Thumbs Down For the Fed

There were a number of quite interesting developments in the market today (Wednesday, August 11th), and I want to focus on those instead of my usual macro view.

The stock market sold off heavily today, presumably in response to the Fed’s recent statement, which admitted two things:  (1) US economic growth is weaker than previously thought (dollar negative), and (2) the Fed is going to renew its efforts at monetizing US government paper (dollar negative).

Anybody following today's nonsensical markets knows what happened next:  The dollar rallied.  A lot.

Actually, the dollar initially sold off yesterday afternoon right after Fed the announcement, but quickly reversed and went up from there.  Adding to the confusion, falling Treasury yields often provide a headwind to any potential dollar gains.  Instead, we saw the two-year Treasury hit a record low of 0.48%, even as the dollar jumped like a penny stock.

Throughout all of this, the ten-year note has consistently dropped in yield since the beginning of April.  Based on this chart, it looks like the ten-year yield is in a well-defined channel and is not at all confused about what's going on: deflationary weakness dead ahead.

Another telling bit of strangeness in the markets today is that the price of gold did not fall nearly as far as I expected. For the past two months it has sported a very strong negative correlation with the USD index meaning that the +1.35 climb in the USD should have brought down the price of gold by $20 or $30 or more. Instead December gold jumped back up over the $1200 mark right before the open of the US gold market, which is more or less where it finished the day, losing relatively little all things considered.

The Fed Statement

For an economy that is supposedly in recovery, investment professionals sure attached a lot of importance to seeing the Fed open up the Quantitative Easing (thin-air) checkbook one more time:

The day before the meeting:

“Markets have been increasingly pricing in additional quantitative easing measures as soon as today,” said Jim Reid, strategist at Deutsche Bank. “The worst near-term development for markets is thus likely to be a meeting that suggests that no additional measures are currently needed. To sustain current levels, the Fed may need to at least signal that they are at least moving towards extending QE at a later meeting.”

(Source - 

The day after the meeting:

“We’re in a worldwide soft patch and investors wonder why the Fed didn’t do more,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $197 billion.

(Source - BusinessWeek) 

The traders may have a point here. Given the obvious economic weakness, as exemplified by the expected downward revision of the 2Q GDP by nearly half to 1.3%, and given the fact that monetary policy (quantitative easing) has a rather well-known and leisurely time lag built into it, the Fed might have missed a chance to be proactive here.  Now they either have to wait another six weeks for the next meeting, when things might be a tad sketchier, or they have to risk appearing panicky with a mid-meeting announcement of some sort.

Either way, I am both concerned and amused that we've arrived at a point in history where the "value" of entire multi-trillion dollar markets is rather dramatically dictated by people's perceptions of how much thin-air money is going to be sent screaming across the fiber optic cables by Fed staffers’ operating keyboards.

Where We Go From Here

While the speculating world waits for the Fed to dump more liquidity into the markets, the rest of us are free to note that the real economy is not responding.  Unfortunately, for legal and political reasons, the Fed is only willing to try 'unconventional' measures that follow the convention of shoveling new money and liquidity into the banking system, specifically to the largest banks in the system.

The problem with this is that most job creation and recovery starts with small- and medium-sized businesses, which are still not in a borrowing mood.

These businesses are both concerned about the future (as they should be) and reeling under a perverse mixture of government disincentives best measured in the thousands and thousands of pages of new rules, passed by Congress this year, with which they must comply.  Additionally, and as if business during a downturn wasn't hard enough, the combined efforts of state and local governments to raise new fees to cover budget gaps have largely fallen on businesses.  The combined costs associated with the new health care bill, increased Medicare and capital gains taxes, hikes in unemployment coverage rates, and higher state and city taxes have hiked the effective tax rate from 40% to 50%, which amounts to a 25% gain for small and medium business.

In Manhattan, Robert Schwartz, the CEO of a three-unit shoe store chain, said he has never seen the tax burden this bad.

"This has been as hard as we've been hit in my 36 years of running this company," said Schwartz, owner of Eneslow Shoes, which employs 50 people, including part-timers, on annual revenues of under $10 million. "It's a tough economy and our costs continue to rise."

Schwartz, who says he's putting his salary back into the business in response to the environment, adds that overhead from taxes and other outside charges have become unbearable. "I certainly don't think the new health care law will save me any money," he said. "Now New York City wants to develop this paid sick leave legislation that would give employees up to nine paid sick days. It's ludicrous. It takes the oxygen out of the blood."


The only people who are completely confused by the weak hiring picture have never owned a business, and many of them apparently work in DC.

That's one end of the economic spectrum.  On the other end, we have DC so entrenched in a deficit-spending mentality that I read three articles this past week describing looming budget 'cuts' at the Pentagon, when what was actually proposed was a 1% increase.  You know things have gone off the rails when an increase is described as a cut.  The July fiscal deficit for DC, -$165 billion, was hailed for being "$15 billion smaller than last year," although $12 billion of that came from a reduction in spending, leaving an anemic $3 billion increase in revenues to point the way forward.

These data points indicate that our economy is going nowhere at present and will most likely be in full-blown retreat by the 4Q if not the 3Q.  Congress will not be in a position to extend any new stimulus before the elections, due to political wrangling (heck, they could barely renew the extended unemployment coverage), and the Fed seems stuck in a wait-and-see mode.  Both stimulus and QE take time to work their magic.  The prior efforts have worn out and are no longer contributing to our economic buoyancy.

My advice still mirrors that of Will Rogers of old:  Don't worry about return on capital; worry about return of capital.  While I do not have a magic ball, I view the risks in the stock market as completely asymmetrical.  Lots of potential downside compared to relatively little upside.   If you can't afford to lose it, don't have your money in this market.  It's eating dedicated professionals alive while going nowhere.

Unfortunately, my prognosis calls for more economic weakness, further house price declines, and future panicky efforts at stimulus and easing, which will elevate the risk of a fiscal and then a currency crisis.  Forewarned is forearmed.  Be safe and be well.

Your faithful information scout,
Chris Martenson

This is a companion discussion topic for the original entry at

“My advice still mirrors that of Roy Rogers of old: don’t worry about return on capital, worry about return of capital.”


I thought that it was Will Rogers that said that.




Ooops!  You are right.  That one slipped through.  Thanks for catch  - embarrassing!  Fixed.

You know at times like this “Roy” brought a welcome smile to my face.

I think there will be a lot of room for small businesses moving forward.
Small businesses that provide fresh milk, a local cobbler, a small textile producer, the chicken and egg farmer, the orchard owner and the vegetable grower. Maybe localized professional private policing and prison services. Any business that provides value, knows the names of their customers, provides a staple that is not dependant on petroleum, and can be relied upon even in the absence of other infrastructure will grow.

I could use the credit in my business for expansions, I simply choose not to. And I will not expand my company to beyond 48 employees, since 50 seems to be the magic number for government intrusion. In spite of it all we are experiencing 30% growth in same store sales and net increases in the 900% neighborhood.

Efficient, valuable, necessary, life sustaining, petroleum and debt free I think are the business basics to watch going forward.


Indeed, I can even imagine him singing “Happy Trails”. Except now he would be  saying goodbye to our stock market.




Very astute observation, methinks. When the fluff is stripped out of the economy, those producing value at the very basic level will endure.

Hmmmmm…funny?  I thought it was Ginger Rogers.  Oh well.

Dr. M,
Thanks for the free report.

In 2008, gold took a significant hit during the market crash, though it did recover quickly in response to unprecedented QE. If another market crash were to occur this fall, do you think gold would behave the same?

Besides relative price action, what kind of early signs would you expect to see if gold was to do well in a deflationary market (and economic) environment?

Thanks for your time…Jeff

this may be a little irrelevant, but actually smiles are always helpful and clear our view of the world’s shennanigans:   Wil Rogers doing rope tricks, from You-Tube - watch it through, 9 minutes  - amazing!

Wil didn’t need a lot of money or oil or anything to smile and make others smile.


Okay, I know this is sidetracking this thread but I just couldn’t resist.

More from Will Rogers:

This country has come to feel the same when congress is in session as when a baby gets hold of a hammer.

This is what really bothers me.  For those of us who played by the rules and put our “retirement” savings into stock portfolios, what do we do now?  Sure, we can have 50% in gold and 50% in cash but there’s got to be a better strategy out there.  If the professionals are confused, what chance does the average Joe have? 

Actually, with the way things are, I was thinking more of Rob Roy. Laughing

Oops, double post.


Congratulations on your success.  That’s quite an accomplishment in this economic climate.  Just curious … what small business are you in?  The majority of small business owners that I know are either struggling to stay even, slowly losing ground, or in danger of going belly up.  The food based businesses you mention above are likely targets for the food safety Nazis (ultimately sponsored by your friendly local Monsanto, ADM, etc.) unless they are flying under the radar.  And if they’re flying under the radar, they’re most likely out of compliance with some regulation and given what I see going down, they will be ferreted out eventually by the data miners.  In almost every area of business, the government is in the process of contracting out “bounty hunter” duties to private businesses that are sniffing under every rock for additional sources of revenue.  Fines can be staggering for the slightest infractions, real or perceived, and the legal fees involved in contesting them can be devasting as well.  Our government is in the process of cannabalizing its own citizens (particularly the productive ones without political power) and it isn’t pretty.   

I’ve got to second that sentiment.  I’m a physician with a large group and we’re seeing increased probing by such government funded “bounty hunters” who search through your billing records and patient records in the hopes of finding any discrepancy.  The laws and regulations regarding Medicare and Medicaid billing are so tortuous that errors are inevitable.  Fraud and honest mistakes are regarded alike and the cost to fight such accusations is prohibitive.  The general attitude among the docs I work with is that the hassle factor is just not worth it.  We sincerely like taking care of people, but when the government is looking over your shoulder while reducing your reimbursement and increasingly involved in your daily decision making–well, it kind of sucks the joy out of doing what we do.  I think we’re going to see a decrease in the availability of quality physicians over the next several years. 

I also own a small farm and I can attest to the intrusion there as well.  The USDA has a program called NAIS which would have required record keeping of every animal on your farm.  The expense and hassle would put many small producers out of business.  Fortunately the program is being “revised” because of fierce opposition, but I’m sure it won’t go away easily. 

I think as we see the unfolding of the “three E’s”  increased government intrusion in our daily lives seems likely.  Interesting times indeed. 


Thanks for the link.  His rope tricks were incredible.  Picked this one up while I was there.  An actor recreating Will’s words.  Nothing much has changed in 80 years.


Actually I believe it was Mark Twain


Welcome exsanguination. I agree with you about the latest changes to medicine 100%. It is becoming more onerous each day to provide care to human beings, what with the “bounty hunters” you describe and the ever increasing paperwork burden coupled with reduced reimbursement rates. Unfortunately,  due to the economy a fair number of my patients are converting to state Medicaid plans from private insurance. Our group foresees a time soon approaching where there won’t be a choice regarding whether we accept Medicaid or not because that is where most of the patients will be. And this coming in a city that is being hailed as recession proof by some observers. But cheer up:  I heard on the radio news today that the expected 200,000 primary care provider shortage predicted for 2025 will be managed by increasing the number of Nurse extenders. It is expected to be very cost effective since their training is much shortened compared with allopathic physicians. Hmmm…