The Fed Has A Big Surprise Waiting For You

Tyler Durden's picture

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,


Risdon Tillery Greenwich House day care, New York May 1944

The topic of potential interest rate hikes by central banks is no longer ever far from any serious mind interested in finance. Still, the consensus remains that it will take a while longer, it will take place in a very gradual fashion, and it will all be telegraphed through forward guidance to anyone who feels they have a need or a right to know. Sounds like complacency, doesn’t it?

Now, it seems obvious that the Bank of Japan and the ECB are not about to hike rates tomorrow morning. In Europe, dozens of national politicians wouldn’t accept it, and in Japan, it would mean an early end to many things including Shinzo Abe.

But the Bank of England and the Fed are another story. Though if the Yes side wins in Scotland next week, the narrative may change a lot of Mark Carney and the City. That leaves the Fed. And it’s important to realize and remember that, certainly after Greenspan entered the scene, speaking in tongues, the Fed has become a piece of theater. The Fed is about perception. About trying to make people believe something, and make them act a certain way that they choose for them.

That’s why after the Oracle left they pushed first a bearded gnome and then a grandma forward as the public face. The kind of people nobody would perceive as a threat. Putting a guy who looks like second hand car salesman in charge of the Fed wouldn’t work.

Not when a big financial crisis looms, and then continues on for a decade and counting. That makes keeping up appearances the no. 1 priority. That’s when you want a grandma, or you’d lose your credibility real fast. You need grandma for your theater, for the next play you’re going to stage.

That market volatility today is at record lows is part of a big play, or a big scene in a play if you will. And the goal is not to make markets look good, as many people think. Making markets look good, making the economy look good, is just an intermediate step designed to lure everyone in.

You make people believe you got their back. All the big investors. Because they make tons of money, while they thought maybe the crisis could have really hurt them. Even the public at large feels you got their back. Because they don’t understand what the sleight of hand is.

The big investors understand, but you got them believing you will play that hand forever, or let them know well ahead of time when you intend to fold. The big investors think you will skim the public, but not them. They think you’re all on the same side. And the public thinks you’re healing the economy, and saving their jobs and homes and pensions.

When rate hikes are discussed, like I did two weeks ago in This Is Why The Fed Will Raise Interest Rates, most people have similar initial reactions. ‘They can’t do that, it would kill the economy, or at least the recovery’.

But the truth is, there is no recovery. It’s just a scene in a play. And the economy is completely shot, it only appears to be left standing because the Fed poured oodles of money into it. Or rather, into a part of the economy that it can control, that it can get the money out of again easily: Wall Street banks. And Wall Street equals the Fed.

Charles Hugh Smith, in What If the Easy Money Is Now on the Bear Side?, notices that there are hardly any bears left in the market, and that shorts are disappearing as a source of revenue for bulls. Interesting, but he doesn’t yet connect all the dots. CHS thinks big money managers can make ‘the play’, that they can fool the rest of the market and unleash a tsunami that will bury the bulls.

I don’t think so. I think what goes on is that the Wall Street banks, many times bigger than the biggest money managers, see their revenues plunge. As they knew they would, because free money and ultra low rates are not some infinite source of income, since other market participants adapt their tactics to those things as well.

Which is what Charles Hugh Smith points to, but doesn’t fully exploit. And it’s not as Wolf Richter presumes either:

After years of using its scorched-earth monetary policies to engineer the greatest wealth transfer of all times, the Fed seems to be fretting about getting blamed for yet another implosion of the very asset bubbles these policies have purposefully created.

The Fed doesn’t fret. The Fed has known for years that the US economy is dead on arrival. They’ve spent trillions of dollars backed, in the end, by American taxpayers, knowing full well that it would have no effect other than to fool people into believing something else than what reality says loud and clear.

Philip Van Doorn, who I quoted two weeks ago, got quite a bit closer in Big US Banks Prepare To Make Even More Money

For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago

That is the essence, and that is why grandma will announce higher rates, against a backdrop of 4% GDP growth numbers and a plethora of other ‘great’ economic data and military chest thumping abroad.

The US economy is dead. The Fed has known this for a long time, but pumped it up to where it is now to draw in all the greater fools, the so-called big investors who have made money like honey from QE and ZIRP. They are the greater fools. The American real economy ceased being a consideration long ago.

We’re in for big surprises, and they won’t be pretty, they’ll be pretty nasty. There are far too many people who think of themselves as smart who don’t see the difference between a theater play and a reality show. And I don’t mean CHS or Wolf, they’re much more clever than your average investment advisor.

The Fed will raise rates because that will make the biggest banks the most money. There’s nothing else that matters. The Fed can’t revive the US economy, that’s just a foolish notion. But it can suck a lot of wealth out of it.

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saveUSsavers's picture

The Fed is a FINANCIAL TERRORIST! Decimating the saving masses in favor of SPECULATION ,a Crime vs Humanity !

Bangalore Equity Trader's picture

Listen! WTF!? You are calling the ones who gave you the greatest lifestyle know to mankind Terrorists?

Are you sick? Explain to me why you are so ungrateful!

Greenskeeper_Carl's picture

Haha it isn't a surprise for me. Not is it for anyone who frequents this place. It should have been obvious to anyone other than the most ardent gov worshipers, but, alas, we are few. Thanks to the gubbermint edumacation system.

Almost Solvent's picture

I'll take this one step further, an LBO of the federal government by wall street through the Fed. 

 

It's not like half of wall street once worked for the government or vice versa. 

 

Not a hostile takeover, mind you, but hike Uncle Sam's interest payments and watch the desperation set in. 

 

kaiserhoff's picture

I don't see much merit in this.  The author doesn't know that the big banks are Investment Banks in all but name.  That's how they make money.  Not off some piddly spread.

But he is right that the Fed is a completely political creature.  Maximum interest rate pain shortly after the election makes sense in that light.

X.inf.capt's picture

o.k.

i have an honest question for the fight club...

the economy is dead...we know that...

other than digging a bunker and stacking PM's...

where do you invest money??

yrad's picture

Apparently, Argentina...

nofluer's picture

ROTFLMBO!!!! Good shot!

"BUENOS AIRES, Sept 11 (Reuters) - Argentina's government is ramping up state intervention in the economy to try to prevent a new debt default from triggering a balance of payments crisis but its policies are also battering business confidence and may deepen a recession.

In the six weeks since Argentina failed to complete a debt coupon payment and defaulted for the second time in 12 years, the government has restricted the amount of dollars available to importers, boosted subsidies and drawn up proposals to interfere in private companies' output plans..."

http://www.thisismoney.co.uk/wires/reuters/article-2752363/After-default...

Arius's picture

@AUTHOR

 

You can speak ill of the FED, and you have an audience here ... however, if it was not for the FED there wont be America as we know it today.

 

The FED is the US Dollar, (before you had greenbacks?) and the US Dollar made America what it is today.

 

Yes, all good things will come eventually to an end, but while you blame the FED from you lazychair, dont forget to give credit where credit is due !!!

 

Four chan's picture

the fed stealing silently we the peoples savings, savings we traded our lives for. their system is evil to the bone.

zhandax's picture

@Arius

"and the US Dollar made America what it is today."

WTF??  Not that I disagree with you, but what the fuck do you smoke to think that is a good thing?  How about a quick history refresher?  How did some little 13-colony podunk republic get to be a world leader in 130 years?  The rule of law and hard money.  What happened in the next 100 years?  Both have been stolen from us. That is the broad prospective.  I won't even try to describe what it has done to the people who live here.

Arius's picture

"The rule of law and hard money."

Really? do u think the rule of law just falled into your lap, or those founding fathers came up with the idea and voila ...

time to awake up amigo ... the same people who brought you the FED brought you the rule of law ... now it is up to you to work hard and keep it ...

but all you are interested is a FREE RIDE and by you I mean the country ...all you people do is blame the FED ... for what??? for giving you the best times of your lives for over 100 years??? where did you get the strong dollar from??? THE FED and only the FED ... will last forever?  IT IS UP TO YOU!

 

same with English ... look how well will the Scots will do once they are FREE ... they will get their part of the Gold from the UK and establish a NEW currency and be an example of what hard works means ... an example for people in the self reliant states in America ... the people who dont wait for FREE loads from the Federalies ...

Squid-puppets a-go-go's picture

kinda off topic, but has anyone noticed the 'relentless downvoting troll' has disappeared?

im seeing plenty of perfectly salient and wise remarks going completely undownvoted.  Its not normal!

wallstreetaposteriori's picture

I noticed that as well a few days ago.  It most likely is some crazy bitcoin fanatic.

zhandax's picture

Arius, time to wake up and smell the tea in the harbor, and I cast no reference to the current tea party.  If I can find any fault with the founding fathers, it is that they didn't swing Hamilton from a rope.  The rule of law and hard money was written into the Constitution, and the former resident of the house a couple of miles from me (The Hermitage) drove a stake in the heart of the central banking cartel for the next 80 years, and survived their attempt to kill him.  Not every ill has started in the last 100 years, but what has left us "rudderless, without a compass, and with guns blazing" most certainly did.

Rubbish's picture

From the trash trenches of So. Cal., belts are tightening in the commercial realm. Sit down food is slowing to sales of pre holiday last year. Grocery have less stockers at night this month also. Maybe it's the hot weather or maybe Joe Six Pack is now once and for all tapped out?

Not the end of the world yet, but managers will be doing the, can't use you this week to some....

 

It's been hit and miss last quarter but now I would say, miss all the time. 3-10% down depending on industry.

Pinto Currency's picture

 

 

The Fed is not raising rates.  The gold market is.

Stand-by for post Sept 29 when the Chinese FTZ gold market goes live.

The Fed is a bystander and it is trying to look like it is in the game with tightening discussion. 

The next trend is selling bonds, buying gold and the Fed can do nothing about that.

Sages wife's picture

I thought it was the "fondling" fathers.  But then I'm not american.  Must have been a breaking story on CNN.

Squid-puppets a-go-go's picture

I take note of the downvotes, and took the liberty of downvoting myself

all-priced-in's picture

Obama has been extra busy -

 

So no time to read Zero Hedge.

sleigher's picture

The system is criminal.  They take 35%+ of what I earn through an exchange of my time and labor.  They are not allowed to do it but they do.  And if I don't give it to them they will seize my accounts or take my house or even put me in jail.  They steal from me and everyone else at gunpoint.  The system is a slow motion armed robbery.  But because some are under the impression that they brought us rule of law, this is ok and allowed to continue.  They got rid of rule of law back in 1933 with the Erie railroad decision.  Rule of law has not existed in your or my lifetime.  Rule of law is a quaint notion that people at university talk about.

BeanusCountus's picture

Ahem. Few here are looking for a free ride. And the "free ride" you so overlook is the system the fed creates that insulates big money banks and investors from ever suffering the consequences of bad decision making and irresponsibility. All in the name of "saving the little people from a collapse of the financial system". Well, I call bullshit on that threat. Its YOU thats getting the free ride of never having to think about your investments. Just led the Fed bail you out.

bitterwolf's picture

hard money and rule of law, lol.  USA grew to power through exploitation of both domestic and other nations labor and pillaging natural resources, transforming indentured servitude to glorified wage slave that can "rise through the ranks", and the big arm of the US Military ( see GEN, Butler comment) to enforce these policies on the foriegn resources.Not to mention utilizing the synergies of monopolies,cartels and buying and selling politicians to pass laws that only benefit American capitalist oligarchs..your comments are from a cartoon sunday school version of history.

Cheers

August's picture

>>>hard money and rule of law, lol.  USA grew to power through exploitation...

The US would have "grown to power" anyway, but two smallish items need to be pointed out:

the extermination of the native inhabitants of North America, and the self-immolation of Europe due to London's unwillingness to share Old World hegemony with Germany.

Hey, Presto!

Moe Howard's picture

The FED is not US Dollars, the FED is Federal Reserve Notes, something entirely different.

deflator's picture

"The FED is the US Dollar, (before you had greenbacks?) and the US Dollar made America what it is today."

 

 Bullshit, you sound like Krugman who believes the past 150 years of persistent economic growth which is an anomoly in contrast to rest of history is a result of our greater understanding of economics (money out of thin air.) 

 

 The past 150 years of persistent economic growth is a result of growth in crude oil, coal, natural gas and the technology that consumes it. Growth comes from the difference between energy return on energy invested not dollar return on dollar invested. My labor is energy, and you are telling me that your money that you can create out of thin air is the most important thing?

dracos_ghost's picture

Best comment by far.

This conflation of Banking as Business idea is the biggest bunch of bullshit perpetrated on humanity.

Bankers are parasitic scum. They are anathema to actual business and wealth creation -- unacceptable to the old arisotocracy. The forcing of everything through their payment and transfer system is the cancer that we have suffered since 1913 and the continuation of Wilsonian Progressive bullshit.

As soon as we as a global society considered debt as wealth, it was all over.

 

kill switch's picture

however, if it was not for the FED there wont be America as we know it today.

 

It would seem you made my point..


NoDebt's picture

Very much depends on whether you think the financial world will end in fire or ice.  If by fire (hyperinflation) you want stocks or gold.  If by ice (deflation, defaults) you want cash.

LetThemEatRand's picture

As Pat Benatar sang, fire and ice.   Deflation of assets and wages, inflation of what you need to survive.  That would be a nice way to usher in a new world order (neo -- new -- feudalism).

willwork4food's picture

+10

Which is what has been happening since the crash.

LetThemEatRand's picture

"There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."

-Niccolo Machiavelli

 

 

acetinker's picture

One word- Tangibles my dear boy!  The future depends on tangibles.

You can be Dustin Hoffman and I'll be Walter Brooke.

While I hold a bit of precious metal, I don't expect that it is my salvation as many here seem to do.

IMHO, you have to possess some type of productive asset.  Whether it is arable land, or machinery, or simply the skills to make actual stuff work (not markets, at the end of the day, the marketeers will fail, and there's a shit-ton of marketeers here, they don't wanna hear what I think, anyway).

As long as the sun rises and the sky is blue, tangible, productive assets will have value, and the charlatans who've made you believe that there is value in their casino will fleece you.

Sorry for that, but you asked.

nofluer's picture

Acetinker

"you have to possess some type of productive asset."

Most excellent response... but if I may improve on it a bit?

You want something that will 1. produce CURRENT INCOME! (ie a continuing income stream - regardless of what is being used as "money".) and 2. To help you decide what to do to produce that current income, look at the bottom of Mazlow's Hierarchy of Needs (generally represented as a pyramid) the contents of which are the things people NEED to live, and put your money and effort into something that is inextricably linked to something on that bottom row. Preferably what you choose will be something that requires a not too common skill or knowledge... thus maximizing the value of your "return on investment".

acetinker's picture

Yes, but Monsanto and Lockheed-Martin are also active on Maslow's bottom row, so you have to be selective as to who you sleep with. Thanks for the reply!

willwork4food's picture

NEW things will cost a lot more. Used things will depreciate and be sold on Craigslist, but will you trust them to last?

acetinker's picture

If willwork4food is truly your situation, and I ran across you in my daily travels, I would feel compelled to help you.  You can find me in Bell Park.  I have given enough hints in previous comments that you should be able to find me.

The grifters call me a "soft touch".

It is so.  But I'm also an asshole, so be careful.