Broken System

Guest Post by Sven Henrich

The Fed poisons everything, and I mean everything. From markets, the economy, and I will even go as far as politics. Sounds far fetched? Let me make my case below. But as much as the Fed poisons everything this crisis here again reveals a larger issue: The system is completely broken, it can’t sustain itself without the Fed’s ever more monumental interventions. These interventions are absolutely necessary or the system collapses under its own broken facade. And this conflict, a Fed poisoning the economy’s growth prospects on the one hand, and its needed presence and actions to keep the broken system afloat on the other, has the economy and society on a mission to circle a perpetual drain.

So how does the Fed poison everything?

Let’s start with the Fed actual process of working towards its stated mission: Full employment and price stability.

How does it do that? Well, for the last 20 years mainly by extremely low interest rates and balance sheet expansion sprinkled with an enormous amount of jawboning. The principle effect: Asset price inflation.

It’s not a side effect, it’s the true mission. The Fed has been managing the economy via asset prices even though Jay Powell again insisted on saying the Fed is not targeting asset prices.

This is a lie. And I can prove it with one chart. Cumulative $NYAD, the flow into stocks versus M1 money supply:

It was not until the Fed flooded markets with cheap money creating the housing bubble that the $NYAD equation changed dramatically, and it was not until the GFC that the Fed went full hog wild on M1 money supply that $NYAD went full vertical alongside of M1. TINA! There is no alternative. Forcing money into equities to manage the economy with a rising stock market.

And guess what? They just saved the $NYAD trend again by going vertical on M1 in a fashion never seen before. All this despite $SPX clearly breaking its long term trend. So yes the Fed is targeting asset prices and Powell is lying when he says the Fed isn’t.

And the entire market knows this. Wall Street knows this. Why? Because the market is a follow the Fed machine long trained to jump back into equities at any sign of Fed action jawboning and promises. It’s no accident that “don’t fight the Fed” is popular mantra. It’s the very proof that market participants know that the Fed is in effect targeting asset prices. Just look at the past year and a half:

And of course this has been going on for years, whenever markets get into trouble here comes the Fed or other central banks with interventions and markets rally, here a long term with M1 money supply thrown in:

Recklessly widening the wealth inequality equation in the process. What happens when you have a slow growth recovery for 10 years and all the wealth benefits going disproportionally to the top 1% who own most of the assets that are targeted while real wage growth stagnates? For one you have a sizable portion of society that doesn’t have a pot to piss in, behind in bills, struggling to pay rent, little to no savings or retirement, taking on multiple low paying jobs with no benefits while real estate prices keep rising as the wealthy keep squeezing people out of neighborhoods. What? You think it’s a coincidence that people have to commute farther and farther to their jobs because they can’t afford housing in the areas where they work? Check San Francisco and Silicon Valley housing prices and commute stories. It’s a horror story.

And so what happens when we have a crisis such as this? Millions needing help immediately, food banks lined up with thousands in line waiting for help and food. A population not able to sustain itself for lack of savings and resources exposing the structural weakness of our broken system. After a 10 year recovery with 3.5% unemployment people should be well off. They are not. Far from it.

And the Fed knows wealth inequality is a huge problem. Powell said so himself in 2019:

“Sluggish productivity and widening wealth gap are the biggest challenges facing the U.S. over the next decade, Federal Reserve Chairman Jerome Powell said Wednesday. Speaking at a town hall in Washington D.C. to a group of educators, the central bank leader said his greatest economic fears lie outside the Fed’s purview. Specifically, he called for more aggressive policies to address income inequality. Wages at the middle and lower levels have “grown much more slowly” than those at the higher end, he said. We want prosperity to be widely shared. We need policies to make that happen,” Powell added.”

Outside the Fed’s purview. Really? No. Why? Because the Fed keeps insisting on bailing out Wall Street.

And the cost is huge. Don’t think for a second that the  political polarization we’ve seen over the past 20 years is an accident. It’s the natural consequence of anger within the larger population that feels left behind, is economically struggling and is being squeezed out and forced into 2 jobs, debt loads, and a general sense of angst. The perfect breeding ground for radicalization, populism and apathy at the same time.

And this anger only gets stirred further now as it’s clear who is again being saved by the Fed. Markets:

We may now have the 30M new unemployed people but market damage has once again been contained. Why? To minimize the economic damage so the Fed’s rationale.

The end results: With inequality is skyrocketing even further as millions are unemployed and many more are losing incomes while the shareholders and executives and those with larger retirement funds can take solace that the damage to them is minimized. No one can with a straight face claim that the trillions in Fed balance sheet expansion have not greatly contributed to the Nasdaq’s move to green and back above the February 2020 lows making shareholders not only whole but back in profit for the year despite the largest economic crisis of our lifetimes:

Perversion in print. But don’t expect any sign of a guilt conscience on the side of the Fed. Expect hypocrisy. Wealth inequality is bad, but it’s not in our purview even though we drive it with our policies. But the Fed can afford hypocrisy. It’s not challenged. By anyone. Not by Congress which benefits from the license to do nothing implicitly provided by the Fed bailing everyone out all the time. Who needs to implement change when the Fed always comes to the rescue? Nobody big gets to fail.

The Fed can’t be challenged by the population, a population that has no say in the Fed’s role, has no right to elect or fire its leadership, heck, largely doesn’t even know what the Fed does.

Nor is the Fed challenged by the press who never presses the Fed on its failings of broken promises, their inability to normalize their balance sheet, their role in driving inequality nor their role in driving ungodly debt levels in society.

Where do you think record debt comes from? Cheap money of course, the very cheap money the Fed has provided. Oh but the debt is bad. Here another pretend handwringing from Jay Powell: “Federal Reserve Board chairman Jerome Powell told Congress that now would be a good time to reduce the federal budget deficit, which is expected to top $US1 trillion ($1.5 trillion) this year. “Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilising the economy during a downturn.”

These words were uttered just last November when the deficit was projected to be $1 trillion. Now that the deficit will be nearly $4trillion instead this year due to the crisis he now says it’s not the time not to worry about the debt and deficit. When, exactly, is the time?

Intellectual bankruptcy:

And never mind being held to account for moving the goalposts as past predictions and promises continue to be broken. The Financial-Industrial Complex Keeps Moving the Goalposts Dan Nathan called it this morning: “I have tried to highlight one simple fact, the Financial-Industrial Complex (you know who they are) wants to keep you in the markets and generally optimistic…their strategists and economists keep moving the goalposts, and they know that in desperate times they can rely on the Fed to take desperate measures.”

Daddy Fed is always there to keep the pain away giving cover and license to make no changes. The Fed in its arrogance is not copping to its role, part and responsibility of this vicious cycle it has created.

Instead we have to recognize the Fed will not stop at anything. There is no voice that says this is enough, or too much or it’s creating distortions.

Yesterday markets closed at 138% market cap vs GDP:

In the past large recessions brought market valuations down as bubbles deflated, and despite the pain with high unemployment wealth inequality was reduced. Not now, the Fed is blowing another bubble and is expanding wealth inequality. And the problem has not gone unnoticed. Via Bloomberg:

The Pandemic Will Reduce Inequality—or Make It Worse:

“The rich got even richer after the Great Recession, but the Great Depression changed the social order. From 1929 to 1932, the top 0.1%’s share of all U.S. household wealth plunged by a third, and the top 0.01%’s portion fell by half—a funhouse-mirror opposite of their 2007-10 surge.
The 1929 Wall Street crash helped create a new economic order in the U.S. called welfare capitalism. With the New Deal, American workers gained a safety net. With World War II, they won leverage with employers and higher wages. The owners of the means of production—well, they didn’t do as well. By 1950 the very richest Americans, the top 0.01%, controlled just 2.3% of the nation’s wealth, less than a quarter of their share in 1929. Meanwhile, the bottom 90% of households had doubled their share”.

What’s happening now is a repeat attempt of the 2009 crisis. All wealth benefits again go toward the top 1% who control all wealth, all the land and all the power and employees will be left to hold the bag again.

And so here we are. $NDX higher than the February lows, only 7% from all time highs. $SPX 9% down year to date. None of it has anything to do with fundamentals. Not a thing.

As Citi said yesterday: “The gap between markets and data is the largest on record. When limitless liquidity meets spiraling insolvency there’s bound to be a long-term price. Unlimited liquidity can postpone debt problems but not fix them.”

And that’s exactly right, but Jay Powell doesn’t care. He went full fiat yesterday. This is not a time to worry about debt or deficits he said. Fine, burn the house down while you’re trying to save it.

But we need to pay attention to all this, the Fed is the biggest market force at the moment and they are creating again the biggest market bubble known to man. And they were very clear in what they were saying yesterday:

“the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Translated:

For when does anyone think we will go back to full employment? Bond traders have now priced in zero rates until 2024. We will also have multi trillion deficits for years to come. And who will benefit from all this? The bottom 90%? We’ve seen this movie before and it’s brought us to where we are now.

And not to go political, but be clear: Doesn’t matter who gets elected in November from a deficit perspective, they will all run huge deficits. It’s basically setting us up for slow growth which means we will never get back to full employment which means we will have zero rates forever. The cycle of doom here, it’s unfathomable.

No, the Fed poisons everything. Markets, the economy, even politics. Its actions have a wide spread impact on society, but because the cycle has become so vicious and debt and wealth inequality so prevalent ever more interventions are required to keep the system afloat. So the Fed is employing the same measures it did before but on a grander scale.

Now imagine if the Fed didn’t intervene with trillions of dollars. What would happen? Markets would collapse, debt would be crushingly unsustainable and the system would collapse. And then what? Have you forgotten the 1929 example already? Wealth inequality would shrink, a new economic order would emerge, the middle class would grow as opposed to shrink and have higher incomes as they would have more bargaining power, a New Deal. Sounds good? No, the financial industrial complex doesn’t want that, it’s a big club:

No, perhaps the truth is much more sinister than that. And that is: The system is not broken, it’s designed to function exactly as it is, because it benefits precisely the very same people that control it. Who controls the Fed? Not you or I or anyone we know. But you know who benefits the most from the Fed.

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