The Fed's Stunning Admission Of What Happens Next
Following an epic stock rout to start the year, one which has wiped out trillions in market capitalization, it has rapidly become a consensus view (even by staunch Fed supporters such as the Nikkei Times) that the Fed committed a gross policy mistake by hiking rates on December 16, so much so that this week none other than former Fed president Kocherlakota openly mocked the Fed's credibility when he pointed out the near record plunge in forward breakevens suggesting the market has called the Fed's bluff on rising inflation.
All of this happened before JPM cut its Q4 GDP estimate from 1.0% to 0.1% in the quarter in which Yellen hiked.
To be sure, the dramatic reaction and outcome following the Fed's "error" rate hike was predicted on this website on many occasions, most recently two weeks prior to the rate hike in "This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession" when we demonstrated what would happen once the Fed unleashed the "Ghost of 1937."
As we pointed out in early December, conveniently we have a great historical primer of what happened the last time the Fed hiked at a time when it misread the US economy, which was also at or below stall speed, and the Fed incorrectly assumed it was growing.
We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.
Here is what happened then, as we described previously in June.
[No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.
Just like now.
Follows a detailed narrative of precisely what happened from a recent Bridgewater note:
The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.
The tightening of monetary policy was intensified by currency devaluations by France and Switzerland, which chose not to move in lock-step with the US tightening. The demand for dollars increased. By late 1936, the President and other policy makers became increasingly concerned by gold inflows (which allowed faster money and credit growth).
The economy remained strong going into early 1937. The stock market was still rising, industrial production remained strong, and inflation had ticked up to around 5%. The second tightening came in March of 1937 and the third one came in May. While neither the Fed nor the Treasury anticipated that the increase in required reserves combined with the sterilization program would push rates higher, the tighter money and reduced liquidity led to a sell-off in bonds, a rise in the short rate, and a sell-off in stocks. Following the second increase in reserves in March 1937, both the short-term rate and the bond yield spiked.
Stocks also fell that month nearly 10%. They bottomed a year later, in March of 1938, declining more than 50%!
Or, as Bank of America summarizes it: "The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones."
* * *
As it turns out, however, the Fed did not even have to read this blog, or Bank of America, or even Bridgewater, to know the result of its rate hike. All it had to do was to read... the Fed.
But first, as J Pierpont Morgan reminds us, it was Charles Kindleberger's "The World in Depression" which summarized succinctly just how 2015/2016 is a carbon copy of the 1936/1937 period. In explaining how and why both the markets and the economy imploded so spectacularly after the Fed's decision to tighten in 1936, Kindleberger says:
"For a considerable time there was no understanding of what had happened. Then it became clear. The spurt in activity from October 1936 had been dominated by inventory accumulation. This was especially the case in automobiles, where, because of fears of strikes, supplies of new cars had been built up. It was the same in steel and textiles - two other industries with strong CIO unions."
If all off this sounds oddly familiar, here's the reason why: as we showed just last week, while inventories remain at record levels, wholesale sales are crashing, and the result is that the nominal spread between inventories and sales is all time high.
The inventory liquidation cycle was previewed all the way back in June in "The Coming US Recession Charted" long before it bacame "conventional wisdom."
Kindleberger continues:
When it became evident after the spring of of 1937 that commodity prices were not going to continue upward, the basis for the inventory accumulation was undermined, and first in textiles, then in steel, the reverse procees took place.
Oil anyone?
And then this: "The steepest economic descent in the history of the United States, which lost half the ground gained for many indexes since 1932, proved that the economic recovery in the United States had been built on an illusion."
Which, of course, is what we have been saying since day 1, and which even such finance legends as Bill Gross now openly admit when they say that the zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable, adding that "the wealth effect is created by leverage based on QE’s and 0% rates."
And not just Bill Gross. The Fed itself.
Yes, it was the Fed itself who, in its Federal Reserve Bulletin from June 1938 as transcribed in the 8th Annual General Meeting of the Bank of International Settlements, uttered the following prophetic words:
The events of 1929 taught us that the absence of any rise in prices did not prove that no crisis was pending. 1937 has taught us that an abundant supply of gold and a cheap money policy do not prevent prices from falling.
If only the Fed had listened to, well, the Fed.
What happened next? The chart below shows the stock market reaction in 1937 to the Fed's attempt to tighten smack in the middle pf the Great Depression.
If the Fed was right, the far more prophetic 1937 Fed that is not the current wealth effect-pandering iteration, then the market is about to see half its value wiped out.
h/t @pierpont_morgan
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Up until the guillotines are rolled out at every county seat
KesselRunin12Parsecs Then it'll all start again, & we'll get to put our lives back together & be treated with Spielberg entertainment
I love your optimism. I would love to see your statement proved right. I really mean that. Wonder why?
US population in 1913 was 100 million. Now: 318. And growing exponentially, even that slowed a little bit.
Back in 1913 not only the US was self-sufficient in oil and coal but both been ‘low hang fruit’. Not the case anymore.
Spielberg entertainment? Walking Dead, more likely.
But, as I said, hope your scenario is the right one.
Now, on The Fed: By Ben Bernanke on 60 Minutes: When there are sand castles built on beaches, there are lots of small waves which may hit them, without any negative result. But when a tidal wave comes, everything is wiped out.
Walking Dead? (not Spielberg)?... OK I'll play
You mean that moronic, designed to be mind numbing distraction posing as art, programming shit out by AMC Networks (Josh Sapan CEO)?
http://jewishbusinessnews.com/2013/12/12/josh-sapan-provides-his-big-pic...
Child please! (go back to your delusions, the water is much warmer there).
For some reason, the water's ALWAY'S warmer in the kiddie pool...
If something slowed, it's not growing exponentially anymore. End of story.
As Iran grows stronger, with the battle-tested Hezbollah riding its coat-tails- so Israel will gently fade.
Nobody listens to Netunyahu anymore, save for a bunch of US neocons, whose heads are half-way into the noose that 9/11 prepared for them.
The world is a-changing, little at a time. The recent jovial Iran/US navy 'incident' was a return to the diplomatic games of times gone by.
Israel is a little country peopled by inbred savages who expect the whole world to dance to their tune (remember the Holocaust? remember it....please remember it) but, sadly, for them, everyone now knows that all that Ann Frank stuff is just stories and bullshit.
Even Hollywood will soon give up on its 'tribe' just like Soros did. Remember that these people worship Satan, so they have no point to rally around. They have only chaos , pornography and money.
Soon they will just be back in the 'pale' -where they belong.
KesselR12P
"...blackmailing Woody Woodpecker Wilson 100 years ago."
Please add some data on this point of blackmail of WW.
Are you referring to the love -letters from an earlier mistress?
Or was there another blackmail for which the love-letters/mistress was the public explanation?
Perhaps the rumors are true that WW was a very sick man with debilitating brain impairment?
There was never a sensible explanation WHY Wilson signed-off the creation of the Fed Reserve System. He seemed to know better, yet he buckled under some forceful pressure.
negative
this reset WILL be different
the elite are not planning on needing YOU any more
and are taking steps that will see to it that YOU will not be a concern in the future.
"Are you referring to the love -letters from an earlier mistress?"
Pretty much. It doesn't seem like much these days because that kind of crap is pretty much a 'ticket to entry' these days. But in those times it was a big deal.
Anyway, I'm sure that was only the surface of it. Nobodoy cares about that anymore because 'scandal' stories come & go in 10 minutes. That's why it's easy to have the Hilary & Bill Clinton's running around today.
more than likely, Id say its inevitable at some point. Another point that should be made is if we had a vibrant and robust economy, as obama insisted in his SOTU speech, we would not be having this conversation. Healthy and robust economies aren't derailed and healthy stock markets are crushed by one measly .25% rate hike. Also, when have you ever heard, 7 years after a recission supposedly ended, a bunch of talk about our "strong" recovery?
They ALWAYS say that the system is sound and all the problems are under control RIGHT BEFORE THE FAILURE. They said it weeks before 1929, Bernanke said the sub-prime was contained weeks before 2008 melt down. Obama said that the economy is sound in his SOTU address and to me that says it all. You cannot believe a word they say. They are not stupid. The system is based on confidence. The 401k money blindly flows into the markets and they MUST invest it or lose their jobs. Its a system. They are running it like they always do. This time hoWever too many people are totally awake and calling them out BEFORE it happens. The fed IS cornered. Its falling down right in front of them and us and we are watching it happen. RUSSIA AND CHINA ARE LIMITING THEIR ABILITY TO GET THE WAR STARTED. But the markets are going down. There are no distractions big enough so be careful because they will manufacture one. And what the FUCK is with this president? Who is this guy? That whole Iranian boat shit show looked way too theatre to me. And the timing??????
I spoke to a friend Friday and brought up the downturn and he had no idea what I was talking about. And he is a big shot Insurance Executive. Totally oblivious. But he knew all the football stats. He said "I should be looking at that more." I couldn't believe it. So many people have no idea. But when the SHTF then panic will spread and the confidence will be gone and it will be too late and they wll be stuck. Wealth will dissapear just like last time but this time it will be GLOBAL. And the currencies will fall. Digital money wont fulfill the need for transactional business. Barter and black markets will fill the void. Just like the last depression.
Yup, like I've been saying for, well, forever, it's The System!
The growth paradigm is done for. We bilked the future "returns" so much that we stole the future. No future, not ability to pay off debts. Coupled with this, and this is where the DOOM in doom comes in to play, demographics puts us in the corner where there's absolutely no way out.
http://econimica.blogspot.com/2016/01/sources-of-growth-examined-and-fou...
I parted ways with my brother, one who was well connected to The System, after he acknowledged that it was all going to fall apart as I was saying. No, not because he agreed, but because he said that he didn't think that it would do so until after he was dead- yeah, he was staring "retirement" in the face, wanting to go play golf in his winter get-away (fucking watering grass in desert, talk about non-sustainable!). Your friend is similarly blind. Oh well, not everyone escapes... I don't ever expect my brother to drag his aging ass up to my farm after things go to heck.
P.S. Recall that it was GW Bush who oversaw the handouts to the banks to start with. Yup, GW, the same guy who protected us from 9/11, wasn't in to nation building, the great "uniter" etc etc.. Politicians and the like are tasked with lying; to think otherwise is to not understand The Game.
Agreed. It isn't just the Fed's December decision. It's a composite of:
QE - free money for the wealthy
Millions of jobs outsourced to cheap labor countries
The billions of $$s given to banks/corporations following '08
political/military arm of the US govt. bought/sold by big wealth or fanatic neo-cons in DC
China/India/Russia/Bric Nations slowly moving away from the US currency
The millions of ignorant Americans who have lost their integrity and character
All the trillions of $s spent on US hegemonic wars that have killed millions and suffocated public needs in America.
It's a hopeless mess, but will these current events lead to the ultimate collapse of the American system?
da man inherit dat brothah, now he get gon' call it whatevah he be wantin'...dat be good when ya be king...
The FED has already gone QE to infinity. How else has:
1. The stock market been propped up and now prevented from a major crash?
2. Dumped treasuries have been bought up by Belgium etc.?
3. The oil patch has not collapsed?
Jim Willie is wrong. It's not double barrel QE. It's triple barrel now.
WWII started 3 years later, and the U.S. was in it 4 years later after Japan attacked Pearl Harbor trying to gain control of the Pacific.
http://www.independent.org/newsroom/article.asp?id=1930
So we're assuming the US had no role in spurring that attack, huh?
Oil was an irritant. We were forced to the ground due to Peak Right Whales.
Stupid, stupid whales.
<---- Gain control of the Pacific
<---- Responding to indirect US economic warfare with direct hot war
You know it's over when a check shows up in your mailbox.
First you kick the can into the wall, then you end up kicking the wall. I think that's the termianl phase.
Then your balls are to the wall.
"Accept"
https://www.youtube.com/watch?v=B_3TlrZLpQ0
How *Greed (self interest) systematically destroyed American society. Fixed!
Anything made by man gets destroyed eventually. Nothing made by man lasts forever.
Self interest has its place in society. Yes it has is pros and cons. But so does everything else.
The rise of one society still remains one big circle or cycle mankind hasn't figured out how to end. We remain gerbils running in the wheel. Most people don't even know they are in the wheel slaving away. An even greater number of people don't see that beyond that wheel, we are still trapped in a glass cage.
Self interest has its place in society. <--- Perhaps. But when it's unbridled and rewarded...well, you just get fucked in the ass. Throw some of these guys in jail (or better yet off a cliff) and then come talk to me
Greed (self interest) is the basis for any rational financial/monetary/politcal system. The framers tried to account for it in their legacy (The Constitution and Bill of Rights) but the people failed to uphold their end of the bargain.
Should be: How cowardice and intellectual sloth systematically destroyed American society.
Are you saying Americans have not been greedy enough and that's why the US is collapsing?
It took long enough, but I am finally reading G. Edward Griffin's The Creature from Jekyll Island, the book about the formation and workings of the Fed.
It is as good as everyone says... A most excellent introduction into how the Socialists want to subvert freedom and savings in favor of a New World Order.
Highly recommended.
Unfortunately, your choice has a credibility problem.
By Anthony Migchels: Ezra Pound, wrote ‘the Secrets of the Federal Reserve’, listing the banks owning the system. Ed Griffin then infamously plagiarized this book with his ‘the Creature of Jekyll Island’, to push the John Birch/Libertarian poison of the Gold Standard as a solution. We’re still dealing with this today, as seen in the ‘End the Fed’ movement.
Though you should know. And that you’ll appreciate.
https://realcurrencies.wordpress.com/2012/01/18/who-is-ed-griffin/
Excellent lilnk. Well supported. TY, Escrava.
Gold is being manipulated down by the bogus paper market. Gold is a store of wealth and is money, sure. Gold is a lot of things. But a monetary system does not need to be based on it.
Very good points about hijacking a populist awareness.
Jurgster your link is making vomit every time!
Next chart, World War II
This is what will happen next......
There will be no real recovery what so ever!
The elite will soon run and hide in the bunkers paid for with citizens taxes, after engineering a full economic collapse as well as starting WW3, plus they will make sure that there are enough Jihadi's in the West to start a race war.
That should be enough to cover up the failed fiat ponzi scheme and take care of the 'excessive' population......
http://beforeitsnews.com/global-unrest/2016/01/the-lion-is-it-time-to-fi...
I downvoted you for spamming.
That said, if you are right, I am not worried. I am prepared as well as my means and knowledge would allow. I think I have a pretty good chance of survival, and I have useful people willing to help me (family, nieghbors etc). I might be ok.
I don't even read what the spambot writes. I hit down vote and move on.
Whatsoever is one word, MrNosey.
Can you uplease give it a goddamn rest?
Sorcha Faal always seems to be bang on with their predictions. I don't even need to click the link to know what 'she' has to say...
Let me guess...
A top secret report has been leaked from the Russian ministry of defense, containing the outcome of a recent study comissioned by the Duma, which stated that world war 3 was imminent, thanks to the interception of an off world transmission, which originated from the iluminati homeworld, nubiru.
The source within the ministry stated that a Russian Typhoon class sub was perfoming a 'Crazy Ivan', whilst on a canyon run, when it intercepted the transmission on VLF channel 476. The transmission was intended for the Bush family, which has now fully relocated to the antarctic Nazi base and it gave the greenlight for operation 'Guidestone'.
Everyone should prepare now for imminent global nuclear war but should go forth with peace and love in their hearts, in the hope that the shadowy plaedian galactic council can somehow prevent the luciferian attack from taking place.
PS, you are a fucking moron.
But wait! Theres more! ~ lol
That is perhaps the most lucid comment you have ever made.
Fuck the fed in the ass until it dies. - Mr. Garrison
Don't see any soup kitchens, men with moth eaten clothing or babies dying in the streets. We may get to a depression era level destruction of society, but we aren't there yet. Ease up on the drama queen bee!
You do understand what an EBT card is, right? It's the 21st century equivalent of a "soup kitchen". A few internet searches should yield a rather telling graph or two.
we are all going to regret the days when ebt cards fail. what a mess that will be.
Only when the EBT cards stop working will it be an equivalent to the Great Depression. Where are the empty storefronts? It is bad, but not near the level of desperation of the 1930's.
It may not be "bad" where you are, but other places, like where I live, it's been depression territory for at least a deacde now.
Today's bread line
http://demonocracy.info/infographics/usa/food_stamps/food_stamp_nation-S...
Detroit? Gary, IN? Basically somewhere in the Midwest?
Please check with mainstreet mom and pop shops - they've almost all gone away. Check Radioshack, Sears, Kmart and never-made-a-profit Amazon. Hell, check Walmart now that they are starting to close stores across the country and fire thousands.
Walmart closings will concentrate EBT holders to fewer stores.
Transit will be farther and longer.
Camps nearby next ?