The central bank balance sheet reduction could crash the market according to David Quintieri (link above). The Fed is engaging in its most dangerous policy move in the last 10 years with its simultaneous moves to raise rates and to unwind its $4.5 trillion balance sheet.
One of the things I don’t understand about this unwinding move from the Fed is who will buy all that toxic debt? If memory serves me correctly, most of the Fed’s balance sheet is garbage toxic debt (mortgage-related securities) that no one wanted to buy and to divert a complete crash of the US economy almost 10 years ago, the Fed swooped in and bought this radioactive toxic debt. Who would want to buy this debt?
Central Bank Balance Sheet Reduction
My own economic ignorance aside as to who would be willing to buy this toxic debt from the Fed, the Fed has never before had to find buyers to shrink its balance sheet. The unwinding of the Fed’s balance sheet is going to be a big challenge IMO.
Current US law states that the Federal Reserve has to be reimbursed by the US Treasury once it realizes the losses by selling the bonds. Interest rates are going up so central bank balance sheet reduction must take place. If the Fed sells a bond at a loss, that loss must be reimbursed to the Fed by the US Treasury. Congress has to send the Fed the money it lost. Congress needs to raise the debt ceiling to a high enough level to reimburse the Fed for its losses on the toxic mortgage backed securities it sells. In other words, central bank balance sheet reduction adds to the national debt.
Folks a coup against President Trump could be taking place. Rogue elements within the US government wire-tapped then candidate Trump’s phones inside the Trump Tower.
Rogue elements inside the US government are log jamming and taking actions to undermine President Trump at every turn. I think we have enough evidence now to show a trend of a criminal bureaucracy, backed by elites, attempting to basically stage a silent-coup against President Trump.
For example, did you know that President Trump eliminated the ObamaCare penalty of penalizing employers and individuals $5,000 per employee for not getting ObamaCare? The mainstream media won’t even be honest enough to report that. The news won’t even report that the ObamaCare penalty is gone. That’s how corrupt the media is folks.
Fox News is part of the corrupt mainstream media and don’t fool yourself and think otherwise. Chris Wallace did a hit piece on President Trump basically accusing the President of lying on Twitter about how his phones were tapped. Chris Wallace left out the fact that two separate sources with links to the counter-intelligence community confirmed to Heat Street that the FBI sought, and was granted, a FISA court warrant in October. Wham! It’s over. If a FISA court warrant was granted last October 2016 to tap then candidate Trump’s computer and phone lines inside Trump Tower, then President Trump is correct in his tweet that his phones were in fact tapped by the Obama Administration! Yet mainstream media talking heads like Chris Wallace ignore this solid proof of President Trump’s claims and instead run the story that there’s no proof of what he’s claiming in his tweet.
Folks, in the Alex Jones show below, Alex focuses on this issue and others and talks about the silent-coup people inside the US government are attempting against President Trump. If they are successful at ousting President Trump, I expect a major stock market crash to take place.
Bring Insight makes the argument that anyone currently invested in the Stock Market is Dancing with the Devil.
Bright Insight said, “The Stock Market closed at its HIGHEST LEVELS EVER! This is actually not a good thing, as the bubble is going to pop sooner rather than later – and crash incredibly hard. It is a mathematical certainty that the stock market will crash. In fact, the stock market is literally rigged, and fraudulent.”
Folks this is one of the reasons why all new stock picks I’m releasing over GuerillaStockTrading.com have to be quality (rising EPS and revenue) that have excellent valuation (P/E and forward P/E under 15), that have already retraced. The idea is that if a big stock market correction takes place, you will lose less money and have more time to get out than if you buy risky growth small cap stocks without P/Es.
Below is the show from Bright Insight that makes some very important points about the dangers that lurk behind every trade you make in the stock market right now.
We know what Trump is bringing to the globalists brawl that has already begun with shots like China threatening a trade war against the US. Globalists are not going just to roll over quietly for a Trump Administration.
Lisa Haven thinks that globalists could crash the US economy in response to Trump’s win. Lisa thinks globalists could even try to assassinate Trump.
I think Lisa Haven is a bit too far on the side of paranoia, but I like hearing alternative views and some of the excellent points she makes. Regardless if you agree with Lisa Haven or not, one thing is clear that we can all agree on. Stock prices are not up because of fundamentals but on risky speculation on a Trump win which begs the question. Are we being set up for a big stock market crash?
When I expressed caution to a trader last week and that the market exists to ruin the greatest number of amateur traders at any given time, the trader replied I don’t believe that. Another trader I expressed caution to about this market told me I have to just ride the wave higher.
Folks, your goal should be to “anticipate,” not “react.” If your big plan at getting rich from trading is to just “ride the wave higher,” you are in for some serious disappointment. Trading is harder than that. Riding the wave higher is a trading strategy of buy high and sell even higher. In other words, you are always chasing. Chasing as a strategy is ok until it’s not.
The wise Djellala trader has this to say about when will the stock market crash.
You will hear some people online always talk about how the stock market will crash. They don’t know. They just say the words that the stock market will crash. If the crash happens after a few days or one month or two they will say oh, didn’t I tell you the market was going to crash? If the market is still going up and up and up and up those people will change their mind and they begin to speak about the market is going up, so it means they don’t know people because no one knows if the market will crash.
I love listening to Djellala. He’s a funny, no-nonsense guy.
Looking at the aggregate supply (AS), aggregate demand (AD) model, we can see where the US economy is currently at in the economic cycle. It is critical that traders and investors understand where we are at in the business cycle so as to be in on the right side of the trade. Timing Bull/Bear cycles and sector rotation is a critical skill for traders.
Stage 1: The economy is at full employment, Q1 where AS1 (aggregate supply) intersects AD1 (aggregate demand) at a price of P1.
Stage 2: The Great Recession hit causing a demand shock, shifting the aggregate demand back to AD2. Consumers reduce their spending and businesses reduce their investment. The new equilibrium is a recessionary output of Q2 at a price of P1. And the result is a recessionary gap equal to Q1 minus Q2.
The Great Recession had a wicked negative feedback loop or multiplier effect.
In the graph above, phase one is an aggregate demand shock, which leads to $100 billion in unsold goods from a reduction in aggregate demand. In phase two, this leads to a cutback in employment and wages. While in phase three, this leads to a reduction in income. Now assuming a marginal propensity to consume of 0.75, we see a reduction in consumption of $75 billion in phase four. This triggers a cutback in sales and further cutbacks in employment, and the process continues to go around in a negative feedback loop.
Stage 3: Wages, prices, and interest rates fall, as a result of the recession. This causes aggregate demand (AD) to move downward, along the aggregate demand (AD) curve.
At the same time, the supply curve (AS) shifts out to AS2, as firms hire more workers, and expand output. Together, these price and wage adjustments drive the economy back to full employment at Q1 and close the recessionary gap, but at a new and lower price of P2.
We are currently at Stage 3 where the trouble is that aggregate demand (AD) is not increasing at a fast enough pace.
Increases in government regulation, taxes, and ObamaCare on businesses, shifts the AS curve inward and thus reduces AD.
The Federal Reserve’s goal of QE was to increase AD.
The figure above shows how an expansion of the supply of money causes a rightward shift of the aggregate demand curve from AD to AD prime. Note that in the range of this shift; the aggregate supply curve is relatively flat. This Keynesian range reflects the presence of unemployed resources and recessionary forces. In this region, we get a very small increase in the price level from the Federal Reserve’s expansionary monetary policy and a large increase in real GDP as equilibrium moves from E to E prime. This is exactly what we saw with the larger increases in GDP in 2010 through 2012.
The Fed decided to expand the economy even further and tried to push the aggregate demand out even more to E double prime. This is well past the economies level of potential output or potential GDP. Here, the slope of the aggregate supply curve turns steeply upward. In this fully employed economy, the higher money stock would be chasing the same amount of output so that the major impact of the Fed’s expansionary policy would be to significantly raise the price level, with little increase in real GDP and this is where we are currently at in the economy.
The next stage is that the Federal Reserve wants to see the price level (CPI, PPI) rise which would indicate the time to raise interest rates. We are starting to see the CPI and PPI move higher. I think this is largely from the recent rise in the price of oil. The move higher in the CPI and PPI would have happened a year ago if it were not for the crash in the price of oil which caused disinflation. The process of the Fed raising interest rates is as follows.
The Fed reduces reserves R, through open market operations which causes the money supply M to contract, and interest rates I, to rise. In the GDP formula (GDP = C + I + G + (Exports – Imports), this interest rate rise, not only reduces investment I, but it also reduces consumption expenditure C and net exports. The cumulative effects of a fall in I, C and exports are to push aggregate expenditures or aggregate demand down in doing so real GDP and inflation likewise go down, thereby achieving the desired policy goal.
Source: A special thanks to Dr. Peter Navarro, Professor, Paul Merage School of Business, University of California for which this article would not be possible. Go here to find out more about my favorite economics professor.
The yield curve continues to flatten at an alarming rate. The spread between the two years and the 30-year bond is the lowest since 2008.
In a note to clients, Deutsche Bank writes…
Since the UK referendum the US yield curve has flattened to new post-crisis lows… This relentless flattening of the curve is worrisome… the probability of a recession within the next 12 months has jumped to 60 percent, the highest it’s been since August 2008.
U.S. residential construction growth is grinding to a halt.
Even auto sales, which have been a bright spot for the U.S. economy for several years, are rapidly slowing.
Payroll growth has also dropped like a rock, and we await this Friday’s non-farm payrolls report update.
Do not panic folks. Deutsche Bank is saying that the odds of a recession are about the same as a coin-flip, 12 months from now.
The yield curve is still healthy.
Once the yield curve goes flat or even inverted, we usually have 3 to 6 months before a recession. The flat or inverted yield curve signal will give us plenty of time to react.
While the stock market could crash at any time between now and the end of October, a stock market crashing from a recession is an entirely different matter. Do not confuse a stock market crash with an economic downturn. A stock market crash could happen at any time and will come like a thief in the night. We will have plenty of time to react to a flat or inverted yield curve before the next economic recession.
Pending home sales have fallen the most since May 2010. The National Association of Realtors (NAR) is spinning this as potential buyers are being thwarted by a shortage of affordable homes because sales are so good.
Lawrence Yun, NAR chief economist, writes…
With demand holding firm this spring and homes selling even faster than a year ago, the notable increase in closings in recent months took a dent out of what was available for sale in May and ultimately dragged down contract activity.
[graphiq id=”bfXwkIACsh7″ title=”Median Home Sale Price in The United States” width=”460″ height=”602″ url=”https://w.graphiq.com/w/bfXwkIACsh7″ link=”http://trends.findthehome.com/l/2828/The-United-States” link_text=”Median Home Sale Price in The United States | FindTheHome” ]
This Reminds Me of 2009 – 2010
We have to go all the way back to 2009 and 2010 to find a similar plunge in pending home sales.
Interestingly, here are the reports the NAR was publishing just before the entire housing market crashed and the Great Recession hit.
“Existing home sales at highest level since 2007… Similarly, robust sales may be occurring in November.”
“U.S. pending home sales surge… Pending sales of previously owned U.S. homes shot up by 6.7 percent in April, the biggest monthly gain in 7 1/2 years.”
The NAR is a cheerleader for the real estate market. The NAR is made up of salespeople, brokers, property managers, appraisers, and others who make money in the real estate industry. The NAR will never publish a forecast report that would scare potential property buyers because it would be contrary to their financial interests to do so. Knowing this, traders have to be careful looking to the NAR to guide their investing decisions.