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It’s All Backwards

It’s All Backwards

by | Oct 29, 2019 | Economic Outlook, Geopolitical Risk Protection, Stock Market

The uninitiated often think of the United States as a free market economy. It is in some specific ways but it is a far cry from a laissez-faire free market system. The main reason why the United States isn’t a free market is because of the Federal Reserve System, which controls money and how much it is worth. Money which is on one side of every single transaction that occurs in the economy.

Another reason the United States is not a free market is because of the myriad of taxes, rules and regulations prescribing how virtually all aspects of economic activity must be conducted.

Conventional foolishness states that deregulation causes the 2008-2009 financial crisis. However there were 115 agencies regulating the U.S. financial sector. As Tom Woods says, “Your friends think things would improve if there were 116.”

Source: https://tomwoods.com/deregulation-caused-the-financial-crisis/

Monday the 28th of October was another example of how distant the US stock market is from a free-market and how the US economy is very much controlled, manipulated and centrally planned. Trump primed the trading algorithms this morning by stating he, “Expects A Good Day In Market Today”.

Source: https://www.zerohedge.com/markets/stocks-jump-after-trump-expects-good-day-stock-market-today

The S&P 500 then opened at a new all-time record high as a result. Meanwhile the Federal Reserve, the biggest currency manipulator in the history of the world, is expected to cut rates from an extremely low 1.75-2% to an even more extremely low 1.5-1.75%.

A free market economy is not driven to all time highs by the words of one man or a small group of bankers.

But a larger question remains: if everything is so great, why the rate cuts and “This is not QE” Quantitative Easing?

Source: https://www.wsj.com/articles/the-fed-is-buying-bonds-again-just-dont-call-it-quantitative-easing-11571218200

Because Everything is Backwards

One factor driving the market is the trade war. When China and the US talk and say nice things to each other the market rallies. When they say mean things or refuse to talk the market sells off. The Federal Reserve is perhaps trying to give some support to the markets when China and the US seem like they can’t play nice.

But I believe the main reason is because the market is expecting it. The Fed isn’t data dependent. The Fed is market dependent. The odds of a rate cut are really just a voting machine to tell the Fed what to do.

Source: https://www.investing.com/central-banks/fed-rate-monitor

I’m sure it doesn’t help the US Fed to be “independent” when Trump pounds on the oval office desk demanding more rate cuts and QE. The irony is that Trump is now just as guilty as Clinton, Bush, and Obama in blowing a big, “fat, ugly bubble.” Trump, if reelected, will be lucky if he can pull an Obama and exist stage left before it blows up during his tenure.

If the US were a free market interest rates wouldn’t be set by a small cabal of unelected, semi-private, pseudo-governmental bankers. It would be set by the supply and demand of lenders and borrowers.

The central banks, who artificially lower interest rates and inflate asset bubbles, fuel greed and cause recessions and crashes. Meanwhile, free markets get blamed and the plutocrats call for more regulations that simply reduce competition from smaller players who can’t afford an army of attorneys to both comply with the new rules and look for and find the loopholes. Regulations also raise costs for consumers.

Meanwhile the regulations wouldn’t have prevented the crisis anyway.

This can’t end well but who knows when it will end.

Is this the Beginning of the Next Downturn?

Is this the Beginning of the Next Downturn?

by | Aug 14, 2019 | Economic Outlook, Geopolitical Risk Protection, Stock Market

The major US indices were down today, each about 3%, likely triggered by the inversion of treasury yields as well as cynicism regarding a US-China trade deal.

The yield on the 10-year treasury note fell below the yield of the 2 year treasury note for the first time since May 2007.

Source: https://www.marketwatch.com/story/dow-ends-around-800-points-lower-after-bond-market-flashes-recession-signal-2019-08-14

“Consider that 2s-10s yield curve inversions have preceded the last seven recessions and nine out of the last 12 recessions.“

ZeroHedge.com

Source: https://www.zerohedge.com/news/2019-08-14/2s10s-just-inverted-heres-what-happens-next

Yield Inversions

Does this one article title sum up the US stock market?
Source: barchart.com

Normally if you are loaning money for 10 years, you demand a rate of return greater than if you’re loaning money for 2 years. In other words, longer term debt should pay more interest than shorter term debt. When this isn’t true, it’s called inversion.

The fact that the yield on the 10-year was less than the 2 year (ie inverted) is a bad sign that historically indicates an incoming recession.

What do negative yields mean?

The way the government responds during a recession is to lower interest rates and spend money. This is the conventional, Keynesian approach, often referred to as monetary stimulus.

Unfortunately, this only makes the problem worse, but the government doesn’t realize that and it will be what they do in the next downturn.

Interest rates are already low, and so there isn’t a lot of room to cut before hitting 0%.

Rational people have positive time preference, meaning that they would rather have $1 now than $1 ten years from now. If you’re going to loan a stranger $1, you’re going to want interest, partly because there is a risk they won’t pay you back and partly because rational, normal people have a positive time preference.

What would negative time preference look like? A person with a negative time preference would rather have $.90 ten years from now rather than $1 now.

You can’t find real people who have negative time preference.

However, former Fed Chair Alan Greenspan, famous for inflating the 2000 stock market bubble and thus causing the subsequent crash doesn’t think negative yields are a problem.

“There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.”

Former US Fed Chair Alan Greenspan

Source: https://www.marketwatch.com/story/ex-fed-boss-greenspan-says-there-is-no-barrier-to-treasury-yields-falling-below-zero-2019-08-13?mod=MW_story_top_stories

He and many other supposed technocrats don’t have a problem with negative yields on debt. That combined with the lack of room to maneuver means that if there is a stock market correction or crash, once the Fed cuts rates to zero and restarting quantitative easing and asset purchases, negative rates are not far behind.

Gold should do well in this environment.

Gold has been bouncing around between $1,490s and $1,510, with a brief breakout attempt on the 13th in which the spot price of gold went as high as $1,530 before retesting supporting at the $1,490s. The yellow metal is up over 17% on the year.

I think we’ll see $1,600 per ounce gold this year, and it could go even higher before 2020 arrives.

Time will tell.