Federal Reserve

So, Three Wise Men and an Ignoramus Are Talking About the Fed

By David Stockman  |  December 28, 2018

Fella says today, ‘Depression is over. I seen a jackrabbit, an’ they wasn’t nobody after him.’ An’ another fella says, ‘That aint the reason. Can’t afford to kill jackrabbits no more. Catch ‘em and milk ‘em an’ turn ‘em loose. One you seen prob’ly gone dry.

– John Steinbeck, The Grapes of Wrath (1939)

The Donald is a lifetime speculator in leveraged real estate. He’s an economic ignoramus to boot.

Indeed, it should be no surprise this self-described “low interest man” continues to swing at the Federal Reserve and Chair Jerome Powell.

Here was the Tweeter-in-Chief on the eve of the December Federal Open Market Committee meeting:

It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!

There are some facts to be checked here.

Most notably, there has been some not inconsiderable inflation over the past nine years. That’s so even if it wasn’t entirely visible from Trump Tower.

In fact, a dollar you saved in January 2010 is barely worth 80 cents today.

[Click to Enlarge]

With only a handful of exceptions, the federal funds rate (represented by the purple bars) has been well below the annual inflation rate for 107 months running.

In other words, money market rates have been negative in real terms for nearly a decade. And negative carry costs are the mother’s milk of Wall Street speculation.

Today, the system is studded with financial explosive devices – or FEDs – from stem to stern.

There’s no reason to expect the “Great Disruptor” to grasp any of this. His job is to attack and discredit the Fed, full stop, by whatever cockamamie means necessary.

Indeed, what does “Paris burning” have to do with sound monetary policy, anyway?

There’s heightened “political risk” just because the Donald occupies the White House and tweets to his heart’s content.

The far more salient aspect of his recent fusillade against the Fed is that a trio of the most solid thinkers who operate on Wall Street basically agree with him.

Kevin Warsh, a former Fed governor, and Stanley Druckenmiller, a legendary hedge fund investor, said “not now” to more tightening in a December 16 op-ed in The Wall Street Journal.

Mega-bond investor Jeffrey Gundlach joined that chorus, even as he warned of a grueling bear market ahead.

All three of these guys have long warned about the folly of the Fed’s massive balance sheet expansion and deep interest rate repression.

This isn’t a bunch of Jim Cramers petulantly insisting it’s the Fed’s job to never let stocks correct.

What Warsh, Druckenmiller, and Gundlach are saying is that the Fed has essentially taken itself hostage.

The financial system rife with egregiously inflated asset prices. The central bank desperately and belatedly needs to normalize rates and shrink its balance sheet.

But it’s dithered, delayed, and defaulted for so long that even another 25 basis points could  blow the casino sky-high.

Here’s the “money” question: If three of the soberest minds on Wall Street fear the prospect of bringing the money market rate even a tad above the current 2.2% inflation rate, why in the world would anyone in their right mind buy another f***ing dip?

Folks, it’s terminal now.

Wall Street is pumped so full of speculative excess that orderly “normalization” – a standard bear market, a soft-landing for the economy – are now no longer attainable.

That’s if they ever were at the end of Bubble Finance.

Are You Paying Attention?

Desperate times call for… “common sense” measures.

These are desperate times… how else to explain an 800-point rally over the last two hours of trading to turn a huge loss into big gain… the day after the biggest single-day point-gain in the Dow Jones Industrial Average’s history?

This is not “normal.”

Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

Sincerely,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan.MORE FROM AUTHOR