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Mr. Powell and Mr. Orwell

Thursday, September 19, 2019 22:09

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“Mr. Powell and Mr. Orwell”

by David Stockman

“… that was the ultimate subtlety: consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word “doublethink” involved the use of doublethink.”

– George Orwell, “1984″ (1949)

“Before we dig into the meat of today’s matter, my editor asked me to pass along his apologies for a sloppy elision during the editing process that overstated the scope of the overnight repo market. It is a critical part of the global financial system, and the overnight general collateral repo rate is an important measure of stress in that system. But participants include mostly funds, traders, and speculators. Banks are eligible for federal funds or the discount window, if push comes to shove. And we should understand these subtleties, particularly amid what’s bubbling up around us.

As Michael Coolbaugh notes in his Thursday commentary on markets, it appears our monetary central planners are losing control. Jerome Powell tried to address his burdens by giving out the planned second rate cut while maintaining it wasn’t really necessary. It doesn’t get more pathetic than this.

After the Fed’s “disappointing” 25 basis-point rate cute on a divided Federal Open Market Committee vote and a failure to guarantee more cuts just around the corner, Powell saw the markets barfing and stumbled out with a 20-word ignition switch. Here’s Michael to see us through the Fed’s Orwellian fog…”

“Say What?”

by Michael Coolbaugh

“If you cracked open the Wall Street Journal this morning, you have no doubt as to why markets are moving higher once again today. First is the headline, “Stocks Open Higher After Fed Move on Rates.” Just below that you have, “Fed Chairman Powell Masters the Art of Saying Nothing.”

Have you ever found yourself in the middle of a group conversation when, suddenly, someone makes a comment that catches your attention and everyone else carries on as if you’re hearing voices in your head? As I listened to Federal Reserve Chairman Jerome Powell speak yesterday, I felt this same sense of, “Am I the only one who caught that?”

While divided in opinion, the Federal Open Market Committee’s projection indicates it does not foresee the need to reduce its benchmark interest rate again through the end of 2020. During the Q&A session, Powell not so subtly noted, “It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought. Possible will need to resume balance-sheet growth sooner than expected.”

As crazy as it sounds with the unemployment rate near record lows and stock markets within spitting distance of all-time highs, Powell’s comments very simply meant that the Fed may need to restart “quantitative easing” (QE) sooner than expected.

Yes, you read that correctly.

Contrary to the story being told by the mainstream media, the stock market actually fell following the announcement to cut interest rates, and Powell did say something. It was Powell’s singular reference to “organic balance-sheet growth” that sent the market rocketing higher, closing the day more than 1% off their intraday lows.

David has already highlighted the lunacy behind these policies. But my opening question was directed at the simple fact that the Fed managed to say two diametrically opposed statements in the matter of mere minutes.

On the one hand, we have our monetary central planners telling the public the economy is quite strong and they don’t foresee a reason to reduce interest rates again for at least the next 15 months. In the very next breath, they indicate a willingness to use tools only sanctioned during the depths of the worst financial crisis since the Great Depression…

Whenever I’ve experienced head-scratching moments like this, I’ve often looked for clarity by way of cross-asset analysis. That’s looking at different asset classes to see if they’re sending similar messages. For example, if the markets were expecting stronger growth in the near future, you’d expect a cyclically sensitive commodity like copper to rally along with equity prices.

(Above) In these two charts, we see that in 2015 and 2018, copper provided an early warning sign for the economic slowdown, well before equity investors came to the same realization.

To be clear, we’ve seen growing disagreements between asset classes over the past several months. But, as we look under the hood at yesterday’s action, whether it’s commodities, currencies or bonds, we can see similar skepticism by investors outside of the S&P 500 Index.

And if there were one thing across the thousands of global securities that truly got under my skin, it would be the fact that short-term U.S. government bond yields rose. If the market truly believed this hint at QE, wouldn’t it only seem logical that the Fed would lower short-term interest rates before restarting asset purchases? I’m personally not aware of any central bank initiating large-scale asset purchases when short-term rates were above zero, let alone 2%.

(Above) As this chart shows, commodities are demonstrating a very similar pattern to what was witnessed just prior to recessions in 1990-91 and 2001. In the end, it would be wise to treat yesterday’s euphoria with a heavy dose of skepticism. After all, if we step back from the day-to-day noise, the 10,000-foot view doesn’t give cause for much more hope.”

- http://deepstatedeclassified.com/

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/09/mr-powell-and-mr-orwell.html

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