Federal Reserve

This is “Late Bubble Finance”

By David Stockman  |  June 10, 2019

Turns out Jay Powell is the Janet Yellen and the Ben Bernanke of Alan Greenspans.

The current Federal Reserve Chair is a gift, and he will keep on giving, maybe – as the consummate gentleman David Rosenberg so graciously put it just before the market open this morning – enough to get us four more years of the Great Disruptor:

Maybe Trump is a genius, after all. What if he finally gets the steep Fed rate cuts he has been demanding? After that, he ends the trade wars, tariffs go to zero, and the stock market to new highs — just in time for the 2020 election!

It looks like Wall Street is warming to the Donald’s cause too. In September guys like Stanley Druckenmiller bemoaned an activist Fed as a horrible idea. By December, they thought it was time to act to save a crashing economy.

Perhaps even the Deep State is working its magic for him as well. In March, Larry Summers said a 50-basis-point cut is a horrible idea. Just yesterday, he tweeted the following:

It’s tempting for the Fed to move slowly. That would be a grave error. The best way to take out recession or slowdown insurance would be for the @federalreserve to cut interest rates by 50 basis points over the summer and by more, if necessary, in the fall.

And he published an op-ed to that effect in The Washington Post, for all his friends to see.

Welcome to Late Bubble Finance, where everybody loves easy money…

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Alan Greenspan let the cat out of the bag in June 2000. Though it was kept “inside the temple,” the Federal Reserve’s focus was no longer “Money.”

It became apparent with the December 2000 meeting of the Federal Open Market Committee (FOMC), where our monetary central planners made their first slash at the federal funds rate.

Whether said out loud or not, the purpose was to reflate Wall Street. And, so, they cut all the way to 1.00% by the June 2003 meeting.

That was the Maestro’s campaign for popularity and power among the Acela Corridor’s elites. His platform was premised on the “wealth effects” doctrine.

That specious bit of rationalization holds that a strong stock market gooses the animal spirits of businesses and consumers alike. Doesn’t matter whether it’s artificial or genuine; “confidence” is “confidence.” And “confidence” will cause them to them to invest and spend at higher rates than they otherwise would…

Of course, nothing could’ve been more insidious in the face of the greatest stock market bubble of modern times than to drive money-market rates to that then-unheard-of rock-bottom of 1.00%.

One percent money rates had never happened before – not even during the Great Depression.

Margin funding and carry-trade finance not only became freely available amid the bust. They could be had essentially for free. That certainly roused speculative spirits.

Sure, after a year in Loony Land at 1.00%, the Maestro’s Fed did march the rate back up to 5.25% over the next 24 months. But the damage had already been done. And “normalization” was executed in the worst way imaginable.

You see, Wall Street now had the Fed’s number. It was pleased with this “Greenspan Put.”

There was simply no other rationale for slashing the Fed’s benchmark interest rate by 550 basis points during the 2001-to-2003 period than to levitate stock indexes.

The Maestro himself had only recently acknowledged there was no stringency of reserves, no “tightness” in the overall financial condition. They couldn’t even describe its bounds.

Even when it came to the “Economy” front, there wasn’t much to write home about. The recession triggered by the dot-com bust was so shallow that real final sales dropped by only 0.15% from peak to trough, and that drop lasted but a single quarter.

Moreover, the well-telegraphed series of 25-basis-point increases in the federal funds rate after June 2003 was actually everything Wall Street could’ve wanted if the 1.00% bound was to be abandoned.

Consider the environment back in J.P. Morgan’s day, when the benchmark interest rate could and would gyrate by hundreds of basis points on a moment’s notice and send the overleveraged into the drink…

These Greenspan increases were a phony normalization. Traders knew exactly what their carry costs would be for all relevant timeframes. They could make their wagers accordingly.

Most importantly, Wall Street learned it owned the world’s most important central bank.

The Greenspan Put became the Bernanke Put. The Bernanke Put became the Yellen Put.

Now, we have the perfectly alliterative Powell Put.

Perhaps this’ll prove the last…

Clean-Up Crew

Desperate times call for… “common sense” measures.

And these are desperate times… 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…

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

To common sense,

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David Stockman

Former White House Budget Director: 50% Crash Coming!

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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. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR