Federal Reserve

What Would Paul Volcker Do?

By David Stockman  |  December 12, 2019

To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again: and above all, to apply the same process to the process itself – 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, Nineteen Eighty-Four (1949)

The occasion of Paul Volcker’s passing this week raises an important question: Did something profound happen in August 1987 when he handed the baton to Alan Greenspan and his heirs and assigns?

By our lights, the answer is, unequivocally and decisively, “Yes.”

From the “Maestro” forward, our central bankers – virtually to a man and to a woman – have deported themselves as a divinely inspired Committee to Save the World. No more does Tall Paul’s prescient admonition ring among them:

The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.

Indeed, we had on full display yesterday the very opposite of Tall Paul’s modest honesty, as Michael Coolbaugh expounds on below in his latest market commentary.

Volcker was The Last Central Banker, an old-fashioned sort who viewed his remit narrowly, as Carter Glass and the folks who framed it in 1913 intended it.

The U.S. central bank’s job was to provide liquidity and reserves and a stabilizing rudder to the commercial banking system.

Beyond the boundaries of the latter, however, stood the realm of honest price discovery in the marketplace of finance. What happened out there in terms of bond yields, stock prices, and Main Street saving and borrowing trends was the business of market capitalism to determine. These were not outcomes to be fostered by the quantitative targets and edicts of the FOMC.

Greenspan and his successors are not even central bankers. They are monetary central planners.

They attempt not only to micromanage the commercial banking system but also the entire aggregate of national economic activity and its principal variables, including inflation, gross domestic product, employment, business investment, consumer spending, etc.

Self-evidently, the tools of managing money are not useful when it comes to economy. That fatal error has been progressively poisoning capitalist prosperity ever since Tall Paul left the Eccles Building 32 years ago…

Here’s Michael with what reads to me a lot like a blueprint for the Fed’s next effort to Bubble Finance alive…

Let Me Be Clear

By Michael Coolbaugh

Over the past several weeks, I’ve talked a lot about the endless double-speak from the Federal Reserve and the never-ending “great progress” from trade negotiations.

Now we’re confronted with the simple fact that our central bank has decided to monetize U.S. government deficit spending.

This last point is particularly important – remember, it’s not the Fed’s responsibility to ensure the U.S. government doesn’t default as a result of out-of-control legislative and executive branch spendthrifts.

No, it’s mandate is all about “maximum employment” and “price stability.”

In fact, the Federal Reserve System was explicitly designed to be an independent entity, separate and apart from those in government who control fiscal policy. You know, that annoying concept known as “checks and balances.”

To be fair, global economic data has been weakening this year. And that’s provided some cover for the use of such unorthodox monetary policies.

But, following a post-FOMC-meeting press conference during which Chair Jerome Powell explained the Fed’s intentions for monetary policy moving forward, the message couldn’t have been clearer.

To be honest, most of the time, Fed press conferences are a waste of time. The verbiage is meticulously planned so Bubblevison’s talking heads can talk as much as possible without saying anything at all.

But, yesterday, well… the whole game changed… again.

You see, thus far, Powell & Co. have hidden behind a slight nuance in what qualifies as “quantitative easing.” That technical difference lies in the fact that the Fed’s been purchasing T-bills and not Treasury bonds.

(It just so happens that the vast majority of government debt issuance has been in short-term instruments, which lends further credence to the whole “monetizing the deficits” argument.)

But, really, it’s a distinction without a difference… especially when we consider the fact that the architect of QE, Ben Bernanke, was once credited as saying that “any” expansion in the Federal Reserve’s balance sheet qualifies as quantitative easing.

So, not only has the Fed been expanding its balance sheet at a rate unseen since the depths of the Global Financial Crisis. There’s also the matter of these few minute details in yesterday’s press conference that caught my attention:

  • Powell: “If it does become appropriate to buy coupons, we will.”
  • The Fed indicated a willingness to adjust its understanding of appropriate reserve levels.
  • The Fed stands ready to calm repo market fears
  • The Fed does not see a return to aggressive rate hikes, as they highlighted significant and persistent upward inflation readings.

Now, all this sounds relatively mundane. But, according to several former Fed insiders themselves, the statements – all the way down to the exact choice of words – is planned with extreme vigilance.

In other words, the Fed chose these statements for a reason.

So, when Powell opened the possibility to purchasing “coupons,” it’s an indication the Fed is willing to buy bonds… the same bonds that would technically qualify their current actions as “quantitative easing.”

Let me be abundantly clear: The Federal Reserve is laying the groundwork for QE4!

I admit, this could all be pure speculation. But, as you may know, I’m a former trader. And what a lot of traders do is look for “hidden” messages from the market.

So, what were some of the messages from the market following yesterday’s press conference? Here are four:

  • The U.S. dollar sold off aggressively.
  • Precious Metals staged a significant rally.
  • Treasury yields moved lower, more aggressively on the short end, as the yield curve steepened.
  • Foreign equities began to move higher.

The real question is, what do these four things have in common?

Well, they’re all consistent with a weakening U.S. dollar as a result of the Fed printing money.

OK, so where are we going with all of this?

Well, if you’ll recall from my October 31 commentary, I suggested that the U.S. dollar is the single most important indicator to watch over the next several months.

And, following yesterday’s reaction, we may be seeing the early signs of a move lower for the buck.

Indeed, as part of my work with The Stockman Letter, we’ve been discussing various investments that could stand to benefit from a weaker U.S. dollar. Click here to learn to join us.

Whether or not the Federal Reserve’s recent actions will be enough to prevent a recession remains to be seen. To be frank, that’s really the least of my concerns.

With central banks around the world seemingly testing to see who’s able weaken their currency the fastest, there’s a distinct possibility we’ll see a series of “competitive devaluations” in the coming year, maybe even a Currency War to augment the Trade War.

This volatility will create a near-perfect environment for the launch my new service, Delta Profit Trader, in January 2020. I certainly intend to capitalize on brewing global geo-macro developments, however they arise.

Where to Begin…

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market…

To common sense.

If You Need Your Money in the Next 5 Years…

America is at a crossroads. The middle class is disappearing… government spending is out of control… and the implosion of Bubble Finance will cause the greatest market crash in history. So, if… Read More
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