Talking Cents (1 November 2018): Fed Up With The Fed


  • The Bernanke/Yellen bubble is nearing its resolution, with several warning signs appearing
  • Henry Ford shows us how economic progress is supposed to work
  • Does a crisis the political wrecking ball that is President Trump the leverage needed to take on the Fed?
  • Tactical trades as we near key technical levels in the S&P 500

President Trump made waves recently with his loud criticism of the Federal Reserve and its current program of interest rate raises. He referred to the central bank as “crazy,” lamenting the fact that it had lost its mind.

The financial media has been rather puzzled by Trump’s remarks. To them, what the Fed is doing is par for the course according to mainstream economic dogma. When recession hits, the theory goes, the correct action of a central bank is to ease monetary policy by lowering interest rates and providing liquidity, to stop falling prices and to kick start financial activity at higher prices. Then, when the ball gets rolling, and prices have been consistently on the rise for some time, the central bank steps in to tighten monetary policy, preventing prices from getting out of hand.

Trump is correct, in a sense. The Federal Reserve’s actions have been crazy, but not because it has embarked on a rate hiking campaign. Rather, the insanity began long ago, in the depths of the 2008-2009 financial crisis. The Federal Reserve today is merely walking down a rigid pathway it charted for itself, owing to the decisions made back then and in the immediate years after.

At the time, the Federal Reserve justified its unprecedented efforts to stimulate the economy by describing the manner in which a “wealth effect,” engendered by rising asset prices would lead to economic expansion. Then-chairman Ben Bernanke laid this out in a rather notable op-ed in the Washington Post back in 2010. He wrote:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Should future generations learn the correct lessons of this Age of the Central Bank, this op-ed will likely serve as a great distillation of the foolhardiness that characterized it. To properly understand why, we must step back and acknowledge a simple, base truth – progress, in all of its forms, requires sacrifice.

This is easily understood when one thinks about the steps it takes, for example, to attain proficiency in a particular discipline, to further one’s education, or even to improve physical fitness. Something must be given up in the short run, whether that is leisure, physical comfort, or something else, with the aim that in the long run, what can be attained through the concentration of efforts elsewhere is greater than what would have been otherwise.

With respect to the economy in a capitalist system, the sacrifice made in pursuit of future progress is of consumption in the present. Consider an individual business which seeks to improve its output by making renovations. In making the necessary expenditures, it is foregoing expenditures on the ‘old’ method of production which could produce a certain number of goods now, in favor of a newer method which may produce a greater number of goods at some point in the future. This takes time as well, as the particular combination of capital, labor, natural resources, etc. required to engender that new method does not yet exist at the start of the renovation. Because of the immediate decrease in output in the short run, the business will see less revenue. This is the sacrifice it is willing to make for a potential greater gain in the future.

The investor Mark Spitznagel, in his rather excellent book The Dao of Capital, described this sort of phenomenon through a brief summary of Henry Ford’s rise to immortality as a businessman. Describing Ford’s transition from making a few high powered automobiles, which while technologically advanced were not practical and merely a toy for the rich, to mass producing cars for the public, Spitznagel writes the following:

Ford’s true vision, which sometimes put him at odds with his business partners, was not to make roadsters for the rich, but to produce modest, reliable, high-quality cars for working people of more modest means, such as his iconic Model T, introduced in 1908 to an enthusiastic public that, just a few years before, did not even know they craved cars. (As Ford once said, “If I had asked people what they wanted, they would have said faster horses.”) With the Model T, Ford transformed his company, and brought the American public into the modern era.27


Led by Ford’s vision, the company made the roundabout transition from assembler to manufacturer in every process along the way in order to reduce costs, gain more control over supplies, and eliminate unnecessary inventory, thus making huge gains in efficiency and innovation (Detroit was the Silicon Valley of its day). The decision was driven by economics; with mass production, Ford could make parts at a lower cost and more quickly than buying them from suppliers.28

It was precisely this lowering of the cost of production that enabled Ford to then sell cars for a lower price, in turn enabling greater access to the product for the masses. This is the essence of improving living standards for a capitalist economy.

The flagship for his roundabout production was the River Rouge plant, which included a port and shipyard, steelmaking, a foundry, a body-making plant, a sawmill, rubber processing, a cement plant, a power plant, and an assembly plant. It was the epitome of Produktionsumweg, which at the outset literally consumes time and requires great capital expenditures to be, in Ford’s words, “turned back into the business so that it may be still better fitted to serve, and in part passed on to the purchasers.”29 The roundabout paradox is that the process of becoming more circuitous takes a tremendous amount of time, during which there is little to show for the sacrifice […], but at the end results in significant time savings; like the conifer it is slow at the start so that it can accelerate at the end.

All of the listed components of the River Rouge plant did not appear by magic. It took a lot of time and effort to set up. The plant was one giant exercise in capital accumulation, a complex one at that. The various aspects of the plant required various tools, inputs and expertise, which in turn required various coordination and extensive planning. In the short run, while such a site was still being assembled, there was little in the way of productive output. This was the sacrifice made so that in the future a torrent of output could be achieved.

After showing extraordinary patience during the building of the roundabout production process, once it was in place Ford switched gears temporally and became obsessed with timing the car-making production process to see how he could make it faster, as annual output of the Model T rose from 585,000 vehicles in 1916 to 1 million in 1921, and then doubled to 2 million just two years later. Speed and efficiency were crucial as supervisors patrolled the plant floor with stopwatches to time production. Newspapers wrote about the astonishing pace of the assembly process; one 1913 account told of a Model T put together by a team from preassembled parts in two-and-a-half minutes. Soon the company would boast a new Ford was born every 24 seconds.30


Ford, the entrepreneurial hero of the common man, believed the production gains at River Rouge would “cut deeply and in many directions into the price of everything we make,” bringing down the prices of cars and also farm equipment. “It is important that it shall be cheap,” Ford said of the tractor. “Otherwise power will not go to the farmers.”31 By getting the farmer used to the comfort and power of the automobile, Ford hoped to convert them to mechanized farm equipment to ease the physical labor of farming, a drudgery he knew all too well.

With the mega machine now built and intact, Ford could then churn out cars at light speed, always tweaking and improving the process as time went on. All of this production meant lower prices, which was of no issue to Ford given the lowered cost of production afforded to him by his new production methods.

Here we can establish an important point – which is that the absolute level of prices is less important than relative prices.  A businessman who has lowered prices to reflect a declining cost of production will still benefit thanks to a greater volume of goods sold. Ford benefitted from this phenomenon; more contemporary exemplars include virtually any business which makes a product affected by semiconductors.

Though progress is most often thought of as a move from a good or neutral situation to a better one, it can also be seen as going from a bad situation to a less bad or neutral one. It is the relative move that is of concern. When an addict, for example, finally decides to kick the habit, he must go through a withdrawal period. This is usually a physically and mentally painful period in the addicts’ life. Yet it is necessary for overall improvement. Once again, we see that sacrifice in the short run is a prerequisite for longer term progress.

When it comes to economies, recessions and downturns are bad situations. They are usually characterized by increased unemployment, bankruptcies, foreclosures, abandonment of business projects and so on. Situations such as these are unavoidable for the simple fact that economies are comprised of human beings. Human fallibility means that at some point or another, mistakes will be made and things will go south.

It is at that point that the pivotal decision will be made. Will we accept error and allow the sacrifice of necessary correction to be made? Or will we attempt to head the pain off at the pass and “ease” our way out of things?

Central bankers like Ben Bernanke, imbibed on the teachings of John Maynard Keynes, believe they have, through the “magic” of fiat money and the printing press, found a means through which humanity can levitate above the truism that progress requires sacrifice.

In embarking on a campaign of easing monetary policy, the central bankers are seeking to ameliorate the pain of elevated interest rates and depressed asset prices which come during recessions. The aim is to induce lending and borrowing, consumption, and asset price appreciation. The folly in this stems in part from the failure to understand the primacy of relative relationship of prices over an absolute price level, as discussed before.

The state of falling prices and rising interest rates that characterize a downturn before the central bankers arrive on the scene is ultimately indicative of the fact that the current lines of production in the economy were not in line with the needs and wants of the consumer base. With respect to the situation in the prior decade, the massive declines in real estate prices was an indication that far too many resources had been set aside by society for use in the various productive lines that encompass real estate development and home construction. There was far too much ‘output,’ in that the high prices that were needed in order to make a profit for its producers could not be attained.

Having made a mistake and gotten itself into a bad situation, the economy attempted to adjust to a less bad or neutral situation. Established business lines which had proven to have been a failure were liquidated, bankruptcies and foreclosures rose, as did unemployment, and asset prices declined. The economy was thrust into turmoil, threatening to embark on a full blown depression. Yet this was part of the short term sacrifice necessary to rectify the mistake. That this sacrifice was to be so painful reflected the enormous size of the mistakes that were made in the bubble years.

All of the capital, labor and resources which had poured into the housing and real estate arenas had to subsequently pour out so as to be redeployed in more productive lines of goods production. The economic purpose of a rising interest rate and falling price environment was to dissuade money from entering into production in those areas so as to be deployed towards loanable funds (savings). As time progressed, and the amount of savings rose, interest rates would start to come down, enticing businessmen to borrow with the view to goods production in potentially profitable lines. This would be further aided by the fact that in a landscape of lower prices, lower costs of production would mean that profits could attained at lower sale prices, which would nudge demand higher.

This adjustment was cut off by the central bankers, for whom the idea of short term pain for longer term gain is an anathema. The process I just described simply would have taken too long for them. The Federal Reserve thus embarked on the most expansive effort of its kind in history, quintupling its already bloated balance sheet in an effort to keep prices from further falling. As Bernanke wrote, the justification for it all was to create a “virtuous cycle” in which rising asset prices engendered confidence. On the back of this confidence, economic participants were meant to borrow and spend, paying ever higher prices, which induced more borrowing and the cycle to begin anew.

Right away we can see a difference between this model of “economic growth” and that of Henry Ford from before. With Ford’s way, time was spent building and replenishing capital, with that sacrifice leading to a higher output of goods and a continually lowered price, which in turn led to more consumption. The Central Banker model of “economic growth” spends no time in the stage of building and replenishing capital. As such there is no increased output, but rather increasing prices for the same level of output. On subsequent rounds of this cycle, more debt must be introduced to ensure that producers can keep turning a profit in a rising cost scenario. In The Dao of Capital, Spitznagel described in more detail the damaging effects this situation causes:

Since artificially lower interest rates by the central bank are typically focused on the front of the yield curve, after a drop in rates the greatest spread, or greatest arbitrage opportunity, is in short-range investments and/or production. This also creates immediate profit opportunities in currently productive capital, which results in title to existing capital (a.k.a., the stock market) to be aggressively bid up until those returns on invested capital—more specifically, the yields on that title to capital—no longer exceed the new lower cost of capital. The most destructive of all, though, is when new owners of this capital have no desire to replace it as it depreciates, preferring instead to gain an extra current return and thus buy more title to existing capital. They do not become more roundabout, because they refrain from investing in capital that will not show returns for a period of time (or a period when the interest rate has not been lowered as much as shorter-term rates). Thus there is a hyperfocus on—and even addiction to—the yields of stocks and other risky and high-duration securities (a “maturity-mismatch”); there is an irrepressible allure to the steep yield curve. What was supposed to create patient, roundabout investors instead creates the opposite: punters in highly speculative “carry trades.”

Stated differently, when money is printed to lower short term rates, that induced borrowing is likely to be for the purpose of “chasing yield” as opposed to being borrowed to facilitate capital accumulation for future productive output gains. This makes perfect sense as in a central bank-induced lower interest rate scenario, time has not been allotted for establishing new lines of production. Indeed, the expedience in providing fresh funds for lending and borrowing is the entire point so as to prevent prices from falling in the immediate term.

As a result, the only thing borrowers can do with their fresh central bank funds is to chase yields in the stock market, chase other existing assets, or plunge into existing lines of production – the same lines of production just shown to have been unprofitable – in effect attempting to reflate a burst bubble.

These tendencies are simply exacerbated if, as I’ve described, the majority of investors have sharply falling discount rates with delay—what mainstream economists now will often refer to as “hyperbolic discounting” (from Chapter 6). Even if all rates are lowered equally (the default assumption if one only speaks of changes in “the” interest rate), if investors have hyperbolic discounting, then the across-the-board drop in interest rates would nonetheless cause the biggest surge in the perceived value of projects that would yield their results in the near future.


What hyperbolic discounting implies is that we do not process a discount rate over an interval in some gestalt (or coherent whole) fashion, as one would implicitly assume under exponential discounting. Rather, discounting is highly sequential and intertemporal: Our willingness to endure a wait from now until next week requires our willingness to wait from now until tomorrow, from tomorrow until the day after, and so forth. And (as per the definition of hyperbolic discounting) we perceive enduring the first day as really hard, and each successive day we perceive will be a little easier. But we must make it past the earlier days in order to get to the later days (thus it is sequential).


What this means is, if we are unsatisfied with the wait early on (from now until tomorrow), we won’t make it to the wait much later (from six days from now until seven days from now)—despite how satisfied we may be were we to wait over the entire period (from now until a week from now). If we are given fewer “marshmallows” for waiting early on (recalling the preschooler experiment), then we won’t likely make it to see perhaps exceedingly more marshmallows by waiting even longer.


Deprived of marshmallows, investors’ desire for the immediate reward of an even smaller, sooner marshmallow, over perhaps a larger one much later, is further magnified. With standard exponential discounting, a uniform drop in interest rates across various maturities would normally cause the longest projects to respond the most in present-value, but hyperbolic discounting concentrates the impact of a rate cut in the near term. The immediate “carry trades” over the immediate, higher discounting (that is, more impatient) period are thus made even more enticing. To say this doesn’t necessarily mean that investors will invest in “short” projects in a Böhm-Bawerkian sense; it is immaterial whether this involves production that is already under way, having gone through a long period of capital accumulation, or a short period of production. The quickness for realizing profits is what matters and so people will tend to invest in projects where they can turn their investments around quickly. Thus, a combination of low short-term rates and hyperbolic time preferences will induce investors to buy title to already existing capital structures, rather than trying to construct them from scratch and suffering the delay in waiting for their completion.

This is further fueled by the fact that in the wake of a fresh bust and recession, investors are thirsty for returns, such that a quick carry trade is more appealing than waiting the much longer period of time necessary to establish a potentially more stable line of production that produces a return.

The effect can snowball, too, as myopic investors seek to draw profits from their acquisitions. Rather than reinvesting in newly acquired and expanded operations, they will pay out higher dividends and buy back stock (and even borrow to do this, such as is happening today), or even just “sit in cash.” (Each time another investor alters his strategy toward “dividend investing,” and another firm adjusts to attract this investor, another bit of future progress is sapped from the economy.) Entrepreneurs and investors are, thus, consuming capital in the same analogous way they consume capital in Mises’s inflationary view.


Interestingly, this increased temporal myopia under artificially lowered rates is the very opposite effect of naturally (savings-driven) lower rates. Genuine, savings-driven declines in the interest rate lead to capital accumulation, more roundabout production, and a progressing economy; artificially lower rates, driven by credit inflation, ultimately lead to naught but capital consumption and a regressing economy.

The point about stock buybacks is an interesting one. The flood of money injected into the system by the Federal Reserve ultimately makes its way into the coffers of Corporate America, as increased credit expansion provides the demand with which higher prices can be paid to make up for a production cost structure which was never allowed to adjust lower. Essentially what has happened was not that Business, on the whole, has materially improved its manner of production, but rather it was simply able to charge more for the same output as before.

Not only does that mean that stock valuations are likely too high, but in terms of asset price appreciation, with major stock indices up better than 400% over the course of a historically long bull run of 9 years, stock purchases of today are likely to be closer to the market top than the bottom.

Yet, we are in the midst of what is the biggest buyback spree ever, well outstripping that spent on capital expenditures. Corporate America apparently can’t find enough profitable lines of production to deploy capital (no doubt thanks to an inflated cost structure), and as such it sees it more fit to essentially buy the top of the market. This is capital destruction, plainly speaking, and as a result it will leave us poorer in the future, as it is capital, and the sacrifice required to accumulate and develop it, that is the basis of true, sustained progress.

So where do we stand today?

With respect to the Federal Reserve- led reflation of the bubble of the last decade, the following set of charts should shed some light on things.

The preceding chart shows the Fed Funds Rate plotted against both the average 30 Year Fixed Rate Mortgage and the amount of loans put out by commercial banks. As you can see, the Federal Reserve cut rates to virtually 0% in response to the 2008 downturn in a bid to revive an economy that was reeling after a burst housing bubble.  What is particularly interesting is that the bubble was quite stubborn in reflating itself.

Despite the most accommodative monetary policy regime in human history, it took nearly 6 years for real estate loans to finally trend upward again and nearly 7 years for loans to eclipse their financial crisis peak. Additionally, one can see that the pre-2008 rise in real estate loans was a much steeper one than after 2008, despite the former occurring under a relatively tighter interest rate regime.

What is shown here is the Case-Shiller Home Price Index against new single family home sales. At first glance, one can see that, in terms of sales, the Housing Bubble 2.0 has packed less of a punch, at least in absolute terms. That prices have still managed all-time highs suggests that a subsequent bust might be that much worse.

The two charts are ultimately evidence of the fact that the economy could not support the pre-2008 distorted structure of production that gave us the housing bubble. The Federal Reserve’s unprecedented efforts to revive a fundamentally broken paradigm were always going to be as fruitless as hoping a ball would bounce as high on the second bounce as it did the first. The true damage that has been done is in the fact that throughout these 10 years, and counting, the economy has not been allowed to adjust, using its resources towards more productive ends that would benefit society in the future. Instead, it has spent those years chasing fairy tales, wasting the most precious commodity we have as humans, time. The restructuring that the likes of Bernanke was so keen on avoiding a decade ago will likely have to occur anyway, and be worse besides.

In terms of when the market will make that second attempt at a necessary restructuring, both charts give us some clues. In terms of the interest rates vs loans chart, what we see in the last bubble is that as the Fed raised the funds rate to 4.5% in 2006, the 30 year fixed rate went from about 5.5% to near 7%, with total real estate loans outstanding of around $3 trillion. That combination of rates and debt proved to be too much for the economy to handle, because this was the peak of the market.

Regarding Housing Bubble 2.0, again the Fed has raised the funds rate, this time from 0% to 2%, and by all accounts it is not finished. This has led the 30 year fixed rate to move from about 3.5% to about 5%, with a total real estate loans figure sitting at about $4.4 trillion. Although the interest rate is lower, the fact that debt levels have risen by nearly 50% means that the debt/interest rate combination is currently roughly the same that proved to be unbearable the last go around.

A mistake many prognosticators are making with respect to the Federal Reserve’s current interest rate normalization schedule is a focus on the fact that nominal rates are still historically low, and as such there must be more room to hike before a problem might arise. The fact that the rise in the amount of debt in the interim has been as it has means that the breaking point will occur much lower, in terms of the nominal level of interest rates.

The home price versus sales chart also is intriguing. During the original Housing Bubble, we can see that sales peaked, and then declined precipitously. Home prices stayed elevated for a short while after sales peaked before declining as well. This is easily explained as a matter of basic supply and demand. As prices became too dear, fewer and fewer were able to pay those prices.

During the original housing bubble, sales peaked in late 2005, nearly 3 years before the crisis hit its height. This time around, it seems as though housing sales have put in a top towards the tail end of 2017 and the start of 2018. In keeping with the fact that Housing Bubble2.0 never reached the heights of the last one, the absolute level of sales was well below what was seen in 2006. But the pattern of behavior suggests that the bubble is starting to burst.

Further buttressing this is the behavior of the stock market, housing stocks in particular. Below is a weekly chart of the Dow Jones Housing Construction Index:

As with some of the other charts, what we see here is a warning sign flashing years before the crisis is ultimately felt by the rest of the economy. In the last bubble, the index peaked in July 2005, before selling off sharply over the next year or so. A recovery occurred which was smaller in both time and distance, before a sustained, precipitous drop through to the depths of 2009.

Fast forward to November of 2017, and we see another sharp run up which was sold off sharply, and continues to the present day. It looks as though this is an analogue of the July 2005-Summer 2006 first leg of the original housing bubble, which was then flashing a sign that the bubble was bursting. From a strict trading perspective, it looks as though the bottom of this “first leg” is near, given the fact that last week’s trading was a sharp reversal candle which took place on high volume. You can see the green outlier in the bottom of the chart representing this.

This augurs a recovery in prices, which will most likely be tepid. I do not anticipate, as in the original housing bubble, that there will be a further two years from this point before the carnage begins in earnest. This is because unlike the last bubble, this recent housing bubble was more of a dead cat bounce. Furthermore, the housing bubble is only one segment of a larger bubble which encompasses virtually all asset classes, including stocks and bonds. The “main event,” as it were, may come in those other arenas. What is certain though is that we are likely in the early stages of a major downturn.

Trading Tactics

With regard to the technical position of the stock market, it is important to first understand where we are in the big picture. To this end, a chart of the S&P 500 over the course of the 9 year bull run, as well as a measure of market breadth (the percentage of NYSE stocks trading over the 200 day moving average) are shown below.

The second chart, when read in conjunction with a price chart of the S&P 500 tells us that major bottoms in the latter usually come shortly after the percentage of NYSE stocks trading above their 200 day moving average dips below 25%, often going to 20% and below. One can quickly glance at the S&P 500 chart above and note that there were major bottoms in 2009, 2011, and 2016 which coincided with the aforementioned levels of stocks trading above their 200 day moving averages. This also happened in 2002, although the S&P 500 chart pictured does not extend back that far.

The only notable exception is highlighted by the arrow – late 2007 into early 2008. During that time period the stock market made its last high before it began its catastrophic decline. I’ve reproduced a chart from that period below.

As you can see, the market made what would have looked like a double bottom in March of 2008, which would have rendered the breadth indicator accurate in calling another major market bottom. However, this March bottom was a ultimately brief respite, merely the end of the first major leg down of the crash.

This 2007-early 2008 topping period in the market is also interesting because it serves as a further analog in the general thesis I’ve put forth in these pages about the market currently being on the cusp of another bursting bubble. Back then, the equity market was finally getting the message relayed by the warning signs of 2005 and 2006. In today’s market, the difficulties which have seemingly reared its head over the last year have sent an equally ominous message which just might have been taken on by the equity market. Consider the following chart of the last year.

The decline of early January and February 2018 was significant because its character, in terms of volatility, speed, length and volume, had only been seen twice before during the previous 9 years. This suggests that the “big players” were behind this move, and thus required some attention. The only conclusion that could have been drawn at the time was that the bull run had for now stopped, and it was to be determined whether a cause was being built for a new leg higher, or whether stocks were being distributed for a substantial decline. The trading range in blue was constructed using the January high and the eventual lows established some weeks later to signify where the selling stopped.

The market spent the better part of the spring and summer months mustering up the fortitude to re-challenge the January highs, and was seemingly successful in early September. However, the market could not commit to those new highs, and the subsequent selloff has been rapid and volatile, mirroring the decline from earlier in the year.

Tactically speaking, it is almost certain that the price will test the lower band of the trading range, around 2550. If this range is a distribution, there might be a breakdown below this level in a substantial way, towards 2500 or 2450. Such moves would be a substantial sign of weakness, and almost certainly coincide with a breadth of NYSE stocks above their 200 day average plunging towards 20% and below.

Such moves could also be interpreted as being the building blocks for a bullish scenario, particularly since should the described events happen, price will also be flirting with the purple trend line until now yet discussed. This is a line which has spanned the bull market since the lows in 2012, and a line that, despite the market turmoil of 2018, keeps the market bull alive. It could be that price tests the confluence of 2018 range lows and the 6 year bull trend line, in conjunction with the low percentage of stocks above their 200 day average, creating the proverbial “blood in the streets” buying opportunity that provides enormous returns going forward.

It is appealing to be sure, but its luster is significantly diminished when the general economic concerns I’ve laid out in this piece with regard to the business cycle are taken into consideration. The bottom line is that we are in 9 years into a bull run, one of the longest in history. It has to end at some point. There are plenty of flashing warning signs, with economic history and precedent all arrayed against a further substantial rise in equity prices.

Returning to the tactical trade, one can be sure in the idea that there will be a bottom soon. The breadth indicator suggests as much. The only question is whether that bottom will be THE bottom, or rather a momentary bottom as was the case in March 2008. In either case, one can buy for at the very least short term swing to the upside. The timing will be right when there is a particularly bad down day at or around the levels described earlier, that rebounds on significant volume, and perhaps holds a secondary test.

Regardless of the longer term situation, a short term buy will work for the following reasons: if this bottom is ultimately THE bottom as was the case in 2011 and early 2016 and the bull market is intact, no further explanation is necessary – we’re in a bull market; stocks go up.

If it is ultimately a pit stop on the way down, a short term buy will still be profitable because you would merely be following the big institutions along for the ride as they distribute stocks. For all the consternation about the sideways movement, stocks are in no way ready to plunge from a technical standpoint. As discussed, the S&P 500 is yet to breakdown from its multi-year trendline support.

Taking a look at the longer term chart of the S&P 500 might make this point a bit clearer. From that vantage point, it is clear that the 2018 correction can be argued as being rather run of the mill and not necessarily a harbinger of anything dire. To put it another way, the market needs more time to build a “cause” for a substantial decline, with big interests chopping and changing the market, keeping it as tight as possible so as to enable large scale selling at higher prices without triggering a precipitous decline. This is a process that takes time.

Final Thoughts

I began this piece by noting the words of President Trump, and his disdain for the rate hiking of the Federal Reserve. I stated that he was correct to be mad, in a sense. That sense is that the rate hikes will kill the economy, as it stands, and present the President with an extremely difficult political situation.

However, the economy that is about to die is not worth preserving. As discussed, it is an economic structure underpinned by continuous credit expansion to prop up bubbles in various lines and fund consumer consumption, ultimately consuming the capital that could have been used to build real, lasting economic growth.

There will be massive pain that comes with the destruction of the bubble economy, perhaps worse than was seen in 2008. But that is the short term ‘sacrifice’ that must be borne to achieve real progress, in the same way the drug addict must endure the debilitating withdrawal symptoms that lead to the ultimate progress of getting clean.

As mentioned, that scenario presents doom for those in political power, as the electorate tends to punish whoever is on call when the crisis hits. It will mean little to the average voter that the bubble that will burst on Trump’s watch was blown in 2009-2014, by Fed chairs Ben Bernanke and Janet Yellen, the latter who is out recently ringing similar alarm bells to what is written in this piece without a trace of irony.

All the average voter will see is that his or her 401K is decimated, and all he or she will see is President Trump in office. Trumpism may be at its most perilous moment in that scenario.

It will also present Trump with a unique rhetorical argument, given his incessant cheerleading of the economy and the stock market. Quite simply, he can, and probably will say something to the effect that “everything was going great until The Fed went crazy and started raising interest rates like a mad man. Then the stock market and economy crashed.”

Trump’s very loud complaints about the Fed now, when things are still superficially good, will serve him well in a crisis situation, when he can call back to his concerns and declare that he told you so. In the same way that the average voter won’t understand, or even care about the fact that the upcoming crisis really isn’t Trump’s fault, that same voter can be persuaded to accept Trump’s shifting of the blame, given he had “called it” in real time.

And in a roundabout way Trump would be right! The Federal Reserve has blown 3 major bubbles in the last 20 years, and pricked them all by raising interest rates. This pernicious Fed-driven cycle of recession -> monetary policy loosening -> bubble ­-> crash-> bigger loosening -> bigger bubble -> bigger crash is ripe for public exposure in the same way the intellectual and moral bankruptcy of the “deep state,” and the foreign policy establishment has been during Trump’s presidency thus far.

The Federal Reserve is yet another institution which has failed the American people over the last number of decades, but owing to its position in the “establishment,” it has escaped real censure or public scrutiny. President Trump, faced with the potential of a presidency in tatters due to poor economic performance and a burgeoning crisis, will have his back against the wall. Based on what we know of him, he will come out swinging, with the obvious target being the Federal Reserve. And the anti-Fed case will be stronger than ever. Without being dramatic, should it come it will be the most important singular political battle in the last 100 years.


Ben Bernanke’s 2010 Washington Post Op-Ed –

The Dao of Capital, by Mark Spitznagel –

The FT on the stock buyback binge –

Janet Yellen warns of the dangers of diminished lending standards –

Disclaimer: None of the writings above constitute investment or trading advice. The reader is solely responsible for any and all financial decisions made.