Guest Post: The Fed Is Playing Global Pump-And-Dump

Tyler Durden's picture

Submitted by Gonzalo Lira via Gonzalo Lira's blog,

People often criticize me for objecting to the Federal Reserve’s Quantitative Easing (QE) and Zero Interest-Rate Policy (ZIRP) on the grounds that they are setting the stage for hyperinflation and a dollar collapse. Since neither has arrived - yet - people mock me, often pretty badly: “Hey Lira! How's that 2% ‘hyperinflation’ working out for ya!”

But even if you don’t buy that QE and ZIRP will lead to a dollar collapse, you do have to admit that these Fed policies have severely brainwashed investors.

Why ‘brainwashed’? Because today, due to the Fed’s policies, stock prices are booming—we’re about to crack 16,500 on the Dow Jones, NASDAQ is well on its way to 4,200, and the S&P is close to 1,850—all record highs.

What’s wrong with record highs? What’s wrong with booming stock prices? Absolutely nothing—unless you look at the two-year charts and realize that these three indices are not reflecting a robust, booming economy. Rather, they have had unrelenting climbs that have been openly—and exclusively—caused by QE and ZIRP.

Which has brainwashed investors into dismissing value. Today, all investors are momentum-chasing pump-and-dumpers who are not worrying about fundamentals, or worrying about the long-term health and well-being of a company.

All they have been brainwashed into caring about is the rise in a stock’s price.

Which is pretty funny, if you think about it: These investors might shun penny-stocks, they might buy and sell stocks by way of “respectable” brokerage houses—but these investors are behaving exactly like the suckers taken for a ride by sketchy boiler rooms operating out of north Jersey.

And we all know how those poor saps usually end up: Broke, holding on to worthless stock certificates not worth the paper they’re printed on.

Why is this happening? Easy, because of the Fed’s QE and ZIRP have so flattened the yield curve across Treasuries and the rest of the bond markets, that anything yielding better than 5%—in any asset class, not just bonds—quickly gets priced up.

They call Treasuries the “benchmark” for a reason: As the (supposedly) safest asset class, they set the yield curve for all assets in all classes—not just in other bonds, but in equities and real estate as well. If Treasury yields are minimal, then a “normal” yield in a riskier asset class will also be minimal.

Look at the following chart:

These are the Top 20 Dow Jones stock as measured by expected stock dividend yields for 2014. The mean of these Top 20 is 3.16%, the average 3.28%.

Now, these are the bluest of the blue-chips—repeat, the Top 20 as measures by yield. If you get dividends of 3.28% on these blue-chip stocks, and pay an income tax rate of say 35% combined State and Federal, you’re looking at a yield of 2.13%.

That’s yearly. That’s less than inflation.

So why are the yields on these oh-so-blue-chips so low? Because of QE and ZIRP’s unrelenting asset price inflation. That’s why you have companies like twitter—which does not have any income to speak of—with a market valuation of $38 billion or whatever.

Since nothing yields a healthy 6% or better, the only thing investors care about today is whether the price of the asset they “invest in” will rise within the year—so that they can sell it at a profit.

That’s not investing—that’s speculating.

By the way, unrelenting asset price inflation was the whole point of the Federal Reserve’s policies. Yeah, I know I went overboard with the combined bold-italics-underlined thing, but I just wanted to emphasize that point, and one other:

The Federal Reserve is the boiler room operation that has pumped up the equities market by way of QE and ZIRP. You are investing in a pump-and-dump scam. And like in all such scams, you will lose.

Clear enough for ya?

Crazy as this may sound, when you look at those measely yields for the Top 20 performer, you realize that investors for the time being are acting rationally: Since yields are minimal—in fact negative, after you factor in income tax and inflation—it pays investors to speculate, rather than to properly invest. Not only are the Fed’s policies goosing the equities markets, the tax code privileges speculators as well, by way of a capital gains tax rate which is lower than the income tax rate. You pay less taxes if you speculate than if you invest responsibly. (!)

Thus both the Federal Reserve and the IRS are encouraging speculation. That’s how investors have become brainwashed: They think that this low-yield, high-asset price inflation, low-capital gains tax environment is the way things ought to be.

But even though the Fed is deliberately, openly goosing the market, no different from a Jersey boiler room operation, nobody’s complaining—or even realizing it—because at this time, investors are making money with this Global Pump-and-Dump.

It ought to be beautiful, right? Everybody making money, all happy in the world. Only problem is, these pump-and-dum scams always end. When do they end? When people stop believing in the hype. When people realize that the global economy is in the toilet, companies are not booming but barely getting by, and there’s nothing on the horizon which will restart the economy. When people—and not a lot of people, mind you, just a tipping point estimated at about 10%—realize that this game that the Fed is playing with QE and ZIRP is a game of musical chairs.

That’s when the Fed’s Global Pump-and-Dump Scam will blow up.

You don’t think as I do that QE and ZIRP will lead to hyperinflation and dollar collapse? Fine, that’s cool—but admit that these Fed policies are skewing the market: They are turning investors into speculators—scratch that, brainwashing them into gamblers.

And it will all end in tears—these schemes usually do. I for one am keeping an ear on this game of musical chairs, trying to anticipate when the music will stop.

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NOTaREALmerican's picture

The Fed did not create the culture of expecting something for nothing and stock speculation.

kaiserhoff's picture

The Fed is not the only miscreant.

All the central banks are acting in unison with Japan currently leading the race to the bottom.  This is too simplistic.  The end will be a multifaceted series of cascades.  I'm still betting that the dollar will be among the last fiats to fail, but fail it will.

GotNuttin'todo's picture

Agreed!

Where else are international capital flows going to go? Japan? Europe? I hardly think so. US is still the best looking horse in the glue factory (Wish I had come up with that expression, but I read it somewhere)

Article states:"Rather, they have had unrelenting climbs that have been openly—and exclusively—caused by QE and ZIRP." ....Gibberish. Try seeing beyond your red-white-and-blue nose.

Grande Tetons's picture

We didn't start the fire...it's been always been burning since the world was turning , Billy Joel

You are correct, NotReal...the Fed took advantage of what has always been there. 

 

TheReplacement's picture

Despite the idiots downvoting you, you are correct.  Someone wanted the power of the Fed to create the culture of dependence.  Someone created the crisis that led to the Fed.  Someone created the Fed.  The people voted for the people who created the Fed because they wanted someone to protect them from the people who created the crisis. 

In the end, in a democratic Republic, all fault lies with the people.  I suppose this is true of all governments.  Ultimately, we have to recognize that we are responsible for ourselves.  We are to blame.

Down vote this to cast blame at someone else and prove my point.

Ranger_Will's picture

Pump and Dump!? So these are the guys responsible for all the "Male Enhancement" emails I keep getting! Just another reason to hate the Fed.

AmericasCicero's picture

If your bull market lasts longer than 4 years...

frankTHE COIN's picture

March 9, 2014 will make this Bull Market 5 years, 1 day long in length.

spastic_colon's picture

"The Fed Is Playing Global Pump-And-Dump"...........no offense but.........DUH!

22winmag's picture

I'm sticking with silver, lead, and brass.

IdeasRbulletproof's picture

I'm assuming over 90% of all Zero Hedgers would've been in the same camp if it weren't for all those boating accidents...

Kirk2NCC1701's picture

Lead & Brass, you say?  That's "Pump & Dump" of a different kind.

new game's picture

best comment of the day-tnx

 

 

TheReplacement's picture

Do not forget steel.  You may need edged weapons for CQs.

NoDebt's picture

Somewhere in 2008-2009 it was agreed we needed a centrally planned economy, headed by the Fed.  The then-new president agreed completely since that kinda talk was right up his alley.

And here we are.  Questions?

Spastica Rex's picture

Yeah - why 2008-2009?

Seems kind of preposterously recent.

max2205's picture

Your rich praising Ben or your poorer bitching here....This last ramp should be fun ....get on the train

Bluntly Put's picture

I think you are at least 50 years behind the curve. Orwell penned this letter in the 40's:

Everywhere the world movement seems to be in the direction of centralised economies which can be made to ‘work’ in an economic sense but which are not democratically organised and which tend to establish a caste system.

http://www.thedailybeast.com/articles/2013/08/12/george-orwell-s-letter-...

 

.

spekulatn's picture

Nice post, Bluntly Put.

 

I'd like to add a link for those interested:

 

http://www.openculture.com/2013/09/george-orwells-1984-free-ebook-audio-...

Winston Churchill's picture

Who are the 'untouchables' in this caste system, we have a beggar caste.

We know who the brahmin are.

TheReplacement's picture

Yeah, what what do you call what happened in 1913?

disabledvet's picture

brainwashing? all you have to say is "how come you're not a billionaire yet? and that'll get 'em moving. no "washing" necessary. (perhaps you meant "rinse and repeat." money laundering i hear is big these days :0)) anywho who knew reputation would even matter with this current crop of scum and villainy? http://www.youtube.com/watch?v=e-9ibRc91gY

LawsofPhysics's picture

Well, all I can say is it really sucks when you become a millionaire and you realize that the goal posts have been moved...

Quinvarius's picture

Let the taunters taunt.  The hyperinflation will continue to build until no amount of data massaging or price fixing can provide relief for the deniers.  Or perhaps they can explain why teh DOW is over 16k in their "deflationary environment" to me?

moneybots's picture

"Let the taunters taunt.  The hyperinflation will continue to build..."

 

Dennionger: "The unadjusted household count of employed people was down by 352,000.  That's bad.  The worse news is that the workforce expanded 178,000 people.  Add the two and the population-adjusted change is -530,000"

Where is the hyperinflation building?

 

Quinvarius's picture

You argued nothing against my point.  There has never been an episode of hyperinflation that was not also accompanied by massive unemployment.  When you print a lot of money, it loses value.  When you try to print your way out of debt while also borrowing another trillion every year, you print a lot of money.  BUt you go right on saving those dollars that you think the rest of the world needs or even wants. 

LawsofPhysics's picture

Please, The Federal Reserve Bank is doing it's job.  It's making it's owners very wealthy and powerful.  Ignore money, this is about ownership, and power/resources (including the human kind).  In this case it is very clear that the Fed has been successful beyond their wildest plans.

layman_please's picture

exactly. 

human resource is only productive asset in the world, everything else for them is just a mean to control it. finance is the invisible chain of modern slave system.

GaitherJ's picture

I'm about to bail on the doom and gloom, market crashing, sky is falling predictions. Not because I don' think it will happen. I check on the stats, listen to many podcast from austrian free market guys but I don't think I can do it much longer. Maybe the world is big enough to soak up all this QE and ZIRP, maybe the masses are so disconnected from what's happening that the show just keeps going on.

IdeasRbulletproof's picture

It's not about staying in the doom and gloom camp. Just be happy you are one of few that has an Ace up their sleeve...

Being Free's picture

There are many here in Sector 26 who would fit that disconnected description; then again thre are a few of us who are preparing for the credits to roll on this show. 

ebworthen's picture

Nice to see Mr. Lira telling it like it is, again.

NoWayJose's picture

One of the overlooked reasons that the dollar has not collapsed is that the dollar is traded - supposedly in 'free markets'. With the ability to print unlimited dollars and the ability to manipulate markets at will, the Fed can easily offset any trades that show weakness in the dollar. It works - until is doesn't... And a big part of that is NOT wanting the CFTC and SEC to look for who is behind those trades...

DeficitAlchemist's picture

Dollar Collapse correct.. although it is likely to be alongside other currency collapses possibly simultaneously...

 

Hyperinflation no... stagflation yes... Hyper is sustained double digit inflation into 3 digits and beyond...

were this to happen the HYPER bit would be over as soon as it strated with wholesale across the board debt default... simple put we cant even afford 'normal' rates of r very long.. before a collapse....

 

Stagflation is stubbornly low 'growth' and stubbornly high inflation... and a major disposable income squeeze on the masses.. ( we bailout Government again, whilst they destroy pensions stuffed with their debt paper) as we get dragged into higher tax bands but buying power is reduced more than weak marginal wage increases...

 

In stagflation it does not even require double digit 'official' inflation (which we couldnt stomach for long for prev mentioned reasons)... In fact with Johns Williams true inflation rates on cleverly masked 'non-smilar' retail baskets and ' no eat or heat' measures we are in fact there already..

 

So more understatements of inflation to permit ZIRP on a sustanined basis.. so debt can be obliterated.. in real terms... this is the call...

 

The government has flagged this policy clearly extending forecasts for ZIRP and employing more doveish FED heads etc... they are holding the door open for Banks and asset managers to sell of bond portfolios and CB's have become buyer of last resort a kinda of bad bank funded by the citizenry tax payers and future tax payers..

 

Until Bretton woods moment MKII.. when the full scale of wealth transfer (and bullion) to the east is aknowledged at a sweep of a pen as we switch to a base currency that is a basket of all currencies a WOCU more formalised, with bullion either being a component independently or those currencies with audited holdings being more strongly weighted..

 

 That is my take..

LawsofPhysics's picture

"Hyperinflation no..." Wrong. As soon as people/organizations with the knowledge and productive capacity to mine/produce/deliver essential commodities and services stop accepting paper promises in exchange for their labor, game over.  If this is the case everywhere on earth there will be no relief, period.

When hyperinflation happened in Europe, the scarcity could be relieved because other countries had a surplus (although the world still went to war).  Tell me genius, who will provide that relief when the global economy and monetary system shits the bed?

DeficitAlchemist's picture

As a genius I will remake the issue you clearly missed.. Hyperinflation is a Zimbabwe story... whilst not impossible in the west, as the buying power dips to ever lower levels and the bond markets unravelling becomes more 'disorderly' CB's will be forced to up rates in a weak economy... this process means greater debt payments by government...till unaffordable and they have default/reset moment enforced upon them... even at normal rates say 6% we will not make payments on the debt load that has been loaded up all the way down and continues to be as deficits continue in the zirp environment...

 

6% is not hyperinflationary it is normal rates in a normal moderated debt economy... it will however destroy us in a short timeframe at current debt levels..

 

People must realise the debt markets are over well before double digits are reached... so where is the hyperinflation... if they ignore rising rates and lie about true rate (pretty much where we are now... and likely continue).. prices will suddenly explode and control will be lost... rate rises are even more unpopular in a weak economy.. caught between rock and a hard place... means benign neglect of true inflation most likely approach... this will lead to sudden need to up rates when the divergenve between real felt inflation and BS stats numbers becomes unsustainable. They will then try act unilaterally.

 

We could even have siutation where rates are raised to try stem bond collapse as a 'signalling' effort but QE continues to stimulate economic weakness ... ie.. chronic stagflation... Hyperinflation is extreme interest rates...

 

AS WE CLEARLY DONT NEED EXTREME RATES TO FAIL UTTERLY IN THE DEBT MARKET... and there will be a reluctance until debt markets force it on CB's for them to be raised.. we are unlikely to hyperinflate but failure is assured at earlier levels of rates.

Do you get the point this time.. or not enough sarcasm for you?

 

pragmatic hobo's picture

it's just matter of time ...

Johnny Cocknballs's picture

What better way to transfer wealth, my dear...

All your markets are belong to pump and dump.

 

q99x2's picture

FED controls the indexes. The indexes will do exactly as the FED determines.

The FED can hold stocks, indefinitely, as a function of the services they provide.

The FED will own most all treasuries in a few years and likely most all of the stocks underlying the indexes.

BTFATH

TheReplacement's picture

So if you were a Marxist and you wanted to take over a formerly capitalist country...

pitz's picture

Keep in mind that those 'yields' are just dividend yields.  You have to add in stock buybacks, and retained earnings, for a full and comprehensive view.  That list of companies is generally pristine compared to the no-earnings dot-coms that are receiving the bubbly valuations.  Not sure why you'd try and equate them in the least. 

walküre's picture

These yields are not realistic unless the Fed directly hands these companies enough money so they can fund the dividend payments.

2014 is hyped up to be the best year yet and economic recovery allowing more taper and tightening. Yes, it is HYPED up to achieve one thing and one thing only.

Getting that last bit of cash from J6P into the casinos of Wall Street or Vegas.

Kirk2NCC1701's picture

Pump & Dump, QE and ZIRP work differently in the US than in any of the world's 195 countries.

Given the Dollar's GRC status, only the US can play its games far longer than anyone else, because the Dollar is forcing other countries to absorb our crap: We send them chits, they send us resources and 'stuff'.  The complexity and dynamics is WAY beyond any academic models or ZHs' "Economic Porn Charts", if you want to front-run the timing with anything more than "The End Is Near" mantras.

For those reasons, Austrian Economics models need to be modified for the case of the US. Although I haven't seen much on ZH to address this "US Anomaly" (US Economy + USD + MISC*) in great depth, you can bet your ass(ets) that the best & brightest minds at the DOD and GS have been at this for a long time, and improved on whatever (Currency Wars computer simulation) Jim Rickards helped them create.

   * Military-Industrial Surveillance Complex

All we can do is play "heads-up hockey" or hide in an igloo.  Take your pick.  Life goes on.

ZeroPoint's picture

Heads up doesn't work. The government doesn't say what's going to do, it just does it. You find out about it later. If you don't want to be run over, you need to pull up your legs now. Get out of the system as much as possible now. 

imapedestrian's picture

Which executive let this joker post here!?!

The last piece of garbage I heard from him was about 2 years ago when he said that "I think this is the day the dollar goes down..."

Exactly how did you arrive at that conculsion professor?

I am going to ask zerohedge to allow my house painter to submit his economic opinions to this "website" if Gonzo can!

 

Laughing Stock's picture

 

 

Holy fuck!

 

What a useless post.

 

Gonzo Douche

verbot's picture

Verbot..exe..load chaos....hffbfjdjdkd, $;=*#*@\hsjej\\&×£@8&#; ¥@.

Like a big fat crazypill to the head...eh?...

We got us a bunch of wonky liars who screwed the pooch and covered/covering it up. 2008s the "line in the sand" and all was bad before then so it was just an admission by et al..of that a moral hazard had happened.

These wonks were greentripe to a malinois if you get that ref.. so when the napkin appeared congress was played...moral hazard was committed and continues to this day..

I say the whole deal is simply a lab project going wrong.. none of those involved will admit they were played and foolish and too ignorant to fix the issues of today...the theory is bad and backed only by total manipulation and they will go to the mat to not be proven wrong..

Whichis why there is no such things as laws to them anymore.. such is the search for absolution in the fevered mind of a pedagogical ego maniac.

 

aquarian1's picture

I think that when the Fed "pump and dump" pump breaks you will an avalanche of sell orders.
All the banks who put the Fed bail-out money into equites instead of new loans will sell.
All the retail investors will sell (at panick level - say -25%)
Foreign institutions holding US equities will sell
------------------------------------------------
As pointed out by Agora news an important story has been effectively ignored by main-stream media - that is that China's foreign ministre said it is no longer in China's interest to accumulate a foreign account surplus. (They have the largest in the world.) So this means when they have a trade surplus with the USA they will sell USD. When foreign institutions holding US equities sell their holdings they recieve USD and sell USD received and convert them back to home currencies. When the selling tops out the USD and it starts to fall, foreign USD bond holders will sell their US bonds (as 0 to2%  less the exchange loss = a negative return) and not buy new US debt at new auctions. The US will have to raise the rates on bonds at treasury/bond actions to sell the paper (as you saw with PIGS countries had to raise yields to move their paper). The avalanche will snowball at an every increasing rate.

kchrisc's picture

Oh, they're going to take a dump alright. Right on the sheeple.

"Pump-and-dump brings on the pull-and-drop of the guillotine blade?!"

SKY85hawk's picture

Hey Gonz!

It's great you're trying to make people aware of the financial risks we all face.

You might want to help  your readers take advantage of existing & LEGAL tax reduction mechanisms.

There's an easy way to legally avoid increasing taxation on retirement income. 

Start transferring your IRA or 401-k money to a Roth-Ira.  If you're not working your deductibles will allow sizable transfers at no cost. 

FORBES has described this technique in 2012. http://www.forbes.com/sites/davidmarotta/2012/02/20/roth-ira-conversion-...

Transfer 401-K or IRA money into a Roth-Ira every year.

              If you're not working, you'd be surprised how much can be transferred each year. 

             Conversion Taxes get consumed by Deductibles & other stuff.  

              Just take last year's Turbo-tax and add a Roth Transfer of x dollars. 

              Move the conversion amount up and down until you aren't paying more in taxes, or the increase is acceptable.

If you are working, you can deposit 5 to 6,000 a year.  If you haven't started, it's not too late.

Now, investing the money, that's a more complex question because of market manipulation and HFT, etc

If anyone shows interest in what I invest in, I'll be glad to do another small post.

I'm not trying to sell anything, believe it or not!