This week the Federal Reserve announced a reduction in the interest rate of 0.25%, bringing it down to between 2.0 and 2.25%. Concurrent with the rate cut, the DOW declined by 736 points in 4 days. This came after a milder decline the previous week.
Typically, a reduction in the interest rate is coupled with a rise in the stock market. Why is it different this time?
Some are pointing to Trump’s announcement of additional tariffs on Chinese goods. However, that announcement was made the day after the rate reduction. The day of the announcement was the same day that saw the largest decline in the market.
The two factors that influenced the decline were: 1- The reduction was not nearly as much as many investors had desired. 2- The announcement of the reduction was accompanied by a statement by the Fed chairman that this will NOT be the beginning of a series of reductions.
Granted, he did not state unequivocally that there will not be any future reductions, he just made clear that this is not the plan at this time.
Basically this announcement means, that while interest rates remain extremely low, the era of free money is over. Large investors and corporations have been forcing an artificial high in the stock market for years now and had hoped to continue that trend. They had even hoped interest rates would reach negative territory, as has happened in some other countries. Which would literally mean they could get paid to borrow money. (Yes, for real.) Even as they used the money they borrowed to buy back stocks, forcing stocks to go even higher, making even more personal profits.
The whole problem with this is something I have noted before. It doesn’t matter if money is borrowed at 0% interest or even with some small negative interest percentage paying them to borrow. A loan is still a loan and must be repaid at some point. Unless.. Unless the entity which borrows that money then declares bankruptcy.
Liquidity for major borrowers has been drying up over time. Companies may state they have a certain level of cash reserves but too often those reserves are held in negative equity. That is, they have more debts than reserves on hand. They use stock values to declare as assets, yet even the most ardent Wall Street economists admit the stock market is tremendously over-valued. The vast majority of stocks aren’t worth the paper they are printed on. Many of the companies behind the highest valued stocks produce little or nothing of value.
Behind the scenes and not much reported on are the facts of judgments against and losses by these companies. Netflix has announced that they are losing subscribers, leading to decline in their stock. Apple announced far lower than expected sales, as did Ford Motors. Google has had multiple legal judgments levied against them with massive fines by the EU. Google is currently being investigated by the DOJ for antitrust violations as well.
The craziest part of all is how interdependent most of the FAANG stocks are- Facebook, Amazon, Apple, Netflix and Google. Of the five, Netflix is the most independent yet is highly dependent on the content produced by other entertainment companies, with whom they have a love/hate relationship. Google, Facebook, Amazon and Apple depend heavily on one another for the tracking and selling of data both between them and to third party advertisers. Which means that if one falls, they all suffer in the stock market.
Yet I have pointed out many times that the stock market tends to be a negative image of the real economy. If employment and wages are doing well, stocks literally go down. We have seen this phenomenon several times in the last two years when jobs and wages reports were released. If jobs and wages are up, stocks do down. When employment and wages decline, stocks go up. This is because investors view wages as a cost. Your job is literally a liability to your employer and investors when considering their profit margin and stock value.
There are other issues playing into the stock decline. Like the fact that the Fed also announced that they are reducing their aggregate holdings two months earlier than previously anticipated. This is basically stating that the Fed holds bonds, mortgage backed stocks, precious metals and multiple currencies in reserve. The statement that the Fed will be reducing “aggregate holdings” is a vague, nonspecific statement which leaves more questions than answers. Exactly what holdings will they be reducing? Only time will tell.
The practice of the Federal Reserve is market manipulation of the highest order and should be illegal by any means. In fact, it would be illegal if the Fed were a government agency but it is not. If the US Treasury has holdings of precious metals like the gold (allegedly) in Ft Knox, that is considered a reserve which is for the purpose of backing the value of the currency, which many countries have done since the creation of national currencies and going back further to the Knights Templar. Those reserves belong to the people of the country. With central banks like the Fed, such is not the case as they are corporate enterprises. Keep in mind that Trump and our media viciously attacked China for claims of currency manipulation and industry subsidization. All while the Federal Reserve and our government do the exact same thing both separately and in conjunction with each other.
For many years, the actions of Western central banks and governments have inflated the value of the dollar, Euro and stocks while suppressing the value of precious metals. The creation of currency has continued unabated since 2008 in numerous countries, which should have reduced the value of the currencies. Multiple nations have been buying huge amounts of precious metals, especially gold and silver, most notably by Russia and China. So the value of precious metals should be much higher than they are. This is just beginning to show because the control has slipped beyond their grasp.
Last week, JP Morgan issued a newsletter to their largest investors (those with holdings in excess of $200 million just with JP Morgan, while such investors typically diversify) advising them to divest significant portions of their holdings away from the dollar into foreign, mostly Asian, currencies and into precious metals, mostly gold. So to move away from the dollar means moving away from US stocks.
As other countries and investors move away from the dollar, at some point we will see the effect on the value of the dollar in relation to other currencies, resulting in accelerated inflation.
For the record, I said in June of 2018 that the crash had begun. In truth, I was correct. It has been since then that mass layoffs have been announced, retail closures accelerated beyond anything seen in US history and the consolidation of wealth began the final stages. We are now witnessing the end of that stage, meaning that the illusion can no longer be sustained much longer. Hundreds of thousands of people have lost their jobs since then and millions more must work multiple jobs for mere survival.
As the stock market declines, the first to suffer will be smaller investors with retirement accounts like 401k’s. This will be an undeniable event which even corporate media will be hard pressed to explain. I’ll be watching to see what lies they try to tell as it happens. By small investors, I mean those with less than the $200 million minimum mentioned above. You may have $1 million in stocks and think you’re a big investor but you’re not.
I still expect a stair step decline in the stock market, which will be investors trying to extract the final pennies out of stocks before the final crash occurs. Though it will be muted by comparison to what we have seen.
Buckle in and fasten your crash helmets. This is going to get rough.
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