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What Can the Fed Do to Hold Back the Crisis? Not Much.
The financial system is in uncharted waters... and it's not clear that the Fed has a clue how to navigate them.
A number of key data points suggest the US is entering another recession. These data points are:
1) The Empire Manufacturing Survey
2) Copper’s sharp drop in price
3) The Fed’s own GDPNow measure
4) The plunge in corporate revenues
Why does this matter? After all, the US typically enters a recession every 5-7 years or so.
This matters because interest rates are currently at zero. Never in history has the US entered a recession when rates were this low. And it spells serious trouble for the financial system going forward.
Firstly, with rates at zero, the Fed has little to no ammo to combat a contraction. Some Central Banks have recently cut rates into negative territory. However, this is politically impossible in the US, particularly with an upcoming Presidential election.
This ultimately leaves QE as the last tool in the Fed’s arsenal to address an economic contraction.
However, at $4.5 trillion, the Fed’s balance sheet is already so monstrous that it has become a systemic risk in of itself. And the Fed knows this too… Janet Yellen, before she became Fed Chair, was worried about how the Fed could safely exit its positions back when its balance sheet was only $1.3 trillion during QE 1 in 2009.
Moreover, it’s not clear that the Fed could launch another QE program at this point. For one thing there is that aforementioned upcoming Presidential election. Another QE program would just be fuel for the fire that is growing public anger with Washington’s meddling in the economy. And this would lead to greater scrutiny of the Fed and its decision making.
Even if the Fed were to launch another QE program in the next 15 months, it’s not clear how much it would accomplish. A psychological shift has hit the markets in which investors’ faith in Central Bank policy is no longer sacrosanct.
Consider China, where despite rampant money printing, the stock market has continued to implode, crashing to new lows. China’s Central Bank is pumping $29 billion into its stock markets per day. This bought a few weeks of a bounce before Chinese stocks continued to collapse.
In short, as we predicted, Central Banks will indeed be powerless to stop the next Crisis as it spreads. The Fed could potentially go “nuclear” with a massive QE program if the markets fall far enough, but this would only accelerate the pace at which investors lose confidence in Central Banks’ abilities to rein in the carnage.
Smart investors should start preparing now. What happened on Monday was just a taste of what's coming...
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
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Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research
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Lose confidence in the fed??
I don't see the relevance to the question.
Where else is there for investors to turn to.
The Fed is a monopoly. There are two choices.
The Fed or The Fed. Take your pick.
And the Fed knows it.
Am I missing something here?
Think about it: if we decided to balk on the debt owed to China - what are they realistically going to do? Jump and scream? Of course not - it would be renegotiated and they would have to make concessions.
"The US Plunge Protection Team is losing control of the markets, and Sinclair warns, “They got the dickens scared out of them. They actually backed off providing the funds necessary. . . . That’s your warning. The warning is markets can overrun plunge protection teams. Markets can and will overrun the manipulation of metals and currencies. The market will overrun the false strength in the US dollar. The idea that a lift in interest rates would be beneficial to the dollar is absolutely incorrect. We do know the limits of the Plunge Protection Team, and we do know the omnipotent power of the Fed is a total fallacy.”
http://usawatchdog.com/plunge-protection-team-losing-control-of-markets-...
Uh, everything? If you haven't noticed they've 'solved' the problem for 7 years with no end in sight. If things get worse, they will buy stocks or take your cash and any other assets. If you lose, you will pay them. So yeah, they can and will do whatever they want. Plan accordingly. What can ZH do? Nothing. Absolutely nothing. Peeps just whine about it as they down a can of Pringles.
What can the FED do? They can buy about a TRILLION DOLLARS worth of stocks , just like they did today. That is what they can do
If they don't print any actual bills, the filthy proles and peasants will never get their hands on any. This digital print can go on forever, and the rich and powerful parasites can rule like 1000 kings.
Because that always works out for oligarchs.
It strikes me that investment managers have it easier than we do, because tactics are easier to anticipate than strategies - interventions are more predictable than policies.
To paraphrase Ayn Rand, it’s harder to front-run psychopaths than front-run the consequences of psychopaths.
I think it is time to recognize the "the market" doesn't really exist as long as the Fed is willing to provide *unlimited funds* to buy back stocks.
Charts only make sense in an unregulated market. What we have here is a totally manipulated puppet show.
The banksters are in control. They have the ability to create unlimited money through the Fed, which allows them to buy back the entire equities of the world. And that is what they are doing.
They also have the ability to create unlimited naked shorts, which allows them to totally manipulate the commodity and precious metals.
This is fascism. They can do whatever they choose.
When did the fed become in charge of solving for negative stock market fluctuations? The fed should be concerned with monetary policy, not intraday movements of stock prices. The fact that they are simply means they have lost direction and focus and are meddling for political purposes. End the Fed.
Graham...thank you for your brilliant..hindsight analysis ...guess the Fed could have used some of your wisdom back in 2009..
Cash from helicopters?
The core of the problem is that specualtion cannot last, creates a false economy, and demand is not matching the potential for supply in consumer markets.
Simple.
Can't get cash from helicopters with a GOP congress. Tax and home buying credits were helping to put a floor under consumer demand from 2009-2011 and as soon as the GOP congress came in they were gone. Not making a value judgement mind you, but as long as the GOP holds onto Congress, and I suspect they eulogies a while, QE can accomplish little as government spending doesn't reach consumers.
The tax and home buying credits were Bernanke's helicopter drop and they actually worked to a degree, but you won't see anything like them again IMO.
That's less because congress is republican and moreso because Obama isn't. Bush got everyone a check too and congress voted for it near unanimously, including the republicans.
Maybe central banks can consider, for once, due to their bogus QE programs, the millions upon millions of innocent citizens worldwide who they have crushed and destroyed these past seven years. Through their market manipulation of interest rates and stock prices, central bankers have forced risk averse seniors and the middle class into riskier assets just to generate incrementally higher income to live off of. At the same time, they have enriched their wealthy cronies via massive asset bubbles. The lesser-off sit now and watch their hard earned, very limited and precious prinicple wiped out, AGAIN, in the latest central-bank-induced Equity and HY implosion.
For one market particpant, I am tired of watching and listening to the central bankers spew lie after lie. They have fully fucked up enough people and markets and have proven, without a shadow of doubt that central bankers have no idea how to fix this mess and therefore should just get the fuck out of the markets and leave it alone. [that felt good]
This has been the most interesting economic malase shitstorm that I have ever seen and all the while the talking heads in the MSM say the economy is great what a joke. What world do these people live in in the real world of working for a living the consumer is hurting and buying what they need. My mechanic yesterday says he has never seen people ignore the serviceing of thier cars as they are he is 60 year old Iranian migrant. FYI he says the mullahs are schooling the Obumer admin and we should prepare they are really scary bunch
Nothing has really changed. The Federal Reserve has failed to take serious efforts in pushing the government to take the necessary reforms needed to move the economy forward. Policy makers aided by the media thrive at presenting simplistic answers that solve both economic and society’s problems with little or no effort required from the masses. What started as a program to support and prop up both derivatives and the economy has morphed into the main driver of economic data.
Between the low interest rates that has propelled investors into high risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that investors will continue to pour money into the sky high equity market is flawed. More on why an exit strategy from easy money remains elusive in the article below.
http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...
This is what happens. I'm calling it:
The Fed could potentially go “nuclear” with a massive QE program if the markets fall far enough, but this would only accelerate the pace at which investors lose confidence in Central Banks’ abilities to rein in the carnage.
We will enter a death wretch here in the US markets. People will finally have to face the truth about their "money." Here is what I bet: the wretching is similar to how in the US markets when it was going down the other day, it kept hitting "circuit breakers" again and again and basically just not functioning. I bet pretty much that happens to the whole economy (well, it probably already has).... :(
They will start with a massive operation twist 2.0 and QE 4.0 followed by a final operation twist (3.0) then they will start increasing rates. This is their only chance at even kicking this can. Otherwise any other course of action opens up the shit locker on them.
They have to convert all low rates to long term - toss out more cash to their friends (perhaps it lands in the market, but who knows this time, it may go into their friends' reserves) then twist it all into low long term rates before they raise rates.
Caveat, they could choose to not raise rates, if they do this ten we will have QE until the wheels fall off - and they will come off.
Here's a question...
China’s Central Bank is pumping $29 billion into its stock markets per day.
Where are they pumping it from???
Deepwater Horizon...
Not the central bank, government. Either way though, probably thin air. They want to devalue any way.
Not chump change!
Not a problem. Sell US Tresuries, convert to yuan, dump into the market. Considering the size of the problem they may dump it all into the market ... too bad, how sad.
PS: Nevada Rule ... don't gamble with the rent money.
money = thin air, what planet are you from?
Wait, wait...didn't the Fed cause the crisis?
I'm confusiated.
No brother, you are confiscated... Right along with the rest of us.
Since the Dow hit 14,000 (and carried on climbing) I said the Fed should have MANAGED the indices, the Dow between 10,000 and 12,000, to allow the system to repair, instead of which it blew a bubble to get back to 'normalcy' - normalcy being the height of the sub prime bubble.
The Fed has used all its arrows (other then NIRP or more QE) - it is its own making and it WILL reap the harvest of the seed it has sown. If it was run by people with some idea of the real world instead of by academic wonks who have NEVER had a proper job the impending crash would not be a likelihood.
DavidC
There’s no way I can ever prove it but, to me, it sure FEELS like - since the first BIG post-Depression crash (1987) - TPTB have devoted their existence to preventing any kind of a washout from coming to fruition -- S&L’s collapsing, Asian Currency Crisis, Dotcom Bubble, GFC…
Each of them has been considered shockingly horrendous and each of them has been worse than the one before!
What happens NOW ?
cant see the Bretton Woods for the Q.E's
The Fed could announce it is dissolving itself. That would give confidence to the markets.
All the FED can do is make it seem like they are still in control. But they aren't. China is.
What can they do? They can operate around the edges. Push up the market for a few hours. Continue the soap opera about the rate change. Have various board members issue contradictory statements. Get together as a group and strike a "hero pose" for the cover of Time. Issue fatuous economic predictions. Leak their minutes to selected audiences thru trusted media. Write position papers on how to prevent American workers from becoming slackers. Muse aimlessly about another QE. Bad mouth gold.
Nobody uses gold fillings these days.
… you left out: Tell us that “Prosperity is just around the corner”.