Is the inflation I’ve been writing about really all just transitory as Papa Powell claims it is? The Fed Head assures us he has this under control. Would that be just like Father Fed and friends had bank reserves under control right before the repo crisis blew up in late 2019? Or just like they had their Great Rewind under control right before the stock market imploded in late 2018 due to Fed tightening that was promised to be as boring as watching paint dry?
Or just like Janet Yellen, the author of paint-by-numbers boredom, now has everything under control, except apparently her yellin’ mouth:
Treasury Secretary Janet Yellen sent markets into a tizzy on Tuesday when she said interest rates may have to rise to keep the economy from overheating with all the government stimulus. But later in the day, she walked those comments back, claiming inflation isn’t going to be a problem and insisting that she wasn’t suggesting or predicting rate hikes.Shiff Gold
The important thing to observe here is not Yellen’s statement, which was really not yelling at all, but a whisper that the market responded to as if she yelled. Look, instead, at what her little statement wound up revealing about the Fed’s control of inflation. It proved in real time that, if someone who is not even part of the Fed anymore even HINTS that interest rates MAY have start to rise, the stock market, being utterly Fed-up and Fed-dependent, will immediately implode … just as it did when Powell announced that Fed tightening, long underway, would go on indefinite autopilot in October of 2018.
That clearly shows the Fed cannot possibly have inflation under control because the Fed’s primary inflation-adjusting tool (the one Yellen just advocated) turns out to be the stock market’s self-destruct button for the bubble the Fed created. As I said well before 2018, the Fed cannot ever unwind its solutions without unwinding the bubbles it built with those solutions. It has never had an end game because you cannot let all the hot air out and expect the balloon to stay inflated. We saw that proved out in late 2018 in stocks and in late 2019 in the Repocalypse.
Yellen’s flipflop is telling. Even if inflation is an issue (and it is), there isn’t a darn thing the Federal Reserve can do about it…. Yellen … warned that all of the government spending coming down the pike could cause the economy to “overheat.” That’s code for “it could cause price inflation to surge.”
In reading back her statement to stem the flow of blood-red ink in the stock market, Ex-Fed Chair Yellen, stated in a calming voice,
“I don’t think there’s going to be an inflationary problem. But if there is the Fed will be counted on to address them.“
How can the Fed be counted on when merely whispering the obvious possibility that inflation might cause the Fed to have to tighten nearly ignited a taper tantrum? It is no doubt being “counted on” by the masses and by the US government and by banks around the world, but it isn’t going to succeed.
The very fact that the markets threw a fit at even a hint of rate increases bears this out. Can you imagine the carnage on Wall Street if the Fed actually raised rates? This bubble economy is predicated on artificially low interest rates and running up debt. This economy can’t run on higher interest rates. That’s exactly why the central bank is keeping them artificially low, and why Powell and Company desperately want us to believe that they won’t have to take action to deal with inflationary pressures….
The US government can’t afford rising rates. And it certainly can’t have the Fed tapering its bond purchases. In fact, I would argue Uncle Sam is going to need the Fed to step up its quantitative easing in order to monetize the additional borrowing that’s looming in the future….
Earlier this week, the Treasury Department upped the amount of money it plans to borrow in the second quarter. And not just by a little bit. In February, the Treasury projected borrowing in Q2 would come in at a relatively modest $95 billion. The new estimate for second-quarter borrowing is $463 billion. Then, in Q3, Uncle Same will nearly double that, with estimated borrowing of $821 billion.
It’s not hard to read those tea leaves.
Dream on, Father Fed, dream on! You haven’t got anything under control, least of all yourselves!
Powell putters and stutters
That’s why, when Powell was asked this week,
When will the economy be able to stand on its own feet?The Mises Institute
the best Papa Powell could answer was,
I’m not sure what the exact nature of that question is.
Was there anything hard to understand in that question?
Helping the apparently elderly Powell understand this simple question,
FOX News correspondent Edward Lawrence elaborated, asking when the Fed would lower the number of treasuries it buys, and when the economy would function “without having that support from the monetary side.”
Powell’s incisive answer, laced with bull crap, was,
We’ve articulated our test for that, as you know, and that is just we’ll continue asset purchases at this pace until we see substantial further progress.
Ah, the punishment will continue until attitude improves. I put it that way because the next question led to an answer that was telling as far as how much the Fed understands that the Fed is the cause of distortions throughout the economy. Powell was asked,
The housing market is strong, prices are up. And yet, the Fed is buying $40 billion per month in mortgage related assets. Why is that, and are those purchases playing a role at all in pushing up prices?
To which Powell responded,
We started buying MBS because the mortgage-backed security market was really experiencing severe dysfunction, and we’ve sort of articulated, you know, what our exit path is from that. It’s not meant to provide direct assistance to the housing market.
In other words, the explosion of inflation in the housing and rental market is just inadvertent collateral damage that is spinning off from the Fed attempt to help banks with their mortgage-backed-securities problem. It’s just a distortion caused by a Fed solution to another problem.
So, we are to believe the Fed firmly has inflation under control as housing prices skyrocket more than 20% in an insta-bubble that makes 2007 look like a piker — a bubble that would not be so readily financed at ultra-low interest if the Fed stopped sucking up all those MBS (mega BS) the banks churn out in order to sell the over-inflated mortgages they are issuing in this bubblicious market.
We do all recall it was the Fed that inflated and then popped the initial housing bubble in the early 2000s, right?
And, so, dementia-ridden Powell blethered on:
But if we bought less, you know, no. I mean, I think the effect is proportional to the amount we buy… And we articulated the, you know, the test for withdrawing that accommodation. And we think, you know. So, we’re waiting to see those tests to be fulfilled, both for asset purchases and for lift off of rates. And, you know, when the tests are fulfilled, we’ll go ahead as, you know, we’ve done this before.
Yes, indeed. They’ve done this before … right up to 2007 when they stopped doing it. Which all sounds a lot to me like, “We don’t really know what the heck we’re doing, but we’re going to keep right on doing it until it starts doing what we want it to do.”
This kind of waffling is only confidence-building in the sense off a con game.
Where does the boom go bust?
Larry McDonald, author of The Bear Traps Report, writes of what he calls the “cobra effect.” First, the definition:
Economist Horst Siebert coined the term “cobra effect” based on the following: When the British ruled India, the city of Delhi was infested with cobras. To enlist the public’s help in eradicating the snakes, officials offered a bounty on cobra skins. Soon, however, a cottage industry of cobra farming sprang up. People were breeding them for their skins. The British paid out more and more money, but the cobra infestation did not abate. And cobra farming only added to the problem. When authorities finally got wise to the scam and withdrew the bounty, the farmers set their now-worthless cobras free.Psychology Today
McDonald says the cobra is about to released:
When governments tinker in capital markets there are always unintended consequences. [Isn’t that what Powell was just saying in all of his stammering about the housing explosion?] Above all, we must keep in mind – what transpired in Q1 to Q4 2020 was NOT a mere tinkering. We have just lived through a colossal public-private experiment where fiscal and monetary policy globally have been unleashed at unprecedented proportions. It is easy to sit back and think the 2021-2022 recovery will be much like the 2009-2010 vintage. This is a mistake…. Today, we are looking at multiple inflation furnaces cooking away as we speak….
There’s a high probability this is it for the tech and the Nasdaq. Supply chains are a mess (disruption unquantifiable), labor shortages exploding as Uncle Sam is the private sector’s colossal drag, commodity inflation is entering a new phase, margin pressures across the SPX are developing exponentially. The Fed is digging in dovish heels which will just make all of the above-unintended consequences that much worse. It’s very similar to Q4 2018, tough guy Powell is playing a dangerous game…. Tech stocks will get destroyed as we move to the next act of this inflation beast.Zero Hedge
The cobra effect in this case is that the trillions of dollars have already been dumped into the financial system by the intervening Fed and into consumer pockets by the federal government as well as by central banks all over the world with apparent good intentions. Powell has just admitted “the effect is proportional to the amount we buy.” In other words the explosive inflation in housing he was being asked about is an unintended consequence of Fed meddling that is directly proportional to Fed meddling.
That money cannot be sucked back out without crashing all the recovery the money was used to build. We’ve seen them try that before with disastrous results — twice. The shortages of materials for manufacturing and now the backlog of available products to purchase (laid out in revealing detail in my latest Patron Post) have already been fully baked in by months and months of government-mandated COVID closures and transportation restrictions and years of trade wars.
That means all the government interference is already fully in place. The economy is bloated with cash and savings, but all of the inflation simmered in the background so few people saw inflation coming. It simmered away unseen as producers absorbed rising input costs because of the shutdowns that were restricting human activity. Now, as the economy is opening up due to vaccines and summer weather, those people who are flush are already pushing prices up to buy goods in short supply. The chemistry already put in place sets up massive back pressure beyond any experiment in human economics.
If you want to see the huge swath of data that reveals how inflation is finally bursting into the public streets everywhere, I’ve laid all of that out in may latest Patron Post. Otherwise, let it suffice it to say “the lid has just come off the pot, and the pot is fully boiling over into streets everywhere.”