The Powell Helium Pump
The Powell Helium Pump by Dave Kranzler – Investment Research Dynamics
The stock market has gone “Roman Candle” since Fed Chairman, Jerome Powell, gave a speech that was interpreted as a precursor to the Fed softening its stance on monetary policy. Not that intermittent quarter-point Fed Funds rate nudges higher or a barely negligible decline in the Fed’s balance sheet should be considered “tight” money policy.
Credible measures of price inflation, like the John Williams Shadowstats.com Alternative measure, which shows the rate of inflation using the methodology in place in 1990, show inflation at 6%. The Chapwood Index measures inflation using the cost of 500 items on which most Americans spend their after-tax income. The index is calculated for major metro areas and has inflation averaging 10% (The John Williams measure which uses 1980 Government methodology also shows the current inflation at 10%).
Using the most lenient measure above – 6% current inflation – real interest rates are negative 3.5% (real rate of interest = Fed Funds – real inflation). The “neutral” interest rate would reset the Fed Funds rate to 6%. In other words, the Fed should be targeting a much higher Fed Funds rate.
So, if the economy is booming, as Trump exclaims daily while beating his chest – and as echoed by the hand-puppets in the mainstream media – why is the Fed relaxing its stance on monetary policy? The huge jump in employment, per the December jobs report, should have triggered an inter- FOMC meeting rate hike to prevent the economy from “over-heating.”
In truth, the economy is not “booming” and the employment report was outright fraudulent. The BLS revised lower several prior periods’ employment gains and shifted the gains into December. The revisions are not published until the annual benchmark revision, on which no one reports (other than John Williams). Not only will you never hear or read this fact from the mainstream financial media and Wall Street analysts, most if not all of them are likely unaware of the BLS recalculations.
The housing market is deteriorating quickly. Housing and all the related economic activity connected to homebuilding and home resales represents at least 20% of GDP. And the housing market is not going to improve anytime soon. According to a survey by Fannie Mae, most Americans think it’s a bad time to buy a home even with the large decline in interest rates recently.
Several other mainstream measures of economic activity are showing rapid deterioration: factor orders, industrial production, manufacturing, real retail sales, freight rates etc. Moreover, the average household is loaded up its eyeballs with debt of all flavors and is sitting on a near-record low savings rate. Corporate debt levels are at all-time highs. In truth the economy is on the precipice of going into a tailspin.
The stock market is the only “evidence” to which Trump and the Fed can point as evidence that the economy is “strong.” Unfortunately, over the last decade, the stock market has become an insidious propaganda tool, used and manipulated for political expediency. The stock market can be loosely controlled by the Fed using monetary policy.
The stock market can be directly controlled by the Working Group on Financial Markets – a subsidiary of the Treasury mandated by a Reagan Executive Order in 1988 – using the Exchange Stabilization Fund. Note: anyone who believes the Exchange Stabilization fund and the Working Group are conspiracy theories lacks knowledge of history and is ignorant of easily verifiable facts.
Trump referred to the stock market as a “big fat ugly bubble” in 2016 when he was running for President with the Dow at 17,000. If it was a visually unaesthetic sight back then, what should it labelled now when it almost hit 27,000 in 2018? Trump blamed the recent decline in stock prices on the Fed. Worse, Trump has put inexorable political pressure on the Fed to loosen monetary policy and stop nudging rates higher. Note that this debate never covers the topic of “relative valuation…”
The weekend before Christmas, after a gut-wrenching sell-off in the stock market, the Secretary of Treasury graciously interrupted his vacation in Mexico to place a call to a group of Wall Street bank CEOs to lobby for help with the stock market. The Treasury Secretary is part of the Working Group on Financial Markets. The call to the bank CEOs was choreographically followed-up by the stock market-friendly speech from Powell, who is also a member of the Working Group.
The PPT combo-punch jolted the hedge fund algos like a sonic boom. The S&P 500 has shot up 10.8% in the ten trading days since Christmas. It has clawed back 56% of the amount its decline between early September and Christmas Eve.
In reality, the speech was not a “put” because a “put” implies the installation of a safety net beneath the stock market to stop the descent. Rather, the speech should be called, “Powell’s Helium Pump.” This is because the actions by Mnuchin and Powell were specifically crafted with the intent to drive the stock market higher. It’s worked for a week, but will it work long term? History resoundingly says, “no.”
Make no mistake, this nothing more than a temporary respite from what is going to be a brutal bear market. The vertical move in stocks was triggered by official intervention. It has stimulated manic short-covering by the hedge fund computer algorithms and panic buying by obtuse retail investors.
Investors are not used to two-way price discovery in the stock market, which was removed by the Federal Reserve and the Government in late 2008. Many money managers and retail investors were not around for the 2007-2009 bear market. Most were not around for the 2000 tech crash and very few were part of the 1987 stock crash.
The market’s Pied Pipers have already declared the resumption of the bull market, Dennis Gartman being among the most prominent. More likely, at some point when it’s least expected, the bottom will once again fall away from the stock market and the various indices will head toward lower lows.
In the context of well-heeled Wall Street veterans, like Leon Cooperman, crying like babies about the hedge fund algos when the stock market was spiraling lower, I’m having difficulty finding anyone whining about the behavior of the computerized buy-programs with the stock market reaching for the moon.