Weekend Wrap: Stocks Rebound in Face of Coming Currency Crisis

Other than the idea that Chinese and US officials were "talking" about trade and tariffs, nothing much changed in the world of high finance during the week, though investors thought they heard the "all clear" whistle.

Major indices broke off a four-week losing streak, bounding higher by 2.5 to three precent over the course of the week, heading into the Labor Day holiday.

The end of August marks the unofficial end of summer, back to school activity, and a return from the idyllic Hamptons or other leisure locales of the Wall Street hard-liners, the big boys with big money who guide trades, firms and financial fates.

Over the holiday weekend, the US slapped on the promised tariffs on September 1, with China responding with some of their own on US imports. That ran in stark contrast to the trading sentiment from the week past and suggests that the gains may be fleeting.

As the opening approaches for the first trading day of September, US futures are sliding. Anticipation of easing tensions in the trade wars are fading fast, though the narrative that the trade and tariff foibles of Trump and Xi are the sole motivator for moving equities is likely a contrived one.

What really worries Wall Street and should concern anybody with a pension tied to a 401k or other stock market vehicle is the shaky state of global commerce. The World Bank, IMF, and pundits far and wide have been predicting a recession for well over a year. Though the timing of such a downturn is far from settled science, evidence continues to build. More than just recession concerns are deeper fears that central banks have run out of ammunition with which to save the world again.

Interest rates, long regarded as the primary tool of central banks to stave off natural downturns in the business cycle are already low and many negative, prompting unbelievers to portend the end of central bank monetary hegemony. While such calls for an impending end to the global financial scheme are almost always present, this time appears to hold some truth.

Fractional reserve lending of debt has impoverished the lower and middle classes, expanded wealth inequality, and may now be acting as a brake on the system as money movement is nearing stall speed. It's been nearly 50 years since President Nixon closed the gold window and set the world on a path of unbacked, floating currencies. The result has been a revolving bubble, boom-bust scenario, punctuated by massive counterfeiting by coordinated central banking interests, each successive round more severe than the last.

Considering the depth of the last crisis in 2007-2009, central banks are desperate to keep the financial plates spinning for as long as possible, because the next crisis may well be their last.

These prospects are not pretty for central banks, or, for that matter, anybody. However, change is always in the wind, and the wind is blowing with a hot breath.

2001 was a malinvestment correction. 2008 was a liquidity affair. 202---? will be a currency crisis that will shake the foundations of monetary policy.

At the Close, Friday, August 30, 2019:
Dow Jones Industrial Average: 26,403.28, +41.08 (+0.16%)
NASDAQ: 7,962.88, -10.51 (-0.13%)
S&P 500: 2,926.46, +1.88 (+0.06%)
NYSE Composite: 12,736.88, +32.88 (+0.26%)

For the Week:
Dow: +774.38 (+3.02%)
NASDAQ: +211.12 (+2.72%)
S&P 500: +79.35 (+2.79%)
NYSE Composite: +320.43 (+2.58%)

Good News Lifts Stocks; No Pain Equals Gain

A tweet here, a headline there, and everything's all right in bizarro finance world.

News that China would not retaliate against President Trump's latest round of tariffs sent stocks soaring on Thursday, dismissing the belief that the tariffs on Chinese imports would cost consumers more.

Apparently, Wall Street doesn't really care about household budgets, so long as their favored companies make profits, and the tariffs, some of which take effect on September 1, aren't going to hurt bottom lines in the near future. Tariffs on many touchy consumer items were delayed until late December, a strategy composed by the White House to minimize pain during the holidays.

The avoidance of pain is what markets are all about these days. Stocks are not allowed to go down, to correct, even though their fundamentals may scream overpriced. Nobody is supposed to feel any pain.

The problem with such a nomenclature is that, like never telling a child not to touch a hot stove, investors are going to get burned badly when the pain is unavoidable.

So far, everybody's fingers are cool.

At the Close, Thursday, August 29, 2019:
Dow Jones Industrial Average: 26,362.25, +326.15 (+1.25%)
NASDAQ: 7,973.39, +116.51 (+1.48%)
S&P 500: 2,924.58, +36.64 (+1.27%)
NYSE Composite: 12,704.03, +144.80 (+1.15%)

Stocks Gain, Gold, Silver Gain More; 2s-10s Remain Inverted

Stocks. More noise.

And it will remain that way as long as the 2-year and 10-year notes remain inverted.

On Tuesday, the 2-year was yielding 1.53, the 10-year, 1.49.
On Wednesday, the 2-year was at 1.50, the 10-year, 1.47.

Gold and silver continue to outperform stocks by enormous margins. Spot silver closed the day in the US at $18.315 per ounce. Gold spot was $1538.70.

Keep a close watch on your 401K. It could vanish at a moment's notice. While that is not probable, the chances for it losing price are very good.

The global financial system is on the verge of complete collapse. Some say it has been since 2008. There is unlikely to be a bell rung when it all falls apart, but a steady, slow, wrenching decline is in the cards now that the marginal utility of a dollar is less than one.

The central bankers know this. Politicians know this. It's best to be informed.

At the Close, Wednesday, August 28, 2019:
Dow Jones Industrial Average: 26,036.10, +258.20 (+1.00%)
NASDAQ: 7,856.88, +29.94 (+0.38%)
S&P 500: 2,887.94, +18.78 (+0.65%)
NYSE Composite: 12,559.23, +85.18 (+0.68%)

Former NY Fed Goldmanite Dudley Attacks President Trump on Bloomberg Platform

It doesn't get any more transparent than this.

For anyone who doesn't already know, the Federal Reserve System is a private banking operation that controls the currency of the United States of America. The "System" issues "notes" at interest. The long-standing assumption is that the Fed is objective, impartial, and apolitical. Here's a taste of that "objectivism" from former NY Fed president, William Dudley.

(Bloomberg Opinion) -- U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?

If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach.

Dudley states unequivocally that the President's trade policy is harmful and that the Fed should determine how to respond. Not exactly impartial, is it?

Here's more:

The Fed’s monetary policy makers typically take what happens outside their realm as a given, and then make the adjustments needed to pursue their goals of stable prices and maximum employment. They place little weight on how their actions will affect decisions in other areas, such as government spending or trade policy. The Fed, for example, wouldn’t hold back on interest-rate cuts to compel Congress to provide fiscal stimulus instead. Staying above the political fray helps the central bank maintain its independence.

So, according to conventional wisdom, if Trump’s trade war with China hurts the U.S. economic outlook, the Fed should respond by adjusting monetary policy accordingly — in this case by cutting interest rates. But what if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of a recession? The central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse.

Fed Chairman Jerome Powell has hinted that he is aware of the problem. At the central bank’s annual conference in Jackson Hole last week, he noted that monetary policy cannot “provide a settled rulebook for international trade.” I see this as a veiled reference to the trade war, and a warning that the Fed’s tools are not well suited to mitigate the damage.

Yet the Fed could go much further. Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.

Again, Dudley appears to favor the Federal Reserve acting in a manner that runs contrary to the policy of the president. While that may be objective, it is hardly impartial...

...and it gets worse:

Such a harder line could benefit the Fed and the economy in three ways. First, it would discourage further escalation of the trade war, by increasing the costs to the Trump administration. Second, it would reassert the Fed’s independence by distancing it from the administration’s policies. Third, it would conserve much-needed ammunition, allowing the Fed to avoid further interest-rate cuts at a time when rates are already very low by historical standards.

I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.

There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.

To Dudley's globalized mind, Trump's trade policies are "disastrous" and imperil his chances at "re-election." Since when are the unelected members of the Federal Reserve experts on election politics? Dudley's remarks reek of political partisanship.

The author and editor's emails are provided here as a public service. In a sane world, Dudley's email in-box would be flooded with contrarian opinions. The world of 2019 does not seem to be particularly sane, however.

To contact the author of this story: Bill Dudley at wcdudley53@gmail.com

To contact the editor responsible for this story: Mark Whitehouse at mwhitehouse1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.

Other than the yield curve re-inverting and stocks reversing course midday, nothing much happened in the world of investing on Tuesday.

At the Close, Tuesday, August 27, 2019:
Dow Jones Industrial Average: 25,777.90, -120.93 (-0.47%)
NASDAQ: 7,826.95, -26.79 (-0.34%)
S&P 500: 2,869.16, -9.22 (-0.32%)
NYSE Composite: 12,474.05, -45.57 (-0.36%)

Amid Turmoil, Stocks Jump to Open Week

Despite Friday's stock slide and confused rhetoric from the G7, investors appeared unconcerned as trading opened the week, with all the major averages up sharply on the day.

Bounces such as the one witnessed on Monday are normal in times of high volatility and anxiety. They can be generally disregarded as more noise than anything meaningful. The gains only half erased Friday's losses, leaving the Dow, NASDAQ, S&P, and Composite all hanging between their 50 and 200-day moving averages, a sign of indecision among market makers.

Gold and silver held onto gains, bonds continued to rally, with the two-year and 10-year notes even, with yields of 2.54% at the end of the day.

With trade talks stalled, traders may be seeking more information on the economy. The Conference Board's gauge of consumer sentiment is due out shortly after the markets open at 10:00 am ET.

At the Close, Monday, August 26, 2019:
Dow Jones Industrial Average: 25,898.83, +269.93 (+1.05%)
NASDAQ: 7,853.74, +101.97 (+1.32%)
S&P 500: 2,878.38, +31.27 (+1.10%)
NYSE Composite: 12,519.62, +103.17 (+0.83%)