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Authored by Simon Black via SovereignMan.com,

On October 12, 929, roughly 1100 years ago, Abd-er Rahman III of the Umayyad Dynasty was proclaimed ruler of Cordova – the Islamic kingdom that comprised most of Spain at the time.

Rahman was just 21 when he ascended to power, and he remained there for nearly 50 years as one of the wealthiest and most powerful monarchs in Europe.

Historians Denis Cardonne and Edward Gibbon calculate his annual tax  revenue at approximately 12 million gold dinars… which was a LOT.

The dinar contained 4.25 grams of gold, so 12 million of them would be worth about $2 billion today.

With Cordova’s population estimated at around 500,000 people back in the early 10th century, that works out to be the modern day equivalent of $4,000 in tax per person.

That’s an eerily similar number to modern day tax figures.

The most recent data from the Internal Revenue Service, for example, shows  that the average individual income tax is just over $4,000 for every man, woman, and child in the Land of the Free.

(Most of the country, of course, pays nothing.)

It’s an interesting data point that shows just how well gold retains its value over long periods of time.

Records from the same period in Islamic history show that the homes of wealthy individuals were worth between 10,000 and 30,000 dinars, and much higher among the ultra-rich.

That’s roughly $1.7 million to $5 million in today’s money– again, eerily similar to what high-end homes cost today.

Day-to-day, month-to-month, and year-to-year, the price of gold can fluctuate inexplicably.

But over the long term, whether you’re comparing loaves of bread, home prices, or government tax revenue, it REALLY holds its value.

This is one of the things that makes gold such an excellent hedge against political uncertainty, macroeconomic challenges, financial crises, inflation, etc.

Said another way, gold is a great insurance policy for all the “I don’t knows.”

Global debt, for example, recently hit an unfathomable level at nearly $250 TRILLION.

Total US national debt is $21.5 trillion; that exceeds 100% of US GDP, and it’s growing rapidly.

Uncle Sam is burning through cash so quickly that even the Treasury Department expects trillion+ dollar annual budget deficits from now on.

Literally just THREE major line items from the federal budget– Social Security / Medicare, Defense spending, and interest payments on the debt– cost more than ALL the tax revenue that the government collects.

They have to go deeper and deeper into debt to fund EVERYTHING ELSE in the federal government– from Homeland Security to national parks to the light bill at the White House.

That’s not good, considering these ballooning deficits are coming at a time when interest rates are RISING.

So the more debt the government accumulates, their interest payments are growing even more rapidly.

Debt is rising so fast that the Congressional Budget Office estimates interest payments will exceed DEFENSE spending within a few years.

Historically speaking, that’s usually the kiss of death for any empire… when it costs more to service the debt than to defend the nation.

And, not to be a downer, but most of these problems are getting much worse.

10,000 Baby Boomers are retiring every day. And that means ballooning Medicare and Social Security payments.

Meanwhile, there are fewer and fewer young people entering the work force to pay into America’s broken pension system.

In 1960, for example, there was an average of 5.1 workers in the US paying tax into the Social Security system to support every single retiree drawing benefits.

By 2000 that ratio had fallen to 3.4 workers per retiree. Today it’s just 2.6.

Pension funds rely on a steady, growing population and work force to remain stable. So this is pretty much a disaster for Social Security.

The US fertility rate, by the way, is at a record low. So this problem is worsening by the year.

(And the pension / demographic fundamentals in Europe and Japan are even WORSE than they are in the US. . .)

And, remember, all of this is happening at a time when the economy is doing well.

What happens when there’s a major market correction (and people’s retirement savings get wiped out again)? Or there’s a major recession?

Across the water, Europe is drowning in debt with radical political parties taking hold.

Japan, the world’s third-largest economy, has a debt-to-GDP ratio of 236% – more than double that in the US.

Japan’s debt is so huge that the government has to spend nearly 25% of tax revenue just to pay INTEREST!

So let’s just take a step back and summarize–

The world’s largest economy (the US) has a ballooning debt and an unsolvable pension problem, yet is starting a trade war with the world’s second largest economy (China).

Meanwhile the third largest economy in the world (Japan) has to spend nearly one quarter of its tax revenue just to pay interest…

And most of the other top economies in the world (Italy, France, etc.) are drowning in debt and economic stagnation.

It’s impossible to predict EXACTLY how this is going to play out. Or when.

But it certainly seems sensible to have some insurance.

Gold has been around for thousands of years. And, as we discussed earlier, it has a great track record of maintaining value.

But with nearly every other asset in the world trading at / near record high prices today, gold is on sale.

You can buy an ounce of gold today for less than $1,200– 38% below its 2011 high.

(In addition to a low price, there are supply constraints in the gold sector, which could be a major catalyst for higher prices.)

The time to buy insurance is when it’s cheap. . . and when you don’t need it. Because when your house is on fire, it’s already too late.

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A curious thing happened on Christine Blasey Ford’s way out of Congressional testimony today – when Rep. Sheila Jackson Lee (D-TX) handed Ford’s lawyer, Michael Bromwich, a thick envelope after shaking hands. 

Watch: 

WATCH: Rep. Sheila Jackson Lee Slips Envelope To Dr. Ford’s Lawyer Following Hearing pic.twitter.com/TG2b0KGVvQ

— Breaking911 (@Breaking911) September 27, 2018

Ford’s attorneys told the Senate Judiciary Committee on Thursday that they are representing her on a pro bono basis.

During questions from staff lawyer Rachel Mitchell as to who was paying her legal bills, Bromwich interjected “Both her counsel are doing this pro bono.” Furthermore, Ford was unable to explain who paid for – or will pay for – her polygraph.

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A deep dive into how China “systematically pries technology from U.S. Companies” by the Wall Street Journal gives essential context to President Trump’s rising trade war with Beijing at a moment that both Chinese and American mainstream media relentlessly bash the president for his unprecedentedly tough stance on China. 

And yet such a bombshell story exhaustively documenting multiple major instances of China caught in brazen acts of theft of American technology and trade secrets has barely made a splash in the rest of major media, and likely won’t hit the network news shows with so much as a whimper: after all it may confirm that Trump is right, and admitting this will certainly not gain ratings. 

Foremost among Trump’s demands after he announced tariffs on about half of all US imports from China while threatening to impose tariffs on the second half, is that China cease requiring American companies turn over trade secrets in order to do business there. Trump has consistently blasted China’s “unfair trade practices” which includes stealing US intellectual property.

In fact the Commission on the Theft of American Intellectual Property, an independent US body including representatives from the public and private sectors, has recently estimated that $600bn worth of US intellectual property is stolen every year, led by China, and the bipartisan body has called for a “decisive response”. 

But the WSJ story gives flesh to prior allegations and statistics, including shocking instances of raids on American offices in Chinese cities, revealing that Beijing authorities have erected an entire system geared toward prying the most innovative technologies and secrets from American companies while passing it off merely as the fair and routine cost of tapping into a new market of over a billion people. 

The report begins by recounting a raid on DuPont’s Shanghai offices, which interestingly the Chinese have since tried to pass off as but normal procedure and their prerogative: 

DuPont Co. suspected its onetime partner in China was getting hold of its prized chemical technology, and spent more than a year fighting in arbitration trying to make it stop.

Then, 20 investigators from China’s antitrust authority showed up.

For four days this past December, they fanned out through DuPont’s Shanghai offices, demanding passwords to the company’s world-wide research network, say people briefed on the raid. Investigators printed documents, seized computers and intimidated employees, accompanying some to the bathroom.

The WSJ describes this as one of the multiple tactics that “reveal how systemic and methodical Beijing’s extraction of technology has become” event while Chinese officials consider the complaints against such coercion “unfair”. 

Reports the WSJ further, “China’s tactics, these interviews and documents show, include pressuring U.S. partners in joint ventures to relinquish technology, using local courts to invalidate American firms’ patents and licensing arrangements, dispatching antitrust and other investigators, and filling regulatory panels with experts who may pass trade secrets to Chinese competitors.” 

With DuPont, its former Chinese partner, Zhangjiagang Glory Chemical Industry Co., continues to sell chemicals used to make fibers that it allegedly ripped off from the American conglomerate. Yet China stacked the deck against it in local courts over years of the company seeking remediation over the technology theft, and its antitrust board has further warned DuPont to drop its lawsuits. 

This is one of many examples of a whole system of “coerced technology transfer” which the White House says inflicts $50 billion yearly in damages to US companies, and more broadly disincentivizing American innovation and crippling US economic growth. 

But China pitches what it sees as up-front and voluntary technology sharing as the cost of lucrative expansion into its markets, though White House officials hold this up as clear evidence of China’s economic aggression. 

A formal Chinese government statement to the WSJ in response to allegations of systematic technology theft reads as follows: “American companies in China have received huge returns through technology transfer and licensing, and are the biggest beneficiaries of technical cooperation.”

Chinese officials have further long claimed that “U.S. companies enter partnerships voluntarily,” according to the WSJ. 

White House trade adviser Peter Navarro, meanwhile, described “The combination of naiveté and hubris on the part of U.S. companies seeking to enter the Chinese market, coupled with a sophisticated Chinese effort to extract technology has been a lethal combination.”

But another Beijing policy maker cited in the report claimed, “China’s offer to the world has been straightforward,” and that “Foreign companies are allowed to access China’s markets but they would need to contribute something in return: their technology.”

Other examples of such “straightforward” practices outlined by the WSJ report are as follows: 

• About one in five members of the American Chamber of Commerce in Shanghai say they have been pressured to transfer technology, according to a survey conducted in the spring. Of those companies, 44% in aerospace and 41% in chemicals report “notable pressure.” China considers both industries strategically important.
• China mandates that foreign companies wanting to open or expand in 35 sectors do it through joint ventures, though it announced a plan in April to phase out rules requiring foreign auto makers to share factory ownership and profits with Chinese companies by 2022.
• When China set out to build its first large commercial passenger jet in 2008, state-owned Commercial Aircraft Corp. of China made clear it would buy components only from joint ventures whose foreign partners would share technology. General Electric Co. agreed.
• Chinese leaders see innovative technologies as forces to propel its industries up the value chain into more sophisticated sectors and the country into rich-nation ranks. To ensure foreigners bring their best, phalanxes of regulatory panels scrutinize foreign investments to make sure they meet government goals.

The report cites Texas-based chemical producer Huntsman Corp as being recently targeted by such “regulatory panels” which ultimately was able to procure “enough information to duplicate the product” under the guise of “approving” chemicals prior to production in China, which required the US company to submit its own chemical formulas and production process for review. 

And likely there are many dozens more of such technology thefts within a “trade partnership” system designed from start to finish to ensure American secrets flow into Beijing’s hands. 

Amidst the ratcheting trade war, chances are growing that over the next year we will hear of more sensational raids on American company offices in Chinese cities – perhaps even Apple which the local propaganda press recently threatened with “anger and nationalist sentiment” – and heightened threats against them from anti-trust and regulatory committees. 

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Authored by Lance Roberts via RealInvestmentAdvice.com,

This bull market seems unstoppable.

Regardless of short-term events, investors have quickly looked beyond those risks to in a bid to push stock prices higher. For example, in February of this year the markets dove roughly 10% as “trade wars” became a “thing.”  Over the next two months, the markets vacillated coming to grips with what “Trump’s war with China” would actually mean. Last week, the Administration announced a further $200 billion in tariffs against China, China cancels talks with the U.S., and China imposes similar tariffs against the U.S. – and the market barely budges..

Seemingly, nothing can derail this bull market which is now the “longest in history” by some counts.

However, in my opinion, the two biggest threats to the bull market may very well be the two issues which are the most visible currently – tariffs and interest rates.

Tariffs

One of the biggest drivers of the “bullish thesis” is the explosion in earnings due to the tax cuts passed in December of 2017. However, the issue is that tax cuts only provide a very short-term benefit and, since we compare earnings on a year-over-year basis, growth will drop back towards the growth rate of the economy next year.

For now, the issue has been overlooked due to the surge in earnings from the changes to the tax code as well as the massive surge in repatriated dollars from overseas due to that lower tax rate. As shown by the Federal Reserve:

“Balance of payments data show that U.S. firms repatriated just over $300 billion in 2018:Q1, roughly 30 percent of the estimated stock of offshore cash holdings. For reference, the 2004 tax holiday, which provided a temporary one-year reduction in the repatriation tax rate, resulted in $312 billion repatriated in 2005, of an estimated $750 billion held abroad.”

Of course, while it was expected to go to CapEx and wages, it went to share buybacks instead.

“The top 15 firms account for roughly 80 percent of total offshore cash holdings, and roughly 80 percent of their total cash (domestic plus foreign) is held abroad. Following the passage of the TCJA in late December 2017, share buybacks spiked dramatically for the top 15 cash holders, with the ratio of buybacks to assets more than doubling in 2018:Q1.”

Not surprisingly, since buybacks reduce the number of shares outstanding, bottom line EPS surged sharply despite a quarterly decline in revenues/share which slumped from $329.59/share in Q4 to $320.39/share in Q1. 

While the bull market thesis continues to be that earnings expansion will justify higher valuations, such may not be the case. Tariffs, which are a “tax on profits,” could effectively eliminate the majority of the temporary benefits provided by tax cuts to begin with.

“As I wrote recently, the estimated reported earnings for the S&P 500 have already started to be revised lower (so we can play the “beat the estimate game”) but an ongoing trade war could effectively wipe out the entire benefit of the tax cut bill. For the end of 2019, forward reported estimates have declined by roughly $9.00 per share.”

But it isn’t just this year where estimates are falling, but into 2019 as well. The chart below shows the changes in estimates a bit more clearly. It compares where estimates were on January 1st versus April, June, and September 1st. Currently, optimism is exceedingly “optimistic” for the end of 2019.

However, those estimates are likely to be revised down sharply in the months ahead as the number of S&P 500 companies issuing negative EPS guidance is now the highest since 2016.

The more tariffs that are laid on companies which do international business, the more likely we are going to see further decreases in earnings expectations. This is particularly the case given the divergence between the U.S. and the global economy.

“The trade war is now a reality. The recently announced imposition of US tariffs on a further $200 billion of imports from China will have a material impact on global growth and, even though we have now included the 25 percent tariff shock in our GEO [Global Economic Outlook – Ed.] baseline, the downside risks to our global growth forecasts have also increased.” – Fitch Chief Economist Brian Coulton.

Of course, the other issue that will weigh on corporate profitability and earnings is interest rates.

Interest Rates Matter

Yesterday, the Fed hiked interest rates for a third time this year and is set to raise again by the end of the year. With the Fed Funds rate now at 2%, it is equivalent to the Fed’s long-term outlook of the economy and inflation. More importantly, the Fed removed the word “accommodative” from their statement which also suggests they may be nearing the “neutral rate policy setting.” 

Nonetheless, markets have continued to discount the risk of rising rates.

They most likely shouldn’t.

Rising interest rates, like tariffs, are a “tax” on corporations and consumers as borrowing costs rise. When combined with a stronger dollar, which negatively impacts exporters (exports make up roughly 40% of total corporate profits), the catalysts are in place for a problem to emerge.

The chart below compares total non-financial corporate debt to GDP to the 2-year annual rate of change for the 10-year Treasury. As you can see sharply increasing rates have typically preceded either market or economic events. Of course, it is during those events which loan default rates rise, and leverage is reduced, generally not in the most “market-friendly” way.

The same applies for heavily levered households. With household debt is also at historic highs, rising rates eventually lead to a reversion in household net worth.

With leverage, both corporate and household, at historical peaks, the question is not “if” but “when” rising interest rates pricks the debt balloon.

As Doug Kass recently noted – rising interest rates do matter:

1. The private and public sector have inflated debt loads today. Rising interest rates raise the cost of servicing that debt and reduce spending and productive investment.

2. Private sector activity is importantly influenced by interest rates:

   • Rising mortgage rates and higher mortgage payments reduce home affordability and hurt home turnover and refinancings.

   • Slowing home sales and reduced refinancings hurt spending on renovations and remodeling.

   • Given record-high auto prices and the difficulty in further lengthening out already long auto loan maturities, rising interest rates will hurt auto sales by raising monthly payments.

   • Consumer, mortgage and corporate loans that are variable rate are hurt by climbing interest rates.

   • The credit markets fall when interest rates rise, serving to have a negative wealth effect on consumers and corporations that own bonds.

   • Rising interest rates impede corporate profit margins, overall profits and earnings per share

   • Debt is issued by corporations in order to buy back stock and pay dividends. Advancing rates reduce a company’s return on investment on those buybacks.

   • Corporate capital spending is partially dependent on borrowings. Higher borrowing costs could lead to lower capital spending.

3. Public sector activity and profitability are greatly influenced by interest rates:

   • The deficit/GDP ratio will increase as interest rates rise and the expectation for lower future deficits will crumble.

4. Dividend discount models are based on future estimates of cash flow discounted back at an appropriate interest rate:

   • Rising interest rates reduce the value of those future cash flows and, in turn, the value or worth of a company’s stock.

5. There is now an alternative to stocks as the yield on the one-month Treasury bill (2.06%) and two-year Treasury note (2.85%) compare favorably to the S&P’s dividend yield of only 1.75%. Additional increases in interest rates will serve as an even more competitive and attractive alternative to stocks.

As I noted previously, the Fed has a bad habit of hiking rates until something breaks.

Stock Market Implications

As long as the backdrop is healthy, in this case strong earnings and economic growth, the markets can fend off attacks from higher rates and geopolitical issues. However, as tariffs attack corporate profitability, and weakens economic growth, it makes the system much more susceptible to the virus of higher rates. This will most likely expose itself as credit-related event which will be blamed for a bigger correction in the market. However, “Patient Zero” will be the Federal Reserve.

Even one of the most bullish individuals on Wall Street, Wharton finance professor Jeremy Siegel, is now turning cautious. While he isn’t abandoning his bullish backdrop for stocks, particularly since he is involved in everything from ETF’s to Robo-advisors, he suggests it is vital for investors to be aware of growing risks stemming from tariffs and interest rates which could spark a sell-off.

“This market has had a great run, and I wouldn’t be surprised to see another correction. We have some major challenges. The trade war is not yet resolved.

We’re going to see how hawkish [the Fed] is with the labor market as tight as it is. I still believe that they’re going to be on track for four increases this year. The question is how will they feel about another raise in December. And, I think between the trade situation and the interest rate situation, and then, of course, the midterms in November, there are a lot of challenges facing Wall Street.” – Trading Nation.

While Siegel only expects a sell-off like the one we saw in February of this year, the real risk is of one much deeper in nature. As noted just recently in “Ingredients Of An Event.”

“The risk to investors is NOT just a market decline of 40-50%. The real crisis comes when there is a ‘run on pensions.’ 

This is a $4-5 Trillion problem with no resolve to “fix” the problem before it occurs. This leaves a large number of pensioners already eligible for their pension at risk and the next decline will likely spur the “fear” benefits will be lost entirely. The combined run on the system, which is grossly underfunded at a time when asset prices are dropping, will cause a debacle. With consumers are once again heavily leveraged with sub-prime auto loans, mortgages, and student debt, they too will be forced to liquidate assets to meet payment demands.

All the ingredients for a more severe market correction are currently present. Between Trump’s “trade war” and the Fed insistence on hiking rates,  it certainly seems as if they are “hell-bent” on lighting the fuse.

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In the aftermath of the “funding secured” tweet, the investing public had been split into two camps: the first, and more cynical, said that the SEC would never pursue what was a clear case of securities fraud and stock manipulation – after all, Elon Musk is “too big” of a visionary to pursue; and then there were the die hard Tesla skeptics who believed that no matter what, Musk would – or should – be punished.

Moments ago the latter group won, when the SEC filed a lawsuit against Elon Musk in New York Southern District court.

Here are the highlights:

This case involves a series of false and misleading statements made by Elon Musk, the Chief Executive Officer of Tesla, Inc. (“Tesla”), on August 7, 2018, regarding taking Tesla, a publicly traded company, private. Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.

…

Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions. When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a “special purpose fund,” and had not confirmed support of Tesla’s investors for a potential going-private transaction. He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, “Only reason why this is not certain is that it’s contingent on a shareholder vote.” Musk’s public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote.

….

Musk’s false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors

….

By engaging in the conduct alleged in this Complaint, Musk violated, and unless restrained and enjoined will violate again, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder

The stock tumbled 5% on the news:

We have a feeling Musk won’t be tweeting much going forward:

Full filing below

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Just seemed appropriate…

 

China stocks gave up all their gains for the week following Powell’s rate-hike (which we note China did not respond to)…

 

European stocks were panic-bid all day after Italy plunged out of the gate on budget headlines once again…

 

US Equity Futures drifted lower after the cash close yesterday then levitated as Europe opened and into the US cash open when a panic bid hit Nasdaq (but nothing else)…Nasdaq futures managed to hold gains post-Powell but S&P and Dow rolled back over…

 

Cash indices on the week shows Nasdaq touching unchanged before being bid, rest of the US majors all red on the week…

 

Interestingly – with Small Caps so ugly this month – “Most Shorted” stocks tumbled after Powell yesterday and held those losses today…

 

With one day left in the month, Nasdaq (and Small Caps) remain in the red for September…

 

FANG Stocks continued their melt-up from Monday’s ugly gap down open…

 

Tech has dominated financials for the last few days..

 

Treasury yields are very modestly higher on the day (well unch at the long-end and up just over 1bps from 5Y in)…

 

The yield curve continued its flattening, back near cycle flats…

 

The Dollar Index surged back up to 2-week highs, extending post-Powell plunge bounce…

 

USD gains were largely prompted by EUR weakness as Italian budget headlines didn’t help (EUR down most in over 6 weeks)…

 

Some questioned whether the EUR weakness was prompted by what appeared to be a dollar liquidity panic into quarter-end as basis swaps blew out (3m EUR-USD basis spiked most since Lehman). Likely this is due to quarter-end dollar funding demand.

 

Despite a record bailout from The IMF and pulling forward the borrowing, Argentina’s Peso tumbled today…

 

On the other end of the scale, the Turkish Lira surged to 6-week highs…

 

Bitcoin was flat today but Bitcoin Cash and Litecoin surged…

 

Dollar gains weighed on commodities broadly today with Copper and PMs ugly, WTI held up…

 

WTI Crude had quite a volatile day, whipped higher on Perry SPR comments and back down on Saudi comments

 

Gold futures tripped back below $1200…

 

Finally, we note that the gap between hope and reality is now at a 11-month high…

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Authored by Jeffrey Snider via Alhambra Investment Partners,

There had been whispers that the FOMC would have to undertake a second “technical adjustment” this year. Is it coincidence that the eurodollar futures curve inverted on the same day, June 13, Jay Powell announced the first one? Perhaps, but given what we are talking about here there is a fair chance they are related, especially in the close aftermath of May 29.

What are we talking about? The effective federal funds rate (EFF) has spent much of this year vexing US central bankers. For reasons they can’t seem to pin down the rate has moved upward inside the policy “range.” That range is defined by the reverse repo (RRP) “floor” on the bottom. On top is, or was, IOER.

As EFF began to make officials squirm on its way up toward the upper parts of the range the FOMC in June voted for this “technical adjustment” to get it back under control, or try. IOER would be set 5 bps less than the upper bound so as to pressure the effective rate lower (under the theory of money alternatives). Thus, at the last “rate hike” RRP was raised by 25 bps while IOER only 20 bps.

In the months since, EFF has squeezed a little higher still. As of last week, it was 3 bps underneath IOER. At such a close level, some were wondering if the FOMC might vote for another adjustment to IOER the same as in June. EFF apparently needs another official push, the first one didn’t really do much.

Practically daring policymakers to do something about it, EFF moved up to 1.93% on Monday. It was the same just 2 bps less than IOER Tuesday, too (we don’t know what it was today, the last day before the current “rate hikes” are carried out, since FRBNY won’t publish the official calculations until tomorrow morning).

Though the Committee voted to raise the corridor yesterday, they will move both RRP and IOER by 25 bps – no second “technical adjustment” yet despite where EFF in all likelihood sits right now.

Why not?

To be candid, I think they are scared. After all, why make the first adjustment? The answer is any rebellion in federal funds. If EFF continues to behave independent of policy levers, corridors, and all moral suasion, then that sends the same chaotic signal as chaotic money markets have been sending since the initial breakdown in August 2007. In other words, if the Fed can’t control federal funds, what can it?

Nothing.

If they adjusted IOER a second time and EFF remained 8 bps or now 7 bps below the top, that would be 2 bps or possibly 3 bps above IOER. It would instead prove IOER is useless (not that we really need any more proof). That would further show that the Fed, by sticking with something so comprehensively and consistently ineffective, is in a tough spot with few actual control levers in just money markets – forget about anything else outside of the mechanical.

At this juncture, why risk placing a spotlight on IOER and having it blow up (again) in their faces? Better to watch EFF slowly boil up to it than to give this dysfunction signal a big push toward the wrong kind of confirmation at a crucial juncture.

Chicken hawks.

Better to be thought powerless and impotent than to adjust technically and remove all doubt. Central banks aren’t central, and you have to wonder if central bankers are finally starting to suspect this truth. 

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