How The Federal Reserve Is Setting Up Trump For A Recession, A Housing Crisis And A Stock Market Crash

Most Americans do not understand this, but the truth is that the Federal Reserve has far more power over the U.S. economy than anyone else does, and that includes Donald Trump.  Politicians tend to get the credit or the blame for how the economy is performing, but in reality it is an unelected, unaccountable panel of central bankers that is running the show, and until something is done about the Fed our long-term economic problems will never be fixed.  For an extended analysis of this point, please see this article.  In this piece, I am going to explain why the Federal Reserve is currently setting the stage for a recession, a new housing crisis and a stock market crash, and if those things happen unfortunately it will be Donald Trump that will primarily get the blame.

On Wednesday, the Federal Reserve is expected to hike interest rates, and there is even the possibility that they will call for an acceleration of future rate hikes…

Economists generally believe the central bank’s median estimate will continue to call for three quarter-point rate increases both this year and in 2018. But there’s some risk that gets pushed to four as inflation nears the Fed’s annual 2% target and business confidence keeps juicing markets in anticipation of President Trump’s plan to cut taxes and regulations.

During the Obama years, the Federal Reserve pushed interest rates all the way to the floor, and this artificially boosted the economy.  In a recent article, Gail Tverberg explained how this works…

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$21,714 For Every Man, Woman And Child In The World – This Global Debt Bomb Is Ready To Explode

According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars.  Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number.  If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.

So if you have a family of four, your family’s share of the global debt load would be $86,856.

Very few families could write a check for that amount today, and we also must remember that we live in some of the wealthiest areas on the globe.  Considering the fact that more than 3 billion people around the world live on two dollars a day or less, the truth is that about half the planet would not be capable of contributing toward the repayment of our 152 trillion dollar debt at all.  So they should probably be excluded from these calculations entirely, and that would mean that your family’s share of the debt would ultimately be far, far higher.

Of course global debt repayment will never actually be apportioned by family.  The reason why I am sharing this example is to show you that it is literally impossible for all of this debt to ever be repaid.

We are living during the greatest debt bubble in the history of the world, and our financial engineers have got to keep figuring out ways to keep it growing much faster than global GDP because if it ever stops growing it will burst and destroy the entire global financial system.

Bill Gross, one of the most highly respected financial minds on the entire planet, recently observed that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.

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"It Can Only Disappoint" - What Wall Street Expects From Friday's Payrolls Report

Following Wednesday's blowout ADP report, which printed some 40K jobs higher than the highest estimate, the only possibility for tomorrow's nonfarm payroll report, the last major economic data point before the Fed's March 15th rate hike announcement, is to disappoint, especially in terms of wages (which in light of the recent downward revision of Q1 GDP by the Atlanta Fed to 1.2% is not out of the question). That possibility, however, is slim to none if one looks at Wall Street's forecasts, where virtually every sellside analyst boosted their NFP estimate in the hours after the ADP number. Still, with the market pricing in a 100% chance of a rate hike, only a very disappointing - think less than 100K - report will derail the Fed from hiking for the second time in three meetings.

Here are some of the more notable forecasts for tomorrow's number::

Westpac 170K
Bank of America 185K
BNP 185K
Barclays 200K
Deutsche Bank 200K
Goldman Sachs 215K
Nomura 235K
Morgan Stanley 250K

Putting it all together, here is what Wall Street expects from the February payrolls report due out at 8:30am ET tomorrow morning:

Change in Nonfarm Payrolls: Exp. 193K (Prey. 227K, Dec. 157K)
Unemployment Rate Exp. 4.70% (Prey. 4.80%, Dec. 4.70%)
Average Hourly Earnings M/M Exp. 0.30% (Prey. 0.10%, Dec. 0.20%)

Consensus calls for an increase of 193K jobs in February, with the unemployment rate falling to 4.7% from 4.8%. Much of the focus could be on average hourly earnings for signs of inflationary pressure. Last month, average hourly earnings disappointed with Y/Y wage growth slowing to 2.5% from 2.9%. This month, average hourly earnings are expected to pick up to 2.7% Y/Y with monthly growth of 0.3%.

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Crude Plunges Below $49, Dragging Markets Lower; All Eyes On Draghi

While traders will be focused on the ECB, and Mario Draghi, early Thursday, it is unlikely that the European central bank will announce anything overly dramatic (see preview in a subsequent post), and instead the attention will be on the ECB's inflation forecast for hints of when the ECB may accelerate tapering after its December 2016 QE cut, as Draghi scrambles to catch up with commodity inflation, if not so much core CPI, which has remained subdued.

However, a more pressing development as US traders get to their desks today, will be the ongoing collapse in WTI, which after crashing 5.5% yesterday, has plunged as much as 3% this morning, sliding not only below $50 for the first time since December 1, but also dropped under $49, and was trading $48.90 at last check, as a near record number of net long spec positions suddenly rush to unwind their exposure.

After resisting oil's gravitational drag earlier, S&P futures snapped, and were trading lower by 0.2% at 2,357. Should the drop persist, this would be the longest losing streak for the index in five weeks.

Elsewhere, European and Asian stocks fell, ahead of the European Central Bank’s meeting while the Bloomberg Dollar Spot Index headed for its best back-to-back weeks since December, rising after yesterday's blockbuster ADP report and expectations that tomorrow's NFP will not derail the Fed's March reta hike, the euro and yen dropped. Speaking of the ADP report, RBC chief economist Tom Porcellisaid the report was so strong it meant the payrolls report on Friday would have to be unbelievably dire to deter the Fed from hiking next week.

"There is almost no number that would stop them," said Porcelli. "It would take an extreme event for the Fed to take a pass at this point."

Indeed, he noted the ADP surprise meant there was a real chance payrolls could beat expectations, perhaps by a lot. "On the face of it, ADP is consistent with private payrolls of about 340,000," he said. The current median forecast is for a rise of 190,000.

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The Next Domino To Fall: Commercial Real Estate

Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can't bail out with a few digital keystrokes.

Just as generals prepare to fight the last war, central banks prepare to battle the last financial crisis--which in the present context means a big-bank liquidity meltdown like the one that nearly toppled thr global financial system in 2008-09.

Planning to win the next war by assuming it will be a copy of the last confict is an excellent strategy for losing the next war. The same holds true for the next financial crisis: reckoning that it will be a repeat of 2008 is an excellent way to be caught completely off-guard.

Crises may rhyme, but they don't repeat. The next Global Financial Meltdown won't start in subprime mortgages--that sector has been wiped out, written down, or passed on to the poor tax-donkey taxpayers.

The next crisis also won't arise on money-center banks, either. Central banks have figured out how to bail out the banks, and have rebuilt the bank balance sheets by stripping hundreds of billions of dollars in interest from savers.

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A Third Of All U.S. Shopping Malls Are Projected To Close As ‘Space Available’ Signs Go Up All Over America

If you didn’t know better, you might be tempted to think that “Space Available” was the hottest new retail chain in the entire country.  As you will see below, it is being projected that about a third of all shopping malls in the United States will soon close, and we just recently learned that the number of “distressed retailers” is the highest that it has been since the last recession.  Honestly, I don’t know how anyone can possibly believe that the U.S. economy is in “good shape” after looking at the retail industry.  In my recent article about the ongoing “retail apocalypse“, I discussed the fact that Sears, J.C. Penney and Macy’s have all announced that they are closing dozens of stores in 2017, and you can find a pretty comprehensive list of 19 U.S. retailers that are “on the brink of bankruptcy” right here.  Needless to say, quite a bloodbath is going on out there right now.

But I didn’t realize how truly horrific things were for the retail industry until I came across an article about mall closings on Time Magazine’s website…

About one-third of malls in the U.S. will shut their doors in the coming years, retail analyst Jan Kniffen told CNBC Thursday. His prediction comes in the wake of Macy’s reporting its worst consecutive same-store sales decline since the financial crisis.

Macy’s and its fellow retailers in American malls are challenged by an oversupply of retail space as customers migrate toward online shopping, as well as fast fashion retailers like H&M and off-price stores such as T.J. Maxx. As a result, about 400 of the country’s 1,100 enclosed malls will fail in the upcoming years. Of those that remain, he predicts that about 250 will thrive and the rest will continue to struggle.

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Citi's Matt King: "We Think You Should Sell"

In a surprisingly bearish report, Citi's Matt King has issued a new, long-awaited note in which he asks rhetorically "what’s a manager supposed to do when by early March your asset class has already exceeded your expectation for full-year returns? Take profit and take the rest of the year off, of course! And if it carries on rallying, go outright short!" And yet, he adds, "somehow nobody seems to want to." The reason for that, according to King is that as we showed demonstrated last week using JPM and BofA data, "the rally owes more to inflows and short covering than to institutional investor exuberance. And part is that the economic data do seem genuinely to be improving."

Nonetheless, King's assessment of the current environment is downbeat and to the point: "sell we think you should, not only in € credit (as we advised a couple of weeks ago) but also more broadly."

He then lays out seven reasons "not to trust your inner Trump", which are as follows:

1. The Fed may stop the inflow party

The Citi strategist begins by noting that "perhaps the best reason to remain long is that institutional investors seem not to be." He adds that the vast majority of the FI investors we have seen in recent weeks still believe in secular stagnation, and further notes that "to judge from our survey, overall positions have been creeping longer, but this is due overwhelmingly to positions among $ investors: those in € and £ credit have actually been falling (Figure 1)."

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Virtually Everyone Agrees That Current Stock Market Valuations Are Not Sustainable And That A Great Crash Is Coming

Current stock market valuations are not sustainable.  If there is one thing that I want you to remember from this article, it is that cold, hard fact.  In 1929, 2000 and 2008, stock prices soared to absolutely absurd levels just before horrible stock market crashes.  What goes up must eventually come down, and the stock market bubble of today will be no exception.  In fact, virtually everyone in the financial community acknowledges that stock prices are irrationally high right now.  Some are suggesting that there is still time to jump in and make money before the crash comes, while others are recommending a much more cautious approach.  But what almost everyone agrees on is the fact that stocks cannot go up like this forever.

On Tuesday, the Dow, the S&P 500 and the Nasdaq all set brand new record highs once again.  Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.

But stocks were already tremendously overvalued before the election, and at this point stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years.

Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely.  We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst…

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Alan Greenspan: Ron Paul Was Right About The Gold Standard

As John Rubino eloquently puts it, "when the history of these times is written, former Fed Chair Alan Greenspan will be one of the major villains, but also one of the greatest mysteries. This is so because he has, in effect, been three different people." Greenspan started his public life brilliantly, as a libertarian thinker who said some compelling and accurate things about gold and its role in the world. An example from 1966: "This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

Yet everything changed a few decades later when Greenspan was put in charge of the Federal Reserve in the late 1980s, instead of applying the above wisdom, for example by limiting the bank's interference in the private sector and letting market forces determine winners and losers, he did a full 180, intervening in every crisis, creating new currency with abandon, and generally behaving like his old ideological enemies, the Keynesians. Predictably, debt soared during his long tenure.

Along the way he was also instrumental in preventing regulation of credit default swaps and other derivatives that nearly blew up the system in 2008. His view of those instruments:

The reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. This unbundling improves the ability of the market to engender a set of product and asset prices far more calibrated to the value preferences of consumers than was possible before derivative markets were developed. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living.

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How A Major Bank "Calculated" That 20x P/E Is Now "Fair Value"

Carbon-based traders of a certain vintage - which excludes today's 20-year-old hedge fund managers - may recall a time when a 15x P/E was considered "fair." Not any more. In fact, according to a new analysis by Barclays' equity strategist Keith Parker, which tries to factor in so-called "animal spirits" as a driver of valuation has found that 20x P/E is perfectly normal and fair for the current market, further demonstrating just how deep into the goalseeking rabbit hole US capital markets have fallen.

First, to prove we are not joking, here is Barclays explaining why it is important to quantify animal spirits as a input factor of "permanently high plateaued" P/E multiples:

Core drivers of the P/E multiple and animal spirit indicators

In order to estimate the effects of “animal spirits”, or the potential effects of some of President Trump’s agenda, we first model the S&P 500 P/E using the core fundamental drivers of equity valuations. We then compare the residual from the model (actual minus fitted P/E) to various indicators of “animal spirits” or potential policy changes, including: tax policy, credit spreads, inflation, macro volatility, long-term growth expectations and corporate/consumer sentiment data.

Rates, growth and payouts are the core drivers of the P/E. Using a dividend discount framework, an equity price is the present value of future dividends. Dividing both sides of the equation by earnings, the P/E multiple is equal to the dividend payout ratio divided by the cost of capital minus the growth rate. Accordingly, the US 10y yield, US real GDP yoy and the dividend payout ratio explain 57% of the movement in the S&P 500 trailing P/E multiple from 1955 to 1997. We use the 1955-97 sample period because confiscatory tax policies prior to 1955 distorted returns to equity holders (excess profit taxes, etc), and thus affected valuations, while the 1998-2001 tech bubble would also distort results.

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Why Sub $50 Oil Is More Likely Than $70 Oil

It is more likely that oil prices will fall below $50 per barrel than that they will continue to rise toward $70. Prices have increased beyond supply and demand fundamentals because of premature expectations about the effects of an OPEC production cut on oil inventories.

Last week’s 13.8 million barrel addition to U.S. storage was the second largest in history. It moved U.S. crude oil inventories to new record high levels.

Meanwhile, 130 horizontal rigs have been added to tight oil drilling since the OPEC cut was first announced in September. That means that U.S. output will surge and will continue to be a drag on higher prices.

Comparative inventory analysis suggests that the current ~$53 per barrel WTI oil price is at least $6 per barrel too high. Don’t hold your breath for $70 oil prices.

Inventory Is The Key

Most analysts believe prices will increase steadily now that OPEC has decided to cut production. Their logic is that over-production caused lower oil prices and lower output should bring markets into production-consumption balance.

The problem is that production is not the same as supply and consumption is not the same as demand. Inventories lie in-between and modulate the flows from both sides of the production-consumption equation.

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U.S. Consumer Prices Post Largest Gain in Nearly Four Years

U.S. consumer prices recorded their biggest increase in nearly four years in January as households paid more for gasoline and other goods, suggesting inflation pressures could be picking up.

The Labor Department said on Wednesday its Consumer Price Index jumped 0.6 percent last month after gaining 0.3 percent in December. January's increase in the CPI was the largest since February 2013. In the 12 months through January, the CPI increased 2.5 percent, the biggest year-on-year gain since March 2012. The CPI rose 2.1 percent in the year to December. 

Economists polled by Reuters had forecast the CPI rising 0.3 percent last month and advancing 2.4 percent from a year ago.

Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.

The so-called core CPI, which strips out food and energy costs, rose 0.3 percent last month after increasing 0.2 percent in December. That lifted the year-on-year core CPI increase to
2.3 percent in January from December's 2.2 percent increase.

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The Globalists Strike Back With A Major Push Toward A Cashless Society

Their agenda may be on the rocks in the United States at the moment, but that doesn’t mean that the globalists are giving up.  In fact, a major push toward a cashless society is being made in the European Union right now.  Last May we learned that the 500 euro note is being completely eliminated, and just a few weeks ago the European Commission released a new “Action Plan” which instructs member states to explore “potential upper limits to cash payments”.  In the name of “fighting terrorism”, this “Action Plan” discusses the benefits of “prohibitions for cash payments above a specific threshold” and it says that those prohibitions should include “virtual currencies (such as BitCoin) and prepaid instruments (such as pre-paid credit cards) when they are used anonymously.”

This new document does not mention what an appropriate threshold would be for member states, but we do know that Spain already bans certain cash transactions above 2,500 euros, and Italy and France already ban cash transactions above 1,000 euros.

This is a perfect way to transition to a cashless society without creating too much of an uproar.  By setting a maximum legal level for cash transactions and slowly lowering it, in effect you can slowly but surely phase cash out without people understanding what is happening.

And there are many places in Europe where it is very difficult to even use cash at this point. In Sweden, many banks no longer take or give out cash, and approximately 95 percent of all retail transactions are entirely cashless.  So even though Sweden has not officially banned cash, using cash is no longer practical in most situations.  In fact, many tourists are shocked to find out that they cannot even pay bus fare with cash.

So most of Europe is already moving in this direction, and now this new Action Plan is intended to accelerate the transition toward a cashless society.  The public is being told that these measures are being taken to fight money laundering and terrorism, but of course that is only a small part of the truth.  The following comes from the Anti-Media…

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What Will Trump Do About The Central-Bank Cartel?

The US is by far the biggest economy in the world. Its financial markets — be it equity, bonds or derivatives markets — are the largest and most liquid. The Greenback is the most important transaction currency. Many currencies in the world — be it the euro, the Chinese renminbi, the British pound or the Swiss franc — have actually been built upon the US dollar.

The world is effectively on a US-dollar-standard, and the US Federal Reserve (Fed) has risen to the unofficial status of the world’s central bank. The rise of the Greenback has to a large extent been propelled by international banking, which has basically “dollarized” in terms of its lending and issuing activities.

The Fed Sets Global Policy
The Fed’s policy not only determines credit and liquidity conditions in the US, but does so in many financial markets around the world as well. For instance, movements of long-term US interest rates regularly have effects on credit and equity markets in, say, Europe and Asia. The Fed’s actions are the blueprint for monetary policymaking in many countries around the world.

The graph shows the Fed’s supply of newly created US dollar liquidity sent to other central banks around the world. It also shows the so-called “euro cross currency basis swap,” which can be interpreted as a “stress indicator”: If it drops into negative territory, it means that euro banks find it increasingly difficult to obtain US dollar credit in the free market place. The Fed’s injection of new US dollar balances into the financial system has helped to reduce the euro currency basis swap. Since late 2016, however, it has started to venture again into negative territory — potentially signaling that euro banks are again heading for trouble.

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"It Was A Deer In Headlights Moment": Japan Dumps Most US Treasuries Since May 2013

With the December monthly TIC data due out this week, bond traders will be closely watching if the selling of US Treasuries by foreign accounts, and especially central banks, which as we have repeatedly shown for the past several months has hit record levels...

... will persist, with a focus on whether China's near record selling of US paper will persist.

However, this time the surprise may not be China, but its nemesis across the East China Sea, Japan.

As UBS notes, Japanese investor appetite for developed market overseas bonds, and especially US, was a big story during the first seven months of 2016. However, since then interest has waned. Weekly flow data underscores how Japanese investors sold ~¥4 trillion of overseas bonds from the time of the US presidential election to the end of Jan-17. Last week the Japanese government released more granular data for the month of December which highlights a number of notable developments.

Most importantly, while December saw the largest overall net selling flow of overseas bonds since Jun-15, this was entirely due to offloading of US Treasuries – other developed bond markets on aggregate actually saw modest net purchases. Indeed, while Japanese investors bought German and Australian paper, US Treasuries were sold to the tune of ~¥2.4 trillion (~$21bn) in December, the largest net selling flow since May-13.

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