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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It will make the Rodney King riots look like a garden party. And not just in the urban areas. Suburban supermarkets, gas stations, and warehouse clubs will burn.
Have you seen Detroit pics lately? Have you seen the rust belt cities of late? Heck the homeless were in Hyannis MA in the pre 9/11 recession and there were empty store fronts before the newly emigrated Brazilians began to move into space. Officials had to move the homeless out of the woods in people's backyards cause of the fear the poop and pee from the many people living there without facilities were causing health issues. Then if I remember correctly they were outlawed from hanging on the streets and removed from the woods. Just move them to another location and deny they exist. At least from the wealthy's perspective, problem solved.
Dupe
Dupe
They won't fail.
It won't come to that. People will continue to get food and toilet paper as long as they follow the rules. Those breaking the rules, whatever they be, will be sent to the FEMA camps. Sterilisation may become mandatory for those on EBT cards and their children who entered or crossed puberty. Those put in FEMA camps will be sterlised before admission itself. What is in store is more government, not societal collapse.
They did a dry run not that long ago where, IIRC, 9 states' EBT system shut down for a few hours. The pavement apes just about looted Walmart...
http://www.cbsnews.com/news/ebt-benefit-card-glitch-sparks-walmart-shopp...
Actually it reminds me of my Skinner box rat when we got to the extinction part of the experiment. You train the rat that he gets a reward when he does a specific behavior. You continually reinforce until he no longer questions it will happen and the behavior/reward. Then you change the box set up so that the behavior no longer produces the reward. Watch your rat go nuts and run around the box in a complete frenzy.
I gotta say I've witnessed Skinner Rat extinction behaviors in all levels on the socio-econic ladder. I've coached myself through the frustration reaction understanding it for exactly what it is. So I don't mean the analogy as a put down. Expectations are a bitch.
Subtract Fed. gov. deficit spending for millions on welfare. We're there and it's being hidden. Abortion kills the babies before they get to the streets. Go into Walmart at midnight on the 1st day of the month. Eliminate Fed. gov. deficit spending via FED counterfeiting and see what happens.
E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E
F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D
T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D
E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E
F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D
T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D
E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E
F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D
T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D E N D T H E F E D
How Many Es in this chart?
How Many Es in this chart?
If you strategically add a 'j' & a 'w'... well then, lots!
only winning wwII and becoming an atomic power reversed the decline and lead to the70 years of prosperity that American's now enjoy.
Someone called in a request for this on NPR this morning. It made the drive to work more enjoyable. http://m.youtube.com/watch?v=NwqPBlSxb-0.
"The country's in the very best of hands"
War. That is what is certain. War.
Joo World Order, that's what's next
You are mistaken. That is the past. That system is crumbling now.
The next world order is the Eurasian Alliance between China, Russia, and Germany (along with most of the rest of the world).
The Germans first have to surgically re-attach their balls.
"You are mistaken. That is the past. That system is crumbling now"
Perhaps... But in the event of THAT scenario unfolding, AmeriKa just gets split up into a fifedom collection of 'Districts' (vis-a-vis HUNGER GAMES), with jews controlling that turf.
FFS ~ it's already like that now.
yep there are currently 12 fed districts
I'd be 100% OK with that. State I'm in has solid Fortune 500 companies, highly regarded research hospital, ore deposits, neighbor to the west has oil, we have enough arable land That needs no irrigation to feed ourselves...plus enough fresh water for an eon.
Plus, you'd have a nice sporty pink hairdo to go along with it!
With 50,000 allied troops still occupying the country to prevent German men from protecting their women that is not going to happen soon.
With 50,000 allied troops still occupying the country to prevent German men from protecting their women that is not going to happen soon.
Or revolution -ala 1930's germany style.
Every indicator points to massive global war. All it needs is the appropriate spark. And Obombyou will likely supply that soon.
Obama will supply the spark, but only because of his lack of leadership, not because of something specifc he has done. His wishy-washy, pitifiul aproach has created a real leadership vacuum on the world stage and other countries know this. Iran, Putin, ISIS, etc. keep pushing the envelope because they know Obama is too incompetent to respond properly...Eventually however, they will push to far...
Leaders cannot lead if they don't have the resources. PERIOD.
Putin is the success that he is because Russia isn't drowning in debt (Obama didn't create the debt-ridden system, though he's ramped it up). Russia has REAL natural resources in the form of energy that it is able to realistically extract and sell: no scraping shale oil barrels. Russia has a first-rate military (likely less corrupt than the US's, though that may not necessarily be saying a lot). And Russia's people aren't heavily divided: the division in the US was underway decades ago, ramping up dramatically in the last two administrations (under the "uniter" and the "peacemaker").
People in the US WANT war, that's the bottom line. They can say they do not but yet the politicians and their industries say otherwise. There will be no introspection, it will be, as humans have been programmed for eons, "others" who have caused our despair- war it shall be.
You realize it's all orchestrated, right? Obama is a sockpuppet same as bush, clinton, and all of the rest. He's not incompetent; hes just following the script.
If this is '1937', then we have 2 years of Currency and Trade Wars ahead, before WW III "gets real and serious".
A rather perceptive and important point. Things such as world wars do not happen overnight.
Things go horribly wrong (or right, depending on who you are) for years before the catalyst sets the physical destruction in motion.
My point is that it is critical to understand roughly where you are on the timeline of epic events. This time might not be exactly like any other, but there are enough similarities that it matters to be looking for them.
The people who are just now waking up and becoming aware had better come to the conclusion that things are really fucked up very fast. Any delay in planning at all will be their undoing.
"If this is '1937', then we have 2 years of Currency and Trade Wars ahead, before WW III "gets real and serious"."
Yeah, that should be just about enough time for the jew controlled MIC to start ramping things up & fatten their wallets even more...
Face it people... You're FUCKED whichever way you turn... You're even fucked if you log on to ZH here and read about this by some douchebag commenter (like me), because the comment (notwithstanding verity), will get junked by the 'sheckel earning' implants who have parlayed a 2% minority into a 51% 'majority' simply because they're more fastidious about it & were clever enough, way back, to play to the emotions of blacks, women, teens, immigrants, homos, & any other DIVIDE & CONQUER demographic (in a SOCIAL MELTING POT), that they can pander to because, OH BY THE WAY, they controll the media & court system as well...
Touch your toes bitchez! (every morning)
https://www.youtube.com/watch?v=EFofqe26t-4
Mr. Kesselrunnin, I down-voted you for slurring Jew for no logical reason. All rapists are men. It does not follow that all men are rapists.
The UNIVERSE thanks you for making things 'FAIR' for everyone (& especially those poor oppressed jews, who are, you know, CHOSEN & all cause they said so themselves).
They THANK you for your service... Now, get out there and borrow some money goddammit & make them REAL happy!
+1 for the nic.
NIRPlus Inventory would be a good one too.
It happened slowly, then all at once. (attribution not recalled at the moment)
'How did you go bankrupt?' Bill asked.
'Two ways,' Mike said. 'Gradually and then suddenly.'
Summary: this is complex matter. Anything they (the FED) do will have negative consequences in places they don't expect.
It’s not so much the .25% increase, it was the Fed procrastinating (bank supporting) and allowing the debt bubble to grow to its toxic size. The .25 was them admitting their ooops.
Exactly. The multiple QEs levered everything, but the econmy has not recovered from 2007-2008. The rate hike was simply admission by the Fed that QE did not heal th Economy and that they are out of answers. Now THAT will tank a market.
I'm starting to think that they know damn well that there's no out (this time).
I've never thought that they were stupid: this article suggests that the decisions made during the depression era were wrong, but the necessary effects took place did they not? I felt that the article demonized the notion of the stock markets getting hammered (when in fact it was absolutely necessary).
As the facts stand, the US is still managing to retain it's status as best-looking-horse-at-the-glue-factory. Other countries are absolutely fucked. Short-term Russia is fucked, but that's because the US's policies have continued to strangle it. In the longer-term it'll level off. China is on the verge of a massive collapse: they failed to allow an earlier crash, so now the landing is going to be HARD- they lack resources. Saudis are running down a dead-end and dangerous alley: the Royals' reign is going to come to an end, and with that will be chaos for that country. Given that the US still has control over the world's currency (the control is diminished, yet everyone else's ability to challenge that, except for say Russia, is diminishing even faster) it'll manage to maintain it's pole position for a while yet. In the long-run, when the books have been burned (war or?), it'll be the US and Russia, with Canada remaining something approximating Canada: all three are fairly well set with natural resources- the litmus test is to see what countries could manage if they had totally closed borders (no trade). Keep in mind that I'm NOT saying that things for these countries will be anything like "normal," just that a semblance to their current power structures will still be there.
So, if you remove the emotions from all of this you find that the Fed has actually performed some amazing magic. Humans are deceptive, and the fact that the Fed is deceptive is only human nature. For sure, however, they have been the masters of deception, for how else could one expect to see a country such as the US with it's atrocious books holding on to the position of the world's top super power (empire)? ALL empires collapse, it's not some fluke, it's not due to some body like the Fed, or even "liberals," it's because of the demands of growth, the inability to maintain perpetual growth on a finite planet.
The markets are over-priced. Production in nearly every sector is in decline because people are broke. And govt bonds? Go IN for entities that are racking up debt that can never be repaid?
Yeah, .25% increase is what we're talking about, early or late, in the end it will make no difference other than the point at which the flames are visible to all. It's not the Fed's fiddling (an actual strong market would trump the Fed), the heat and friction was out there a LONG time ago. The fiddling might just be the swan song...
This is the first time you've written something I can agree with. Upvote.
Too many here assume there must be some sort of cataclysmic event, when meek and mild endings surround us. The old european empires are still with us as 2nd or 3rd rate powers. They muddle along with their socialism, and when the credit runs dry people find a way to get by on less. I'm talking portugal, spain, italy, france and the UK. Once great powers, now just mediocre places that get by day to day.
Yes, the US is the best dying horse. But that must not be underestimated. Everyone wants the best investment return. So the US as safest haven will continue to get a large amount of foreign investment capital. Ask yourself why creditors abandon places like Greece and Venezuela, but not the US. It is because they still see the best (or least worst) potential for a return.
The US will keep this status until something better comes along. As you said china is a basket case. Russia can be self reliant, but their economy is much too small to take over reserve status. Europe and japan are also basket cases. Show me how anyone else can be the reserve in the next 3 decades and I'll believe it's possible.
So the short to medium-term future is more of what we've seen since 1971. Slow decline where the middle class lifestyle becomes less and less comfortable, and more and more like a subsistence lifestyle. Fewer McMansions, more humble shacks. But also, no Greece style collapse or end of EBT cards until a better economy takes over.
brilliant comment, Seer.
3 words: war & debt forgiveness.
the world is about to experieince the application of the stick and then a nice, sugary carrot.
in answer to your tacit question: continential europe could survive well if insulated, if it weren't for that pesky muslim issue. austrailia will do fairly well, too.
Seer, last night i met the brother of SA's crown prince...oh, how i wish i could share that story privately with you and a few other Hedgers over some frosty beers.
https://www.youtube.com/watch?v=HnQ89jZvZD0
cheers...
gettin ready to get down,
janus
"We need a better curtain next time around..." - The Wizard
Then they can seize all the gold, revalue it, and we can start all over again!!
Just how to they propose to seize all the gold when it's mostly sitting in vaults in China?
Invade, CIA style.
Doesn't work on nuclear armed nations.
Which is why the US has fought so hard against nuclear proliferation. It is obvious to anyone with more than two brain cells to rub together that nuclear armed nations don't invade one another (even if they do go to war). This is why there hasn't been a repeat of any of the mass casualty wars of the last two centuries.
Here's a scenario. Trump gets elected. The CIA finally delivers that dirty bomb that Cheney and the puppet, Hussein, have been 'warning' about for years. It detonates next to the FED's imaginary gold hoard in NYC. Iran immediately, like 20 minutes ahead of schedule, gets the blame. Trump, very insulted by the attack on his home city, immediately institutes the draft to muster up a military to invade oil rich Iran. The petro dollar is saved! Hallelujah!
Gold will return to the system and trust me gold allocation of nations are not as warlike as we tend to think. The gold is at the banks and the banks are controlled by the BIS. The BIS will define the new economic order based on years of careful gold allocation planning based also on their economys. Remember China are also members of the BIS. None of this is careless.
Is this a freegold perspective comment or info from other sources? Is it speculation?
This is one mechanism we think could bring about a reval in the gold price. It would require a buyer of unlimited abilities.
One possibility would be a dollar failure and then the ECB stepping in to enlarge the euro float by buying gold in massive amounts to support the float. Such a move would crush the paper markets and almost immediately cause a jump in the gold price.
Hmm. So they print, and buy gold with what they've printed to support that print?
That sounds like solid economics. Good thinking.