The Fed’s Done It Again

Worst Week Since January Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] The Fed’s Done It Again - “The Federal Reserve has once again frightened the horses, fluttered the dovecotes and flustered the fish”… - The “quad witch” cast a spell on the market today… - Foundations of sand… Recommended Link [You missed this once — but here’s another chance]( [Read more here...]( You recently MISSED the most important [Special Profit Briefing]( Jim Rickards has ever given. In case you don’t know, Rickards is the one of the media’s biggest “go to” guys for context on global macroeconomic happenings… And how to make money from them. In his new Briefing, he blew the lid off a growing international conflict that’s already costing $6.6 trillion a day. Yes, trillion… Every. Single. Day. More importantly — Jim reveals his [proprietary secret]( for profiting from this massive daily flow of capital. [Click Here To Watch The Replay]( Annapolis, Maryland June 18, 2021 [Brian Maher] Dear Reader, Five consecutive losing sessions. The stock market’s despairingest week since January. The Dow Jones Industrial Average opened the week at 34,381. It closed the week at 33,290 — a 1,091-point falling away. The index plummeted 533 points today alone. The S&P and Nasdaq underwent similar harrows, on a percentage basis. The S&P surrendered 55 points today; the Nasdaq, 131. The very angels weep. What is the going explanation? The Federal Reserve has once again frightened the horses, fluttered the dovecotes and flustered the fish. CNBC: U.S. stocks fell on Friday with the Dow Jones Industrial Average on pace to post its worst week since January, after St. Louis Federal Reserve President Jim Bullard told CNBC the first rate hike could come as soon as next year. Economic comeback plays led the market sell-off. The Federal Reserve’s latest consensus — this week reached — projected two rate hikes in 2023. That alone was sufficient to quiver the markets. But today, this monetary grandee mumbled about a rate increase in late 2022. Here are Mr. Bullard’s specific comments: This is a bigger year than we were expecting, more inflation than we were expecting. I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures. He expects inflation will go at 3% this year — and 2.5% next year. Both estimates exceed the Federal Reserve’s just perfect 2% inflation rate. And so: If that’s what you think is going to happen, then by the time you get to the end of 2022, you’d already have two years of two-and-a-half to 3% inflation. To me, that would meet our new framework where we said we’re going to allow inflation to run above target for some time, and from there we could bring inflation down to 2% over the subsequent horizon. And so you have today’s stock market plummet — at least in part. Our men inform us of a complementary explanation… It is technical in nature and beyond our slender understanding of market piping and wiring. But it involves the expiration of options — a “quad witch” in particular. This day represented the second-largest single stock options expiration in market history. $818 billion of stock options expired. And the business evidently amplified the rout. “Evidently,” because its operations are mysterious to us. Can you penetrate Goldman’s gobbledygook? Then you earn our highest hosannas: At major expirations, options traders track situations where a large amount of open interest is set to expire. In situations where there is a significant amount of expiring open interest in at-the-money strikes (strike prices at or very near the current stock price), delta-hedging activity can impact the underlying stock’s trading that day. If market makers or other options traders who delta-hedge their positions are net long ATM options, expiration-related flow could have the effect of dampening stock price movements, causing the stock price to settle near the strike with large open interest. This situation is often referred to as a “pin” and can be an ideal situation for a large investor trying to enter/exit a stock position. Alternatively, if delta-hedgers are net short ATM options (have a “negative gamma” position), their hedging activity could exacerbate stock price moves. Just so. We can only conclude the delta-hedgers had negative gamma positions. We are willing to take correction... if mistaken. Regardless, we are informed it is a passing fright. It should not carry into next week. But put aside the arcane market sciences and take up this fundamental question: What kind of stock market is this that shrieks at the prospect of a minor rate increase late next year? Or two minor rate increases in two years? We must conclude it is not a sturdy one if a slight wind can knock it down. Yet the Federal Reserve cannot quiet the winds for all time. Soon or late, a good gust will blow on through. Perhaps — even — a mighty gale. How will the stock market withstand the inevitable blast? Again, we must conclude it cannot. “You can build a throne of bayonets,” said former Russian president Boris Yeltsin — “but you can't sit on it for long.” Alternately… you can build a stock market upon foundations of sand... as the Federal Reserve has. But how long can you sit upon it? Below, Jim Rickards shows you why you shouldn’t wait too long “to leave the party,” and the steps you can take now to guard your wealth. Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning Editor’s note: Have you seen Jim Rickards’ brand new, urgent [Special Profit Briefing on the Sixth Domain of War?]( It’s the talk of our office — and for good reason. Jim says that $6.6 trillion is quietly at stake each and every day. It’s the largest market on Earth, much bigger than the stock market. And he says there’s a [way you could tap into this money tsunami for major profits.]( In this briefing, Jim revealed: - What this hidden, frightening new kind of warfare is - Why it’s already forcing $6.6 trillion to change hands every day - How investors like you could play this giant flow of cash for big potential profits If you’re concerned about the future — and the future of money (including yours)… Please see Jim’s [blockbuster briefing on the rising Sixth Domain of War.]( But we’re only airing it for a short time, so time is of the essence. [Click here now to see the whole thing.]( Recommended Link [The secrets in this book will make your landlord see red]( [Read more here...]( But all you’ll see is green when you discover how to earn monthly income from real estate without all the hassles of being a landlord. Over a dozen “lazy” real estate secrets ready for you to take advantage of. [Click Here To Claim Your Copy]( The Daily Reckoning Presents: “Complacency and overconfidence are good leading indicators of an overvalued market set for a correction or worse”… ****************************** Don’t Wait Too Long to Leave the Party By Jim Rickards [Jim Rickards]Liquidity is the ultimate paradox in finance. It’s always there when you don’t need it and never there when you need it most. The reason is crowd behavior, or what mathematicians call hypersynchronicity (a fancy word for everyone doing the same thing at the same time). When markets are calm, no one wants liquidity because investors are happy to hold stocks, bonds, commodities and other assets in their portfolios. As a result, there’s plenty of liquidity on offer from bank lenders and very few takers. The opposite is also true. In a financial crisis, everyone wants their money back at once. Stocks are crashing, bonds are crashing, margin calls are streaming in, and everyone is trying to sell everything at once to avoid losses, meet margin calls and preserve wealth. In those circumstances, there’s not enough liquidity to go around. Banks, and ultimately regulators, decide who lives and who dies (financially speaking) by offering liquidity or cutting it off. Investors are lulled into complacency by the illusion of liquidity in good times. Investors know that markets turn around, that bulls become bears, and that the time may come when they want to take some chips off the table and move to the sidelines. Their mistake is believing that a willing buyer or bank lender will be there for them the moment they want to sell or finance a position. If an investor unwinds a position slowly enough and early enough, liquidity may be available. But investors who stay too long at the party discover that when they want to move to reduce position size, everyone else is already doing the same thing, and the crash has already started. That’s one of the hardest parts of investing: deciding to liquidate positions when markets are still rising and the party is still going strong. To paraphrase one of the great gems of Wall Street wisdom, “Nothing infuriates a man more than the sight of other people making money.” That’s a pretty good description of what happens during the late stage of a stock market bubble. The bubble participants are making money (at least on a mark-to-market basis) every day. Investors are overcome with FOMO (fear of missing out). They don’t want to reduce stock positions and obtain cash only to find their neighbor is still fully invested and enjoying big gains. When markets go up 10%, 20% or more in short periods, market participants think of their gains as money in the bank. Yet, that’s not true unless you sell and cash out of the market. Few do this because they’re afraid to “miss out” on continued gains. This is especially true today when the bubble is not confined to the stock market but includes cryptocurrencies, residential real estate and more. The term “everything bubble” applies. The problem with a market meltdown in today’s deeply interconnected markets is that, once it strikes, it’s difficult to contain. There’s no guarantee that a stock market meltdown will be contained to stocks. It can spread rapidly. The problem comes when the bubble bursts and losses of 30%, 40% or more pile up quickly. Panic can quickly spread to bonds, emerging markets and other asset classes in a general liquidity crisis like in 2008. Investors tell themselves they’ll be smart enough to get out in time, but that’s not true either. If they wait too long, the mad dash for liquidity will begin, and they won’t find liquidity when they need it. Soon a market-wide liquidity panic emerges in which “everybody wants his money back.” This is exactly what happened during the Russia Long-Term Capital Management (LTCM) crisis in 1998. The month of August 1998 was a liquidity crisis involving broad classes of instruments. But, the month of September was systematically aimed at LTCM. I was right in the middle of that crash. It was an international monetary crisis that started in Thailand in June of 1997, spread to Indonesia and Korea, and then Russia by August of ’98. It was exactly like dominoes falling. LTCM wasn’t a country, although it was a hedge fund big as a country in terms of its financial footings. I was the general counsel of that firm and negotiated that bailout. The importance of my role was that I had a front-row seat. I’m in the conference room, the deal room, at a big New York law firm. There were hundreds of lawyers, 14 banks in the LTCM bailout fund, and 19 other banks in a one billion dollar unsecured credit facility. Included were Treasury officials, Federal Reserve officials, other government officials, Long-Term Capital, and our partners. It was a thundering herd of lawyers, but I was on point for one side of the deal and had to coordinate all that. It was a 4 billion dollar all-cash deal, which we put together in 72 hours with no due diligence. Anyone who’s raised money for their company or done deals can think about that and imagine how difficult it would be to get a group of banks to write you a check for 4 billion dollars in three days. Systematic pressure on LTCM persisted until the fund was almost broke. As Wall Street attacked the fund, they missed the fact that they were the creditors of the fund. By breaking LTCM, they were breaking themselves. That’s when the Fed intervened and forced Wall Street to bail out the fund. Those involved can say they bailed out Long-Term Capital. But if Long-Term Capital had failed, and it was on the way to failure, 1.3 trillion dollars of derivatives would’ve been flipped back to Wall Street. In reality, Wall Street bailed out itself. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses. This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008. Today, systemic risk is more dangerous than ever. Each crisis is bigger than the one before. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system, and have much larger derivatives books. New automated trading algorithms like high-frequency trading techniques used in stock markets could add to liquidity in normal times, but the liquidity could disappear instantly in times of market stress. And when the catalyst is triggered and panic commences, impersonal dynamics take on a life of their own. These kinds of sudden, unexpected crashes that seem to emerge from nowhere are entirely consistent with the predictions of complexity theory. The ability of central banks to deal with a new crisis is highly constrained by low interest rates and bloated balance sheets, which are even larger today than they were after the last crisis. Complacency and overconfidence are good leading indicators of an overvalued market set for a correction or worse. It’s better just to diversify, build up a cash reserve, have some gold for catastrophe insurance, and then wait out the bubble crowd. When the crash comes, which it always does, you’ll be well-positioned to shop for high-quality bargains amid the rubble. Then you’ll participate in the next long upswing without today’s risks of a sudden meltdown. Regards, Jim Rickards for The Daily Reckoning P.S. Although you’re not seeing it in the news (not yet, anyway) the U.S. government is already engaged in a [world wide type of “asymmetric” warfare.]( Our financial fate hangs in the outcome of this war. And there are moves you can make, right now, to control your future. I’ve blown the lid off this covert, yet rapidly escalating war that’s causing [$6.6 trillion to change hands — every single day.]( It’s offered little in the way of profit opportunities for everyday folks — until now. I’ve developed a strategy I call [C.O.B.R.A]( — a first-of-its-kind chance for retail investors to capture the upside of this massive $6.6 trillion bonanza. You can tap into this massive, daily flow of money for potentially [HUGE profits.]( If you missed the blockbuster briefing I held on Wednesday, it’s not too late. You can catch the whole thing by simply [clicking here.]( But don’t delay, I don’t know how long my publisher will keep it up. --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! 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