George Orwell’s dystopian book “1984” introduced the world to the concept of Newspeak. Newspeak is the process of redefining words for political purposes. Examples in the book include, “War is peace. Freedom is slavery. Ignorance is strength.” There are plenty of examples of Newspeak today in the United States and doubtless throughout the world. The United States Federal Reserve is a terrible offender when it comes to the use of Newspeak. Below are several examples.
Federal Reserve Newspeak: Price Stability
Part two of the Federal Reserve’s “Dual Mandate” is “Price Stability.” However, the Federal Reserve actively undermines price stability. Here is a quote from the St. Louis Federal Reserve website:
Price stability: If prices for goods and services are stable, that preserves the purchasing power of money. The Federal Open Market Committee, or FOMC, has equated price stability with a low, measured rate of inflation. (Inflation is a general, sustained upward movement of prices for goods and services in an economy.) To achieve this part of the mandate, the FOMC targets an inflation rate of 2 percent over the longer run.
Why is this newspeak? Two percent inflation is not stable. If a ship is losing 2% of its buoyancy every year it will eventually sink. Take a worker who makes $15 an hour. After 20 years, at a 2% inflation rate, that money is now worth $10.09. That “stable” price stability cut a workers wage by a third.
Price stability actually means prices neither rising nor falling.
Of course the real rate of price increases is well above 2%–more on that later.
So when the Federal Reserve use the term “Price Stability” what they really mean is rising prices and a steady erosion of the purchasing power of the dollar.
Federal Reserve Newspeak: Balance Sheet Normalization
US Federal Reserve Balance Sheet shown in Trillions ($) Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
The US Federal Reserve makes available their “recent balance sheet trends.” The Federal Reserve narrative of their balance sheet trends is as follows:
The Federal Reserve’s balance sheet has expanded and contracted over time. During the 2007-08 financial crisis and subsequent recession, total assets increased significantly from $870 billion in August 2007 to $4.5 trillion in early 2015. Then, reflecting the FOMC’s balance sheet normalization program that took place between October 2017 and August 2019, total assets declined to under $3.8 trillion. Beginning in September 2019, total assets started to increase.
There is lots of Newspeak in that paragraph. I will give the Federal Reserve some credit, as one sentence doesn’t need too much translation “During the 2007-08 financial crisis and subsequent recession, total assets increased significantly from $870 billion in August 2007 to $4.5 trillion in early 2015.” Here is the translation:
The Federal Reserve’s balance sheet has significantly expanded over time. During the 2007-08 financial crisis and subsequent recession, total assets more than quadrupled from $870 billion in August 2007 to $4.5 trillion in early 2015. Then, the FOMC’s balance sheet normalization program that took place between October 2017 and August 2019 failed and the balance sheet was only able to be reduced back to about $3.8 trillion which is still 3.3 times higher than it was prior to the 2007-2008 financial crisis. Starting in September of 2019 the balance sheet started to grow again. In the year long period between March 2020 to March 2021 the balance sheet increase by over 80% and is currently almost 8x higher than it was back in July of 2007
Balance Sheet normalization in actual english would mean reducing the balance sheet from $4.5 trillion back to under $1 trillion. But in Federal Reserve Newspeak it means reducing the balance sheet 17% from the highest it had been up to that point, going from $4.5 trillion down to $3.8 trillion and then proceeding to more than double it up to $7.7 trillion.
Federal Reserve Newspeak: Tools to Fight Inflation
Fed Chair Jerome Powell has talked about how he has the tools to fight inflation. This is arguably just a lie and not Newspeak, but since Newspeak is a way of lying this distinction doesn’t matter. The translation of this statement is that the tools the Federal Reserve will use to fight inflation will be to ignore and downplay that inflation exists and claim it is transitory.
The Federal Reserve first ignores and downplays inflation by using the CPI. The CPI is already designed to not measure the real rate of price increases. Official CPI released 15 April 2021 is 2.6%. According to shadowstats.com, if inflation was measured the same way it was in 1990, it would be over 6% or over twice as high. This works well for the Fed in conjunction with the Newspeak of “price stability”. If prices rising by 2% each year is price stability then 2% is the new 0% and 3% is the new 1%.
The Federal Reserve was previously targeting a 2% reduction in the value of the dollar per year. Now that the CPI is officially over 2%, the Federal Reserve is saying this is transitory and that because there were periods of time in which inflation was under 2%, it is okay to be above 2% now.
So the Federal Reserve starts by using a number that is already too low (2.6% instead of 6%) then redefines price stability to mean 2%. So we’re really only seeing a 0.6% increase in prices and that is transitory.
Meanwhile, the only real tools the Federal Reserve has to fight inflation would be to shrink its balance sheet and raise rates. But this would tank the stock market and make it too expensive for the US government to borrow money.
In US Federal Reserve Newspeak, “Price Stability” is rising prices. “Balance Sheet Normalization” is doubling. “Fighting inflation” is ignoring it.
I wrote a little bit about the mechanics of shorting stock and naked shorting of stock. Some version of what I described in Scenario C happened to a hedge fund called Melvin Capital. Melvin Capital was heavily short GameStop (GME). The price rose rapidly and it sounds like they didn’t have enough money to close their position. According to the New York Post, “Hedge funds Point72 Asset Management and Citadel gave a $2.75 billion capital infusion to Melvin Capital earlier in the week, enabling it to close out that position with a large loss.”
Remember that name: Citadel. Citadel is a huge client of the trading platform Robinhood. Robinhood sells trading information to Citadel.
The retail traders on Robinhood trade for free. On platforms like Google, Facebook and Twitter where you get something for free you are the product.
Citadel is Robinhood’s customer. Without clients like Citadel Robinhood doesn’t make any money. So there is motive for Robinhood to want to keep Citadel happy.
Was there any hanky-panky between Citadel and Robinhood? Did Citadel tell Robinhood to halt trading so a hedge fund they sank billions into could close their positions? I don’t know. I don’t have evidence that this happened. But the motive is definitely there. Motive by itself isn’t sufficient though.
Should someone look into what happened? Don’t worry: Treasury Secretary Janet Yellen is on it! She is the first female Treasury Secretary and she is on the case.
Treasury Secretary Janet Yellen
Former Fed Chair and now Treasury Secretary Janet Yellen did very well for herself while between jobs. She has made at least $7.2 million in speaking fees. This number includes some $800,000 paid to her by Citadel. The same Citadel who is a huge client of Robinhood and bailed out Melvin Capital.
But guess what, despite what I think is a clear conflict of interest. Treasury Secretary Janet Yellen will be presiding over a regulatory hearing regarding the GameStop saga. So what are the chances that the Hedge Funds come out the loser in all this? I don’t think they are very good.
I don’t think regulations help that much anyway. Many do more harm than good. But let’s say you believe we need strong financial regulation. How is that supposed to happen when the regulators are getting millions from the people they are supposed to be regulating?
If anything happens, I suspect some of the more prominent “redditors” will be accused of something and trotted out as the scapegoats and the hedge funds will get away free. Even though the hedge funds were the ones who lost money due to them having poor risk management and being incredibly short a stock.
I’m not an attorney but from an ethical perspective I don’t see how the redditors buying the stock did anything wrong in seeing hedge funds were over-short a stock and taking advantage of what Melvin Capital were doing.
So what is the Lesson Here?
This is just one example of how the foxes are guarding the hen house.
Going back to the GameStop drama: some people probably made money buying GME but as of writing this it is back under $55. I suspect most redditors lost money on GME. GME peaked at around $483. I’d like to know how many people knew to buy GME at say $20 or less and then decided to sell at $400 or even $300.
Maybe some of the folks who lost money on the GME trade believe it was worth it just for the chance to stick it to a hedge fund. As for myself I’m not in favor of cutting off my nose to spite my face.
It is really hard to bet against the house at their own game and win. The hedge funds are too powerful and they pay the regulators’ speaking fees. Even the folks in the “big short” of 2008-2009 were gutsy insiders.
That is one of the reasons why I like a 10-20% allocation to physical gold and silver. Despite manipulation in the futures markets for these commodities, you are still opting out of the tradition financial system.
Since early 2009 US markets have been in a bull market. In less than a month that 11 year bull market has ended and we are now officially in a bear market. The big three US indices are all down more than 20%.
NASDAQ in blue, S&P 500 in Grey, Dow Jones Industrial Average in Purple and Gold in Yellow
Interesting that the trigger to the selloff was something no one was expecting. But perhaps the fact that no one saw this specific catalyst coming shouldn’t come as a surprise.
As I mentioned before, making financial decisions out of fear or panic will rarely result in the best outcome. Cool heads will prevail.
At this point in time I have more questions than answers, but in the midst of this bear market there is great opportunity.
Is Now the Time to be “Greedy”?
“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett
It’s hard for me to respect Warren Buffett when the man does everything in his power to avoid paying taxes while at the same time publicly saying he should pay higher taxes. It is hypocritical.
Despite my misgivings about Mr. Buffett I can’t argue with the long term performance of Berkshire Hathaway.
It’s important to ignore what Warren Buffet says on his virtue signaling tours and look at what he is actually doing with his money.
Others are fearful right now so it could be a good time to be “greedy”. Of course buying things on sale isn’t actual greed but I digress.
Who Knows when the markets will bottom out?
I’ve been underweight US stocks and will be using this bear market as an opportunity to dollar cost average into US index funds and ETFs. I do not believe it is possible to time the bottom so I’m not going to try. What I am trying to do is to buy into the market at an interval of good prices.
Compared to the highs stocks are on sale at a 25% discount. They might go on sale for 40% off or even 50% off but in either case it is a significant discount from the mid-February highs.
How is Gold Working Out?
Gold has been a decent hedge so far. However during a panic the yellow metal will probably fall as people sell everything. And indeed gold is down from the $1,700 high made earlier this month.
For the first five years after the last financial shock (2008-2009) US stocks were the place to be and gold, which had a tremendous run-up, went into a bear market. Of course past performance is no guarantee of future performance, but it can provide a guide for how markets could possibly perform.
Gold in Yellow and S&P 500 in Blue
Over the past five years, as a result the current crash, gold has outperformed the S&P 500. Gold is up 32.71% compared to the S&P 500 being up 24.06%.
Gold in Yellow and S&P 500 in Blue
However, even after this large drop. Since the 2008-2009 financial crisis, stocks have been the place to be. The S&P 500 is still up 248% since February of 2009, while gold is up relatively modest 68.9%.
Gold in Yellow and S&P 500 in Blue
And despite this large drop, for the past 10 years, stocks have done very well.
NASDAQ in blue, S&P 500 in Grey, Dow Jones Industrial Average in Purple and Gold in Yellow
The Fed Tries to “Help”
Not one to stand by and allow the free market to operate–the US Federal Reserve announced more quantitative easing (QE4) on Thursday. Of course if you count the not-QE QE, this would be QE5, for those keeping score at home. It is also anticipated that rates will be cut again.
Rates were over 6.5% prior to the 2000 dot com crash. They were hiked back up to about 5.25% prior to the 2008-2009 financial crisis. But after the 11 year bull run rates only made it as high as 2.4%.
In short the rates have never been this low going into what could be a recession.
The Fed is entering this bear market (and potential recession) with interest rates already so low they have little ammunition to “help”.
The Fed is already doing more Quantitative Easing.It seems inevitable that rates will go negative.
Central planners President Donald J. Trump and Fed Chair Jerome Powell both spoke regarding the US Economy this week. Trump was Tuesday; Powell Wednesday.
One interesting quote from Chair Powell’s prepared remarks were the following: “Nonetheless, the current low interest rate environment may limit the ability of monetary policy to support the economy.”
In other words if the economy goes south, the Fed won’t be able to do much to prop it back up.
This assumes rates don’t go negative (like Trump is already calling for) or Quantitative Easing (QE) isn’t further expanded (which Trump has also called for). With those in mind, the Fed still has tools at it’s disposal to wreck the dollar and re-inflate asset bubbles.
Powell also read, “In a downturn, it would also be important for fiscal policy to support the economy. However, as noted in the Congressional Budget Office’s recent long-term budget outlook, the federal budget is on an unsustainable path, with high and rising debt: Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”
As he states the obvious, Powell is of course correct about the unsustainable federal budget.
Seeing as how the Fed is empowering the Treasury to go deeper and deeper into debt it is ironic that the Chair of the Fed is concerned about the debt.
Powell also mentioned his “In no sense, is this QE,” Quantitative Easing program: “To achieve this level of reserves, we announced in mid-October that we would purchase Treasury bills at least into the second quarter of next year and would continue temporary open market operations at least through January. “
In his Tuesday speech President Trump called for negative interest rates. He is further complaining the Fed isn’t working with him and that interest rates were cut too slowly.
While touting the stock market at all time highs (which he once called a big, fat, ugly bubble), Trump purports the stock market would be 25% higher if not for the Fed.
Trump is the Bubble-Blower in Chief. He basically wants the kind of sweetheart deal Obama got.
He also mentioned a desire for more tax cuts. Tax cuts are fantastic and important, but without cutting spending they will only increase the unrepayable and unsustainable deficits.
All of this should be good news for gold. While the yellow metal has not dropped through the $1450 resistance line, it is hovering just about it.
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