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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> INDU 14 handle by Wed.?
> Temporary miracle stick-save.?
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=Djia&ins...
Oversold. It'll bounce first. Typical bear markets last a couple of years.
What happens next:The following \i believe
SPX: Death cross imminent and current EW count
http://goldenopportunitytrading.blogspot.co.uk/
War, what is it good for? Tyranny, oppression, expanding government, and hiding illogical economic policies.
This was no mistake. Everyone knew the prick had to eventually happen.
I call bullshit on this article. The allegation is that the Fed made a mistake with the December rate hike. Guess what? The Fed has been making mistake after mistake after mistake all the way since 1913, 1937, more mistakes in the 1950's, and 2000 and then 2008.
Who give a flying fuck anymore? If they lower lates again, how much are they really going to lower them, 0.25? Big fucking deal. Is that really going to help anybody but Wall St.? Nope. Go ahead, make interest rates negative. I don't give a fuck anymore. Let the market lose 50%, fuck it !
If they raise rates, it's an alleged mistake. How do you or anybody else know that? Who really gives a rat's ass anymore? Take your money out of the system, stop paying interest, and let them fuck up !! That way, we can get rid of them at some point (I hope) once and for all !!
True dat. If you don't think they should exist, they do more harm than good to the general masses, than it is hard to get excited about what their next bullshit moves will be.
The only real mistake is thinking that they are there for our benefit. Only once you accept that fallacy can you view their actions as mistakes.
So you are not 'sugar coating ' it ? Nice rant !
" 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...blah....blah...blah...bullcrap""
WTF is this shit??
The Obama administration and the Fed all but declared "Mission Accomplished" on the US economy being "recovered" from the Great Recession. So either admit the US economy is NOT recovered and still needs help or STFU.....you cant have it both ways.
Further, the Fed's ZIRP FAILED to stimulate fresh credit fueled consumption and product demand on the scale would've mattered.
Especially considering the US consumer was up to his eyeballs in debt BEFORE the Great Recession started and hasnt been very willing to get into more debt....even if the debt was cheaper to get.
Maxing out your credit at the expense of rent, car repairs, basic food staples, the shirt on your back, etc.....is STILL universally recognized as a piss poor idea.
EPIC KEYNESIAN FAIL.
The probelm is that the fed does not raise nor lower interest rates: the markets do. The fed only move a targeted rate which until recently is based upon the actual rate.
Without a Fed, thousands of independent banks would compete by offering and charging different interest rates, and that would constitute a Free Market, and would enable what Free Markets enable, which is Price Discovery. With a Fed, Price Discovery disappears. A Fed replaces Price Discovery with Central Planning, and Central Planning always fails.
It wasn't a mistake.
A mistake is something that causes something you didn't mean to cause.
thinking this is 1937 is way too optimistic. that would mean only another 4 years of depression. this is moar like 1929 except the continuing depression will never end.
"the continuing depression will never end."
EXACTLY! And I don't say that because I'm a "doomer." Not until there's a drastic flip-flop in our demographics will it be possible to generate any "growth;" and even then it will be nothing like we've come to know it- we'll lose "economies of scale," and with it most of the "cool" stuff that we're used to being able to walk into a store and buying: I've been noting this as "economies of scale in reverse."
Anyone spending enough time gaming this all out can see that we'd hit what Chris Martenson calls "Peak Prosperity."
Our entire notion of nation-states will die off. Our "American Dream" of suburbia will die off. What then happens I cannot say, but the future will not be anything like the past nor will it be like what most were expecting it to be.
And that is the point isn't it, the quest. Kill the nation states or subordinate them to the New Atlantis. Bacon's dream. One controlling world government ruled by illuminated preist/king philosophers. That's what happens next, whether next is next year or next decade. The american dream will be sacrificed upon the alter of the "greater good". So be prepared to sacrifice your pink little house in order to move into your 200 sq ft apartment in a megacity.
Don't be selfish now! One must be willing to sacrifice for Utopia.
HA HA HA HA
If you sell stocks and move to cash now, you will be able to buy back in after the crash.
By doing this you will make even more money!
That's assuming there will be a 'recovery' - there WON'T be !! There is nothing left on the planet that would stimulate a 'recovery - It's over !
You can't sell now; they went down last week. Wait until they go back up, then sell!
During the Great Depression we had a lot of factories and manufacturing.
Only the husband had to work, and people still had big families.
We didn't have a flood of illegal immigrants working for lower wages back then either.
We didn't have political correctness being crammed down our throats, and a president that's funding terrorism. (Iran)
So you can say that we were better off as a country even during the Great Depression than we are today.
"During the Great Depression we had a lot of factories and manufacturing."
Which were (had been) staffed with child labor (well, until those "libtards" demanded child labor laws).
Lots of those factories closed.
"We didn't have a flood of illegal immigrants working for lower wages back then either."
They'd already done a fair amount of work prior to this era: only, they were considered "legal" because TPTB wanted their cheap labor.
Because most were doing that work. Corporate America, which emerged following WWII, didn't yet need to pull eveyone off the land.
And in the Great South they were still legally killing niggers.
"We didn't have political correctness being crammed down our throats, and a president that's funding terrorism. (Iran)"
No, we had FDR usurping individual rights and helping to kill millions of people (400 million of it's own)
"So you can say that we were better off as a country even during the Great Depression than we are today."
Not using your examples.
The biggest difference between 1937 and 2016...
Perhaps this, this and this for starters?... The United States wasn't at war in 1937, had the World's largest oil production 78 years ago and a good portion of the World's gold in it's bank vault(s) AND No nuclear weapons technology...
Today's America?... No energy... No gold... No manufacturing infrastructure... Only threats to ANYONE and EVERYONE that refuses to buy more of our "green shit paper" with Western banks to put "it" in and a military always ready to enforce that threat!!
America has been with reckless abandon at war based on this lie for 15 years, bankrupting itself mutiple times since 2001 and will start WWIII just as they were instrumental in doing so after 1937!...
My hats off to ZH for being the beacon of truth on the financial front, but nothing could further from the truth at the cause of our economic decline then and now!
I would pine for 1937 and happily "bathe in it" (find me a god damn time machine) compared to what we are living in now!!!
the grownups in the room think the fed will keep raising because its time to normalize rates and the data isn't clear in either case. obviously the fed loses credibility if it doesnt continue to raise rates. the markets don't care about good policy they want free money. raising rates should support energy prices which helps them achieve their inflation target. for the first time in eight years the fed is making an effort to normalize policy and everyone has their shorts in a knot. surely if you have hated fed policy since 2008 you must be able to say well this is a step in the right direction, but most of the fed haters just keep going, and the free money wall street lounge lizards want the punch bowl. its a media nightmare.
the problem is not the policy. the problem is that
the fed exists in the first place. (the structural
and systemic fraud.)
I base my observations of the Fed not on what IT does for me, but what it's supposed to do. Keep in mind that it's primary function is to maintain a steady state of banking for commerce. Yeah, there's that little "promote low unemployment" thing in there, but that's just a feel-good thing for the masses.
The entire globe is plunging. The game is the glue factory and all nations/states are horses. The aim is to hold out entering the glue factory for as long as one can. I suppose the hope is that the factory will clog up or break down. In the real world instance I think it's that there's really no one around that is capable of forcing a closure on a big bag of bad contracts (with another big bag holder).
Growth was always going to end. Our economic system, the very story we tell ourselves daily, does NOT accept any notion of protracted decline (which will be as buzz notes above, perpetual). Without growth it is certain that the margin calls will be made. The lesser nations/states will get shaken down first (as has been happening- those with resources were the most prized). After this I cannot say how it'll play out other than ALL contracts will have to be "reviewed" and dealt with. Since it's not mathematically possible to properly close on all contracts (ALL principal and interest can never be repaid) it's going to be a matter of how to make them null and void. War?
In my opinion, there is only one reason why the Fed raised rates in December...
Because the rest of the world is dumping T-Bills, and they had to offer some form of carrot to the bond holders to hemmorrhage the rush.
Dovie'andi se tovya sagain (It's time to toss the dice)
The Daily Economist
Exactly. They put $2.4 Trillion in bank reserves. Now, it's time to defend the currency. This means China will crater, unleashing a deflationary tsunami back at the world.
there is also the desire to manually levitate interest rates against a backdrop of zero or even negative real rates. if the world is dumping T Bills and rates go negative there is at least some kind of secondary market for this paper. once the yuan currency peg is reset then the currency reserves held as dollars in the form of tbonds can be repatrioted or resolved in some manner. having the bulk of these us dollar products held closely at the US treasury is a problem of some magnitude, the fed has been paying interest to treasury which suggests they may already be holding this paper.
Yup.
It's been a quite a marvel to see the Fed keeping the US and the USD on top. They had to play slightly out of step with others. And now, as you say, they've turned away from the field in hopes of attracting support for USTs.
At this level you really cannot give away your hand. That everyone running around and being unsure what the Fed is going to do next is a good thing: otherwise anything they'd do would be totally front-run (and perhaps by some foreign entity).
Let's face it, the business environment is fucked: businesses have had the opportunity to buy back their companies, to keep them from being dismantled by Wall Street; those that didn't are going to perish; again, the survival of the strongest. Everyone is highly in debt (still, and despite all the talk to the contrary). Businesses are going to go down and there's little that can be or should be done. Last thing left is "nationalism," shoring up the government- supporting US debt: whether one believes this is correct or not is not the point.
In Barter Town these folks will be shoveling shit for crackers.
The problem in comparison to 1936 is US hasn't got any industry left.
The rest of the world has a lot of manufacturing mouths to feed. Not a good thing when Americans and Europeans are not buying "things."
In 1936 the "Dollar" was backed by gold. We manufactured our own products. Government was smaller including the armed forces. And my mother bought her house at auction for $50.00!
We're royally screwed my friends.
And the US population was 128 million, world population ~ 2.1 billion. Number of barrels of oil in the ground? A LOT.
Just pray US companies don't stop making toilet paper domestically, otherwise you'll have to go to plan "L". (Left hand, w/o paper).
With Negative Interest Rates, 'Myra' becomes 'Theira'.
https://www.youtube.com/watch?v=L9EKqQWPjyo
Bob Dylan - Things Have Changed
.
if you don't have wings and confidence in riding a tiger
over a cliff, i say get out.
.
Comparing the 1930's to present day doesn't pan out... too many differences especially the amount of government/Fed control, lack of a base for the currency and the interconnected fiat system of today and finally the criminality of those in government in the 1930's are not even on the same scale to the criminals of today.
lack of currency base is the key to making prices so distorted o the upside and downside.
the move from -50% (spx 1100) to spx 550 (for top to bottom of -74%) will be what rips peoples hearts out....a Second 50% decline in a very short period of time.
Wrong. The BIG difference was the repeal of Glass Steagal in 1999. It only took them 8 years to take the system down in 2007/08. Look at the profits of Banks in that time period.
Keep an eye out for the Federal Reserve's Plunge Protection Team buying stocks this week.
You will see these crazy buying spurts based on no news. Then you know its the Fed buying.
I'm looking forward to the day the PPT sells the indexes short on the way down tripping all the curcuit breakers and closing the markets for two weeks to a month. It's a question of not will it happen but when will it happen. The crooks (PPT) will pull anything and I know they'll sell the indexes short instead of buying long. That's when we know America is in real trouble.
I believe this time is going to be different. New technology allows us to survive deflation. The only problem will be 90% unemployment. If you are not engineer you better go to school. Fast!!!!
Derivatives ..
Did we have such a thing in '36/'37?
Probably not .. To be fair, not at all ..
These did not exist until the 80s ..
Lee Wanta explains just what is and why we have derivatives today ..
They were created specifically for an issue he was dealing with ..
He did not create them. The banks did. In order to satisfy certain transactions ..
This had to do with prime bank guarantees. Traditionally these were performed with some collateral backed by hard assets ..
A derivative is a promise to pay, in order to secure a prime bank guarantee with no hard collateral. It is based on a bet that the future price of oil (what a petro-dollar actually is) will go up or down. The mother-of-all-abuses of a fiat currency. And now we have the mother-of-all-ponzis to date, to the tune of literally quadrillions.
We speak of malinvestment. This is the mother-of-all-malinvestments. How does such unwind? When Bill Holter said margin call last week, what did he mean here? We think of Randolf and Motimer Duke in fiction. Fiction is too kind to the reality to come ..
That is for the cabal, agents, and collaborators. Ask Jim Willie what The Voice (his own personal Deep Throat, a European gold broker, who probably works with Wanta) told him in December, just before Christmas of their fate ..
For the rest of us, we just need to keep our heads down, and out of the line of fire. This will all be over sooner than later. Wanta further, does give us a clue posted on Dec. 17, 2015. Kinda a early Christmas present for the rest of us ..
http://eagleonetowanta.com/?p=297
So far as WW3 ..
Wanta was instrumental in preventing that in 1990. I'm sure he is capable of doing it again. He has vast experience here. They tried to silence him. Permanently several times. He is still alive and well. 75 years old and working 18 hour days ..
https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp
Go straight to here for explanation of a derivative: 3rd interview with Wanta Dec 19 2014.mp3 (discuss specifically ~20:00 mark. We can thank those specifically for creating the USSR. This was a direct consequence of having to slay that monster. And something called U.N. Contract #4.)
Wanta did not create this mess. It started before he was born. He was stuck having to work within it. At some point, he knew he would be instrumental in fixing it. We are living witnessing history people ..
Brooksley Born warn us about derivatives during Greenspans years. They called her a kook. Some years later, Greenspan realized she was right. By then, it was too late. I say buckle up, pop some popcorn and watch the destruction of the world.
https://youtu.be/AuxT0X179PI
besco - Born's destruction had little to do with Greenspan. A lot more to do with Robert Rubin and Larry Summers. Rubin saw that they amalgamation of Banking, Brokerage, and Insurance would bring about a huge M&A of all those competing entities.
Banks, brokerage and insurance used to compete for investor dollars and institutional funding under Glass Steagal. This si what kept corruption and immoraltiy at bay, beacuse of the self policing aspects of the competition.
Without the self policing because of competition for investment dollars, the neo Bolsheviks used their innate skills of corruption and influence to build their case that repeal of Glass Steagal would bring "efficiencies" to the financial markets and those efficienecies would be passed onto the consumers. What a crock of shiite.
Born knew this, but with Rubin's influence over Bill Clinton (Born could not be counted on to enrich Clinton after he got out of office) and Summer's supposed academic bona fides from feckin' Hahvahd.... guess how many people in Congress (including "He made me bite the pillow" Frank, were going to listen to the warnings of Brookley Born?
A staue of Brookley Born should be erected in front of the Golsmn sachs building .. or the Federal Reserve ... I might be repeating myself.
In the 1930s, America's politicians had not turned against Americans, for money. In 2016, America's politicians HAVE turned against Americans, for money. We're going to have a serious population reduction, in part, because Prince Phillip and Bill Gates want it. It's, seriously, time to get ready for that zombie apocalypse.
"We're going to have a serious population reduction, in part, because Prince Phillip and Bill Gates want it."
Where do people come up with this kind of thing? I'm not trying to defend these folks (I don't care for them), but these sorts of statements border on the absurd (and diminish the rest of any otherwise decent contribution).
Now then, I suppose that one could see Gate's involvement in Africa as addressing issues such as we see here:
http://econimica.blogspot.com/2016/01/sources-of-growth-examined-and-fou...
That is hardly ammo in support of population reduction within the US. Of course, I don't condone any such manipulations; but, the realities (see link) are there/here.
You're free to tilt at whatever windmill you wish.
Like the old Chinese proverb the FED didn't want to lose face. They had to raise rates. The ruse about the recovering economy must continue even if no one alive believes it.
The Private banking cartel scam aka 'the fed' was a mistake ab initio.