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Authored by Charles Hugh Smith via OfTwoMinds blog,

Even if we don’t measure the erosion of intangible capital, the social and political consequences of this impoverishment are manifesting in all sorts of ways.

The central thesis of my new book Will You Be Richer or Poorer? is the financial “wealth” we’ve supposedly gained (or at least a few of us have gained) in the past 20 years has masked the unraveling of our intangible capital: the resilience of our economy, our social capital, i.e. our ability to find common ground and solve real-world problems, our sense that the playing field, while not entirely level, is not two-tiered, and our sense of economic security–have all been shredded.

The unraveling of everything that actually matters is quickening. While every “news” outlet cheerleads the stock market (“The Dow soared today as investor optimism rose… blah blah blah”), our “leadership” and our media don’t even attempt to measure what’s unraveling, much less address the underlying causes.

The hope is that if we ignore what’s unraveling, it will magically go away. But that’s not how reality works.

The unraveling is gathering momentum because prices have been pushing higher while wages lag, feeding the rising precariousness and inequality of our economy. The connection between people losing ground and social disorder/disunity has been well established by historians such as Peter Turchin Ages of Discord and David Hackett Fischer The Great Wave: Price Revolutions and the Rhythm of History.

In our era, trust in the legitimacy of our institutions is unraveling because the statistics presented as “facts” are so clearly designed to support the status quo narrative that everything’s getting better every day in every way rather than the politically unwelcome reality that the bottom 95% are losing ground and whatever they do earn and own is increasingly at risk from forces outside their control.

Economic decay leads to social and political disorder / disunity. The sudden rise of vast homeless encampments is one manifestation of the social fabric unraveling. In the political realm, the insanity of accusing Democratic candidates of being “Russian agents” matches the hysterical destructiveness of the McCarthy era in the 1950s.

It all starts with economic decay, so let’s look at some charts. Here’s a chart of income inequality which helps drive wealth inequality.

Note that the only group that benefited from the past 20 years of speculative bubbles is the top 1%. The whole idea that inflating bubbles creates a “wealth effect” that “trickles down” is preposterous, as evidenced by the decline of the middle 60% of households while the speculators and owners of bubble-assets skimmed the vast majority of income gains.

Meanwhile, we’re told inflation is less than 2% annually while rising costs have outpaced meager wage increases. What’s a more realistic measure of real-world inflation–the official Consumer Price Index (CPI) at 18% over ten years or rent and healthcare at 34% and 45%?

According to the Chapwood Index, real-world inflation in urban America is running 9% to 13% annually. This is more in line with reality than the bogus CPI, as evidenced by this chart of wages and healthcare costs:

Even if we don’t measure the erosion of intangible capital, the social and political consequences of this impoverishment are manifesting in all sorts of ways: large-scale social disorder is breaking out around the globe, and the political middle ground has completely vanished: no matter which way an issue is decided, one camp will refuse to accept the outcome.

The only way forward with any chance of success is to start by acknowledging the decay of our economy due to rampant financialization, legalized looting, the pathologies of “winner take most” speculation and the realities of a two-tiered system in which entrenched elites are “more equal” than the rest of us, economically, socially and politically. We have to accept the limits of technology to reverse the unraveling and assess the damage that’s already been done to our shared capital.

Acting as if the system is working just fine and the problem is perception/optics is accelerating the unraveling.There’s more in my new book Will You Be Richer or Poorer? Profit, Power and A.I. in a Traumatized World. Read the first section for free (PDF).

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If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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My recent books:

Will You Be Richer or Poorer? Profit, Power and A.I. in a Traumatized World (15% discount in October, Kindle $5.95, print $10.95) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

Many wondered what the driver of the late-day panic-buying across the US equity market was today.

The answer is simple – The Fed… again.

In a statement issued at 1515ET, The New York Fed confirmed it would dramatically increase both its overnight and term liquidity provisions beginning tomorrow through November 14th.

That is a massive 60% increase in the overnight repo liquidity availability (from $75 billion to $120 billion) and a 28% surge in the term repo provision (from $35 billion to $45 billion).

As a reminder, overnight liquidity demands have remained high since initiated...

The decision to increase the liquidity provision could be based on the soaring demand for POMO…

Additionally, while there are no details, this time period crosses both month-end (and the normal liquidity issues associated with that) and the UK’s Brexit deadline – which could still very well mean dramatic dislocations and ‘clogs’ in the pipelines of critical liquidity around the world.

$120 billion of liquidity per day?! What is The Fed not telling us?

Once again, bonds were dumped and every effort was made to pump the S&P back above 3,000 (again)…

 

Chinese stocks were weak overnight…

Source: Bloomberg

European stocks were mixed with Germany’s DAX leading and UK’s FTSE lagging on the week…

Source: Bloomberg

US equity markets were unable to make any progress today, losing early gains (but managed a small gain into the close as The Fed unveiled even bigger repo operations)…

 

US Futures markets were chaotic again overnight – panic-puked at the Japan open (mirroring the panic-bid the previous night)…

 

Boeing and Caterpillar initially whacked Dow futures but were miraculously bid (until the EU close after which stocks faded)…

 

Algos were once again focused on getting S&P back above 3,000…

 

Another day, another short-squeeze…

Source: Bloomberg

Momo was dumped once again…

Source: Bloomberg

Bank stocks continue to outperform but have decoupled from the yield curve…

Source: Bloomberg

Treasury yields ended the day practically unchanged, roundtripping from overnight bond buying to selling during the US day session…(NOTE – same pattern for 3 days)

Source: Bloomberg

30Y Yields returned to unchanged on the week…

Source: Bloomberg

The market is now almost entirely convinced that The Fed will cut rates next week… and The Fed never lets the market down at this level of certainty…

Source: Bloomberg

The dollar ended the day weaker after overnight gains were erased late-on…

Source: Bloomberg

Offshore Yuan surged to 2-week highs…

Source: Bloomberg

The Turkish Lira spiked after Trump lifted sanctions…

Source: Bloomberg

Cryptos were smacked three times in the last 24 hours…

Source: Bloomberg

Bitcoin broke below $8000…

Source: Bloomberg

Testing down to its 200-day moving-average…

Source: Bloomberg

Copper and Crude surged today as PMs largely flatlined…

Source: Bloomberg

And aside from the surprise crude inventory draw, WTI surged above $56 on the back of Dennis Gartman’s short positioning early on…

 

Gold tested up towards $1500 once again but failed to cross it…

 

Finally, the SMART money flow continues to diverge (weaker) than the market…

Source: Bloomberg

And then there’s this – Warren leaking lower as Hillary’s odds surge…

Source: Bloomberg

Eight months after launching his latest hedge fund, the one-time mutual-fund rockstar Jeffrey Vinik, who once ran Fidelity’s storied Magellan Fund, is opting to return capital to shareholders and close up shop.

Why? Apparently Vinik, who had been out of the hedge fund for five years when he decided that he and some business partners would try and raise some outside capital and give it a go, isn’t a regular reader of Zero Hedge.

If he had been, he would have understood that after a decade of centrally planned markets that only go up (and, for the past 18 months, haven’t really gone anywhere), LPs had finally thrown in the towel and decided to ditch their handsomely payed portfolio managers en masse. 

The difficulty carried over into 2019, as the market’s robust rebound made it hard for traditional long-short equity funds to beat their benchmarks.

This would make life difficult for Vinik, who pledged to raise $3 billion for his new fund. He has apparently learned the hard way that, despite his reputation, he isn’t immune to the broader trends. After all, even Steve Cohen had trouble meeting his fundraising targets this year, and he’s Steve friggin Cohen.

For those who aren’t familiar with Vinik’s legacy, he notched several years of consecutive double-digit returns for the Magellan fund before departing Fidelity in the mid-90s to launch his first hedge fund. That fund also performed amazingly well, until Vinik returned capital to outside shareholders at the end of 2000 to “spend more time with his family”. He still made them a ton of money, despite pulling out in the middle of the dotcom crash.

Jeff Vinik.

Along the way, Vinik acquired a professional sports franchise (the NHL’s Tampa Bay Lightning) and also became a minority owner in the Boston Red Sox. But in 2013, he again decided to shutter his fund, which he had reopened to outside money eight years prior, after nearly a year of disappointing returns. At the time he managed about $6 billion in outside money.

According to WSJ, Vinik expected that his third comeback would be met with fanfare from investors, who would scramble over one another to put money in his hand for another long/short equity fund run by the veteran stock-picker.

Unfortunately, it didn’t work out like that. After eight months of aggressive fundraising, he still had a little over half a billion in AUM. Rather than try to stick it out, Vinik decided to call it quits. Despite putting up modest numbers (his fund was up 4.8% between March and September, per WSJ), Vinik’s performance apparently wasn’t enough to spark more inflows.

He told WSJ that between him and his partners, the economics of running a hedge fund simply wouldn’t make sense, particularly after slashing fees.

In an interview, Mr. Vinik said he needed to manage significantly more money for the “economics to make sense” for himself and his business partners. He said he had been surprised to find how much the industry had changed since 2013, a period during which he had focused on the Lightning and a project to invest in Tampa’s downtown. Investors he had known had changed jobs and the decision-making process to invest was far more drawn out than in the past, he said. He said he made the decision to close recently as it became clear more money wouldn’t be pouring in at the start of 2020.

“I honestly believed, obviously foolishly, that I could raise $3 billion by March 1,” Mr. Vinik said. “What I learned after probably 75 meetings is, the hedge-fund industry of 2019 is very different than the hedge-fund industry when I started in 1996, and it’s even very different from the hedge-fund industry when I closed in 2013.”

It’s just one more example of a hedge fund titan finally realizing that in a way, the hedge fund industry is slowly becoming like the music industry in that smaller funds are finding it harder to stay in business, while the biggest, most successful funds effectively have carte blanche to do – and charge – whatever they want.

Authored by Sven Henrich via NorthmanTrader.com,

The Fed has gone into full intervention mode. Not only into full intervention mode, but accelerated intervention mode. Not just a little “mid cycle adjustment” but full bore daily interventions to the tune of dozens of billions of dollars every single day. What’s the crisis? After all we live in the age of trillion dollar market cap companies, unemployment at 50 year lows and yet the Fed is acting like the doomsday clock has melted as a result of a nuclear attack.

Think I’m in hyperbole mode here? Far from it.

Unless you think the biggest repo efforts ever by far surpassing the 2008 financial crisis actions are hyperbole:

What is the Fed not telling us?
I’m asking for a friend. pic.twitter.com/BZK0XuLloV

— Sven Henrich (@NorthmanTrader) October 23, 2019

What indeed is the Fed not telling us?

Something’s off here. See it all started as a temporary fix in September when suddenly the overnight target rate jumped sky high and the Fed had to intervene to keep the wheels from coming off. Short term liquidity issues they said. Well those look to have become rather permanent:

And these liquidity injections are absolutely massive. Just yesterday the Fed injected $99.9 billion in temporary liquidity into the financial system and $7.5 billion in permanent reserves as part of its $60 billion per month in treasury bills buying program. The $99.9 billion coming from $64.90 billion in overnight repurchase agreements and $35 billion in repo operations.

All this action is surprising frankly. What stable financial system requires nearly $100B in overnight liquidity injections. The Fed did not see the need for these actions coming. They are reacting to a market that suddenly requires it. Funding issues Jay Powell called it in October. The Fed was totally caught off guard when the overnight financing rate suddenly jumped to over 5% and they’ve been reacting ever since which pretty much describes the Fed in all of 2019.

What started as a slow walk in policy reversion from last year’s rate hike cycle and balance sheet roll-off (QT) on autopilot has now turned into full blown ongoing rate cuts and balance sheet expansion:

And be clear: This is not a temporary jump in the balance sheet, this is the beginning of something big. The Fed’s balance sheet looks to expand to record highs once again.

Not a mid cycle adjustment.

I keep questioning the efficacy of all this and I have to question the honesty of the Fed. After all they keep chasing events and their policy actions are turning ever more aggressive while insisting on everything being fine. Their actions are saying things are not fine. Far from it. Otherwise they wouldn’t be forced into all these policy actions. But would the Fed cop to things not being fine? To do would be to sap confidence. Can’t have that.

What in fact would markets look like without all these policy interventions? One can only wonder. Well, we know the overnight financing rate would be much higher. This is after all why the Fed is forced to intervene, to keep the target rate low.

Many analysts now suggest a year end market rally to come primarily driven by the Fed as earnings growth remains lackluster and weak. If they print you must buy.

It may well be that our financial markets have permanently devolved into a Fed subsidized wealth inequality generation machine benefitting the few that own most stocks, but one has to wonder why all the rate cutting and liquidity injections have so far not been able to produce sustained new market highs.

Consider the evolution of the Fed put in 2019 so far:

First came the hints in January. “Flexible on the balance sheet” Jay Powell suddenly was uttering following the Q4 2018 stock massacre producing a 3.5% market rally in one day on that pronouncement. Then we got treated to a multi month jawboning show of Fed speakers increasingly sending dovish messages and markets gladly jumped from Fed speech to Fed speech. Powell again rescued markets in early June after the May market rout. “Ready to act” was the rallying cry then and markets rallied dutifully into the July rate cut.

But then the dynamics changed. Rate cut 1 in July was sold. Rate cut 2 in September was sold. Then came repo operations also in September, now in October the $60 billion per month treasury bill buying program was announced and launched.

You note the accelerated pace of Fed actions here? We went from pausing rate hikes to ending balance sheet roll-off to multiple rate cuts and aggressive daily repos and balance sheet expansion. And all of this now since just July. And guess what? Another rate cut coming next week.

Why? Because markets want it. And what markets want markets shall receive. That’s the only data point that matters it appears.

And markets really want that third rate cut next week:

94.6% probability of a rate cut. Think that a Fed that is intervening in markets daily by the dozens of billions of dollars will chance to disappoint markets by not cutting rates? Please.

Investors have been chasing the Fed into multiple expansion all year. But now that the Fed is forced to intervene ever more aggressively it has to prove something: Efficacy.

Are we seeing an improvement in growth? No. Are we seeing an improvement in earnings? No. From the looks of it they are barely keeping it together and are forced to do ever more to prevent markets from selling off as now the principle bull rationale for buying markets here is the Fed.

But, to be fair, the Fed has again succeeded in compressing volatility as price discovery has degraded to overnight action over any intraday price discovery. Markets are back to tight intra-ranges void of any actions and elevating indices near record highs.

Whether they can effect a move to sustained new highs remains to be seen and all eyes will be on the Fed next week to see whether they can achieve it.

If they can then investors can look for another run at the upper trend line on the $SPX chart:

If they can’t, then things may turn out quite differently such as this speculative scenario:

What? You don’t think Fed is not all about markets? Where have you been? After all the Fed’s stated policy objective now is to extend the business cycle by any means necessary. And they can’t do that with falling stock prices.

And so they are in accelerated, daily, intervention mode. Because this is what it takes. The questions investors have to ask themselves is this:

• What if it’s not enough?

• And what is it they are not telling us?

• Why are they are forced into these historic unexpected measures?

• What happens if they lose control?

We may know more next week.

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