President Trump wants to blame the Fed — Jerome Powell in particular — for the stock market’s nasty action this fall. If things keep going this badly, you can be sure the Fed chief will want to blame Trump and his treasurer Munchkin for recent tweets that killed Santa Claus and for trade wars and wall wars. Who is right? Who is really killing the stock market?
In this round of Truth or Trump, Trump clearly wins. First, look at this chart. Where did the market break down and what was happening at the obvious breaking point? Did Trump suddenly start tweeting things that left people unhinged last January? I don’t know what he said on that day in January that broke the stock market into a mess for the entire rest of the year after a year of a steady Trump Rally where all of his tweets could do no harm.
Second, note that the MSCI, which essentially gauges all the stock markets of the world, broke down at exactly the same time as the US market and has tracked with the US stock market in almost flawless correlation. Are you really going to believe that the tweets of the president are determining the market actions of the entire world — especially when there is no evidence of any big change in his tweeting habits that happened last January? Trump has been a Twitter bug since his campaign days, and it is not as if he just became president last January. He had already been president for a year.
So, who broke the market?
Readers here, know that I expected the stock market to break badly last January. They know the expected cause was that the Federal Reserve would double down in January on the speed at which it unwinds its balance sheet, which I am calling the “Great Recovery Rewind.” They also know that the Fed’s main action of rolling off bonds and not refinancing them came at the end of January, which is when we see all the stock markets of the world break into pieces in the chart above.
Next, look at what happened in the Fall, which is when I said the breakup of the economy and particularly the stock market would become so severe that it would get everyone’s attention. Has it not gotten everyone’s attention? (Sure, I did also say that the stock market would take its next leg down in the Summer, and that didn’t happen on schedule; but the rollover of the housing market did, and the stock market was not long in joining the Malay with historic, record-breaking force.)
Readers here knew that it was expected here that everything would begin to break up in the fall because that is when the Fed’s Great Recovery Rewind would finally hit full speed and create such a huge downdraft that nothing could overcome it. After all, is there not a stock-market adage that says, “Never bet against the Fed?” So, why would you?
The Fed has unlimited resources, and the market bet with the Fed for as long as the Fed was creating new trillions and pumping them into banks to be pumped into stocks and bonds. Thus, bond prices went up and stock prices went up together for about a decade under the Fed’s Great Recovery plan. Why, then, would you not expect the market to go down when the Fed switches to going down (down with stimulus and liquidity by raising target interest rates, down with stimulus and especially liquidity by clearing assets off its balance sheet that it used to inject money into the system)?
The market has been slow to recognize that “never bet against the Fed” applies just as much to when the Fed is taking things down as it does to when the Fed is taking things up. For some reason, even the Fed seems to be betting against itself by, at least, appearing to believe it can vacuum-suck trillions of dollars out of the economy and not have any major impact on either the economy or stocks.
Down by design or down by dim-witted deficiency?
I am going to stay away from conspiracy theories that say the Fed only appears to think it can undo its revery causes without undoing its recover effects because it is head-faking attention away from its real conspiracy to crash the economy so banksters can profit from a new round of bailouts (though I’m sure the economy will crash and banksters will certainly go for bailouts again and will most certainly get them unless good citizens stand in hyuge numbers against that).
I am going to stay with the notion, albeit a bit quaint at this point in the game, that bad philosophies can turn the thinking of smart people … well, stupid. I have no doubt that members of the Federal Reserve’s Board of Governors probably have average IQs or better; but I think pride in their own powers and prestige blinds them, causing them to be overconfident, while bad philosophy misguides them, causing them to endlessly repeat stupid crash cycles. History shows the Fed always continues to tighten until we hit a recession. Only then are smart enough to say, “Well, I guess it is now time to stop tightening.”
Of course, that puts a weight in the pan on the side of the conspiracy theorists arguments. I won’t say the conspiracy-theory folks are wrong because it truly is hard to believe a group of such highly-paid, high-ranking officials can really be dumber than stumps. Well, it is until you stop to think about other brilliant people, like Lennin and Marx, who put many nations of the world on unmistakably disastrous paths because of bad philosophy. Clearly those nations that followed those paths have universally done much worse than the West, which did not follow those paths — and to the extent they have moved more toward capitalist economies, they have done much better in recent years. So, people with high IQs come up with and advocate dumb ideas all the time!
However, our own corruption in the West will take us down, too, because corruption is always a bad philosophy wherever you find it, and there is an abundance of it right now in the United States. Greed contains the embers of its own eventual confligration, and I think we are entering the year when we’ll be seeing fires break out everywhere.
Truth or Trump
Trump is smart enough to recognize that the Fed would love to use him as scapegoat. Frankly, Trump sets himself up to be the perfect scapegoat by constantly tweeting things that upset huge numbers of people, which makes all of those people want him to become the scapegoat. He also sets himself up by saying he’ll do one thing and flip-flopping to another, which he claims to be a negotiation tactic that keeps his opponents off-balance. Maybe it is, but it also makes many people want to see him become the scapegoat.
I’m say that those actions make millions of people eager and ready to blame him. He makes himself almost more of a sitting duck than a scapegoat. The Trump Tariffs, which he clearly has to own as being solely his idea, certainly give him some fault in the market’s actions. Trade wars will always have a negative impact on markets. The Trump border battle with the Dems that is shutting down the government, which he loudly and proudly said he would love to own as the Trump Shutdown, also gives people reason to blame him for the chaos we’ve seen in December since the market’s downfall got worse when the government shut down.
Nevertheless, truth is truth, and Trump is Trump. Trump is going to keep on tweeting and saying things in the most divisive ways he can and stirring the pot because he loves the attention; but truth is truth, so even if you hate Trump, and even if he might be exacerbating some of the market’s turmoil, you cannot legitimately blame Trump for the troubles that we now are all facing. The chart above leaves no doubt that 1) the troubles began at the very moment the Fed doubled down on its Great Recovery Rewind speed in January of 2018 — double trouble; and 2) the entire world was seriously impacted at exactly that moment (because the entire world uses the Fed’s dollar as a trade currency and to bank a large amounts of sovereign treasure); and 3) the troubles really went chaotic in the fall as soon as the Fed finally hit full rewind speed and have remained chaotic ever sense, Plunge Protection Team or no Plunge Protection Team. The market’s plunge began the day bond interest took a major rise, and bonds started sucking money out of stock by competing favorably against them with higher yields.
Housing is not falling due to Trump. Housing has rolled over into gradual decline because of the rise in interest rates making housing more unaffordable. Auto sales are in serious trouble because of the rise in interest rates. With both kinds of major purchase, people do not buy price so much as they buy payments. You can even look at the rise in long-term interest as expressed in bond yields and see that long-term interest rises only started happening as the Fed started unwinding its balance sheet.
When the Federal Reserve was only increasing its stated interest targets, that had little effect; but the second it started rolling bonds off its balance sheet in its “automatic” unwind, the effect grew quite pronounced. And why wouldn’t it? Who couldn’t see that coming? Why does the Fed constantly act as if its interest targets are the most significant factor impacting interest rates when it was the Fed that told the whole world it was going to start sucking up bonds in order to drive down longer-term interest rates on things like mortgages? Why, then, would rolling off those bonds not drive longer-term interest rates back up? That kind of thinking makes no sense, and certainly adds another weight to the conspiracy side of the scale on the argument that the Fed is merely telling the public one thing while it intentionally crashes the economy.
(Still, if the Fed wants to crash the economy, why does it engage as the main player on the president’s Plunge Protection Team to keep the stock market from falling? Why not just let it go already? We certainly saw what appeared to be a heroic-scale effort yesterday by the PPT to save the market, which had been in decline all day with a final massive shove at the end of the day — a sudden run of bidding unlike just about anything we’ve ever seen.)
Whether by Fed design or dull-witted default, the market’s turbulence started with Fed action at the beginning of the year, remained an intense problem throughout the year that battled down the lift that was expected from the world’s biggest tax cuts to where they almost accomplished nothing (see chart above, which shows a year-long battle), and then crashed into chaos, as anticipated here, in the fall. So, the truth goes to Trump when it comes to saying the primary fault lies with the Fed.
Let’s all remember that.