The Fed poisons everything, and I mean everything. From markets, the economy, and I will even go as far as politics. Sounds far fetched? Let me make my case below. But as much as the Fed poisons everything this crisis here again reveals a larger issue: The system is completely broken, it can’t sustain itself without the Fed’s ever more monumental interventions. These interventions are absolutely necessary or the system collapses under its own broken facade. And this conflict, a Fed poisoning the economy’s growth prospects on the one hand, and its needed presence and actions to keep the broken system afloat on the other, has the economy and society on a mission to circle a perpetual drain.
So how does the Fed poison everything?
Let’s start with the Fed actual process of working towards its stated mission: Full employment and price stability.
How does it do that? Well, for the last 20 years mainly by extremely low interest rates and balance sheet expansion sprinkled with an enormous amount of jawboning. The principle effect: Asset price inflation.
It’s not a side effect, it’s the true mission. The Fed has been managing the economy via asset prices even though Jay Powell again insisted on saying the Fed is not targeting asset prices.
This is a lie. And I can prove it with one chart. Cumulative $NYAD, the flow into stocks versus M1 money supply:
It was not until the Fed flooded markets with cheap money creating the housing bubble that the $NYAD equation changed dramatically, and it was not until the GFC that the Fed went full hog wild on M1 money supply that $NYAD went full vertical alongside of M1. TINA! There is no alternative. Forcing money into equities to manage the economy with a rising stock market.
And guess what? They just saved the $NYAD trend again by going vertical on M1 in a fashion never seen before. All this despite $SPX clearly breaking its long term trend. So yes the Fed is targeting asset prices and Powell is lying when he says the Fed isn’t.
And the entire market knows this. Wall Street knows this. Why? Because the market is a follow the Fed machine long trained to jump back into equities at any sign of Fed action jawboning and promises. It’s no accident that “don’t fight the Fed” is popular mantra. It’s the very proof that market participants know that the Fed is in effect targeting asset prices. Just look at the past year and a half:
And of course this has been going on for years, whenever markets get into trouble here comes the Fed or other central banks with interventions and markets rally, here a long term with M1 money supply thrown in:
Recklessly widening the wealth inequality equation in the process. What happens when you have a slow growth recovery for 10 years and all the wealth benefits going disproportionally to the top 1% who own most of the assets that are targeted while real wage growth stagnates? For one you have a sizable portion of society that doesn’t have a pot to piss in, behind in bills, struggling to pay rent, little to no savings or retirement, taking on multiple low paying jobs with no benefits while real estate prices keep rising as the wealthy keep squeezing people out of neighborhoods. What? You think it’s a coincidence that people have to commute farther and farther to their jobs because they can’t afford housing in the areas where they work? Check San Francisco and Silicon Valley housing prices and commute stories. It’s a horror story.
And so what happens when we have a crisis such as this? Millions needing help immediately, food banks lined up with thousands in line waiting for help and food. A population not able to sustain itself for lack of savings and resources exposing the structural weakness of our broken system. After a 10 year recovery with 3.5% unemployment people should be well off. They are not. Far from it.
And the Fed knows wealth inequality is a huge problem. Powell said so himself in 2019:
“Sluggish productivity and widening wealth gap are the biggest challenges facing the U.S. over the next decade, Federal Reserve Chairman Jerome Powell said Wednesday. Speaking at a town hall in Washington D.C. to a group of educators, the central bank leader said his greatest economic fears lie outside the Fed’s purview. Specifically, he called for more aggressive policies to address income inequality. Wages at the middle and lower levels have “grown much more slowly” than those at the higher end, he said. We want prosperity to be widely shared. We need policies to make that happen,” Powell added.”
Outside the Fed’s purview. Really? No. Why? Because the Fed keeps insisting on bailing out Wall Street.
And the cost is huge. Don’t think for a second that the political polarization we’ve seen over the past 20 years is an accident. It’s the natural consequence of anger within the larger population that feels left behind, is economically struggling and is being squeezed out and forced into 2 jobs, debt loads, and a general sense of angst. The perfect breeding ground for radicalization, populism and apathy at the same time.
And this anger only gets stirred further now as it’s clear who is again being saved by the Fed. Markets:
Price discovery pic.twitter.com/eIOqnlhNnp
— Sven Henrich (@NorthmanTrader) April 29, 2020
We may now have the 30M new unemployed people but market damage has once again been contained. Why? To minimize the economic damage so is the Fed’s rationale.
The end results: With inequality is skyrocketing even further as millions are unemployed and many more are losing incomes while the shareholders and executives and those with larger retirement funds can take solace that the damage to them is minimized. No one can with a straight face claim that the trillions in Fed balance sheet expansion have not greatly contributed to the Nasdaq’s move to green and back above the February 2020 lows making shareholders not only whole but back in profit for the year despite the largest economic crisis of our lifetimes:
$NDX futures a mere 7% from all time human history highs and higher than February’s lows. pic.twitter.com/3Q0eLTrLFa
— Sven Henrich (@NorthmanTrader) April 29, 2020
Perversion in print. But don’t expect any sign of a guilt conscience on the side of the Fed. Expect hypocrisy. Wealth inequality is bad, but it’s not in our purview even though we drive it with our policies. But the Fed can afford hypocrisy. It’s not challenged. By anyone. Not by Congress which benefits from the license to do nothing implicitly provided by the Fed bailing everyone out all the time. Who needs to implement change when the Fed always comes to the rescue? Nobody big gets to fail.
The Fed can’t be challenged by the population, a population that has no say in the Fed’s role, has no right to elect or fire its leadership, heck, largely doesn’t even know what the Fed does.
Nor is the Fed challenged by the press who never presses the Fed on its failings of broken promises, their inability to normalize their balance sheet, their role in driving inequality nor their role in driving ungodly debt levels in society.
Where do you think record debt comes from? Cheap money of course, the very cheap money the Fed has provided. Oh but the debt is bad. Here another pretend handwringing from Jay Powell: “Federal Reserve Board chairman Jerome Powell told Congress that now would be a good time to reduce the federal budget deficit, which is expected to top $US1 trillion ($1.5 trillion) this year. “Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilising the economy during a downturn.”
These words were uttered just last November when the deficit was projected to be $1 trillion. Now that the deficit will be nearly $4 trillion instead this year due to the crisis he now says it’s not the time not to worry about the debt and deficit. When, exactly, is the time?
We’re witnessing full intellectual bankruptcy here.
Whatever it takes.
Consequences be damned.
No checks, no balances. No accountability.
Powell 2019: Debt not sustainable.
Powell 2020: Go wild & don’t worry about it.
— Sven Henrich (@NorthmanTrader) April 29, 2020
And never mind being held to account for moving the goalposts as past predictions and promises continue to be broken. The Financial-Industrial Complex Keeps Moving the Goalposts Dan Nathan called it this morning: “I have tried to highlight one simple fact, the Financial-Industrial Complex (you know who they are) wants to keep you in the markets and generally optimistic…their strategists and economists keep moving the goalposts, and they know that in desperate times they can rely on the Fed to take desperate measures.”
Daddy Fed is always there to keep the pain away giving cover and license to make no changes. The Fed in its arrogance is not copping to its role, part and responsibility of this vicious cycle it has created.
Instead we have to recognize the Fed will not stop at anything. There is no voice that says this is enough, or too much or it’s creating distortions.
Yesterday markets closed at 138% market cap vs GDP:
In the past large recessions brought market valuations down as bubbles deflated, and despite the pain with high unemployment wealth inequality was reduced. Not now, the Fed is blowing another bubble and is expanding wealth inequality. And the problem has not gone unnoticed. Via Bloomberg:
The Pandemic Will Reduce Inequality—or Make It Worse:
“The rich got even richer after the Great Recession, but the Great Depression changed the social order. From 1929 to 1932, the top 0.1%’s share of all U.S. household wealth plunged by a third, and the top 0.01%’s portion fell by half—a funhouse-mirror opposite of their 2007-10 surge.
The 1929 Wall Street crash helped create a new economic order in the U.S. called welfare capitalism. With the New Deal, American workers gained a safety net. With World War II, they won leverage with employers and higher wages. The owners of the means of production—well, they didn’t do as well. By 1950 the very richest Americans, the top 0.01%, controlled just 2.3% of the nation’s wealth, less than a quarter of their share in 1929. Meanwhile, the bottom 90% of households had doubled their share”.
What’s happening now is a repeat attempt of the 2009 crisis. All wealth benefits again go toward the top 1% who control all wealth, all the land and all the power and employees will be left to hold the bag again.
And so here we are. $NDX higher than the February lows, only 7% from all time highs. $SPX 9% down year to date. None of it has anything to do with fundamentals. Not a thing.
As Citi said yesterday: “The gap between markets and data is the largest on record. When limitless liquidity meets spiraling insolvency there’s bound to be a long-term price. Unlimited liquidity can postpone debt problems but not fix them.”
And that’s exactly right, but Jay Powell doesn’t care. He went full fiat yesterday. This is not a time to worry about debt or deficits he said. Fine, burn the house down while you’re trying to save it.
But we need to pay attention to all this, the Fed is the biggest market force at the moment and they are creating again the biggest market bubble known to man. And they were very clear in what they were saying yesterday:
“the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
BREAKING: Fed will never raise rates again.
— Sven Henrich (@NorthmanTrader) April 29, 2020
For when does anyone think we will go back to full employment? Bond traders have now priced in zero rates until 2024. We will also have multi trillion deficits for years to come. And who will benefit from all this? The bottom 90%? We’ve seen this movie before and it’s brought us to where we are now.
And not to go political, but be clear: Doesn’t matter who gets elected in November from a deficit perspective, they will all run huge deficits. It’s basically setting us up for slow growth which means we will never get back to full employment which means we will have zero rates forever. The cycle of doom here, it’s unfathomable.
No, the Fed poisons everything. Markets, the economy, even politics. Its actions have a wide spread impact on society, but because the cycle has become so vicious and debt and wealth inequality so prevalent ever more interventions are required to keep the system afloat. So the Fed is employing the same measures it did before but on a grander scale.
Now imagine if the Fed didn’t intervene with trillions of dollars. What would happen? Markets would collapse, debt would be crushingly unsustainable and the system would collapse. And then what? Have you forgotten the 1929 example already? Wealth inequality would shrink, a new economic order would emerge, the middle class would grow as opposed to shrink and have higher incomes as they would have more bargaining power, a New Deal. Sounds good? No, the financial industrial complex doesn’t want that, it’s a big club:
No, perhaps the truth is much more sinister than that. And that is: The system is not broken, it’s designed to function exactly as it is, because it benefits precisely the very same people that control it. Who controls the Fed? Not you or I or anyone we know. But you know who benefits the most from the Fed.
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Sven, revolution is coming….
History is very clear about printing money…it always…eventually ….ends in a total FIASCO. Always.
Superb update as usual. I only follow 7 people on twitter and your tweets/articles are always interesting to read.
Excellent article. After the huge drop in the next few weeks you’ll start the climb to DOW 40,000. Could take three years. The wealth gap will widen further. The US will have to do universal basic income. Maybe they’ll call it something else. Only a handful of other nations will be able to try this. This will keep the pitch forks in the garage for years to come. Most other nations will be in utter chaos soon.
@Anonymous…the money printing is going only to the ultra wealthy right now. The lower classes are barely squeaking by, barely enough to pay for food and (not even) bills.
We might not see hyperinflation in the real economy for some time because the ultrawealthy will not liquidate their holdings to buy real goods.
But* what we will see is the ongoing exacerbation of wealth inequality, which will foment popular unrest. I guess my point is that we’re more likely to see the unexpected (popular unrest) than what many are talking about (currency debasement / inflation).
Excellent article. Thank God there are people like you speaking the truth. Finally someone recognizes that this criminal system is setup intentionally.
This time we can’t even protest if we wanted to. Those who are awake enough to realize what is happening are also stuck at home without the ability to organize a protest.
Actually, you are still free to leave your house and protest. The Constitution has not been repealed. Yet.
Very well said, Sven. The last eight months of Fed behavior has probably been the worst in its history (and that’s saying a fair bit). Perhaps this asset inflation can continue for a while yet, enriching the richest and impoverishing everyone else. If it goes too far then two things will happen: the monetary system will destruct, the rich will be killed.
Some of the rich seem to be aware of this and are trying to balance things out a bit by charitable efforts. The Fed may be stymying their efforts at nobility by its grotesque policies. It’s not just the Fed, the current administration’s policies have advantaged the rich and impoverished the poor while increasing the deficit astronomically.
What is happening now must and will end. The key question is how bloodily and how soon.
30 million unemployed is a powerful finger on the trigger. How long can it linger there without twitching?
Nice SPX annual anniversary chart you posted earlier on twit. I’m pretty sure it’s going down from here, will it pause around 2750, 2500, 2200? Repeating myself, we’ll be lucky if it stops above 1800.
No, we only shoot the evil and wicked, not the fallible.
“We’ll know more at the end of next month” – it could be that we’ll be lucky enough to see that, or maybe not, or maybe it will seem irrelevent.
WTI June looks an enticing sell at $19.20 (20:40 GMT Thursday), methinks it has got ahead of itself.
BTW nothing is enough to buy infinity.
You can read that a couple of ways 😉
Bravo; superb, as always, Sven!
Once the masses fully comprehend the criminality of what The Elites are perpetrating,
it’ll be Bastille Day in the United States.
I have a favor to ask. The next CNBC interview, can you ask the world on CNBC why the fed can not set up a coronavirus bond, that pays say 3-5% rate, in order for those who are retired and/or just want to avoid the Stock Market Casino? Look, savings rate has exploded to 13.8%, a record all the way back to 1981 according to the article below:
And in this same article, the fed says the following:
At a press conference on Wednesday, Fed chair Jerome Powell was asked about what savers should do since rates are at zero. He conceded that for people “really just relying on their bank savings account earnings, you’re not going to benefit from low interest rates.”
So for God’s sake Jerome Powell, tell us 90% of Americans without any real stock market assets, how can we make any return greater than inflation? Look we know you told the other central banks to buy American stocks with the liquidity swap lines you recently created, helping push the markets back to near all time highs. Look we know you told Blackrock, Goldman Suks, and the rest of the hedge fund banking cartel that you would give them unlimited zero interest loans to buy stocks, allowing them to ride this latest fed induced stock euphoria wave on Wall Street. So for God’s sake, what do the other 90% do to earn a simple safe 3%??? Look if you let Sweden’s central bank get richer these last three weeks, why not giv us 90% of Americans getting 0.5% savings rate a few crumbs? Do you enjoy watching 90% of Americans fail? Why would you want the global non-American super wealthy go get more rich, who own 35% of American stocks, and in the process make 90% of American citizens even more poor? Jereme Powell, you are a traitor to millions of hard working Americans who played by the rules you have just destroyed, and once the average citizen figures this out, you might need to move to Sweden as I think the mass riots will have your mug shot on their posters chanting “End the Fed NOW!”.
That’s a good way to tell the story. A main question now is will the Fed continue to operate as it has been, if the GOP cancels or nullifies the election. I am certain they will. I think that is actually the point. So too then will all corporations toe the line and get in line for unlimited credit. Then send Elon’s Starships to Mars for our entertainment.
Agree! The Elites are cold-hearted and ruthless. Bastille Day in America’s future.
“From 1929 to 1932, the top 0.1%’s share of all U.S. household wealth plunged by a third, and the top 0.01%’s portion fell by half—a funhouse-mirror opposite of their 2007-10 surge.”
The mistake of the Great Depression was that the stock market was allowed to liquidate — everything was allowed to liquidate. The elite were then too principled, to their own detriment they felt that bankrupt companies must go bankrupt. Had FED (which was created before) stepped in and purchased everything, we would not have this oxymoronic “welfare capitalism” and the wealth would have been preserved — from the prospective of capital, “welfare capitalism” is bulls**t, a huge mistake that we have been trying to repair since 1980s… With the power of FED to wipe out losses and support asset prices, depressions are impossible… at least depressions for the shareholders.
I am surprised that anyone who has been tracking economy is surprised. This is like a decades old thing. Forget, social security, medicare, etc.. Some even tried to figure out ways to bring child labor back. Ever since Reagan it’s been create conditions so that an individual could become fabulously wealthy in a single generation… boom… we are here.. we create a class of overlord whose purpose is to goad us to work in unsafe conditions. We live in the exact world we set out to create 40 years ago… What have you been reading and looking at?
I don’t care to imagine what would happen if Fed did not intervene, it was going to and it did, and that’s done. We need to look forward and play out things.. when is the next problem, the next hole in the barrel that will shake this system up…
The truth, straight up. You are a fantastic technician, and more importantly, a man of honor and integrity. Thank you for telling truth of the financial markets and conveying it in ways we can all understand clearly. Powell is a deceiving, corrupt criminal who works for higher order deceiving, corrupt criminals. They work to destroy our lives and enslave to their will and command.
Agree! The present is simply a repeat of the past, dating back to the New Deal; perhaps, even prior thereto. Backwards, morally, fiscally wrong!
Sven for Fed Chair, would be more than interesting. 🙂 Peace all
Brilliant analysis, Sven – many thanks! 🙂
I must admit – as a German – that I had to look up a couple of words…
George Carlin sums up for the broader audience what you prove to the detail.
I am following your site many times per day.
Many thanks again,
Full employment can not happen. Technology has continued to replace jobs. In the past, there were new industries to move into. Where do millions of people move into now ? millions are all going to code ? Except the computers are learning to do that too.
Collocation does not always lead to causation.
Capitalism leads to being able to buy more with less. Socialism is to buy less with more. Socialism for the rich shrinks demand of the serf class. Ensuring greater availability of resources for the rich, less for everyone else. keeping the serfs where the rich want them. For the majority of recent human history, slavery was common, and feudalism. History doesn’t always repeat, but it often rhymes.
Yes, the world, markets, economies and consumers are all in turmoil right now. It’s a mess and the Fed will be running out of fingers to put into the dike very soon. This time the Fed, Central Bankers & Politicians will be losing control. How do you go bankrupt………..slowly at first……….THEN ALL OF A SUDDEN! The Fed will not be able to contain the detonations this time. The blow-ups still to come, debt defaults, will erase quite probably over 100 Trillion dollars of collective world wealth over the coming decade. Then………after the reset………we can start over.
ON POINT! Nice piece Sven! Couldn’t have said it better myself
Enlightening article Sven, thank you.
Sven, I don’t think you’re too far from getting a horses head in your bed.
Excellent post Sven! I have thought about this broken system, debt that enslaves the masses, markets that are manipulated, fundamental economics that don’t make sense. But your point is well taken, the system isn’t broken at all. It has been created to serve only those who created it. Well done!
I am an emergency physician fighting covi in an urban setting but also worked on the street and trained as an economist prior to medicine. Your insight and candor are breathtakingly accurate. Thank you so much for making my day
This is what happens if you put a lawyer in charge of the printing press.
You are spot on, especially your end comments. I think Central Banks have known exactly what they are doing ever since they were made independent. Where does this end? With CBs owning most of the Government/Company debt, and they will start sharebuying on the pretence ‘to support markets’. Suddenly, our futures are not in the hands of democratic Government; instead, we will be ‘owned’ by CBs and their hidden backers. Why the hell do you thinks FANG stocks keep rising? They are the new Government in waiting. Anyone read ‘1984’? However, the sun still comes up and the Robin still sings in the tree.
In the long term, however, we are all dead. So, while I can accept it might be “best” to let it all turn to shit for the next decade or 2, or 3, I can sympathise a little with an approach that aims for something more palatable – very imperfect though it is. Ultimately, you are right though: it’s a gamble that the economy does “catch up”over (a very long) time.
It makes my blood boil to think how warped and corrupted our “leaders” are in this era of money above everything else. Where are our Western values of Truth (Logos), honor, achievement, useful work, nation, beauty, and God (Christianity)? These are nowhere to be found. Everything we are suffering from today is the result of the fact that in WWII we fought the wrong people. Doubt me? Go to BitChute and watch some videos of Adolph Hitler and his criticism of the internationalists and their central banks. The U.S.has a fifth column of dual citizens, a predatory parasite nation within a nation. Nothing will change until we rid ourselves of them. Mark my words.
Adam Smith (in Wealth of Nation) and James Madison (in papers during construction of Constitution) said essentially this: capitalist governments have one central role, protecting the wealth of the few from the many. That mandate has been spread to also accumulate more by any means necessary. It is so far beyond just the fed that reform is impossible. See The Myth Of Capitalism by Jonathon Tepper for particulars in every corner of our economic lives.
Great write up Sven! Paul Krugman was on MSNBC this morning following the Biden interview stating that there are no ramifications from the amount of debt being issued. He claims it will melt away through growth in GDP, maybe 30 to 50 years from now. How arrogant is that line of thought? I’d like to see you and Dan Nathan take him on, thoroughly and constructively!
This is your Magnum Opus, Sven. Thank you for the year’s of sage advice. You’ve changed the way I look at… well, everything. Best of successes to you and yours. See you in the gulag.
Why is it that so many very, very smart financial minds lament the removal of capitalism from our capital markets, but then virtue-signal for greater socialism in the wider economy? Is it guilt that they’ve benefited from the financialization of the global economies over the last thirty years, grown disproportionately wealthy from this, and so believe that the same should be accorded to the masses? Here’s a tip: two wrongs do not make a right.
And this is without a doubt wrong: “a new economic order would emerge, the middle class would grow as opposed to shrink and have higher incomes as they would have more bargaining power, a New Deal. Sounds good? No, the financial industrial complex doesn’t want that, it’s a big club.”
This kind of argumentation merely seeks to replace one cabal (i.e., the Wall Street and Tech elite) pulling the ever-expanding levers of government power with another, which is what the massively expanded leviathan under FDR represented. It won’t lead to more competent leadership, as radical lefty politicians are as susceptible to corruption with all that power as the center-left establishment that runs the show now.
At core, this is a conflict between individuality and free markets on the one hand, and collectivism and authoritarian government intervention on the other. If Sven is going to rightly point out the problems with the latter in the capital markets, then he ought to also acknowledge the dangerous history of Big Government explosions in the 1930s. Union bargaining power disappeared not because of Wall Street, but because the Japanese, Koreans, Germans, and most importantly, the Chinese joined the world trading system and outcompeted our workers in the US. Still more important was the ability to replace those workers with automation–the ever-rising bar that requires each worker (blue and white collar) to improve everyday to justify a paycheck. Useless market participants who cannot be good stewards of capital should be wiped out, but so should workers who cannot acquire skills to serve a useful purpose as well. We don’t need a Russian or a Maoist Revolution. We need another American one.
It’s time to stop selling too-good-to-be-true stories about utopias governed by better leaders in an ever more authoritarian state. It’s time to call for more self-reliance: educate yourself, make yourself productive, and resist further control from anyone pitching you that too-good-to-be-true proposition. It’s a Faustian bet.