Fed Chair Powell Sets New Record: 180 Degree Flip Flop in 15 Days!

by Victor Sperandeo with the Curmudgeon



Curmudgeon Disclaimer:

As usual, the opinions expressed herein are those of Victor Sperandeo.  The Curmudgeon has enhanced Victor’s remarks with additional references, quotes and data.  We urge readers to read Note 1. on the PPT fact or fiction, which is an important contribution on that murky subject.

Note that the 15 days in this article title is measured from the end of the Fed’s December 2018 rate hike announcement to the January 4th Fed Chair panel discussed immediately below.

What the Fed Said:

On January 4th, Fed Chairman Jerome (Jay) Powell spoke at the American Economic Association’s annual meeting. He was joined on stage by former Fed Chairs Janet Yellen and Ben Bernanke. The “Three Amigos” put on a “Road Show Act” to sell the world that the Fed is now “flexible and patient” on future interest rate increases. The auto-pilot shrinking of the Fed Balance sheet debt (aka Quantitative Tightening or QT) was also being re-evaluated.

According to the NY Times, the slow pace of inflation allows the Fed to postpone judgments about raising interest rates. Powell also sought to ease concerns in financial markets about the Fed’s gradual reduction of its bloated balance sheet (i.e. its holdings of U.S. and mortgage bonds, which it bought in large quantities after the financial crisis which artificially boosted financial markets via a “free money party.”). He said the Fed was watching financial markets closely and willing to change its mind.

“If we ever came to the conclusion that any aspect of our plans was somehow interfering with our attainment of our statutory goals, we wouldn’t hesitate to change it,” Powell said.  "If we came to the view that the balance sheet normalization plan — or any other aspect of normalization — was part of the problem, we wouldn't hesitate to make a change," he added.

You might enjoy watching CNBC's discussion of the Fed panel’s remarks. CNBC economic reporter Steve Liesman said that Fed watchers think that Powell is now a combination of a (NFL) running back and a gymnast. One implies that’s because of the Fed chairman’s agility and flexibility on its monetary policy.

December Jobs Number is Bogus:

The excuse for Friday’s stock market rally was partly attributed to release of the BLS Nonfarm Payroll Jobs report, which said that 312,000 jobs were “created” in December.  In addition, the change in total nonfarm payroll employment for November was revised up from +155,000 to +176,000, and the change for October was revised up from +237,000 to +274,000. With these revisions, employment gains in October and November combined were 58,000 more than previously reported.

In my opinion, the December jobs gain number was literally made up. No one I can find stresses this is a “seasonally adjusted number.”  Yet that implies it has NO meaning as the seasonal adjustment for December greatly overstates the real number of jobs added. 

In particular, it doesn’t count the estimated number of seasonally hired Christmas holiday workers that were laid off or let go late in December.   Please see John Williams comments below on the “recalculation of seasonal factors,” which describes the shifting of seasonal adjusted jobs from past months to the October to December 2018 time period.  What a sham!

The seasonally adjusted number is meant to smooth the jobs added/lost and unemployment numbers. To show 312,000 jobs added instead of 200,000 (my estimate) is to make the December number look much better than it really was.  However, January to March jobs numbers will not look so good.

Without a footnote these are U.S. government “Three Card Monte” tricks, which apparently few people care about.   John Williams is one that does care.  Here’s what he wrote in his ShadowStats newsletter:

Surging December payrolls were a reporting fraud, a canard, no more than massive prior-period revisions “recalculation of seasonal factors” that shifted growth from past months into the October 2018 to December 2018 time frame, without showing the headline downside revisions to the earlier months from which the growth was borrowed.

Unadjusted October and November payroll numbers revised negligibly higher, while the seasonally adjusted data revised sharply higher and surged further in December. The not credible headline December jobs gain of 312,000, was a nonsensical 370,000 net of prior-period revisions.

The effective reporting fraud and standard gimmick here is that previously reported data, back more than two months (before October) from which much of current headline growth was borrowed, are not reported as revised with the current headline data. That revised reporting is seen only the annual benchmark revision, which will not be published until next month (this reporting gimmick is reviewed regularly by ShadowStats, as last detailed in Commentary No. 979, Supplemental Detail).

Stock Market Reaction - Bullish but should have been Bearish if not for the Fed:

Stocks surged Friday after Powell’s comments.  On Friday, the DJI rose 746.94 points, or 3.3%, to 23433.16 and the S&P 500 added 84.05 points, or 3.4%, to 2531.94.  Both indexes ending the week more than 1% higher. The Nasdaq Composite gained 275.35 points, or 4.3%, to 6738.86, putting its weekly gain at 2.3%.

In reality, the headline jobs report number was bearish for the market without the Powell Mia Culpa, as the perception of higher job numbers and wage increases would otherwise imply the Fed would raise rates more and at a faster pace.

CNBC headline summed it up nicely:  Fed chief Powell gave the markets the message they wanted.”

·      Fed Chairman Jerome Powell used his appearance with his predecessors at an economic conference to walk back his previous comments on the Fed's balance sheet policy.

·      Powell added context to the comment that its wind-down was on "autopilot" by saying that the balance sheet wind-down was supposed to operate in the background while the Fed actively used its interest rate policy to influence the economy.

·      That added to rally in stocks and a surge in bond yields, as did comments that the Fed is listening to markets and can be patient on interest rate hikes.

Powell’s repeated message was: Inflation is muted, we are flexible, and we are patient about raising rates.

With all objectivity and candor, President Trump, WSJ editorials, and many professional traders were 100% correct in calling for the Fed not to raise rates in December, while the Fed and its comrades were 100% wrong by doing so.

To have 10 FOMC members all be so wrong at the same time has to be for one of several reasons:  They have no idea of what they are doing; they are all totally political; or they are like gorillas protecting their turf and pounding their chests.  Apparently, the Fed is more interested in ego, than in pursuing the proper monetary policy for the economy.

Headwinds for the Bear Market Rally in U.S. Stocks:

The tactics the U.S. Treasury and the Fed that were likely used to boost the U.S. stock market are the following:

·       Using the Plunge Protection Team (PPT) [1] and the unlimited credit of the Fed to buy S&P 500 Index Futures and similar instruments (e.g. stock index ETFs, derivatives, etc.) from the opening all day without let-up, till the end of the day. [See December 26, 2018:  S&P 500 was+4.96% or +127.25 points.]

·       Having a non-voting FOMC member say: “I think we should wait till after June to access the economy” was reported by Bloomberg in the article: “Dallas Fed's Steven Kaplan Favors Rate Hike Pause Amid Uncertainty.”

·       Sending out the generals/kings (the two former and current Chairman of the Fed kingdom) on January 4th to say what was needed to stop the stock selling and cause buying in unison by the big institutions and hedge funds covering short positions.


Curmudgeon Note 1.  Is the PPT real or a conspiracy theory?

The first mention of “The Plunge Protection Team” was in a February 1997 article in the Washington Post. Yet if you surf the Web you will find numerous articles that treat the existence of the PPT as a given.

The existence of the PPT has never been confirmed by the U.S. government.  The President’s Working Group on Financial Markets, formed in March 1988 as a result of the October 19, 1987 stock market crash, is chartered with “policy coordination and contingency planning” to stabilize financial markets when necessary.  There is NO reference or mention in any U.S. government document or official speech of either direct or indirect intervention in financial markets.  Please see John Crudele’s remarks below.

Yet Victor and I strongly believe that there is a PPT, part of the Working Group on Financial Markets, that regularly intervenes in the U.S. stock market by executing trades through the New York Fed.  We think the PPT also uses moral suasion to strongly suggest the Fed’s dealer banks buy stock index futures and ETFs to support the market.

Here’s an excerpt of an August 2005 eye opening report by Sprott Asset Management titled MOVE OVER, ADAM SMITH: The Visible Hand of Uncle Sam:

A thorough examination of published information strongly suggests that since the October 1987 crash, the U.S. government has periodically intervened to prevent another destabilizing stock market fall. And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent. Some of these interventions have apparently occurred with the active participation of selected investment banks and brokerage houses. In this regard, evidence from credible sources, including a former top adviser to President Clinton, appears to confirm the existence of a so-called “Plunge Protection Team” (PPT). This group is not simply the figment of creative imaginations, and we are not alone in this conclusion. Indeed, Todd Stein and Steven McIntyre of the Texas Hedge Report stated in 2004 that, “Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years.”

Much of the information is evidence of intent to intervene, rather than proof of manipulative activities themselves. This amounts to a distinction without a significant difference. That the government has given such serious consideration to supporting the stock market demonstrates its willingness to cross an important line, violating the traditional American belief in unfettered markets. It underscores the notion that the health and stability of the market represents an integral part of national security, thereby justifying government action when financial peril looms.

On October 15, 2018, New York Post columnist John Crudele wrote:

Has anyone proved that the President’s Working Group actually dons a cape and like Superman comes to the rescue of the financial markets with a big PPT on its chest?

Nope, and they probably will never prove it definitively.

I probably came closest to finding this legend was true when I got hold of Treasury documents from the Great Recession showing Treasury Secretary Hank Paulson conferring by telephone regularly during the darkest days of the 2007-09 stock market with his pals on Wall Street before stocks suddenly came back to life.

So just remember that if the stock market’s current volatility continues, there is this thing called the PPT that many believe will jump into action — just as many think it has before.

On February 7, 2018, Crudele wrote in the NY Post:

In late 1989, a guy named Robert Heller, who had just left his position as governor of the Federal Reserve, gave a speech that was later published in the Wall Street Journal that proposed that the Fed should rig the stock market in times of emergency.

Heller suggested that the Fed — through, I suspected, its favored brokerage houses — would purchase stock index futures contracts as a way to stop a market collapse in its tracks. Heller said that since the Fed already rigs the bond market through securities purchases, the stock market would be easy to control.

Nobody has ever proven that the Fed and its friends actually protect Wall Street against plunges. It is, you might say, the Loch Ness monster of the financial world — people get glimpses of something but never see a clear picture.

The US Plunge Protectors are going to have their work cut out for them. Rigging the stock market works for a while — but if the equities markets are overpriced, eventually the bubble bursts.

Finally, a December 24, 2018 article by Natasha Frost states:

Because the exact workings of the committee has often been kept under wraps, conspiracy theories about exactly what they do have proliferated. Some believe they secretly buy up “S&P futures in an effort to put a floor under the market,” while others are convinced that they report only to the President, and keep no records of their shadowy trading history with big banks. (While they do necessarily interact with the President, there’s no evidence of any such trading history, or of their meddling in S&P futures.)


Victor’s Opinion and Henry Ford Quote:

This magic sleight of hand road show always wins the day! The Fed grand scheme is replayed every time. Only this time they don’t appear to have a scapegoat?

Perhaps the past words of a master car manufacturer are apropos:                                                  

“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”. -- Henry Ford

The Fed vs the U.S. Constitution:

It really is disgraceful that this unconstitutional Fed can rule over America, when our Founding Fathers did all they could to outlaw this type of virtual criminal enterprise.

See U.S. Constitution: Article 1 Section 8 (in part: To COIN Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures (NOT PRINT money out of thin air) and Section 10 (“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; EMIT BILLS OF CREDIT; etc.

After all, what allows for unlimited spending, and debt creation to buy votes?  It’s the Fed’s money creation via an unlimited printing press!  The Fed constantly shows itself to be self-serving (they are private bankers, not a U.S. government entity).                                                                                                                                  

This begs the question never asked to Powell: with inflation at 2% (and projected to be 2% in 2019), with unemployment at 3.7% (uptick in December to 3.9%, but still at full employment), then why is the Fed targeting GDP growth?

Is it to get rid of (Darth Vader) President Trump via a stealth slowdown/recession, with the American people as collateral damage? It sure looks like it to this observer?

Am I exaggerating?  Consider Louis T. McFadden Chairman of the Banking and Currency Committee House of Representatives 1920-1931. He was re-elected in 1932.  After two failed attempts on his life (with bullets and poison) an assassin succeeded (unofficially with poison) in October 1936.  Here’s a quote from Remarks by Louis T McFadden in Congress -1934- on the Federal Reserve Corporation:

“We have, in this country, one of the most corrupt institutions the world has ever known.  I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it.” (Reference to 1929-1932)

“Some people think the Federal Reserve Banks are U.S. government institutions. They are not... they are private credit monopolies which prey upon the people of the US for the benefit of themselves and their foreign and domestic swindlers, and rich and predatory money lenders. The sack of the United States by the Fed is the greatest crime in history. Every effort has been made by the Fed to conceal its powers, but the truth is the Fed has usurped the government. It controls everything here and it controls all our foreign relations. It makes and breaks governments at will.” (Louis Thomas McFadden)

”The Federal Reserve Bank of New York is eager to enter into close relationship with the Bank for International Settlements....The conclusion is impossible to escape that the State and Treasury Departments are willing to pool the banking system of Europe and America, setting up a world financial power independent of and above the Government of the United States....(and an INCREDIBLE 1934 prognostication ) The United States under present conditions will be transformed from the most active of manufacturing nations into a consuming and importing nation with a balance of trade against it.“ Louis Thomas McFadden

It's hard to believe McFadden could see this?

Trade Deal with China vs. Global Economic Weakness:

A trade deal with China, if concluded, would cause the equity markets to continue to rally. I still believe we are in a bear market.  A “pause” does not change what was preset in September and December -- the increased slowdown and weakness of the world economy.

The Democrat controlled House of Representatives will not allow any positive changes to the economy, and the potential turmoil in England, France and Germany. In my opinion, the political and economic deterioration of Europe is cause for extreme concern about the EU’s survival.  That does not augur well for economic growth or corporate profits (a key driver of stock prices).

Lessons from Woodrow Wilson:

Woodrow Wilson, the 28th and possibly worst U.S. president, signed the Federal Reserve act into law in 1913.  He had this to say a few days later:

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.” -Woodrow Wilson.                                      

At least Wilson admitted his fallacy and blunder, unlike Greenspan and his successor Fed Chair acolytes, who have grossly misused the wizard wand of a printing press.  They have created a monopoly on money and credit creation, including the power to fix interest rates.

Conclusions and End Quote:

Speculation, trading and investment have become increasingly difficult the last two decades.  One now has to guess what the politics of the Fed rulers will do, rather than base trading and investment decisions on the fundamentals of the economy.

Except if you are one of the secret owners of the Federal Reserve banks (which own the Fed and thereby control the FOMC), then you always know what they will do, and you’ll always be right.

Perhaps the mental state of Fed Chairman is best described by a great American Journalist:

”The demagogue is one who preaches doctrines he knows to be untrue to men he knows to be idiots.” H. L. Mencken. 

I would change “knows” to believe! 

The message here is to stay solvent. In my case, I currently have no trading positions but am looking to go short stock index futures.

Good luck and till next time………………….

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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