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
(51 votes)
»
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -
I had a dream last night that someone shat in a set of boxer briefs and forced me to eat them. I must've been dreaming of the fed.
It wasn't a dream.
Some shit is to be tasted, others to be swallowed, but some few to be digested. Francais Bacon's alternative phrase
Was it the shitty attempt to paint a new picture of the Fed that was the giveaway?
I've said it before, the fed is well aware of this and they know what they are doing. The collapse was planned from the beginning.
Wht comes after the collapse is the scary part
If you have 31min to kill...this video should be standard grade 3 curriculum.
http://m.youtube.com/watch?v=PHe0bXAIuk0
...Fucking hell.... the mess we're in ....
More then just "the plan" it's by designe.
WWII started over resources appropriated by both Germany and Japan. SSDD! This time there will be no recovery.
How exactly did the 1933 gold confiscation and revaluation play into events in the past as contrasted with events today?
I am still waiting for an event of similar import.
So far,...this Crisis is fucking boring.
In '33 the US was still on the gold standard. Now, it's the oil standard, so the asset grab will continue to be in oil rich nations. See Iraq, Libya, Russia. Next up Iran. I hope Iran has taken the time(I'm sure) to make military hardware deals with the Chinese. They're gonna need 'em!
Who the f*ck would want to steal oil? FFS, they are giving the shit away.
I guess nobody uses it anymore.
/s
I think negative interest rates will be the 2016 equivalent to the 1933 gold confiscation and revaluation. Of course it will fail because we have no political leadership in the US anymore.
Reading the opinion articles in the local newspaper has more of dems blaming repubs, rupubs blaming dems, more of the same except: Bernie (a non democrat socialist) has support from 50% of democratic base and Trump (a non republican capitalist) has support from 50% of the republican base. Both parties had a good run making it look like they were different but people are realizing that neither dems or repubs can fix anything. Interesting times ahead. I think you will see the dems try to put Biden in and the repubs will try to put Romney in at their conventions.
QE, 7 years old, has been the asset grab. Anytime the banksters counterfeit currency they are stealing savers' 'gold'. See how well it works? You haven't even noticed.
Janet to U.S. Citizens: Would you like that QE dropped to you by helicopter or direct deposited into your fraudulent straw man account?
Have you checked out our new negative interest rate accounts?
There may be future delays in payments especially if me and my associates are successful at starting a World War. Enjoy the rest of your cruise on the global Love Boat and have a nice day.
With negative interest rates the name of the game is to get rid of the cash as fast as possible and to delay receipt as long as possible.
Not sure why someone down voted you.
http://www.zerohedge.com/news/2016-01-12/you-know-negative-interest-rate...
They're desperate now. And desperate times call for desperate measures. They'll throw in everything plus the kitchen sink to keep it going if they have to before they will ever let it go down in a spiral of death ahead of schedule.
So what constitutes a recovery? In all honestly, the only unemployed people I see and know are people who are choosing not to work or travel somewhere to get a decent pay. I guess, I do know people who studied worthless degrees in college that are not making as much as they had hoped, but they still have a job. Put the way the stock market has been behaving aside, and focus on the ability for Americans to exchange their time for a monetary value to purchase goods. From what I can see that mechanism is working and isn't broken. Perhaps this is different in other parts of the country, but that goes back to traveling to where the jobs are. The "recovery" wont ever happen for lazy ignorant fucks who wont take risks or enlighten themselves intellectually, and I don't shed any tears for those people.
My first guess is you work in government............
Sure sounds like it.
Guess you don't run into any of the 98 million adults not working...what I see is everyone going to skool and getting student loans...hundreds of homeless under the bridge, and that's in the Oregon capitol....oh, I also see government employees everywhere and the service sector providing for them...private contractors that stay alive with government projects etc...
Janet is that you?
I guess life is different inside the Beltway.
Yeah, I moved to Florida, US virgin islands, back to florida, to Ohio to Washington state then to california then back to washington state and was unemployed for a time again this year.... all for work and you say I am just a lazy fuck. Worked 65 hours last week and 3400 hours in 2013 with other years being around 2800 to 3000 hrs annually but have no idea what the situation will be at the end of this year.... Hey FUCK YOU you have no idea what you are talking about.
in this case, the mistake the fed made in determining the good health of the economy was the target they algoed for bank activity in aggregate. what they didn't factor in their algo, apparently, was the quality of the bank activity. a trillion dollars in student loans that produce nothing but money and and how many hundreds of billions in stock buyback activity that just chainged some numbers on a balance sheet. car loans are the only worthwhile activity as the motgage industry has not recovered and much of the activity has been spurts of refi.
an economy cannot recover without capex and capex has been almost nonexistent.
"the mistake the fed made in determining the good health of the economy was the target"
Do we really have any idea what their intentions are/were? Sure, they can babble about all sorts of things, but that don't mean that that's what they are really planning.
Again, and PLEASE note that I am NOT defending the Fed (I'm trying to defend logic), the fact that the US and USD is still on top of the heap says a lot. The game is always about survival and the Fed is still managing to keep things alive: yes, it's all sick as hell, but when compared to others in the game we're still doing a LOT better; in the end, however, we shall ALL succumb to growth collapse.
"an economy cannot recover without capex and capex has been almost nonexistent."
I'd stated years ago to watch CAPEX. As you note it really is the future's leading indicator. I'm not thinking that there's going to be any break-through or event that'll be significant enough to turn this around.
i wish i could find the reference but the fed clearly stated they were targeting aggregate bank activity as their holy grail of indicators. at the time, last summer, they were 500billion short of that number.
Soon to be heard on main street - " Has anyone seen my face?"
If you have Carbon Credit gas, the flight attentant will dismiss you from the emergency door seat. The Federal Reserve is blowing small fart bubbles. Testing the market reaction.
the bond market is the brains of the operation. money is flowing into bonds betting the fed is done and will have to lower rates. easy money on a quick turnaround.
I am going to keep posting the following:
WE have got to do something to stop this criminal cartel called the Federal Reserve, IMF, World bank, etc. Why does the US Federal Government, which is authorized by the Constitution to create and issue interest-free money, instead borrows that money at interest from a privately owned central bank, thereby plunging future generations into debt slavery to that bank? THAT is the real question we should be asking!"
The idea of a Privately owned central bank printing what THEY call money and loaning this ink and paper out with interest is patently absurd.
Well, they have badges an' stuff. That's why we can't do anything, except not play.
I'd be almost willing to bet my life that if you find one random person on the street, random town, dice roll basically:
Doesn't know what the fed is, doesn't know how money is supposed to work via the constitution, doesn't know how it works for real, doesn't know how interest works. Will become angry and possibly violent if you tell them the government is using them as a tax cattle. Will scoff at the idea of paying taxes. Will scoff at the idea of the arbitrarily defined 'rich' not paying taxes. Will think government is the answer to government created problems. Would march their family into boxcars if called unpatriotic. Perhaps most disturbing, would not be able to read and interpret any law on the books. Can read the news, sports magazines, but is functionally illiterate when it comes to language that truly matters.
You're 100% correct. Now what?
There has to be appropriate arrangements of words, said at appropropriate times at appropriate places, that lead to appropriate actions, that lead to freedom with minimal loss of specifically innocent life. I think about that a lot. I wouldn't be whining on this forum if I knew the right combo.
It is better to fight and die for freedom than live a life of slavery under tyranny. by someone
Not really. Your first post is brilliant. As to what can be done? Almost nothing. The pepetual optimists will call me names, but probably 200 million Ameicans have no clue as to how the Financial World Works. Chinese citizens are even worse in their knowledge base.
The many nests of the Black Swans have been destroyed and the Black Swans will soon be flying all over the world.
Something can be done. I believe that down to my core 100%. Whether we figure it out or not, or make it happen, is where to me the odds aren't so good.
Start bartering.
Most people get it wrong by improperly assessing the problem and running off with "solutions." I tend to avoid laying out any "solutions" because I think that the problem isn't really known/understood. As much as what you said is true it still falls WAY short of closing in on what might be the core problem: how can we manage decline? (we sure as hell know how to manage growth- 7+ billion humans and increasing [for a while yet])
Upvoted...
The fed is actually managing the decline pretty well. When credit growth hit the wall in 2008, they tried letting a few 100 year old banks collapse. It became apparent that every bank was insolvent, and if they didn't step in, there would have been a daisy chain that would have quickly resulted in bank runs and bail ins.
Now it's happening again. They've learned that sovereign and bank debt must be protected at all costs. That is the red line. You can argue and cry that they should have stopped the bubbles earlier, but that is water under the bridge now. Grown ups need to manage the decline as best as possible.
You have to pick your poison. You can either have a fast, massive wipe out with bank runs and bail ins. Or you can have a strategic retreat, where you allow the banks to drop mark to market and ignore their losses. If you choose the first option, then it is your responsibility to explain why nearly everyone at once needs to be unemployed and lose their savings.
Stuffing the balance books, leading to record executive bonuses but not addressing the fundamental issues, does not suggest good management to me. In theory I agree with you, but in practice it just looks like a bunch of rich guys siphon money to each other.
What we say publicly does affect people.
The financial collapse of 2008, combined with the alternative views about the economy and macro economics found on ZeroHedge shortly after it went live were the first two major catalysts that changed my financial life. Here are just a few ways things have changed for me since 2008:
There are many more things that I have done but these are just a few.
It is up to each of us to read between the lines, take things with a grain of salt and to be open minded, but when you truly have found someone telling you the truth and you can verify it to the best of your ability, it is time to act immediately and become a better person. You just might live a lot longer than you think.
Around the time I was waking up financially, sometime around early 2009, I was unable to make minimum monthly payments on loans. My fucking fault but I learned I fucked up and I owned it. All you can ask for of someone is for them to truly own their fuckups, at least that's my view.
Fast forward to present day: I made more than one ounce of gold every day at work for the last 3 days. Tomorrow I will make more than the average person in the United States makes in a week at work, and I will make it in one day.
I'm not bragging and there is no secret. I work crazy long hours and I earned this with blood, sweat, tears, stress, research, the help of people who love me and an incredible amount of risk. But I did it, and it's because some people were willing to tell the truth and their words and thoughts DO matter! I saw the light because someone cared enough to say, 'you've been lied to.'
I'll end with this thought: In the Great Depression and even up until '91 there was no internet. This is huge. Really a huge thing that happened in history and perhaps nothing like it will ever happen again. Reading about money in books is valuable, but ZH and many, many other sites are basically public Think Tanks for individuals who are willing to think really far outside the box to explore and share ideas. As long as the internet is functional, these places will exist. Sometimes it's bullshit looney tunes stuff, but sometimes people posting wild ideas are on to something (I would not be surprised if many of these posts are discussed at the alphabet agencies we loath so much). My point is that in my view, the next big crash will have a LOT more people MUCH better off and prepared because they had information that simply didn't exist back in the day.
Think on that, and as always, Good luck.
Great post Nirples !!
Maverick
Amen
3 times after the American revolutionary killing off of King George's Bank of England, the corrupt 'people's congress' has reinstated another interest-earning private bank, and someday a worldwide debt collapse cum depression will bring this financial repression to a hopefully final end:
http://whatreallyhappened.com/WRHARTICLES/allwarsarebankerwars.php#axzz3...
As long as people demand growth then they'll open the door to the true invader: "interest," which is the real debt-maker. Of course, when things are actually, "organically" growing then it's not seen as an issue, but eventually growth ends and then the calls have to be made...
www.RevokeTheFed.com March 2008WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";
WHEREAS, on December 23rd, 1913 the US Congress enacted the Federal Reserve System;
WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;
WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;
WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;
WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;
WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;
WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;
WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);
WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;
WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;
WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;
WHEREAS, it is recognized that the current time is such a time of great difficulty;
WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;
WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;
WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;
WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;
IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;
WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.
NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.
IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;
FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;
WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.
SO HELP US GOD!
The congress has the power to coin money NOT issue interest free money.
HUGE difference.
Squid