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  • Podcast

    Wolf Richter: The Era Of The Fed “Put” Is Over

    It now wants lower asset prices (just not too fast)
    by Adam Taggart

    Monday, April 2, 2018, 7:39 PM

To all those investors expecting the Fed to step in to backstop the recent weakness seen in the stock market, Wolf Richter warns: The cavalry isn't coming.

After years of force-feeding too much liquidity into world markets, the central banking cartel is now aware of the Franken-markets it has created. And now with a new head at the US Federal Reserve, and soon at the ECB, central bankers have shifted their priority from supporting asset prices to now actively engineering lower prices.

They just don't want prices to drop too far too fast.

Of course, the big question is: how much control do they really have? The situation may very quickly get out of their hands.

But the big takeaway is to expect lower prices across the board for nearly every "risk on" asset: stocks (including and especially the FANGS), corporate bonds and real estate. The Fed is working to reduce investor exuberance — and as many bloodied contrarian investors will warn you — Don't fight the Fed:

Now we're in an environment where we have an Everything Bubble, and even though there's still a few central bankers out there that say that they can't see the bubble, others have now acknowledged it. Of course they don’t call it a "bubble"; they say that prices are "elevated". So they're seeing this. In my opinion, a lot of the responses from the Fed are not really about inflation; they're really about trying to avoid the asset bubble from getting any bigger. They're trying to avoid a deflation of that asset bubble that could be very messy for the financial system.

Which is why they're now tightening. Even though inflation by their measure is still relatively low and below target. And so they're really not targeting inflation; I think they're targeting asset prices. They're trying to put a stop to the Everything Bubble out of fear that it might bring the financial system down again if this goes any further.

There's debt behind this asset bubble, and this leverage is what's risky. So I think the Fed is clearly, this time, on the side of targeting assets bubbles. Investors are asking if the stock market drops, if the Dow drops a thousand or two thousand or five thousand points, is the Fed going to step in and put a stop to it? And my gut feeling is, no, they won't. They will let this run unless credit freezes up. They're trying to bring these asset prices down somewhat. I think that's the environment we're in. We have bubbles everywhere, and now we have Central Banks trying to somehow save the system with minimum damage.

Of course we only have the central banks to blame for this situation. They wanted every investor to go way out on the risk branch, and pension funds have done that. And now, the price to be paid for that will be tremendous.  Most of these insolvent pension funds are state and municipal funds, so taxpayers may be at least partially responsible for picking that up.

This same will probably be true with corporate pension funds. We are seing companies that are going bankrupt, such as Remington, you know, they're guaranteed to some extent by the Federal government and that, too, in the end, is probably going to require that the taxpayer will have to step in.

And as for the pain that rising interest rates will create, this is just the beginning. This has just started. After almost a decade of 0% interest rate policy we don't know anymore what it's like to look at many years of rising interest rates. Money will get a lot more expensive for a lot of companies. And those that have to roll over their debt, even if they're not on LIBOR, if they have fixed rate debt they'll have to roll that over eventually. And when they roll that over, they go from, you know, from a 4% percent coupon to maybe a 6% percent, 7% percent or 8% percent coupon.

As for housing, I think what we'll see is not a dramatic selloff of double digit percentages that we had last time. I think we'll see a long, drawn-out, much more difficult process. At first, it won't even look like a sellout. I think on housing on a national basis, housing will continue to look strong even though the selloff will start in particular cities. You will have some cities that are turning around, but overall, nationwide the numbers are still stable. And so the Fed won't even be worried about it because they're looking at the nationwide numbers, and they're saying, "Oh, it's still okay, it's just declining a little bit" or it's "plateauing" whereas house pricing may be coming down pretty sharply in some of the most bubbly cities.

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8 Comments

  • Mon, Apr 02, 2018 - 4:01pm

    #1
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

    Posts: 520

    Surprise, surprise? Leveraged buyouts by another name?

    The LBO strategy has been around for the last several decades and done wonders for firms like KKR, (et.al). always on the backs of investors when the “funders” dump their shares. Do we really think the major equity firms didn’t foresee the huge potential in ultra-low interest rates? Pension funds will be taking it in the shorts by buying (safe?) municipal bonds for infrastructure projects that will be funded, eventually, by the taxpayers. Does Warren Buffet look stupid for buying utilities, railroads, water projects? Automation companies have an opportunity in productivity generating firms as opposed to social tech firms. How many robots buy cell phones? Absolutely, one of the best featured voices interview guests PP has had on. Well done, Chris and Adam and Wolf. Yogi Berra was right on! 

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  • Mon, Apr 02, 2018 - 5:39pm

    #2
    pat the rat

    pat the rat

    Status Member (Offline)

    Joined: Nov 01 2011

    Posts: 108

    hr5404 bill congress

    I took a fast look at this bill , I think they have it backwards. Gold should become the standard for the dollar, not the other way around.This bill needs  fixing!

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  • Tue, Apr 03, 2018 - 10:21am

    Reply to #1
    richcabot

    richcabot

    Status Bronze Member (Offline)

    Joined: Apr 05 2011

    Posts: 187

    Correlation vs Causation

    These are clearly correlated, probably with the S&P itself,  but does one lead in time by enough to establish causation?

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  • Wed, Apr 04, 2018 - 6:06am

    #3

    Dante

    Status Member (Offline)

    Joined: Jan 22 2009

    Posts: 4

    Trade Deficit

    Very good interview.
    I have one point I am still confused about.  Again, this man reiterates that our huge trade deficit with China is a big problem.  He is not alone in this but for every one I read that holds this view I can find another that states is not an issue.  Both sides “seem” to have credible arguments – thus my confusion.
    To be simplistic – I personally have a huge trade deficit with my local grocer.  I buy all my food there but he buys nothing from me.  On the other side I have a huge trade surplus with the purchaser that buys all my produced product.  Isn’t that just the way it is?  We all have different products to peddle – we can not always be even on an individual basis can we?  Is there not other countries that we have huge surpluses with?
    i would love to see an interview that digs in to this issue and helps clear things up …. or it may be I am the only one confused.

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  • Wed, Apr 04, 2018 - 7:31am

    Reply to #1
    MKI

    MKI

    Status Member (Offline)

    Joined: Jan 12 2009

    Posts: 69

    Surprise, surprise?

    Key graph? The S&P 500 dividends has doubled since 2008. This was mostly blue-chip, big companies who pass on their profits to stock owners, not smaller companies trying to grow.
    Seems an obvious consequence of the government regulations post-2008; if you aren’t a politically connected big player, you really can’t compete very well. This was easily predictable and why I’ve been in the (blue-chip) stock market for this last decade. These companies are making big bucks and paying fat dividends, and have been for 10 years.
    I think people are crazy not to be in the blue-chip stock market these days making huge ROIC (I’m not taking about FANG stocks here, or small companies). As the FED pours cash into the economy to prop up jobs, where does it go? Politically connected blue-chips. If fearful of a stock market apocalypse, just keep funneling 10% of one’s dividends into gold. 

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  • Wed, Apr 04, 2018 - 8:49am

    Reply to #3
    richcabot

    richcabot

    Status Bronze Member (Offline)

    Joined: Apr 05 2011

    Posts: 187

    Lots of trade deficits, few surpluses

    Yes, trade surpluses balance trade deficits.
    The United States has the world’s largest trade deficit. It’s been that way since 1975. The deficit in goods and services was $566 billion in 2017. Imports were $2.895 trillion and exports were only $2.329 trillion.
    The U.S. trade deficit in goods, without services, was $810 billion.
    It imported $2.361 trillion. The largest categories were automobiles, petroleum, and cell phones.
    see https://www.thebalance.com/trade-deficit-by-county-3306264

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  • Wed, Apr 04, 2018 - 11:21am

    Reply to #3
    MKI

    MKI

    Status Member (Offline)

    Joined: Jan 12 2009

    Posts: 69

    Huge Trade Deficit

    Dante wrote:

    I have one point I am still confused about.  Again, this man reiterates that our huge trade deficit with China is a big problem.  He is not alone in this but for every one I read that holds this view I can find another that states is not an issue.  Both sides “seem” to have credible arguments – thus my confusion.
    To be simplistic – I personally have a huge trade deficit with my local grocer.  I buy all my food there but he buys nothing from me.  On the other side I have a huge trade surplus with the purchaser that buys all my produced product.  Isn’t that just the way it is?  We all have different products to peddle – we can not always be even on an individual basis can we?  Is there not other countries that we have huge surpluses with?
    i would love to see an interview that digs in to this issue and helps clear things up …. or it may be I am the only one confused.

    The problem many see with trade deficits is that everyone is not using the same currency. Regarding why your analogy isn’t the same thing: you and your local grocer use the dollar (USD) and are required by law to do so. If one of you uses something else, sometime, somewhere, there must be a balance. When this happens, it’s gonna be a wild ride, unless it’s slow a multigenerational. Especially since the US has the largest military, lots of oil, food, natural resources, and a huge population, and nobody dares to piss us off. And this rebalancing of the deficits could have happened anytime since 1980 to now.
    In 2008, we used QE to create lots of USD which should have helped weaken the dollar and deal with the gap via inflation. But everyone else laughed and did the same thing (hello, China!). But it will happen somehow or another.

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  • Wed, Apr 04, 2018 - 12:44pm

    Reply to #3
    mntnhousepermi

    mntnhousepermi

    Status Bronze Member (Offline)

    Joined: Feb 19 2016

    Posts: 149

    not equivalent comparison

    Dante wrote:

    Very good interview.
    I have one point I am still confused about.  Again, this man reiterates that our huge trade deficit with China is a big problem.  He is not alone in this but for every one I read that holds this view I can find another that states is not an issue.  Both sides “seem” to have credible arguments – thus my confusion.
    To be simplistic – I personally have a huge trade deficit with my local grocer.  I buy all my food there but he buys nothing from me.  On the other side I have a huge trade surplus with the purchaser that buys all my produced product.  Isn’t that just the way it is?  We all have different products to peddle – we can not always be even on an individual basis can we?  Is there not other countries that we have huge surpluses with?
    i would love to see an interview that digs in to this issue and helps clear things up …. or it may be I am the only one confused.

     
    Your example as a person is not equivalent. USA trade does not overall balance out, taken alltogether, we have a deficit. It is not balancing out. It would be more similar, on a personal level, to you having a part time job, but still buying the same stuff, and making up the difference using your charge card.

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