Category Archives: Financial Markets

Repo Operations, Money Printing, Gold And Mining Stocks

Financial Markets, Gold, Market Manipulation, Precious Metals, U.S. Economy, , , ,

The Fed is printing money again – this time disguised as “repo operations” instead of “QE.” The price of gold and silver rallied over the summer anticipating an easier monetary policy. The economic problems and financial system excesses are two to three times larger than in 2008. This will necessitate a money printing/QE/balance sheet expansion operation that dwarfs the $4.5 trillion printed the first time around. Plus most of the money printed from 2009 to late 2014 is still in the banking system.

The scale of the inevitable money printing policy will not stimulate economic activity but it will act as rocket fuel for the precious metals market – gold, silver and mining stocks. Ten years of Central Bank money printing has pushed debt issuance, malinvestment, moral hazard and fraud to levels that well-exceed the levels when Lehman collapsed.

Craig “Turd Ferguson” Hemke invited me back onto his “Thursday Conversation” podcast to discuss the the Fed cranking back up its money printing machine and the implications for gold, silver and mining stocks. Click on the link above or the graphic below to listen:

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In the latest issue of the Mining Stock Journal, I review several junior mining stocks plus I recommend a larger cap silver/gold/lead/zinc producer that has been sold off irrationally and which will report great earnings in Q3 and Q4 vs the same quarters in 2018.

You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Fed’s Money Printing Escalates

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Last week the Fed announced that it was going to start buying $60 billion in T-Bills per month at least into Q2 2020.  The Fed will also rollover the proceeds as the T-Bill’s mature. The rationale was to address the decline in the “non-reserve” liabilities of the Fed.  So what are “non-reserve” liabilities?  Federal Reserve Notes.

The directive as written was “Fed Speak” which means that the Fed would print $60 billion per month for the next 4-6 to months cumulatively.  If it’s only 4 months, it means that the Fed will be printing at least a quarter trillion dollars which apparently will be become permanently part of the Fed’s balance sheet.

Chris Marcus invited me onto this Arcadia Economics podcast to discuss probably reasons why the Fed has ramped up its money printing operations despite explaining a month ago that it was only temporary to address quarter-end issues:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Stocks Bubble Up From More Money Printing

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The stock market spiked up last week as Trump started in with his trade war optimism tweets, which excited the algos and momentum chasers. As Monday rolled around, however,  it was determined that a “Phase 1” trade agreement amounted to nothing more than a commitment from China to buy some farm products. On Tuesday China made the purchases contingent on Trump removing tariffs. So there is no “Phase 1” trade deal.

But the hedge fund computers don’t care.  Now the market is bubbling higher on the reimplementation of Federal Reserve money printing. Call it whatever your want – QE, balance sheet growth, term repos, whatever. But the bottom line is that Fed is printing money and injecting it into the banking system, which thereby acts as a transmission mechanism channeling some portion of this liquidity into the stock market.

The semiconductor sector is traveling higher at the fastest rate as hedge fund computers and daytraders are chasing the highest beta stocks up the most. The SOXX index is pressing its all-time today.   This is in complete disregard to underlying fundamentals in the sector which are melting down precipitously.

For the 1st ten days of October, exports from South Korea fell 8.5% YoY with chip exports down a staggering 27.2%. Remember back in January when the CEO of Lam Research forecast an upturn in 2H of 2019? Does that look like an industry upturn? Two of the world’s five largest chip manufacturers are based in S Korea:  Samsung is the world’s largest and Hynix is ranked fourth.

Today the Fed’s daily money printing repo program surged to $87.7 billion, which is the highest since “QE Renewed”  began in mid-September.  Recall back then the popular Orwellian narrative explained that the “temporary” funding was necessary  to address quarter-end cash needs by corporations and banks.  Well, certainly the banks need the money…

But on Friday the Fed announced that it was going to extend the overnight and term repo operations at least until January. In addition, the Fed added a  $60 billion per month T-bill purchasing program. The Fed explained that it was implementing the  operation to supplement the liability side of its balance sheet.  Besides currency and coin issued by the Fed, deposits from “depository institutions” –  aka demand deposits from banks – represent the largest liability on the Fed’s balance sheet.

This means that this liability account needs more funding because either bank customers are holding less cash at banks OR banks need to increase reserves to maintain regulatory reserve ratios. The latter issue would imply that bank assets – aka loans – are deteriorating more quickly than the banks can raise the funds needed to meet reserve requirements. Given the recent data on MZM, it would appear that customer cash deposits at banks have increased recently. This implies that banks are experiencing stress in the performance of the loans and derivatives on their balance sheet, thereby requiring more reserve capital.

Money printing apologists want to point at DB or JPM as the target of the Fed’s money printing.  And I’m certain they are among the largest contributors to the problem.   But GS, MS, BAC, HSBC, C should be included in there as well.  They’re all connected via derivatives and I’m guessing subprime asset exposure at all the big banks is blowing up,  causing cash flow shortfalls and counterparty derivatives defaults on credit default and interest rate swaps.  Just look at the dent  WeWork is putting into the exposure to the failed unicorn at JPM and GS.  Then there’s the melt-down going in energy/shale sector debt…

Eventually the Fed will have to announce that it is permanently implementing temporary liquidity relief programs – or “organic” balance sheet growth operations.  Jerome Powell will take painstaking measures to assure the market this is not Quantitative Easing.   And he’ll be right. That’s because it is outright money printing.

I expect the stock markets to get a temporary “meth” fix that pushes the SPX back up to the 3,000 area of resistance.  I also expect that it will fail there again, triggering a sharp sell-off into the end of the year, similar to last year. The risk the Fed is running here by using more money printing to juice the stock market is that eventually – like all heroin or meth addicts – stocks will become immune to increasing doses of the happy drug.   At what point will the Fed be forced administer a dosage level that kills the market?

The Dutch Central Bank Endorses The Gold Standard

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“De Nederlandsche Bank (DNB) holds more than 600 tonnes of gold. A bar of gold always retains its value, crisis or no crisis. This creates a sense of security. A central bank’s gold stock is therefore regarded as a symbol of solidity Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis.” – DNB’s Gold Stock

The quote above is from the “Payments” section of the Dutch Central Bank’s website. Incredibly, it goes on to suggest the possibility of  a systemic collapse: “If the system collapses, the gold stock can serve as a basis to build it up again.”

It’s been 48 years since the U.S. Government unplugged the gold standard, thereby enabling the world’s Central Banks to plug in their fiat currency printing presses. This in turn gave rise to a series of asset bubbles and unfettered credit creation. Don’t forget that the junk bond bubble in the 1980’s led to an acceleration in the creation of paper money, which in turn fueled the internet/tech stock bubble, followed subprime debt/real estate bubble and  the current “everything” bubble.” Which may the last bubble…

The chart below,  shows M3/M2 vs the “real” GDP since 1971 and  illustrates the problem:

Note that the Fed discontinued publishing the M3 money supply data in 2006. The U.S. at the time was the only major industrialized country that refused to publicly disclose M3. Also note that “real” GDP is calculated using the Government’s highly muted measure of price inflation. A real real GDP line would be shifted down on the chart and project at a lower trajectory.

The difference between the two lines somewhat measures the degree to which the U.S. fiat currency has been devalued or has “lost its purchasing power.”  However, the graphic does not capture the creation of credit.  Debt issuance behaves exactly like money printing until the debt is repaid. Think about it.  A dollar borrowed and spent is no different than a dollar created by the Fed and put into the financial system.

But think about this:  since 1971, the U.S. Government has never repaid any of the debt it  issues. It has been increasing pretty much in perpetuity.  This means that $22 trillion+ issued and outstanding by the Treasury Department should be included in the money supply numbers – until the amount outstanding contracts – which it  never will…

Alasdair Macleod, in “Monetary Failure Is Becoming Inevitable,” summarizes the eventual consequence embedded in a morally hazardous currency system:

If history and reasoned economic theory is any guide, the demands for credit by the state will terminate in the destruction of government currencies. For the truth of the matter is inflation of money and credit has created the illusion we can all live beyond our income, our income being what we produce.

“Destruction of Government currencies” is really just a politically/socially polite phrase for “systemic collapse.”

Whether intentional or unintentional, the Dutch Central Bank has alluded to this possibility, which I see more as an inevitability, with just the issue of timing yet unresolved.  I would argue, however, that the financial system liquidity issues currently addressed by the reimplementation by the Fed of repo/extended repo operations – and the inclusion of foreign banks in the liquidity injections – reflects the growing instability of the global financial system.

Furthermore,  the suddenness of these systemic “tremors,” suggests that the Central Banks are losing control of a system dependent on fiat currency and credit creation that expands at an increasing rate in perpetuity.  Unfortunately for the paper money maestros running the Central Banks, the value of fiat currency approaches zero as the supply of currency and credit heads toward infinity.

In all likelihood, the recent rise in the price of gold, which has been driven by escalating demand for physical gold – notably by eastern hemisphere Central Banks – reflects the increasing visibility of an inevitable collapse in the global fiat currency system.  The Dutch Central Bank has made it clear that it sees gold as an ideal asset for wealth protection when the next crisis erupts.

Fed Balance Sheet Expansion, Unicorns, Unintended Consequences and Gold

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The Bank for International Settlements (BIS) – the Central Bank of Central Banks – released two reports on “unconventional policy tools” – e.g. QE/money printing and interest rate suppression. It concluded that the extreme Central Bank interference since 2008 has had a negative impact on the way in which financial markets function.

While Jerome Powell and his “Gang That Couldn’t Shoot Straight” at the Fed prefer to use the term “balance sheet growth” in reference to money printing, the big-thinkers at the BIS call it UMPT (Unconventional Monetary Policy Tools).”

“Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fueled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function.” (Financial Times)

“Moral Hazard” is defined as the “lack of incentive to guard against risk where one is protected from its consequences.” In economics (real economics, not the Keynesian psycho-babble of the current era) this would refer to the egregious misallocation of investment capital caused by the unfettered creation of fiat currency injected into the global financial system.

Additionally, unprecedented permissiveness by the regulators, who are charged with enforcing laws originally established to prevent or at least contain the escalating financial fraud that accompanies asset bubbles, further enables and accelerates the formation and inflation of investment bubbles.

The BIS report of course neglected to discuss the extreme moral hazard engendered by the trillions in money printing. The “unicorn” IPOs are the direct evidence of this. The extreme  overvaluation of the equity in the ones that have sold stock into the public markets reflects the complete disregard of historically accepted tools and guidelines used for business model appraisal and financial valuation analysis. “But it’s different this time.”

The losses racked up by these companies, the ones with public equity plus the ones yet to be IPO’d, will aggregate well into the $100’s billions, possibly trillions before this era dies. A journalist from The Atlantic, in an article titled “WeWork and The Great Unicorn Delusion,” correctly asserted that “most [of these companies] have never announced, and may never achieve, a profit.” But he lost me when he asserts that these companies are “extraordinary businesses with billions of dollars in annual revenue and hundreds of thousands, even tens of millions, of satisfied global customers.”

Quite frankly, the business model of almost every Silicon Valley unicorn is predicated on building revenues and gaining market share by selling products and services for a significant discount to the all-in cost of production and fulfillment.

Every single unicorn IPO’d over the last several years that I have evaluated is not only highly unprofitable, but also burns legendary amounts of cash. Of course there are “millions of satisfied customers” globally – the unicorn business model functions in a way that is the equivalent of selling $1 bills for 75 cents.

The more relevant proposition is that, in all probability, many of these companies would have never  spawned if the Central Banks had not inflated the global money supply well in excess of real economic growth generated by the global economy.

I find it difficult, if not impossible, to refer to these appallingly unsustainable businesses models as “extraordinary” when in fact most if not all of them are nothing more than the product of the extreme moral hazard created by the Central Banks’ printing presses running overtime.

The economic losses incurred by the Silicon Valley unicorns are funded by the “private equity” funds which have managed to harness a significant share of the cash flowing from Central Bank money-spigots and transmitted through the primary dealer banks into the financial system. Little noticed is the fact that since 2014, roughly $1.3 trillion has drained out of the banks’ excess reserve account at the Fed and disappeared into the financial system’s “black hole.”

The 2008 Great Financial Crisis – which was a de facto financial system collapse until money printing bailed out banks and reckless investors – was fueled by the easy monetary and credit policies of Alan Greenspan and Ben Bernanke. Those policies stimulated huge mortgage, housing and general stock market bubbles. The unintended consequences bankrupted a large swathe of households and banks.

But that decade’s reckless Central Bank policies pale in comparison to the current era of unfettered money printing cranked up by Ben Bernanke (recall that he was affectionately called “Helicopter Ben”). The ensuing widespread asset bubbles have fomented into a financial Frankenstein that has broken free from its chains as evidenced by the sudden implementation of the Fed’s repo program, which has yet to be accompanied by a credible explanation.

Jerome Powell yesterday (October 8th) asserted in a speech that “balance sheet expansion is not Quantitative Easing.”  But make no mistake, the repo operations function as emergency room triage until the Fed and the Treasury Department formalize another round of money printing, or QE or whatever you want to call it. At this point it is nothing more than a game of Orwellian semantics.

If you’re curious as why the price of gold has risen 37% since the end of May, look to the events unfolding at the Fed and in the banking system. Just like in late October 2008, the price-action in gold is sending a loud alarm that is no longer containable with manipulative efforts in the paper derivative gold market. Eventually the Government’s Working Group on Financial Markets will be helpless in coaxing the hedge fund trading robots to help hold up the stock market.

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The commentary above is an excerpt from the next issue of the Short Seller’s Journal (Sunday). I’ll be reviewing several unicorn short ideas over the next several issues. To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

Fed Delivers More QE “Light” And Gold Responds

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On October 4th, as I expected would happen, the Fed announced that it was extending its overnight and term repo operations out to November 26th (the November 12th two-week term repo matures on the 26th).

The Fed added 7 more 2-week  “term repos, ” plus a 6-day “term repo,” with the next three operations upped to $45 billion. It extended the overnight repos until at least November 4th.  Well then, I guess the “end of quarter” temporary liquidity issue with corporate tax payments was not the problem.

Follow the money -The Fed’s repo operation extension further validates the analysis in my last post in which I made the case that an escalation in the non-performance of bank assets (loan delinquencies and defaults and derivatives), caused by contracting economic activity, has created a liquidity void in the banking system that is being “plugged” by the Fed. The Fed’s balance sheet has increased $186 billion since August 28th.

Not only did the Fed end “QT” (balance sheet reduction) two months earlier than originally planned in January, the Fed has effectively reversed in the last 5 weeks all of the QT that occurred since March 28th.

The evolution of Orwellian propaganda terminology for “money printing” has been quite amusing. It seems that the Fed has subtly inserted the phrase “balance sheet growth” into its lexicon. While Jerome Powell referenced “organic balance sheet growth” in his press circus after the last FOMC meeting,  expect that it will be considered politically/socially incorrect to use “QE” or “money printing” instead of “balance sheet growth” in reference to this de facto banking system bailout.

Meanwhile,  thank the Fed for providing the amount of money printing/currency devaluation needed to offset China’s absence from the physical gold market for the last week:

Given the technical set-up in gold plus the enormity of the Comex bank/commercial short position in paper gold, many gold market participants, including me, expected a much bigger price-attack on gold during Golden Week than has occurred. In fact, gold has held up well, with the December future testing and holding $1500 three times in the last week. Business activity in China, including gold and silver trading, resumes tonight.

The Fed’s QE Light program will likely transition into outright permanent money printing before the end of 2019. The November meeting is scheduled for the end of this month (Oct 29-30). But I doubt the Fed will turn its repo money printing into permanent money printing – aka “POMO” or “balance sheet growth” – until the December FOMC meeting (Dec 10-11).

An Unavoidable Global Debt Implosion

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“[Whatever] the repo failure involved, it is likely to prove a watershed moment, causing US bankers to more widely consider their exposure to counterparty risk and risky loans, particularly leveraged loans and their collateralised form in CLOs. a new banking crisis is not only in the making, for which the repo problem serves as an early warning, but it could escalate quite rapidly.” Alasdair Macleod, “The Ghost of Failed Bank Returns”

The delinquency and default rate on consumer and corporate debt is rising. This creates funding gaps and cash flow shortfalls at banks. In a fractional banking system, banks only have to put up $1 of reserve for every $9 of money loaned. When the value of the loans declines because of non-performance, it requires capital – cash liquidity – to make up the shortfall in debt service payments received by the banks. In simple terms, the banks are staring at a systemic “margin call.”

To be sure, the current repo funding shortfall may subside. But it will not fix the underlying causes (Deutsche Bank, CLO Trusts, subprime debt, consumer debt, derivatives), which are likely leading up to another round of what happened in 2008 – only worse this time.

Chris Marcus of  Arcadia Economics  invited me to discuss my thoughts on the meaning behind the sudden need for the Fed to inject $10’s of billions into the overnight bank lending system:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Repo Madness – An Enormous “Margin Call”

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“Central Banks are panicking…the whole system is on the verge of disappearing into a black hole.” – Egon Von Greyerz on USAWatchdog.com

On Wednesday, after Wednesday’s overnight Repo operation had $92 billion in demand for the $75 billion operations, announced that it was increasing overnight Repos to $100 billion and doubling the two-week term Repo operations to $60 billion. Well, that escalated quickly.

The rationalization is “end of quarter liquidity needs” by the banks who have to increase reserves against assets (loans) or face taking earnings write-downs. But this dynamic occurs every quarter and Repo operations have not been required to keep the banking system from seizing up since QE was initiated.

Note that overnight repo operations were not necessary when the Fed flooded the banking system with QE funds.  The banking system requires immediate liquidity for the first time since QE commenced.  Why?  Recall how you go bankrupt: gradually then suddenly.

Typically the repo rate should correlate tightly with the Fed Funds Rate. But last Tuesday it spiked up briefly to 10%. The media and Wall Street analysts did a good job reporting that there was an obvious liquidity squeeze in the banking system but they did nothing to explain the underlying causes. Moreover, there’s still $1.3 trillion remaining from QE sitting in the Fed’s Excess Reserve Account,  which means banks with cash have plenty of cash to lend overnight to banks which need money.

But the banks with cash were unwilling to lend that cash even on an overnight basis.  So why did the Fed have to inject, by last Wednesday, $75 billion in liquidity into the banking system?

Think about what happened as the start of a giant “margin call” on a global financial system that is likely reaching its limit on credit creation. The enormous increase in derivatives magnifies the problem.  One immediate contributing factor may been losses connected with the cliff-dive in the price of the 10yr Treasury bond.  Hedge funds loaded up on Treasuries chasing the momentum higher using margin provided by the banks (prime brokerage loan agreements). The 10yr Treasury price dropped $4 in eight trading days – i.e. the 10yr benchmark yield jumped 55 basis points.

This may not sound like a lot in stock price terms, but losses on speculative Treasury bond and Treasury bond futures positions likely ran into the  billions. Several entities lost a lot of money during that rate rise, which means there had to have been some margin calls and derivatives blow-ups which required cash collateral or faced liquidation.  Banks themselves carry large Treasury positions which fell $10s of millions in value over that 8-day period.

In addition to losses on Treasury bonds, I’m certain there’s been a general erosion of bank assets – primarily debt-based securities and loans, which have led to enormous losses when Credit Default Swap derivatives are factored into the mix. In effect, there likely was a large systemic margin call which has created a cash and collateral squeeze in the banking system with the primary dealers, which is why the overnight funding mechanism required a cash injection by the Fed eight days in a row now. This is similar what happened in 2008.

For now the Fed is going to plug the funding gap at the banks with these Repo operations. But my bet is that the problem is escalating rapidly.  It is much bigger in aggregate globally than anyone can know,  just like in 2008.  In all probability the Fed has no clue how big the potential problem is and these Repo operations will eventually morph into outright money printing.

With More Money Printing Coming (“QE”) Gold, Silver And Miners Will Soar

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It would be difficult to find a chart with a  more bullish set-up than that of GDX unless it was a chart of the imminent move higher in the U.S. dollar money supply:

The Fed was unable to move the Fed funds rate within 50% of the long term average “normalized” level. It was also unable to unwind little more than 20% of the money it printed under Bernanke and Yellen, despite Bernanke’s insistence that the $4.5 trillion printed and injected into the banking system was “temporary.”  Not only was the first series of QE operations not temporary, the Fed is preparing to re-start its printing press.

I believe we are very close to a major shift in investor sentiment, as investors lose faith in the Central Banks’ ability to control the markets with monetary policy. As you can see from the chart above, we experienced just a “whiff” of the type action we can expect in the precious metals sector as reality ushers in true price discovery in the markets.

I can tell the sentiment is not getting frothy in the precious metals sector when several people, subscribers and others, have expressed disappointment in the rate of return for the mining stocks. From May 30th thru the start of Labor Day weekend, gold rose 15.3% and silver climbed 32.3%. Over the same period of time, GDX rose 43.7%. Call me old fashioned, but I can remember when 43.7% over a two or three year period of time was considered a great return on stocks (this was before the tech bubble).

Where I really see disappointment expressed is with the junior exploration micro-cap stocks. Although some have been stuck in mud, many have doubled or tripled. One example is Discovery Metals (AYYBF, DSV.V), which ran from 17 cents to as high as 52 cents this summer. Based on today’s closing price, it’s more than doubled since May 30th. Many of the other stocks I feature in my  Mining Stock Journal newsletter provided double-digit percentage returns this summer and some have doubled or tripled.

I believe the pullback in the sector this month is a necessary and healthy technical correction, with some help from the price management squad, that will lead to higher highs sometime between now and year-end. Certainly investor sentiment, from the metrics I see daily, are far from exuberant, which is bullish.

 

Repo Rates And Gold: Something Big Is Happening

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“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” – Ayn Rand

Something big is happening beneath the surface of a Dow and S&P 500 trading near all-time highs. The soaring repo rate, more demand for overnight Fed funding loans than is being supplied and a big move in the price of gold since the end of May are clear indicators.

The global financial system is unsustainably over-leveraged. This problem is compounded by the massive increase in OTC derivatives. The U.S. financial system, in exceptional fashion, leads the way. Trump calls it “the greatest economy ever.” Yet the Fed was unable to “normalize” the Fed Funds Rate back up to just the historically average level without crashing the financial system. In fact, the Fed couldn’t even get halfway there before it had to reverse course and take rates lower plus hint a more money printing.

Phil Kennedy of Kennedy Financial hosted me plus Larry Lepard (mining stock fund manager) and Jerry Robinson (economist and trend trader)  to discuss what appears to be a giant margin call on the global financial system and where we think the price  of gold is headed:

NOTE:  I will be analyzing the signal being sent by the soaring repo rate this week and why it may be evidence that the fractional reserve banking fiat currency system is collapsing in my Short Seller’s Journal this week. You can learn more about my newsletters here  Short Seller’s Journal  and here  Mining Stock Journal. Two weeks ago I presented ROKU as a short at $169 and last week Tiffany’s (TIF) at $98. So far my put play on ROKU has been a home run.