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Authored by Michael Snyder via The Economic Collapse blog,

The Federal Reserve is responsible for creating the stock market boom that we have witnessed in recent years.  Are they now also setting the stage for a stock market bust?

After hitting an all-time high earlier this year, the Dow has plunged more than 3,000 points from the peak of the market, and it would appear that it would be extremely irresponsible for the Fed to raise interest rates in such a chaotic environment.  In addition, evidence continues to mount that the U.S. economy is slowing down, and everyone knows that raising interest rates tends to depress economic activity.  So it would seem that it would not be logical for the Federal Reserve to raise interest rates at this time.  In fact, economist Stephen Moore told Fox Business that if the Fed raises interest rates “they should all be fired for economic malpractice”…

“The Fed has been way too tight. They made a major blunder three months ago with raising the rates. It’s caused a deflation in commodity prices. And I will say this, David, if the Fed raises interest rates tomorrow they should all be fired for economic malpractice.”

If the Federal Reserve raises interest rates and indicates that more rate hikes are coming in 2019, it is quite likely that the markets will throw another huge temper tantrum.

But as Jim Cramer has noted, if the Federal Reserve make the right choice and leaves rates where they currently are, we could potentially see a significant market rally…

“Today was a dress rehearsal for the kind of rally we can get if the Fed does the right thing tomorrow and repudiates the idea that we need a series of rate hikes in 2019, not just one more tomorrow,” Cramer said Tuesday. “If we get the Fed on board, expect more positive action like we had this morning before the market gave up much of its gains.”

Unfortunately, there is a factor that is complicating things.

In recent weeks, President Trump has been extremely critical of the Federal Reserve and Fed Chair Jerome Powell.  If the Fed decides to leave interest rates where they are, that could be interpreted as them giving Trump exactly what he wants, and it is likely that they do not want to be viewed as siding with Trump.

This is yet another reason why we need to end the Fed.  The Fed has become just another player in the game of politics, and the truth is that the Federal Reserve is a deeply un-American institution.  Our founders intended for us to have a free market capitalist system, but instead we have an unelected panel of central planners setting our interest rates and running our economy.

Since the Federal Reserve was created in 1913, there have been 18 major economic downturns, and now we are heading into another one.  Central banking manipulation endlessly causes boom and bust cycles, and hopefully this time around the American people will finally decide that enough is enough.

As losses on Wall Street mount, hedge funds are starting to go down like dominoes, and that is going to cause huge problems for some of our largest financial institutions.  For example, we just found out that Citigroup could potentially lose 180 million dollars due to bad loans that it made to a prominent Asian hedge fund…

It’s not just hedge funds that are blowing up left and right: so are the banks that are lending them money.

Citigroup is facing losses of up to $180 million on loans made to an unnamed Asian hedge fund which saw major losses on its FX trades Bloomberg reports citing a person briefed on the matter. The hedge fund and Citi “are in discussions on the positions and how they should be valued” which is usually a bad sign as when it comes to FX the mark to market is, at least, instantaneous. Bloomberg adds that the situation is fluid and the eventual losses may end up being smaller depending on how the trades are unwound.

We haven’t seen anything like this in 10 years, and if the Fed raises interest rates this new financial crisis could begin to escalate quite rapidly.

At this point, even former Fed chair Alan Greenspan is urging investors to “run for cover”…

The former Federal Reserve chairman who famously warned more than two decades ago about “irrational exuberance” in the stock market doesn’t see equity prices going any higher than they are now.

“It would be very surprising to see it sort of stabilize here, and then take off,” Greenspan said in an interview with CNN anchor Julia Chatterley.

He added that markets could still go up further — but warned investors that the correction would be painful: “At the end of that run, run for cover.”

The markets were calmer on Tuesday because everyone was kind of waiting to see what the Fed would do today.

The decision should be obvious, but unfortunately things are never that simple.

We live in very uncertain times, and the shaking of our financial system has begun.

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While market commentators seem convinced The Fed will hike rates today, the market is less convinced – assigning a two-thirds chance to it, the lowest for an FOMC Day in years.

The bigger question is just how ‘dovish’-ly can Powell hike? And, more importantly for world harmony, can he avoid the appearance of kow-towing to the President (because god forbid, establishment elitists would be forced to agree with the current White House resident’s views).

His dovishness bar is set extremely high already, as former fund manager and FX trader Richard Breslow notes, the shift in forecasts as to what the FOMC might do later today has been changing day by day. With every downdraft in equity prices the degree to which the Fed is expected to infuse its decision with dovishness has increased.

We have even managed to convince ourselves that the stock market knows best. And in an investing world that has become long-only, it is easy to understand why people would think that way.

At the end of the third quarter, when stocks were making new highs, the interpretation of economic data tended to err on seeing the brighter side whenever a number missed or was ambiguous in its message. After this sell-off, that has clearly reversed. We see recessions lurking behind every turn of the calendar.

Suddenly, the various financial-conditions indexes have become the most widely discussed economic data points. It had to because while some numbers have been squishy, you can’t justify the extent of this change in sentiment by the “slowdown” in economic growth and employment that has been posted.

The base case for today’s outcome has become a dovish hike with an optimistic spin. Something for everyone. That’s not easy to deliver. Especially with the burden of those dot plots they continue to carry around, try to de-emphasize and which are universally fixated upon. You can’t really be convincingly data-dependent when you have to justify everything around a meaningless exercise.

It is not a coincidence that the highest price of the year in S&P 500 futures occurred on the same day as the high in WTI crude. And at the time, while investors were willing to acknowledge that equities might have some of the characteristics of a bubble, was anyone calling for the collapse in oil prices?

Back then oil futures were still in backwardation. And, for lack of a better thing, most central banks go right to the futures curve for their forecasts. Pity the traders who think they are gospel truths.

Be especially leery of predictions about how various markets will trade based upon what we will hear. Especially a week before the end of the year. The 2s10s yield spread has widened a bit since the beginning of the month and investment-grade credit spreads have stabilized. Both in anticipation of a more accommodating Fed. But so far, people have continued to look for any excuse to reduce exposure to high-yield. And it is surprising how non-existent the bounce has been in equities if people really think this will be a game- changer.

Given how far these markets have moved, they can have sizable corrections within the context of larger trends. But you can be sure whatever happens will be assumed to define the way forward.

At the end of the day, an extra 25 basis points either way will make little difference to the economy. Especially since so many of the prevailing “headwinds” have nothing to do with U.S. monetary policy.

But, as Breslow notes, the FOMC will face two big challenges with ongoing significance. Chairman Jerome Powell will need to be sufficiently even-handed so as to not have investors conclude that this is the end of the tightening cycle, yet market- friendly enough to avoid the inevitable and ridiculous taper tantrum. And the much greater challenge of convincing anyone a dovish lurch isn’t just where the new Fed put is struck and the party can begin again.

Especially as “dovish hike” mentions on Twitter are taking off

h/t @Sentio

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Authored by Mike Shedlock via MishTalk,

As of the 2017 City of Chicago Actuarial Report, each Chicagoan would have to pony up $140,000 to make pensions solvent.

WirePoints reports Chicago Mayor Rahm Emmanuel wants a Constitutional Amendment to address Illinois Pension Woes.

The mayor’s plan cannot possibly work because Chicago is far too deep in pension debt to do anything but default.

Nonetheless there is some benefit in the idea for the simple reason it may force the legislature to think about things as they are, not as they want them to be.

Kudos to Rahm Emanuel for broaching the subject of a constitutional amendment for pensions and for using cost-of-living adjustments as an example of why the amendment is so necessary.

The possibility of an amendment in Illinois has experienced a revival of sorts since Arizona recently amended its constitution for a second time. Already, the Chicago Tribune, Crain’s and Mayoral candidate Bill Daley have supported an amendment in some form. And COLAs are finally being recognized as a key driver of Illinois’ pension crisis.

However, it would be a mistake – as some may be tempted to do – to think that an Illinois fix is as simple as COLA reforms via a narrow, Arizona-style constitutional amendment. Instead, Illinois needs an amendment that’s as broad as possible if it hopes to fix the pension crises playing out all over the state.

Collectively, Illinois governments owe more than $400 billion in pension debts alone, based on Moody’s most recent methodology.

Its a particular problem for Rahm Emanuel, as Chicagoans are the most swamped of all. Each city household is on the hook for $140,000 in overlapping state and local retirement debts.

Piecemeal Approach Cannot Work

WirePoints discusses changes in Arizona and accurately concludes piecemeal changes won’t work for Illinois.

Here’s a hint, they won’t work for Arizona or any other state or municipality either. Ridiculous COLA adjustments are only a tiny piece of the problem.

More Substantial Fixes Needed

WirePoints concludes and I agree:

“Any Illinois amendment should repeal the protection clause and say expressly that the state may modify past and future pension benefits notwithstanding the state constitutional contract clause or anything else in the Illinois constitution that might conflict.”

Of course, Labour unions could and would appeal that, all the way to the US Supreme Court. The process could take years.

In Wirepoints’ view such appeals would fail.

Mish’s Better Approach

I have a far simpler approach that is 100% certain to work, and work faster.

1. Illinois can allow municipal bankruptcies

2. The Federal government can pass national legislation allowing municipal and even state bankruptcies

Q. How does that fix the problem?

A. As we have seen in Detroit, Michigan; Central Falls, Rhode Island; and numerous cities in California, pension promises are not sacrosanct in bankruptcy.

As it stands, states can allow or prohibit municipal bankruptcies, but if allowed, Federal laws take precedence over state rules. In bankruptcy, pension obligations can be reduced. They were hammered in Central Falls.

In Illinois, I would expect the City of Rockford to file bankruptcy the moment it could. Rockford is Illinois’ third largest city.

Such a bankruptcy would send shock waves through the bond markets, but also where reform is needed most: Illinois pension plans.

Bankruptcy reform would put huge pressure on unions to reduce demands in a fair manner (highest pensioners get the biggest cuts), rather than leaving matters to the courts to decide where the cuts happen.

Bankruptcy reform would in and of itself likely ensure that the state would get around to fixing, via constitutional amendments, its other pension problems.

The advantage of my approach is we would not have to wait for a constitutional amendment. It would come later.

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With equities, bond yields and federal funds target rate expectations collapsing, FOMC expectations are changing daily, Standard Chartered’s Steve Englander writes overnight describing prevailing market sentiment as “fear and loathing in asset markets.”

Yet with economic data reasonably strong, investors are trying to gauge how the FOMC will balance asset market fears and softening growth abroad against still-robust incoming economic data, which the NYT profiled overnight.

Investor perception is that the FOMC will back off sharply from the hawkish stance of September/October, but there is a recognition that the Fed is reluctant to make big policy shifts based on asset markets and foreign growth. Amusingly, as Englander writes, “the FOMC is aware that there are more 130/30 long/short funds than 30/130 long/short funds.”

In terms of how the Fed will achieve the gradual lowering of its dot plot, Bank of America expects the dots will shift lower by 1 hike across the forecast horizon, with the median shifting to 2 hikes for 2019 vs. 3 hikes previously. If newly appointed Governor Bowman is in the 3 hike camp, then we would need 2 Fed officials to shift from 3 to 2 hikes in order to move the median. If Bowman is a 2-hiker – which is possible given that she is a community banker who may naturally lean more dovish- we would only need one additional member to revise down. In our view, the potential candidates to shift their views are Powell, Williams, Evans and Brainard.

Looking further ahead, BofA notes that the story for 2020 is less clear, stating that the bank’s baseline is that the median expectations will be for one hike in 2020 but it is possible that we see a shift up to 2 hikes. If so, it would show that Fed officials are maintaining the same terminal rate but expect to get there slower given the lack of inflation pressure which allows the Fed to slow the cycle. Incidentally, it is the opinion of BofA’s chief economist Michelle Meyer that removing one additional hike is more dovish than if the Fed just pushed it forward.

Even with a dovish move in the short-end, BofA does not expect the long-run dot to move. It has gradually shifted higher over the course of this year and the bank does not think we have seen any evidence to suggest that expectations have moved too much in this respect:

The long-run dot is sticky and it would be surprising if we saw a rapid reversal. However, the risks are for the median dot to shift lower as it would only take one dot to move down from 3% or Governor Bowman to pencil in a long-run rate that is below 3%.

That said, on the economic outlook BofA expects downward revisions to headline and core PCE inflation projections for this year reflecting the decline in energy prices and the relatively weaker string of core PCE inflation prints of late. Looking ahead, Meyer thinks that the growth and headline inflation forecast for 2019 are likely to be revised modestly lower and there are risks to the downside for the core inflation forecast.

So going back to what the market expects, here is how Englander frames consensus:

• Few investors think the FOMC can back off a December hike
• Two 2019 hikes in the dot plot, nothing beyond
• Significant changes in the statement language to indicate a pause is likely after a small number of hikes
• Once neutral is hit, any hikes become very conditional on strong inflation and activity outcomes

There is some debate on whether this “consensus” would be considered sufficiently dovish given current economic and asset market fears and the Std Chartered strategist suspects that it will work to calm markets, but possibly not immediately. It is likely that investors will ultimately be convinced by the Fed’s stress on conditionality of future hikes, but two hikes in the dots may be read in the short term as Fed indifference to market conditions.

* * *

The ultimate dovish market reaction is based on the following logic. Markets now price in only 17bps of hikes for 2019 and 8bps of easing for 2020 – investors tend to view the Fed dots as reflecting a relatively optimistic scenario. Two 2019 hikes in the dots would be read as saying – “three hikes are likely out; two are aspirational but possible; the Fed would settle on one if economic outcomes show ambiguity, but do not suggest it has to stop altogether.”

This is likely acceptable in terms of market pricing. If the Fed points to c.2.87% as the peak of the FFTR (hiking on Wednesday and twice in 2019) and stresses conditionality, market pricing of 2.5-2.6% for a FFTR peak is reasonable. That would still seem to leave room for US long-term yields to come down from current levels of 2.84%.

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A surprise crude build from API sent WTI briefly lower but as the dollar has tumbled this morning, crude prices have rallied back above $47.50, helped by optimistic jawboning from Saudi Arabian Energy Minister Khalid Al-Falih.

“We will meet in April and I’m certain that we will extend it,” Al-Falih told reporters in Riyadh, referring to the next meeting of OPEC+ members to discuss whether to extend the December agreement to reduce output. “We need more time to achieve the result.”

Additionally, Al-Falih said the current price dip isn’t based on supply and demand of oil, and has plenty of blame to go around:

“What has happened in my opinion recently is a confluence of many non-oil fundamental issues including the geopolitical issues, especially around the sanctions and the waivers that were granted by the United States,” Al-Falih said.

“It also includes the trade tension between the U.S. and China.”

But for now inventories are what is driving price action.

API

• Crude +3.45mm (-3.25mm exp)

• Cushing +1.063mm (+1.3mm exp)

• Gasoline +1.76mm

• Distillates -3.442mm

DOE

• Crude -497k (-3.25mm exp)

• Cushing +1.091mm (+1.3mm exp)

• Gasoline +1.766mm

• Distillates -4.237mm – biggest draw since March

After two weekly draws, last night’s build from API surprised traders, and DOE reported only a small crude draw of 497k (well below the 3.25mm draw expected). Distillates saw the biggest draw since March

Crude production is unchanged on the week.

WTI remains well below $50 still…

“The market is experiencing price carnage, maximum pain and considerable downside pressure,” technical analyst Robin Bieber said in a report for PVM Oil Associates. The space between the flat price and the 5-day MA is unsustainable and “begs for a temporary ‘cooling off’ reaction higher to relieve some of the recent pressure.”

Still, the market is “weak and very exposed to lower numbers”

Hovering around $47.50 ahead of the DOE data, energy stocks also rallied into the print on whisp[ers and kneejerked up to $48 on the confirmed crude draw…

But downside risk remains:

“The market’s judgment on the most recent cuts deal, even before it starts, is now pretty clear — it was too vague, lacked some credibility, and the April review date suggested it might be too short,” said Derek Brower, a director at consultant RS Energy Group.

“So it makes sense that producers are already fretting. But it is also pretty early to be saying what OPEC will do in April – lots can change by then.”

Concerns about oversupply and the slowing global economy seemingly grow by the day.

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Senate Majority Leader Mitch McConnell announced Wednesday that he will introduce a stopgap spending bill to keep the government open until February 8, after Democrats pushed back on Tuesday against a proposal which would allocate $1 billion to President Trump’s immigration policies. 

If passed into law, the measure would prevent a partial government shutdown set to begin Saturday. According to The Hill, McConnell’s proposal will keep funding for border fencing flat. 

The White House had previously backed down on a demand for $5 billion in funding for President Trump’s wall, with Press Secretary Sarah Sanders claiming “We have other ways that we can get to that $5 billion.” 

“At the end of the day we don’t want to shut down the government, we want to shut down the border,” she added. 

Earlier Wednesday President Trump tweeted: “In our Country, so much money has been poured down the drain, for so many years, but when it comes to Border Security and the Military, the Democrats fight to the death. We won on the Military, which is being completely rebuilt. One way or the other, we will win on the Wall!”

In our Country, so much money has been poured down the drain, for so many years, but when it comes to Border Security and the Military, the Democrats fight to the death. We won on the Military, which is being completely rebuilt. One way or the other, we will win on the Wall!

— Donald J. Trump (@realDonaldTrump) December 19, 2018

The details of McConnell’s stopgap proposal will be released later Wednesday. 

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Peter Schiff believes that the next stop for interest rates heading into 2019 is going to be directly back to 0%. And in a new podcast, Schiff warns that he believes it is going to be QE4 that finally causes the dollar to collapse. 

“The Fed will announce another rate hike tomorrow most likely,” Schiff says.

“I think that if the Fed hikes rates, there is a very high probability that its the last hike in the cycle. That should remove a headwind from gold.”

He continued, “If the Fed doesn’t hike rates tomorrow, they’re never hiking them again.”

In addition to this, Schiff also talked about the price of oil, which tanked into the mid $40 range during trading on Tuesday. Schiff anticipates that another round of quantitative easing and continued inflation will eventually cause the price of oil to move higher. He’s bullish on the commodity and bullish on other commodities that are priced in US dollars for the same reason.

Schiff spoke about the price of gold and why he believes the commodity hasn’t been able to catch a bid despite the unrest in the equity markets and among central bankers. On the podcast, he discusses how he believes the volatility in the crypto space has taken away from gold catching a bid for the time being.

Schiff also addresses long time CNBC bitcoin bull Brian Kelly who, earlier this week, casually revealed that he had been net short the cryptocurrency after years of pumpish “analysis” on it, as well as other alt-coins, when there was nary a skeptical point to be made and the price of Bitcoin was a mainstay on the CNBC screen at all times.

“Maybe he’s not as dumb as I thought, but he’s obviously a lot less honest,” Schiff said about Kelly.

Schiff had tweeted that he believed Kelly was engaging in pumping and dumping the cryptocurrency and that he should be fired from his job at CNBC as a result.

Brian Kelly, just revealed for the first time on #CNBC that he has been short Bitcoin. Too bad he did not disclose this conflict as he was pumping Bitcoin up to the CNBC audience so he could dump the rally. CNBC should apology to its audience and fire Kelly from their network!

— Peter Schiff (@PeterSchiff) December 17, 2018

Since Brian Kelly, a CNBC regular, just admitted to using his position as a CNBC regular to pump and dump Bitcoin, CNBC viewers who were duped into buying Bitcoin based on Kelly’s table pounding bullishness, without disclosing his conflict, should be lawyering up. Look out CNBC!

— Peter Schiff (@PeterSchiff) December 17, 2018

Finally, Schiff talks about political aspirations that he may have for 2024. He addresses why he believes libertarian ideology can only penetrate into the mainstream via the Republican Party and he talks about possible aspirations for bringing his ideology to office in the future.

You can listen to the entire podcast here:

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