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October 18, 2019 | The Feds Interfere in Markets and Multiply Corruption Opportunities

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

YOUGHAL, IRELAND – The fix is in.

President Trump has surrounded himself with grifters, hustlers, and opportunists – Rudy Giuliani, Peter Navarro, Wilbur Ross, et al. One of them was bound to notice.

Trump’s tweets regularly send the stock market hundreds of points in one direction or another. Surely there was a way to trade it.

Lucky Bet?

Vanity Fair reports that one trader is either very lucky… or has an inside track to POTUS. According to the magazine, on the 10th of September,

…in the last 10 minutes of trading, someone bought 82,000 S&P e-minis when the index was trading at 2969. That was nearly 4 a.m. on September 11 in Beijing, where a few hours later, the Chinese government announced that it would lift tariffs on a range of American-made products. As has been the typical reaction in the U.S. stock markets as the trade war with China chugs on without any perceptible logic, when the news about a potential resolution of it seems positive, stock markets go up, and when the news about the trade war appears negative, they go down.

The news was viewed positively. The S&P index moved swiftly on September 11 to 2996, up nearly 30 points. That same day, President Donald Trump said he would postpone tariffs on some Chinese goods, and the S&P index moved to 3016, or up 47 points since the fortunate person bought the 82,000 e-minis just before the market closed on September 10. Since a one-point movement, up or down, in an e-mini contract is worth $50, a 47-point movement up in a day was worth $2,350 per contract. If you were the lucky one who bought the 82,000 e-mini contracts, well, then you were sitting on a one-day profit of roughly $190 million.

That was peanuts. In just two trades – both front-running presidential tweets concerning the trade war with China (at least one of which was a lie) – somebody made a potential profit of $3.3 billion.

The amounts are staggering. But the process is old and familiar. As the feds interfere in markets, opportunities for corruption multiply.

Front-Running the Fed

And Mr. Trump himself is no stranger to market manipulation. The New York Times claims he used the technique in the 1990s to rescue his fortune. He bought shares in target companies, let out the word all over town that he was going to take them over, and then sold into the rising market.

But the examples above are isolated incidents. The real money was made, especially over the last 10 years, by systematically front-running the Federal Reserve.

The naïve academics in charge of the Fed decided that they should be “transparent,” that they should signal their intentions long before taking action. This allowed traders to buy stocks and bonds (taking positions funded by the Fed’s ultracheap short-term loans), confident that the central bank would drive prices even higher later on.

They weren’t disappointed. The Fed pushed so much new money into the system that it distorted the whole capital structure – driving up both equity and debt. Speculators made billions. And asset holders were left with as much as $35 trillion extra in unearned wealth.

Which has encouraged us to wonder if we couldn’t do a little front-running ourselves.

Pixie Dust

Do we know what the feds will do? Check, almost guaranteed. All over the world, every official, mover, shaker, half-wit economist, and crackpot Nobel Prize-winner has the same idea. Julia Coronado, a former Fed staffer and founder of MacroPolicy Perspectives consultants, explained to Reuters:

U.S. debt in relation to the size of the economy “is going up no matter what…You can see politically it is going to happen,” she said, with no strong constituency in either major party arguing for aggressive short-term spending control. When the United States saw its spotless credit rating downgraded amid a political impasse on the debt ceiling in 2011, and interest rates still fell, “a bunch of light bulbs went off in a bunch of politicians’ heads…It is like magic money.”

This week, the Fed injected more than $80 billion of magic money. China followed suit. Here’s Bloomberg:

China caught traders off-guard with a surprise injection into the financial system via loans to banks, ahead of data on Friday which is expected to show a further slowdown in the domestic economy.

The People’s Bank of China added 200 billion yuan ($28 billion) of one-year cash through the medium-term lending facility on Wednesday.

And come the next crisis, the pixie dust will be so thick, you won’t be able to see your hand in front of your face.

Magic Money

Do we know what the effect will be? Not precisely. But unless the laws of the universe have been repealed, the feds will keep adding more new money. And sooner or later, prices will rise.

You can see today what they’ve already done to the financial sector. In 1971, the Dow was about 880 – in old U.S. dollars, which were tied to gold at a fixed rate of $35 an ounce. Back then, you’d need 25 ounces of gold to buy the Dow.

Then, they changed the money system, breaking the link to gold so they could issue more dollars.

Today, in new dollars, the Dow is at 27,000. Gold is trading around $1,500 per ounce. So you’d need 18 ounces of gold to buy the Dow stocks right now.

In other words, in old dollars – at $35 per ounce of gold – we see that the Dow has actually lost value for nearly half a century. It now stands at only 630 – 18 ounces of gold – in old-dollar terms.

But wait. Who has old dollars? How can you get pre-1971 greenbacks?

Fortunately, you don’t have to. Remember, what kept the old dollar honest was that it was tied to gold at a fixed rate of $35 per ounce. So, if you own an ounce of gold, you have the equivalent of 35 old dollars.

Safe Bet

So, what to do? As I said yesterday, isn’t it obvious?

The fix is in. And our globe-trotting colleague, Tom Dyson, has already shown us how to take advantage of it.

We don’t know what will happen in Syria or Iran. We don’t know how the U.S.-China trade war will end. We don’t know who will win the next election… or what new technology will change our lives forever.

But we know this: The new, post-1971 U.S. dollar has lost 97% of its value compared to the old dollar.

And probably the safest, surest bet around is that sometime in the years ahead, it will lose most of what’s left.



Bill Bonner

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October 18th, 2019

Posted In: Bill Bonner's Diary

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