Yesterday’s Market Rally Was a Short Squeeze, Not a Reaction to Powell’s Speech

By Pam Martens and Russ Martens: June 5, 2019 ~

Jerome Powell Is Sworn In As Federal Reserve Chairman on February 5, 2018 by Fed Vice Chairman  Randal Quarles.

Jerome Powell Is Sworn In As Federal Reserve Chairman on February 5, 2018 by Fed Vice Chairman Randal Quarles.

It felt like headline writers were out to engineer a stock market rally yesterday by scaring hedge funds that had shorted the market to the tune of tens of billions of dollars. When traders who are short the market act simultaneously on breaking news, (news that suggests the stock market is going to rally), by buying back stock to close out their short positions, that causes a big upward spike in the stock market. In Wall Street parlance, it’s called a short squeeze. It happens a lot in a secular bear market and is a head fake to investors desperately looking for a bullish trend.

A number of major business publications put a bullish spin on what the Chair of the Federal Reserve, Jerome Powell, actually said in his opening remarks yesterday morning at a conference sponsored by the Federal Reserve Bank of Chicago. What Powell actually stated was this:

“I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Powell’s promise to “act as appropriate” could mean many things other than an interest rate cut. But here’s how his statement was reported by the business press.

The Wall Street Journal reported Powell’s statement this way: “Federal Reserve Chairman Jerome Powell said the central bank is closely monitoring the recent escalation in trade tensions and indicated it could respond by cutting rates if the economic outlook deteriorates.” Powell never once mentioned the words “cutting rates.”

Bloomberg News put a caption under its YouTube video on the issue that read: “Federal Reserve Chairman Jerome Powell discusses the Fed’s preparedness to act on cutting interest rates if necessary due to trade and other risks. He spoke at a conference at the Chicago Fed.” Again, Powell said nothing about cutting interest rates.

Dow Jones’ MarketWatch ran this headline: “Powell suggests interest rates could be cut if trade tensions damage economic outlook.”

The Federal Reserve may, indeed, be inclined to cut rates if the GDP numbers continue to falter. The Atlanta Fed’s GDPNow forecast is currently showing a weak 1.3 percent GDP growth in the second quarter on a seasonally adjusted basis. But the headline writers have forgotten that it was less than six months ago, on December 19, that the Fed actually raised interest rates and suggested that there could be additional rate hikes in 2019. The statement from the Fed’s Federal Open Market Committee read as follows at that time:

“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.”

Typically, at the end of a long economic expansion, the Federal Reserve has taken interest rates to a sufficient level to have plenty of room to cut interest rates to assist in alleviating a deep recession.

In 2007 the Fed began cutting interest rates from a level of 5.25 percent on its benchmark Fed Funds rate. As the financial crisis deepened in 2008 and thereafter, it had plenty of room to make multiple ½ point and ¾ point interest rate cuts. Beginning in December of 2008, the Federal Reserve held Fed Funds at zero or almost zero until December 16, 2015 – an astounding 7 years. It has been delicately raising rates by a mere ¼ point since that time to reach its current 2-1/4 to 2-1/2 percent benchmark rate. (Fed Funds actually trade within that targeted range. As of yesterday, they were trading at 2-3/8 percent.)

The delicacy with which the Fed has acted is commensurate with a heart surgeon operating on an extremely weak patient. That comes as a result of the devastating blow to the U.S. economy that Wall Street delivered with its 2008 implosion which took down the U.S. housing and jobs markets along with it. It was the largest economic collapse in the United States since the Great Depression of the 1930s and the Fed’s secret response to the crisis was exponentially far greater than its actions during the Great Depression.

The Fed has been correctly restrained by legislation from secretly sluicing another $29 trillion to miscreants on Wall Street to allow them to resuscitate zombie banks as it did from 2007 to 2010. The Dodd-Frank financial reform legislation that was passed in 2010 prevents the Fed from invoking its “emergency powers” to make  those kinds of wild-eyed funding decisions in secret without approval from Congress.

As we reported on May 1, the former Fed Chair Ben Bernanke; former Treasury Secretary under G.W. Bush and Ex-CEO of Goldman Sachs Hank Paulson; and former New York Fed President and Treasury Secretary under Obama, Tim Geithner, who orchestrated the massive bailout of Wall Street during the financial crisis, are now engaged in a massive lobbying effort (in drag as a book tour) to strong-arm Congress into restoring the unlimited bailout powers of the Fed before the next crisis – which they obviously sense is coming.

The trio clearly understands that the Fed cutting interest rates from the already anemic level of 2-3/8 percent is not going to offset the blow to the U.S. economy from the unchecked financial bombs that are hiding in the dark recesses of Wall Street’s mega banks and, potentially, U.S. insurance companies.

The Fed’s gunslinger holster currently has just nine ¼-point rate cuts. The American people are in no mood for more Wall Street bailouts and Congress, facing a fierce election in 2020, knows that. What every American should be demanding from Congress this time around is a meaningful restructuring of Wall Street instead of throwing more trillions of dollars at a sick market structure that continues to threaten the national security of the nation.

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