I watched the dog and pony show yesterday.
Most of the questions and answers were, for our purposes, irrelevant and immaterial. They indicated just how little the Wall Street media subsidiary is interested in getting at the relevant facts.
But first, to the chart!
First things first, the conventional measuring objective of this breakout to a new high overnight, if it sticks today, is 3795. That’s right 3795.
There are two short term uptrend channels working right now. The ES is touching the top of one at 3715. It needs to clear 3714 to break out through last week’s high. If it gets through that, and the top of this channel, which will be around 3725 when NY opens, and 3745 when it closes. The top of the less steep channel which currently contains the action will end the NY trading day around 3745.
The 5 day cycle projection is 3730.
As I’m finishing these comments, the ES is back below the breakout line. It’s proving to be at least minor resistance. A slightly rising support trendline is now at 3707. If they don’t break that, then we’ll see that upside breakout at some point today.
Chat with me at the Stool Pigeons Wire.
Now, the several things that Powell said that drove me up the wall were as follows. They are interrelated and critical for investors to understand, particularly for those who require a longer term view than the swing trades that I like to focus on in my work.
First, the question was raised about housing price pressures. Load Jaysus said, “It’s not a problem.” I would note, again, pardon me for beating a dead horse, that neither the Fed, the Wall Street captured media, nor the eConomic community in general ever calls housing inflation, “inflation.” The term the reporter used at the Powell Dog and Pony Show, “price pressures,” was about the most negative I’ve ever heard a so called financial journalist use.
He didn’t say “What about housing inflation?” He said, “What about price pressures?”
Powell then riffed on why everything is great. Later he riffed on why there’s no inflation. Of course there’s no inflation if you ignore all the shit that’s inflating and count only the garbage that isn’t.
Housing inflation is one of the purest manifestations of inflation. The correlation between between money supply and house prices is one of the strongest you will ever find. Yet, the Wall Street/Fed/Academic/eConomic Conspiracy always calls housing inflation “growth” or “appreciation.”
Powell, the straight faced lying bastard, says that there’s no problem because demand is strong and builders say business is fantastic, the best ever. The pandemic is good for housing. Whoopee.
I mean WTF. The Fed is subsidizing the mortgage market both directly and indirectly to the tune of $2.4 trillion per year when it buys MBS and Treasuries. The pandemic caused the Fed to flood the market with money, forcing mortgage rates through the floor. When the Fed takes debt supply off the market permanently via QE, and at the same time injects cash into the system, bond prices rise, and long term interest rates fall.
So of course demand is strong. The Fed is making half the payment every month. Where would rates be without that $200 billion per month of Fed buying? Buyers aren’t stupid. They see mortgage rates below 3% and a McMansion where they can afford the monthly payment because of it, they could care less housing is inflating 12% a year.
That’s right 12%. The NAR’s database of nationwide MLS services shows house contract prices rose that much year to year in October. Does that stimulate demand? As one who spent half his professional life in the real estate business I can only say, “Goddamn right it does.” I was there and saw it firsthand.
In fact, buyers say, I gotta get aboard that train and get rich on my house, or do it before I can’t afford it. We’ve seen this dynamic once before. In 2004-2006. WTF do they think will happen if they let rates rise? BOOM CRASH BANG DEAD
So then Powell says that, “Oh, we’ll be in the market for as long as necessary but not permanently because the underlying demand for Treasuries is strong.” WTF! That’s utter bullshit and he knows it. The yield on the 10 year has crept up from under 0.5% to a range of 0.9%-0.97% over the past 4 months while the Fed was directly buying, or indirectly funding, 85% of all new Treasury issuance. The market can’t even absorb 15% of new issuance without bond yields rising.
And he says, “Oh there’s plenty of demand.” Lying liar who lies. The market can barely absorb 15% of new issuance. That’s the fact. And you’d better believe that if the 10 year creeps above 1%, the Fed will start buying more. Why? Because there’s only enough demand to support less than 15% of the market to keep the yield under 1%.
The Fed tried to “normalize” it’s balance sheet once. Janet Yellen, Gawdblessher, tried to do the right thing. What happened, bond yields rose. The 10 year went from 1.4% to over 3%, while the Fed was allowing its balance sheet to shrink by not rolling over maturing Treasuries.
What happened? The market choked. The Fed had to stop. It got so bad that in September 2019, the money markets froze and the Fed had to institute a massive program of “Not QE.”
That was just the appetizer. $50-60 billion a month of Fed “Not QE” wasn’t enough to prevent abject systemic collapse when the pandemic hit.
That’s how much leverage is in the system. Once prices start down, they fall uncontrollably. The Fed had to buy $2 trillion worth of MBS and Treasuries from Primary Dealers in the space of a few weeks to reverse the catastrophe. For the first 3 weeks it didn’t work. They had to keep buying more and more and more until finally, $2 trillion did the trick.
And it now must keep the market on a permanent drip of $200 billion per month. Without it, we’re dead. Powell knows it, and lies out his ass to paint the markets with his shit.
He said, don’t worry, we’ll give the market plenty of notice when we decide to taper.
That’s more meaningless bullshit. The Fed wants everyone to think that what it says matters. Why would it matter? Money talks. Bullshit walks, especially in the markets.
You want more BS? Powell has it. “Monetary policy works with long and variable lags.” How long Jerome? How variable? Let’s face it. There is no lag. Monetary policy works instantly in the financial markets AS IT IS EXECUTED.
BUT it never works in the economy in the way that eConomists and policy makers pretend that it should. Through all the machinations of monetary policy over the past dozen years or so, the US GDP grew in a narrow, nearly straight line range, despite all that seasonally adjusted quarterly nonsense. Changes in monetary policy have no effect on the economy. Ask Japan.
The asset markets will rise or fall on the amount of liquidity the Fed supplires relative to the amount of new debt supply the market must absorb. That’s it. There’s no alternative, regardless of what Jerome the Lying Liar says.
The economy will grow or not grow based on underlying secular, demographic, and technological trends.
For example, the more jobs are automated away, the more people will depend on government support. Some form UBI is inevitable.
Or those of us lucky enough to still have a job will be stepping over homeless unfortunates sleeping on our front doorstep. In fact, if you live downturn in any of America’s wealthier cities, you already are. So don’t think I’m exaggerating. This is already a fact of life for many of us. American cities are overrun by homeless people. They become invisible to many of us. It’s pathetic, but it’s the American way.
So yeah, monetary policy works with long and variable lags. Tell that to the ever growing multitudes of homeless people, and the millions more who will become homeless in the next few months.
Meanwhile, Powell says stocks are maybe a little expensive in terms of PE ratios, but not relative to the risk free rate. Well, yeah-ah. And what’s the risk free rate? ZERO. And who’s making it ZERO? Powell. What if they let the risk free rate go to 1-2%? Then how overvalued would stocks be?
The whole concept of stocks and value is BS anyway. What rights to the business or its income do owning a stock convey? None, zero, zilch, nada. Stocks have as much value as bitcoin, which is, what someone will pay you for it if you want to sell it.
Fortunately, very few owners of stocks or bitcoins want to sell at the same time. If everybody wanted to sell, what would they be worth then? I guess it would depend on what the Fed would pay for it all at once.
Gee what would the US dollar be worth then? When I came to Europe a little over a year ago, it cost me $1.08 to buy a euro. Now it costs me $1.22. Do I as an American see inflation with my rapidly devaluing USDs?
Last I looked, we still import a lot of stuff back home. If they continue to promote this dollar weakness with this endless massive money printing, the “problem” of too little inflation, will be going away real soon.
But when it comes to stock prices, the housing market, and the cost of servicing US Government debt, there is a simple truth that Powell attempt to hide with his lies. That is that with the US running $100-200 billion monthly deficits as far as the eye can see, the Fed can never stop monetizing virtually all of the supply. The market can’t even absorb 15% of that without yields creeping up.
But yeah, everybody has fun making money by piling into stocks and bitcoin. Whee!
Powell says when you look at the cost of servicing the supermassive black hole of debt overhanging the markets, it’s not a problem because the total interest cost is low.
Duh. It’s low because, AGAIN, the Fed is buying 85% of new supply, cashing out dealers and banks, and forcing them to redeploy that cash into financial assets. It’s a virtuous circle for the dealers and specs. Boy are they raking it in. The leveraged speculating community, the bankers, and the mega capitalists get richer and richer and richer, while the manual laborers of the world are forced to rely on the government dole.
What would happen to the US Government’s debt service costs, with its $28 trillion in debt, if the Fed stopped subsidizing the markets and suppressing rates at near zero? Riddle me that, Jerome, and tell me again just how the Fed will taper its purchases some day, Mr. Lying Liar.
Here’s an idea. Instead of cashing out the Primary Dealers at the rate of $200 billion per month, why not lend every man woman and child in the US $600 every month, with the proviso that they must buy stocks and bonds with that money. What’s really cool is that the Fed will give you this money every month and buy the bonds you bought last month back from you at the same or a better price the next month. And you can use those bonds as collateral to buy stocks, and the stocks will go up, because everybody’s buying them because they’re going up, and everybody gets richer and richer and richer.
Unless Jerome, or somebody just like him, pulls the plug. Which will be never. So we never have to worry about risk. There’s no risk. That’s why savings acounts pay zero, and the US government has almost no interest costs despite being $28 trillion in debt. FREE MONEY for everyone!
Someday though, somebody will get nervous and he or she will take that big pile of leveraged stock that they own, and they’ll sell it all at once. The confidence game will end. And everybody will be broke again. This time, no one will believe the Fed when it tries to ride to the rescue.
Enjoy the game while it lasts. I’ll help you make sense of it.
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