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Durable Goods and The Stock Market, with The Fed In The Driver's Seat

ilene's picture




 

Intro by Ilene 

After reading Lee's article, I asked him, "Why is it the Fed's job to be propping up the stock market? Doesn't it make the whole market a Fed-controlled game, rather than what it started as - a mechanism for companies to raise money and people to invest in public companies?"

Lee answered: "Bernanke has made no bones about it. He sees the stock market as a legitimate instrument of policy manipulation. It's his biggest tool, much bigger than the ones between his ears and his legs. The Fed works for the banks, and the capital markets exist as a means for 'capitalists' to extract wealth from the public. Stock markets weren't started for the purpose of enriching the public, that's for sure... The Fed has two clients, the US Treasury, and the banking system. It operates to make sure that they stay in business."

Lee also noted that the history of the Fed is replete with a variety of programs where it tried to manipulate something. "The stock market manipulation is relatively new as an overt policy tool, but the Fed can't manipulate indefinitely. Eventually the unintended consequences will rise up and bite it in the ass."

Worth moving up, "the grateful unemployed" asked an excellent question in the comment section of Zero hedge: "So why did the Fed precipitate the 2008 crash? Any thoughts?"

Lee: "It was just another one of their serial blunders. It's just that some of their mistakes look good on the surface for a while until the unintended consequences overwhelm the intended ones. That one went bad immediately. I was shocked at the time that they would sterilize the alphabet soup programs that started with the TAF in 2007, by pulling the funds from the SOMA, thus crippling the Primary Dealers. I warned repeatedly that it would precipitate a crash, especially as the Treasury began selling over $100 billion a week in new debt to fund the TARP in Q3 2008. Bernanke fucked up, plain and simple. They started to realize the mistake in November by starting direct purchases of limited amounts of GSE paper, but didn't go full bore until they started massive Treasury purchases in March 2009. That turned the market."

 

Durable Goods and The Stock Market, with The Fed In The Driver's Seat

Durable goods orders rose 8.7% In February versus January on a nominal, not seasonally adjusted basis. The mainstream media reported only the 2.2% seasonally massaged increase, which missed the consensus expectation of 2.9%. The actual, unadjusted increase was the best February gain since February 2004, so the actual data could hardly be read as disappointing. Last February, the month to month increase was only 0.90%, and the gain in February 2009 was only 2.8%. The average February gain over the past 10 years was 5.2%. Any way you slice it, this was a very strong increase. Once again, the use of seasonal adjustments obscures the truth and sends the market racing to the wrong conclusion in the knee jerk reaction.

In nominal terms, durable goods orders are now up 17.8% year over year. The rate of increase has actually  been increasing lately.

In real, inflation adjusted terms the increase was "only" 14.4%. That's still a huge jump. The problem is in the big picture. While durable goods orders have had a strong cyclical increase, they have only recovered 60% of the loss incurred during the recession. The idea of US manufacturing making a comeback is a myth. This myth may have arisen because the rest of the world is doing worse under austerity than the US is doing under ongoing stimulus spending and Fed propping. No doubt if the Federal government ever decides to actually reduce the deficit, the meager growth the US economy has shown would stop dead and reverse. Furthermore, if US companies really are moving production back home and adding to capacity in the process, based on the long term trend of orders, they are headed for another bust. It's only a question of when.

Real Durable Goods vs. Stock Prices Chart - Click to enlarge

Real Durable Goods vs. Stock Prices Chart - Click to enlarge

The chart shows just how sick the secular trend of the US manufacturing economy is. However, that does not matter to the stock market, which is perfectly capable of increasing its margin away from the trend of manufacturing in the US due to the financialization of the economy. Durable goods orders are at best a concurrent indicator of stock market trends. Orders lagged the downturn in stocks 2007-08.

In fact, this measure of manufacturing did not collapse until after the Federal Government and the Fed panicked in 2008 and pulled $700 billion out of the economy in raising TARP and funding it through debt sales, which the Fed then funded through a variety of propping programs that were themselves funded by the Fed pulling cash out of Primary Dealer trading accounts. The Fed's withdrawals of dealer funding precipitated the stock market collapse, and the economy followed.

As I have shown throughout the 10years I have been directly tracking this, the Fed has near absolute control over both the US  stock market and the economy based on how much cash it pumps into Primary Dealer trading accounts.  This indicator is a proprietary measure of the amount of money the Fed pumps through Primary Dealer accounts. The data is all available from the Fed in various places. I just accumulate it and publish it weekly in the Wall Street Examiner Professional Edition Fed Report.

The Fed and the Stock Market Chart- Click to enlarge

The Fed and the Stock Market- Click to enlarge

When the Fed buys securities from the dealers it pumps cash into their trading accounts, the market rises and the economy tags along. When the Fed drained money from dealer accounts, especially in the face of the Treasury selling $700 billion in new debt over the same time window, the economy collapsed.  I'm well aware that correlation doesn't imply causation. In this case, the cause and effect are easily observed. The effects of the Fed's actions are completely predictable now, just as they were in 2008, when I warned that what the Fed was doing would precipitate a crash.  While the mainstream gives Bernanke credit for averting an even worse fate, the facts clearly show that his  and Henry Paulson's panicked actions (not to mention then NY Fed President Tim Geithner) triggered a far more precipitous break than might otherwise have occurred.

Here's an all in one chart that uses a slightly different measure of Fed actions that doesn't capture all of the impacts of the nuances of various Fed policy measures, but it's clear enough to give you the idea.

The Fed, Stock Market and Durable Goods Chart- Click to enlarge

The Fed, Stock Market and Durable Goods Chart- Click to enlarge

Had the Fed not pulled cash from the SOMA in 2008, it is highly likely that the market would not have crashed and the economy would not have collapsed. The glide path would have been much smoother. Once the Fed realized its error and resumed direct pumping to the Primary Dealers, the market and economy recovered to the trend level it would have been on.  As long as the Fed keeps the Primary Dealers flush with cash, the market and the economy will respond in kind. Financial assets and commodities will continue to rally and the economy will follow along in a slow growth path.

At some point, however, inflation will tie the Fed's hands. Will it be this summer, when the Fed's MBS purchase program ends? Then what? A wide variety of inflation measures, including especially commodity prices, which the Fed pretends to ignore, will hold the key to whether the Fed can continue to artificially drive up asset prices in a way that promotes false and otherwise unsustainable economic growth.

 

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

© Copyright 2012, The Wall Street Examiner Company Inc. All rights reserved.

 

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Thu, 03/29/2012 - 18:35 | 2302066 bkrolik
bkrolik's picture

Very good post, thank you very much.

Good observation about SOMA, but is it really the main cause of the crash? Do you remember inflation numbers back then? Oil prices? Commodities prices? What wooud have happended if the Fed, instead of removing some "liquidity", pumped more money into the system around 2007?....

Regarding durable goods - it might be interesting to see the its major components unadjusted growth numbers for the past several years.

Thu, 03/29/2012 - 10:49 | 2300541 SanOvaBeach
SanOvaBeach's picture

All hell is gonna break loose when the debt ceiling has to be raised in Sept.  Another credit rating thumbs-down for the US.  Gold I'll spike and perhaps it I'll jolt some of the fucking morons that actually think everything is just peachy.

Thu, 03/29/2012 - 09:24 | 2300261 Everybodys All ...
Everybodys All American's picture

the bite in the ass comes in the form of another credit rating downgrade.

Thu, 03/29/2012 - 09:20 | 2300252 GMadScientist
GMadScientist's picture

Too bad the Fed pimping of primary hustlers doesn't generate (non Mc)-jobs or a viable recovery.

 

 

Thu, 03/29/2012 - 00:21 | 2299626 Dingleberry
Dingleberry's picture

"How long will it last?"  

That depends on how much ink Ben has....

Thu, 03/29/2012 - 09:27 | 2300273 WmMcK
WmMcK's picture

Bit(s) in the ass.

Wed, 03/28/2012 - 23:18 | 2299524 q99x2
q99x2's picture

I guess they can repeal the NDAA now. All is well. The Bernank has spoken.

Wed, 03/28/2012 - 22:39 | 2299445 the grateful un...
the grateful unemployed's picture

so why did the Fed precipitate the 2008 crash? any thoughts?

Thu, 03/29/2012 - 09:01 | 2300191 Lee Adler- The ...
Lee Adler- The Wall Street Examiner's picture

It was just another one of their serial blunders. It's just that some of their mistakes look good on the surface for a while until the unintended consequences overwhelm the intended ones. That one went bad immediately. I was shocked at the time that they would sterilize the alphabet soup programs that started with the TAF in 2007, by pulling the funds from the SOMA, thus crippling the Primary Dealers. I warned repeatedly that it would precipitate a crash, especially as the Treasury began selling over $100 billion a week in new debt to fund the TARP in Q3 2008. Bernanke fucked up, plain and simple. They started to realize the mistake in November by starting direct purchases of limited amounts of GSE paper, but didn't go full bore until they started massive Treasury purchases in March 2009. That turned the market. 

Thu, 03/29/2012 - 00:26 | 2299633 Dingleberry
Dingleberry's picture

According to Cramer "they know nothing about markets!"

Wed, 03/28/2012 - 22:19 | 2299400 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

...good article...thank you

 

Wed, 03/28/2012 - 22:12 | 2299372 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

@Zero government ....Lee was saying the other day that he DOES think the housing market has bottomed and is the road to recovery

Wed, 03/28/2012 - 21:54 | 2299349 Solarman
Solarman's picture

The FED is goosing the stock market because that is where the capital gains tax revenue will come from.  Bill Clinton and Robert Rubin opened everybody's eyes to the amount of tax receipts that pour in from a bubble.  This is their last hope to get the budget under control, and they need to get the cost basis and loss carry's out of the way, so this avalanche of cash can come pouring in.

I have been telling anybody who would listen for three years that that will drive up this market until oil and food stop them. So far, so good.  Will they succeed, don't know, but they are darn close.

Don't get me wrong,I hate the FED, central planned socialism (Family came from the enlightened leadership of communist Eastern Europe), but I make my money inn the markets and will trade with the crooks and not against them.

Today, they stopped the freefall with one planted story, and some purchases of Apple stock.  One day it won't work, then ya know.

Thu, 03/29/2012 - 02:42 | 2299795 Iam Rich
Iam Rich's picture

To see capital gains, wouldn't there have to be...hmm what is it....right there, tip of the tongue...yes!  Selling.  Just a thought.

Thu, 03/29/2012 - 09:44 | 2300331 Manthong
Manthong's picture

Boy, that puts a few things in focus.

In case anyone hasn't been keeping up on their required reading, tax revenue is ever less consequential to what the government does (to us) as each month, quarter and year passes. 

 

Wed, 03/28/2012 - 21:42 | 2299321 Iam_Silverman
Iam_Silverman's picture

Hmmmm, I-Lean, towards the left, and towards the manipulated numbers.

While I welcome contrary reports to imminent doom, I also like to have honest dialog.

"The mainstream media reported only the 2.2% seasonally massaged increase, which missed the consensus expectation of 2.9%. The actual, unadjusted increase was the best February gain since February 2004, so the actual data could hardly be read as disappointing. "

So, when the MSM itself can see the tricks and lies (obfuscation), and reports the truth, they missed the boat?

 

Wed, 03/28/2012 - 20:44 | 2299166 Zero Govt
Zero Govt's picture

"Eventually the unintended consequences will rise up and bite it in the ass."

It's a feedback loop from where the original policy originated ...exit and entry in the same local'

"As long as the Fed keeps the Primary Dealers flush with cash, the market and the economy will respond in kind."

Er, have you made any notes on the US property market yet? ...has that recovered??

Banking is not a productive occupation, it is a commission cutting occupation (ie. takes a slice out of existing wealth) hence Benny has got precisely zero in real wealth or real productive GDP back for all the bucks he's shovelled into this 'industry' 

What is the productive value of the $700 Trillion of bankers paper? $0.0000000

The entire $700 Trillion derivatives market has no productive value and is completely worthless 

This is why as Big Govt and Big Banks (the unproductive) get bigger the productive economy turns to wrack and ruin.. check pretty much every nation State wrecked throughout history.. bloated bankers and politicos are the wrecking balls (vandals) 

...so soon it is time again? ...shucks, we never learn!

Thu, 03/29/2012 - 07:13 | 2300003 Son of Loki
Son of Loki's picture

...so does that mean my banker still gets his Bailout Bonus this year? He gets so grumpy when the $5 million bonus check does not arrive.

Wed, 03/28/2012 - 22:13 | 2299378 GeneH3
GeneH3's picture

It reminds me of Kipling's "The Gods of the Copybook Headings"

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Thu, 03/29/2012 - 09:34 | 2300305 WmMcK
WmMcK's picture

"History is only repeated as farce to those who either have forgotten it or enjoy the sick humor of a disaster foretold."
- WSJ (linked from above).

... Especially when it rhymes so well.

Thu, 03/29/2012 - 06:42 | 2299966 QuietCorday
QuietCorday's picture

I had never read that poem, and, now I have, it has made my day :oD. So incredibly true.

So, thanks, Gene. Have a green on me.

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