With the markets in a steep downturn since the US credit downgrade announcement by S&P, many traders and investors carefully listened to the FOMC meeting in anticipation of an announcement that the Federal Reserve would interfere in the markets through credit injection. Bernanke didn’t confirm the much anticipated next round of Quantitative Easing. Instead the Fed chairman released a statement in which he admits that the economic recovery is not as strong as previously anticipated:
“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”
With the FOMC meeting at 2:15pm the markets sold off rather rapidly as no announcement was made about QE3. Failing to confirm a capital injection in combination with the negative economic growth outlook resulted in new session lows for stocks. It wasn’t until the DJIA reached a session and week low of 10603 around 2:45pm that money flooded to the markets. Within the last 75min of market activity the DJIA gained 639 pts to close at a day high of 11,242. That begs the question, where did that injection of capital come from? The President’s Working Group on Financial Markets? Or did the “policy tools” to promote price stability by any chance include the next round of Quantitative Easing unannounced?
In February of this year we wrote an article about the overbought status of the stock market. In “Why Investing In US Stocks Or Treasuries Is A Bad Idea” we highlighted how companies benefitted during this artificial recovery that was made possible with accounting regulation changes, bailouts, foreclosure moratoriums, and massive infusion of newly created debt into the markets. It wasn’t a fundamental recovery but merely a re-inflating of the bubble.
Jim Rogers is talking with Maria Bartiromo about the state of the US Economy, the future of the US Dollar, the emergence of China and the recent US Stock market correction.
“The U.S. is the largest debtor nation in the history of the world. The debts are going through the roof. Would you keep lending money to somebody who’s spending money and not doing anything about it? No you wouldn’t.”
Jim Rogers is a Singapore based American investor who co-founded the Quantum Fund with George Soros in the 1970s. Author of numerous books, Rogers is an outspoken critic of the Federal Reserve System and an advocate of free markets.
The Breakout show with Matt Nesto and Jeff Macke hosted Jim Rogers for an interview to discuss the Federal Reserve System, Ben Bernanke and the manipulation of markets. Jim Rogers shares his views about the stock market and why he is short technology stocks through tech ETFs and why he is bearish US Treasuries.
“If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia.” – Jim Rogers
The iShares Japan ETF which includes stocks of major Japanese companies has been trading with record options volume as traders anticipate a further decline in the Nikkei or a bounce of the recent sell off that was initiated with the earthquake and tsunami.
Former Federal Chairman Alan Greenspan was hosted on CNBC answering questions about monetary policy and his views on the current state of the U.S Economy. WTF Finance is a harsh critique of Alan Greenspan as the policies of the Federal Reserve were interfering with the natural demand and supply variables of the markets. Greenspan “solved” economic recessions by infusing trillions of newly created liquidity into the markets while keeping interest rates at artificial lows, fueling the speculation in the stock and real estate markets.
“The Fed does do look at future inflation…. It can look at future inflation just as well as he can, not any better, not any worse”
Greenspan acknowledged the budget problems and rightfully questioned equity prices while also voicing concern about the deficit spending and the loose monetary policy. Interesting given that this is descriptive of the policies of the Federal Reserve while Greenspan himself was head of the quasi-private Federal Reserve Bank.
On January 28, 2011, the U.S. Commerce Department’s Bureau of Economic Analysis released the advance estimate of the gross domestic product (GDP) for the fourth quarter of 2010. In response to the reported 3.2% annual growth rate the markets initiated a rally but later sold off due to the Egypt crisis. The following Monday the markets continued the rally and many economists mentioned the GDP to conclude that the US Economy has recovered.
Here’s part of the press release from the Commerce Department where U.S. Commerce Secretary Gary Locke said:
“With more than a million jobs created by the private sector over the last year, there is no doubt that America’s economy is stronger today than it was two years ago when President Obama took office; today’s GDP number is yet another strong indication of that. Growth in consumer spending and exports during the fourth quarter has led to increasing optimism about our economy. As the President emphasized in his State of the Union address, winning the future depends on our ability to out-innovate, out-educate, and out-build our global competition and restructure our economic foundation so that it is competitive, growing, and working for all Americans.”
Today the previously reported GDP estimate for the fourth quarter of 2010 was adjusted downward. Economists expected GDP to be revised upward from the previous annualized rate of 3.2% to 3.3% but the growth domestic product was revised to 2.8% for that period. Despite the negative revision the markets closed positive reversing the downtrend of the week. This once again illustrates that news only matters when the financial powers that be want them to.
The US stock market peaked in October 2007 with the Dow reaching a high of close to 14,200. Government guaranteed mortgages and a loose monetary policy by the Federal Reserve fueled the real estate bubble. Artificial low interest rates and excessive credit creation by the quasi-private Central bank lead to much malinvestment and speculation. The appreciation of property values not only made sellers of real estate rich but allowed those that refinanced to live a lifestyle they otherwise couldn’t afford.
Many Americans that had a modest salary enjoyed the financial irresponsible spending that was made possible through home equity loans. Others enjoyed the temporary high salaries that were made possible by the increased consumer spending and those employed within the Real Estate sector benefitted from the high transaction volume.
US equities only traded at their artificial high levels as a direct result of the housing and credit bubble. The increased economic activity allowed for massive consumer spending which resulted in record earnings for companies pushing the Dow Jones Industrial Average and NASDAQ to unsustainable record highs. With the beginning of the Real Estate collapse that started with subprime defaults and by no means was isolated to the lower income demographic the consumer spending came to a quick halt as individuals were limited to a level of spending they could afford.
With banks having been exposed for the nearly insolvent institutions they are, consumer spending limited without easy access to credit, and a significant rise in home loan defaults the DOW reached a low near 6500 in February of 2009. The Federal Reserve and the President’s Working Group on Financial Markets pumped trillions of dollars into the market to prevent a further down trend in equities.
In March 2009 the accounting rules were changed eliminating mark to market accounting rules and replacing it with a “mark to bubble” system that allowed financial institutions to take the previously written down losses and mark them up to a value of their choice. The sudden increase in value was translated to gains and the financial institutions reported record phantom profits since that accounting change. Nobody in their right mind can seriously believe that the financial companies that were on the verge of collapse could turn to record profitability within a few months.
Fundamentally nothing has changed with the U.S. Economy since the Real Estate bubble and the US Economy were exposed for what they are. This recovery has only been made possible through unprecedented market interference and bailouts which include:
Changes in accounting regulation, eliminating mark to market and implementing the Enron accounting system
Injection of trillions of dollars of newly created “capital” by the Federal Reserve
Artificial low short term rates that allows financial institutions to borrow money at nearly free terms in order to trade equities and bonds
Foreclosure Bailouts and Loan Modifications that allowed many Americans to live mortgage and rent free for several years
Avoiding foreclosure allows the banks to keep their non-performing loans on their balance sheets without having to realize those losses. The hidden losses remain artificially marked up on the balance sheets while contributing to the profitability of the institution’s quarterly statement.
With a majority of Americans free of mortgage obligations for several years the US Economy appeared to have recovered as sales of consumer goods rapidly increased. Many stocks are trading higher now than they did at the peak of the Real Estate bubble in 2006. Given that fundamentally the US Economy is fueled by similar unsustainable variables that allow Americans to continue living beyond their means it is naïve to expect a continuation of this bull market. Many companies reduced their American workforce in response to the market decline in 2006 through 2009. Since consumer spending returned to bubble levels they are more profitable now than in the past as they book similar or greater revenue with fewer overhead costs. While a reduction in workforce was a viable option for companies to address the slowing economy and deal with unprofitability, WTF Finance warns that US companies will no longer have that option in the upcoming downturn.
WTF Finance especially warns foreign investors as they not only are exposed to the equities that benefitted from the re-inflation of the bubble but also the value of the US Dollar. As we’ve reported in our article “Geithner Criticizes China” the biggest foreign holder of US Treasuries is becoming increasingly concerned about its US currency holdings as they are rightfully worried about future inflation and the potential default of the United States. WTF Finance shared the “Historic Lessons Of Inflation” and also explained why official CPI data is not a true reflection of inflation in our past articles.
WTF Finance does not suggest to panic sell into market weakness but does recommend selling equities that primarily depend on the true economic health of the American consumer. A rebound of US equities could be a last chance to cash out of your positions before the unsustainable fake US Economy is exposed for what it is.
As if it hasn’t been enough that we had to be lied to about Ireland, Portugal, Iceland, etc. causing a pull back in the US equity markets in the past, today the news media blamed Egypt for a sell of in the Dow and Nasdaq. Reuters reports:
“Wall Street retreated from its 29-month high on Friday as escalating anti-government protests in Egypt prompted investors to move away from equities and into safer assets. Disappointing results from Amazon and Ford further triggered the sell off. The S&P 500 was on track to close below its 14-day moving average for the first time in two months.”
WTF Finance anticipated this pull back in the stock market as the Dow crossed the 12,000 mark but struggled to remain above. Decreased demand for several stocks whose companies just recently announced their earnings was another variable that lead us to believe that the markets are topped out for now. But the most important variable that made us come to that conclusion that the markets will correct had nothing to do with earnings, price action, or volume. Politics made us anticipate the beginning of this sell off.
In the fall of 2008 when the bailouts were first introduced to legislators Americans were against such an intervention. Stock market manipulation has been used for hundreds of years in order to drive agenda as the resulting Government policies are used to the benefit of certain industries who benefit from the imposed regulations. Imposed regulations are often lobbied for and it is not uncommon that industries voice opposition against regulatory changes while simultaneously funding them. Without the stock market drop of 777 points in a single day the American mass psychology wouldn’t have been ready for the $700 billion bailout plan. Needless to say economic fear has been used for centuries to implement regulation and laws in general.
WTF Finance mentioned in the past how Ireland, Spain, and the financial troubles of other European Nations can be used to distract from the economic and monetary realities of the United States. With Congress urged to increase the debt ceiling of the U.S. this sell off in the market comes at a convenient time to convince Congress and prepare the American public to further allow for a debasing of the currency, more bailouts and market interventions while continuing with the same living above your means deficit spending.
The Financial Crisis Inquiry Commission that was established in May 2009 as part of the Fraud and Recovery Act released its report that examined the domestic and global causes of the financial crisis. The report states that the financial crisis could have been avoided and names the Clinton and Bush Administration, the Treasury Secretary, as well as the current and former Federal Reserve Board as having been partially responsible by having failed to act appropriately to prevent the financial disaster from happening.
WTF Finance doesn’t disagree with the panel that the above named individuals and entities are to blame but we strongly disagree with the conclusion that lack of regulation lead to the financial demise. It wasn’t their lack of actions but their market interferences through Government and Fed policy that allowed the credit bubble to reach those proportions.
“The prime example is the Federal Reserve’s pivotal failure to stem the low of toxic mortgages, which it could have done by setting prudent mortgage-lending standards…More than 30 years of deregulation and reliance on self-regulation by inancial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful inancial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe.”
It wasn’t a free market that caused malinvestment but lose monetary policy by the Federal Reserve Policy and Government Guarantees of non-sense loans that fueled price increases and the associated speculation. If the banks knew they were accountable for the loans they were writing they would have been more careful on who to qualify, but big anti-free market Government policies that run on the premise that homeownership is an American right, not a priveledge, distored the markets as the Government indirectly guaranteed nearly 5 Trillion Dollars of mortgages.
The report blames the Federal Reserve for not regulating the quality of mortgages that were written but the panel fails to understand that a free market would have allowed for self-regulation. The panel wrongfully blames 30 years of deregulation as a root to the problem when the United States driften furhter away from a free-market system during that period.
It’s interesting but not surprising that those entities whose anti-free market policies are responsible for building the foundation for the credit and real estate bubble are still in charge of solving the problem and they are doing so with the same policies that got us here. The Federal Reserve is still operating on the inflationary policy of adding excessive liquidity to the markets in an attempt to re-inflate the bubble while the Federal Government still guarantees non-sense home loans through its various agencies.
It wasn’t lack of regulation but interference through loan guarantees by agencies such as Fannie Mae, Freddie Mac, VA, and the USDA that still guarantees 100% home loans in rural areas. WTF Finance highlighted in our article “Inside the Bubble Economy” how those in charge of these programs acknowledge the problems while continueing writing more loans to re-inflate the bubble and continue policy as usual.
“Nearly one-quarter of all mortgages made in the first half of 2005 were interest only loans. During the same year, 68% of “option ARM” loans originated by Countrywide and Washington Mutual had low- or no-documentation requirements.”
Instead of focusing on the malinvestment variables that led to the excessive speculation one should focus on the policies that created the environment in which malinvestment was encouraged. Had it not been for Government subsidized home purchase and refinance loans home prices would have never appreciated the way they did. In an attempt to prolong the housing market’s appreciation and delay the inevitable downturn Congress voted on numerous occasions to increase the FHA loan limit which allowed more people to take on a greater amount of debt and resulted in further increases of home values.
The Panel of the Financial Crisis Inquiry Commission can point fingers at creative loan financing all they want but the reality is that without excessive credit in circulation banks would have been more conservative with their borrowed capital. It’s Federal Reserve policy to manipulate interest rates and herein lies the problem as the rates do not reflect the true cost of what credit should be. Manipulating the interst rates to artificial low values can also lead to malinvestments, dependence on unsustainable overconsumption, and provide a wrong sense about the economic state of the Economy. In a non-regulated free market system interest rates would rise in the event that the overall savings rate is low. This is simple supply and demand economics. In times of low savings money supply is low and the cost to borrow that capital should increase. It’s the manipulation of credit conditions that is at the root of financial bubbles.