit behind this volatility in stocks? The well-informed have been pointing to the actions of the Federal Reserve as the prime driver, focusing on its determination to slow the economy by raising interest rates.
For example, the insider bank Goldman Sachs said in late November: “The FOMC [the Fed’s Federal Open Market Committee] will likely be reluctant to stop [raising interest rates] until it is confident that the unemployment rate is no longer on a downward trajectory….”
In other words, the Fed is determined to keep on raising interest rates until the economy is so weak that unemployment starts to increase!
If more evidence of the Fed’s deliberate intervention in the markets were needed by skeptics, last week’s volatility on Wall Street ought to suffice. Late last week, Chairman Jerome Powell raised interest rates for the fifth time this year, ignoring pleas not to do so from well-informed observers and Tweet pressure from the president. Powell not only raised interest rates, but made it clear that more rate increases were coming next year.
Street commentators and technophobes alike refused to consider the root cause, looking elsewhere to place the blame. They ranged from concerns over the incipient trade war with China instigated by the president as he seeks to rebalance fair trade with that communist-controlled country, to the firing of his Secretary of State over U.S. troop withdrawals from Syria and Afghanistan. Pundits pointed to Treasury Secretary Steven Mnuchin’s attempt to calm the markets by calling big bank CEOs and reporting that all is well with their reserve ratios. This attempt backfired, especially when it was followed by reports of a gathering of the president’s “plunge protection team” consisting of Mnuchin, the head of the Fed Jerome Powell, the chair of the SEC Jay Clayton, and the head of the Commodity Futures Trading Commission, Christopher Giancarlo at the White House on Monday.
Blame for the volatility fell on the so-called government “shutdown” that in reality affected very few people and impacted the economy not at all. The haggling over the funding for Trump’s wall also appeared on the list of worries driving the market, and its observers, crazy.
Technophobes blamed program trading (which involves the trading of massive “baskets” of stocks executed by computers programmed by “quants” to measure every move of every stock) and short covering (by traders who made bets on the direction of the markets and then sold their positions when the markets went against their bets).
And there was the end-of-year pension-plan “rebalancing,” the chicanery by pension managers to have their portfolios appear at the end of the year to be holding winners, just in time for their annual reports to be sent to their plan participants.
Not surprisingly, the president himself came closest to naming the guilty party when he tweeted that “the only problem our economy has” is the Federal Reserve. On Tuesday he added that the Fed was “raising interest rates too fast because they think the economy is so good.”
The president is right about the economy, according to Gershon Distenfeld, the head of fixed income for the investment house AllianceBernstein:
There’s a lot of uncertainty in the short-term and that makes sense. We’re going to have a lot of volatility. But this case of ‘the world is coming to an end’ just given the fundamental data out there doesn’t make any sense.
Indeed it doesn’t. Consumers set records during the holiday shopping season, spending their after-tax wage increases and enjoying their year-end tax-free bonus as gas prices at the pump are saving them 50 cents a gallon over a year ago.
The S&P CoreLogic Case-Shiller 20-city home price index rose five percent year over year, and the report on consumer confidence released by the Conference Board on Thursday also confirmed the economy’s health: with 1985 as its baseline of 100, consumer confidence came in at 128 for December. Said Lynn Franco, Senior Director of the board’s economic indicators, “Expectations regarding job prospects and business conditions weakened but still suggest that the economy will continue expanding at a solid pace in the short term.”
Raising interest rates by the Fed is only half the story and not even the most important half. Ivan Martchev, an investment strategist with institutional money manager Navellier and Associates, nailed it:
I think the present volatility of the stock market is not due to the hiking of the fed funds rate alone, but also to the more disruptive overall quantitative tightening[emphasis added], which demonstrates itself via the rising Fed balance sheet runoff rate, which went from $20 billion in January to the present $50 billion/month rate.
Letting bonds mature (and not reinvesting the proceeds) … sucks excess reserves out of the financial system. Sucking electronic cash out of the financial system may be the simplest possible explanation as to why the stock market is doing what it is doing.
What Martchev is referring to is the Fed’s intentional withdrawing of capital (quantitative tightening, or QT) from the financial markets, capital which is the lifeblood of a capitalist economy. The Fed’s intentionality was never more obvious when Powell and his happy band of economic interventionists (his Board of Governors and its Open Market Committee) deliberately raised interest rates for the fifth time this year last week in spite of the nervousness that Wall Street has been expressing since late September.
The Deep State has had it in for Mr. Trump since his election. Some have forgotten that the Deep State includes international bankers whose agenda differs greatly from Trump’s plan to “make America great again.” Those international bankers’ guilt in foisting the Federal Reserve System onto the American economy has been exposed by many, none better than by G. Edward Griffin in his expose The Creature from Jekyll Island, published in 1994. Suffice to say, this explains Powell’s deliberate attempt to slow the Trump economy: he’s taking orders from his handlers. Trump sees it, along with a few others. But most are looking in the wrong places. Goldman Sachs, one of the Deep State’s most influential players, is right: the Fed won’t stop raising interest rates until Trump’s economy stops. This will virtually guarantee that his reelection efforts in 2020 will fail.
The McAlvany Intelligence Advisor: Who’s to Blame for the Decline on Wall Street?
The Wall Street Journal: Dow Industrials Leap More Than 1,000 Points
Finance.Yahoo.com: U.S. Stocks Surge in Best Rally Since March 2009: Markets Wrap
The Wall Street Journal: Stocks Slide a Day After Record Surge