Who’s to Blame for the Decline on Wall Street?

This article was published by The McAlvany Intelligence Advisor on Monday, December 10, 2018:  

Following a volatile week in the stock market, President Trump met with his advisors to see if his Twitter account had anything to do with it. It is hoped that Trump’s original diagnosis remains in play: It’s Jerome Powell, the head of the Fed and his Keynesian sycophants on the Federal Open Market Committee (and not Trump’s Twitter account), who thinks it’s time to slow down the Trump train.

Some have opined that that decision was made more than a year ago when the Fed started raising interest rates an inch (25 basis points) at a time. Others think it was September 2017 when the Fed began shrinking its Adjusted Monetary Base with a vengeance. According to the FRED chart provided by the St. Louis Federal Reserve Bank (see Sources below), on September 12, 2017 the AMB was $4.0 trillion. On November 21, 2018, it had shrunk to $3.5 trillion, a 12.5 percent decrease in the single most important ingredient a capitalist economy needs to survive and thrive: capital. In simpler terms, the Fed has been stepping on Trump’s economy’s oxygen hose for more than a year, and the results are just now showing up.

Pundits have been peering into every other conceivable corner for the culprit(s) to blame for the ferocious decline: shrinking housing and auto sales, rising credit card debt delinquency rates, rising oil and gas prices, slowing of job growth and capital investment, the accusations leveled at Chinese companies trying to break into technology service providers here in the U.S., the appearance of “yield curve inversions,” and so forth.

The appearance of so-called “death crosses” (the 50-day moving average falling below its 200-day moving average) in the major averages have no doubt triggered more volatility. Algorithms have driven trading by computers (program and high-frequency trading) to up to half of all stock trades on the New York Stock Exchange. This leaves money managers and individual investors behind, forcing them to the sidelines to wait for calmer times.

Who is the real culprit behind this volatility in stocks? The well-informed have been pointing to the actions of the Federal Reserve as the prime driver, focusing on its determination to slow the economy by raising interest rates. For example, the insider bank Goldman Sachs said in late November: “The FOMC [the Fed’s Federal Open Market Committee] will likely be reluctant to stop [raising interest rates] until it is confident that the unemployment rate is no longer on a downward trajectory….” In other words, the Fed is determined to keep on raising interest rates until the economy is so weak that unemployment starts to increase!

That oxygen starvation is now showing up in the various places pundits are looking to place the blame: anything that affects the financial wellbeing of the economy. As interest rates rise and money supply shrinks (the two most powerful tools the Fed is using to slow the economy), housing starts slow, car sales dwindle, credit card payments increase, profit margins decline, and capital expenditure projects are taken off the board as being no longer profitable enough to be justified.

Add to this the toxic blend of mixed messaging from the White House over the China trade talks, the incipient arrival of the Mueller investigation’s findings into Trump’s alleged misdoings, the threats being ramped up against the president by the Democrats salivating over their power to investigate when they take control of the House in January, and one wonders that Wall Street has any buyers left at all.

What about the economy? Does the “yield curve inversion” signal a recession in six months or so? Not according to Joseph Haubrich, an economist and a consultant to the Federal Reserve Bank of Cleveland. In April 2006 Haubrich was tasked with answering the question, “Does the Yield Curve Signal Recession?” His answer:

Evidence since the early 1990s suggests that the relationship between the yield curve and [future economic] growth has shifted, if not disappeared….

Speculating on whether or not the yield curve is truly predicting a recession remains exactly that: speculation.

Evidence continues to pour in regarding the health and strength of the U.S. economy. The latest reports from the Institute for Supply Management on both the manufacturing and services sectors of the U.S. economy confirm that health and strength. The latest jobs report, coming in below expectations for the first time, shows remarkable strength considering the shrinking pool of capable and skilled workers so desperately needed in the increasingly technology-driven U.S. economy. Oil and gas prices will continue to trend lower worldwide thanks increasingly to U.S. production records being set on an almost daily basis that are making the U.S. the world’s largest producer of crude and refined products.

It’s not your Twitter account that’s causing Wall Street to stumble, Mr. President, although there are times when you’re less than totally consistent in your using of it. It’s not the “natural end” of the nearly 10-year long bull market. Bull markets (and economic growth) don’t die of old age, they are murdered by the Fed. There is only one enabler that has the power to raise interest rates and shrink the money supply, Mr. President, and Powell and Friends are using both of these tools to stop your economy.

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Sources:

McAlvanyIntelligenceAdvisor.com: Who gave Powell the Power to Manipulate Markets?

CNBC.com: Dow tumbles more than 500 points, wipes out gain for the year to cap wild week on Wall Street

Does the Yield Curve Signal Recession? By Joseph G. Haubrich, Federal Reserve Bank of Cleveland (2006)

Five year chart of the Adjusted Monetary Base

History of the Financial Crisis of 2007

MarketWatch.com: A death cross for the S&P 500 highlights a stock market in tatters

Investopedia.com: Program trading 30 to 50 percent of daily NYSE volume

Background on Joseph Haubrich

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