Home Stock Market Commentary Stock Market Cracks Being Hidden By Federal Reserve “Yield Control” Talk –...

Stock Market Cracks Being Hidden By Federal Reserve “Yield Control” Talk – Mike Swanson (07/15/2020)

Today the DOW is gapping up on more vaccine development news, but the stock market action Tuesday was interesting and shouldn’t be forgotten. You see yesterday several major banks reported earnings and fell. While Goldman Sachs succeeded in making big trading revenue profits Wells Fargo stock dumped along with Citigroup. The key banks though announced that they putting aside billions of dollars of cash on their balance sheets in preparation for a surge of coming loan defaults.

When they reported last quarter these bank CEO’s weren’t thinking things were going to be as bad as they are now thinking they will be. The “V” shape recovery people talked about in April is simply now clearly not going to happen. You can see this in Las Vegas where the Las Vegas Sands which operates the Venetian and the Palazzo hotels just announced that it was only going to operate the Palazzo rooms on the weekend. There just wasn’t enough demand for the whole week. Some of the casinos on the strip remain closed and Boyd’s Gaming which operates off the strip and downtown casinos said Tuesday that it was laying off 2,500 people.

Where is the “V” boom in the real world?

Here is a walk around in Circus Circus. This is what an economic collapse looks like.

Where are the people?

When Vegas reopened the casinos that did open said that they were going to limit the rooms to 30% capacity. The reports are that they have only been able to book up 10% of them.

This is a reflection of the overall economy and is why the banks are bracing themselves for what is to come. “This is not a normal recession. The recessionary part of this you’re going to see down the road,” Jamie Dimon of Goldman Sachs said Tuesday. “You will see the effect of this recession. You’re just not going to see it right away because of all the stimulus.”

“It’s fair to say right now, given where we are in the crisis, that the relationship between the business cycle and the health of the business sector and the health of the household sector is broken,” JPMorgan CFO Jennifer Piepszak said.

What they are saying is that during a recession you see loan and debt liquidation. We have seen a few bankruptcies so far, but real process hasn’t even begun.

JP Morgan, Citigroup, and Wells Fargo have set aside $28 billion for loan losses. This news came out before the opening bell yesterday and did spark some selling, but then by the close the DOW rallied over 500 points and the S&P 500 got back right below its key 3200 resistance point.

What helped fuel the turn around was the fact that several Federal Reserve officials led by FOMC board member Lael Brainard made remarks to help the stock market. She gave a speech in which she said that the economic recovery was showing signs of having slowed down with employment data of the past two weeks that they are following looking pretty dismal.

She even said that the damage is so bad that even if the virus went away that it will take take for the economy to get back to normal.

However, her solution is her suggestion that the Federal Reserve should announce “yield control” policies that would amount to a promise to keep interest rates of all duration as close to zero for as long a possible until inflation gets above 2%.

How would they do that?

They would print more money out of thin air and buy bonds across the board.

Won’t this hurt the deficit and could it cause a problem with how foreigners view US solvency and the US dollar?

They don’t want you to think about that!

Stock market traders took her talk as a promise to keep the stock market up no matter what and so some of them piled into the DOW and SPY ETF.

However, the action was very narrow and many weaker stocks that I am now following that were down in the morning did not get into the green with the other averages. So we are in a month of heavy crosswinds that doesn’t have a clear resolution yet. We might be seeing cracks underneath the market that could cause it to fall apart after this month is over.

But one thing is sure gold, silver, and the mining stocks are basically going up no matter what. They have all broken away from the market action and are going to benefit from more Federal Reserve action going forward. Take a look for instance at the popular silver ETF SLV, which made a new high yesterday.

You can’t figure everything out and don’t need to predict the future when it comes to the stock trading game. If you want to beat the market then you want to be invested in the sectors and stocks BEATING the stock market averages. This is also the only way to escape being at the mercy of the market too. This is why precious metals is now the sweet spot.

It’s also why my favorite stock pick for this summer is in the right position. After a big surge last week it looks like it is set to consolidate in a range for a few weeks to set the stage for another rally. For more on it by clicking here.