By Brandon Smith
The latest Federal Reserve meeting in Jackson Hole, Wyoming, is over and so far it would seem that the general investment world is not too happy about Janet Yellen’s statements as well as those of other Fed officials. In fact, many people are looking for some simple clarity as to what the central bank is actually planning.
Most importantly, investors want to know why the Fed is suddenly so adamant about continued interest rate hikes in 2016. Only a couple months ago, almost everyone (including alternative economic analysts) was arguing that the Fed would “never dare” to raise rates again so soon, and that there was no chance of a rate hike so close to the presidential elections.
Instead, investors have been greeted with surging rate-hike odds as Fed officials openly hint of another boost, probably in September.
As I have been saying for years, if you think the Fed’s motivation is to protect or prolong the U.S. economy, then you will never understand why they do the things that they do. Only when people are willing to accept the reality that the Fed’s job is to undermine the U.S. economy can they grasp central bank behavior.
Here is the issue that scares mainstream markets — many day traders are greedy, but not necessarily dumb. They KNOW full well that the only pillar holding up stocks at record highs has been central bank intervention. A vital part of this intervention has been the use of near-zero interest rates. That is to say, cheap and free overnight loans through the Fed have allowed banks and other corporations to remain “solvent,” and these loans have been the fuel companies have used for corporate buybacks of stocks.
Corporate buybacks have been a primary driver in the bull market rally that supposedly saved the world from the ongoing deflationary destruction of capital. In 2015, buybacks reached historic levels and garnered one of the largest equities reversals in history. While these buybacks do little or nothing to heal the economy on Main Street, they certainly do wonders for equities portfolios. By buying up their own shares, corporations boost the value of remaining shares through a brand of legal trickery. And, in the process, these corporations also boost the overall perceived value of global stock markets.
As Edward Swanson, author of a study from Texas A&M, noted on stock buybacks used to offset poor fundamentals:
We can’t say for sure what would have happened without the repurchase, but it really looks like the stock would have kept going down because of the decline in fundamentals… these repurchases seem to hold up the stock price.
Yes, to us he seems to be stating the obvious, but for the average American, a green stock market means a recovering economy. There is no deeper question of why the markets are rallying, and this lack of understanding is dangerous for our country.
Even marginal hikes in borrowing costs will kill the party and, while people not involved in finance and stocks are oblivious, day traders know exactly what is going on. This is the reason for the underlying panic felt by the investment world at any hint of a rate hike by the Fed.
As we saw with the limited audit of TARP, the Fed was pumping tens of trillions in overnight loans into distressed banks and companies, even foreign companies overseas. I suggest that if a FULL audit of the Fed were ever conducted, we would find tens of trillions more in overnight loans since 2008.
Imagine for a moment if those loans never stopped. Imagine that such loans have been an ongoing mainstay of our financial system and stock markets in general. Now, ask yourself, what would happen if the companies reliant on these free loans suddenly had to pay interest on them?
Think about it; what would the interest cost be on a mere .5% to 1% of $16 trillion in overnight loans through TARP? What would the cumulative cost be on all the loans banks and companies need to survive every quarter? In the end, corporations would either drown in billions of dollars in exponential debt or they would have to stop accessing loans from the Fed. Once the loans stop, the stock buybacks stop. Once the buybacks stop, stock markets crumble.
Without free cash from the Fed, the bubble in stock markets will finally and thoroughly implode, crashing down to meet all other fundamentals.
Why would the central bank pull the plug on life support to stock markets? There are multiple reasons, but a top reason is that this is the Federal Reserve’s modus operandi. They consistently seem to raise rates into recessionary conditions that they also tend to create. In essence, the Fed likes to acclimate and addict markets to low interest percentages, and then increase those percentages to agitate and elicit a chaotic reaction.
In my article Brexit Aftermath – Here’s What Will Happen Next, I stated:
Really, the only safe measure the Fed can take from now on is to do nothing. I highly doubt that they will do nothing. In fact, even in the face of the Brexit I still believe the Fed will raise rates a second time before the end of the year. Why? This is what the Fed has always done as recession takes hold. Historically, the Fed raises rates at the worst possible times. As with the Brexit, I am going to have to take the contrary position to most analysts on this.
What analysts out there need to understand, whether they are independent or mainstream, is that a great shift in central bank policy and attitude is coming. Christine Lagarde at the IMF calls it the “economic reset,” some Fed officials, like Atlanta Fed President Dennis Lockhart, state that central banks are entering a “brave new world.” These are highly loaded phrases that represent a drastic overhaul of the global financial system; an overhaul that is quite deliberate and inevitably destructive for certain nations and economies, including the U.S.
If we examine the policy pursuits and recently stated goals of central banks around the world, and those statements made after the Brexit referendum, we find that a process of complete global centralization is underway. This includes a push for all central banks to “coordinate policy” under a single directive.
Alternative analysts already know that all central banks are ALREADY covertly coordinated by the Bank for International Settlements. So, when central bankers call for policy coordination in the mainstream press, what they really mean is, they want the existing coordination that is covert to become publicly accepted and celebrated. They want that which is illegal to become legal. That which is morally reprehensible to become morally relative.