Tag Archives: repo operations

The Fake News Economy

The stock market is becoming increasingly disconnected from underlying main street reality. Corporate profits have been declining since the third quarter of 2018. However, pre-tax corporate profits have been declining since the Q3 2014 (this data is available on the St. Louis Fed FRED website). Real corporate profits (adjusted for CPI and including inventory write-downs and capex) are the lowest since the financial crisis. Remarkably, rather than the usual “hockey stick” forecasts, Wall St analysts have revised lower their consensus earnings estimates for the Dow Jones Industrials. In fact, per the chart above, I think you can say that Wall Street’s forward EPS estimates have gone off a cliff.

The “narrative” architects and fairytale spinners are desperately looking for evidence to fit their “consumer is still healthy/economy still fine” propaganda. But a look under “the hood,” starting with the employment report, reveals a reality that is in stark contrast to the manipulated headline numbers.

There’s no b.s. like the BLS (Bureau of Labor Statistics). The BLS publishes the monthly non-farm payroll report.  Predictably, the headline number reporting that 225k “jobs” created was well above the consensus forecast of 160k. But the benchmark revision removed 514,000 jobs reported to have been created between April 2018 and March 2019. This is visually what it looks like when 20% of the prior year’s job “growth” is erased:

The black line shows the number of jobs originally reported between April 2018 and March 2019. The light blue line shows the revised data. The two lines are lined up prior to April 2018 reflecting prior benchmark revisions, which is why they’re in sync. A large portion of the revision came from the BLS’ seasonal “adjustments” model over-estimating job creation related to consumer spending, primarily the retail sector and leisure/hospitality.

The benchmark revision does not apply to the current report, which is largely not credible. As an example, the BLS attributed 44,000 new jobs to construction. But the December construction spending report showed 0.2% decline from November. Private construction spending was 0.1% below November.

The total value of construction spending in 2019 was 0.3% below 2018. Private construction spending for the entire year in 2019 was 2.5% below 2018, with residential construction 4.7% below 2018. Removing construction inflation from the numbers, private residential construction spending in 2019 fell 8.8% from 2018 (per John Williams’ Shadowstats.com).

I glean three conclusions from the construction spending data. First, the BLS attribution for 44k new construction jobs in January is egregiously incorrect. No way construction firms are hiring with construction spending in decline. Recall I mentioned in the last issue (the Short Seller’s Journal) that Caterpillar’s CEO had forecast a further decline in residential construction spending in 2020.

Second, without the increase in Government spending, the decline in construction spending would have been worse. Third, per the CAT CEO’s outlook for lower residential spending in 2020 (and I’m certain his view is derived from residential construction equipment orders) it would seem that homebuilders are not backing their optimism per the homebuilder sentiment report with real money if they are planning to spend less in 2020 than they did in 2019.

Notwithstanding the BLS fantasy employment report this past Friday, here’s a good leading indicator of labor market weakness:

When businesses start reducing payroll to cut expenses in response to expected business weakness, the temp labor goes first. You’ll note that this data series went negative briefly in 2015,  but recovered somewhat. In all probability businesses responded to the Trump election hopium and the stimulative effect from Trump’s massive corporate tax cut. But businesses prematurely implemented expansion and capex spending and now they’re back to using cash for stock buybacks into which insiders are selling.

While December retail sales, released in mid-January, showed a 0.3% increase over November, ex-autos retail holiday spending was slightly better than expected. December retail sales not including autos increased 0.7%. However, if you exclude gasoline and auto sales, retail spending increased 0.5%. Auto sales took a hit in December (predictably) and gasoline price inflation boosted the headline number. Surprisingly, considering all of the hoopla in the mainstream financial media about “strong” online sales for the holidays, online sales only increased 0.2%.

Underlying the “good” holiday retail sales number, is a troubling reality. The Fed reported this past Friday (Feb 7th) that consumer credit soared by $22.1 billion in December ($15 billion was the consensus forecast). Most of that increase is attributable to credit card spending, which accounted for $12.6 billion of the $22 billion. This was the biggest one-month jump in credit card debt since 1998. Total consumer credit outstanding hit a record $4.2 trillion in December.

What makes this statistic even more troubling is the fact that credit card delinquency and default rates are starting to accelerate per the Discover Financial (DFS) data I presented in January 26th SSJ issue. PNC Bank (PNC) also reported rising credit delinquencies and charge-offs when it reported its Q4. Its stock tanked 7% over the next eight trading days. Credit Acceptance Corporation (CACC – subprime auto loans) reported rising delinquencies, defaults and charge-offs on January 30th. It’s stock fell 8.1% the next day though it’s recouped about half of that loss through Friday (Feb 7th).

The chart above shows CPI-adjusted retail sales (blue line) vs consumer credit outstanding (red line) for the last 5 years. CPI-adjusted retail sales declined slightly in 2019, which means “unit volume” declined slightly, while consumer credit continued to rise. Now imagine if a real inflation adjustment was applied to retail sales instead of the phony CPI. Real retail sales would show a decline in 2019. The chart above is not a “friend” of perma-bulls and economic fantasy promoters, which is probably why you will never see a chart like that in the mainstream financial media.

Target (TGT, $115) said its same-store-sales were up just 1.4% during the holidays vs 5.7% a year ago. Toy sales were flat, electronics sales were down 6% and home items sales were down 1% (apparel was up 5%, food/beverage up 3% and beauty items up 7%). Macy’s, Kohl’s and JC Penney all reported same-store-sales declines for the holiday period. Macy’s announced earlier this past week that it was going to cut 2,000 jobs and shutter 125 stores.

While it’s clear e-commerce is slowly taking market share from brick/mortar, the latter’s troubles are derived primarily from the deteriorating financial condition of the average household. A study released this past week from a survey taken in late November showed that nearly 70% of all respondents said they had less than $1,000 in savings.

The economy is contracting in most sectors. Any area of the economy that still has pulse is being driven by debt issuance.  Any media reports or official proclamations that the economy is “doing  well” are nothing more than fake news and propaganda.

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The commentary above is  excerpted from the February 9th is of the Short Seller’s Journal. Each weekly issue contains macro economic analysis, market analysis, and short ideas.  I  To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

Mining Stocks Are Setting Up For Another Run

The Fed is trapped.  If it stops adding money to the money supply, the stock market will crash.  It’s already extended the repo money printing program twice. The first extension was to February and now it has extended it again to April.

What was billed as a temporary “liquidity problem” in the overnight repo market is instead significant problems developing in the credit and derivative markets to an extent that it appears to be putting Too Big To Fail bank balance sheets in harm’s way.  That’s my analysis – the official narrative is that “there’s nothing to see there”.

The delinquency and default rates for below investment grade corporate debt  (junk bonds) and for subprime consumer debt are soaring.   Privately funded credit,  leveraged bank loans,  CLO’s and subprime asset-backed trusts (credit cards, ABS, CMBS)  are starting to melt down. The repo money printing operations is a direct bail out of leveraged funds, mezzanine funds and banks, which are loaded up  on those subprime credit structures.    Not only that,  but  a not insignificant amount of OTC credit default derivatives is “wrapped around” those finance vehicles, which further accelerates the inevitable credit meltdown “Minsky Moment.”

The point here is that I am almost certain, and a growing number of truth-seeking analysts are coming to the same conclusion, that by April the Fed will once again extend and expand the repo operations. As Milton Friedman said, “nothing is so permanent as a temporary government program.”

Gold will sniff this out, just like it sniffed out the September repo implementation at the beginning of June 2019.  I think there’s a good chance that gold will be trading above $1600 by this June, if not sooner.

Eventually the market will discover the junior exploration stocks and the share prices will be off to the races. This is part of the reason Eric Sprott continues to invest aggressively in the companies he considers to have the highest probability of getting enough “wood on the ball to knock the ball out of the park” (sorry, baseball is right around the corner).

Precious metals mining stocks are exceptionally cheap  relative to the price of gold (and silver).   Many of the junior exploration stocks  have sold down to historically cheap levels  in the latest pullback in the sector.   As such, this is a good opportunity to add to existing positions in these names or to start a new position.

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In my latest issue of the Mining Stock Journal, I present a penny stock idea that I believe could be a 5-10 bagger.  I’m not alone in this view because a royalty company I know and respect recently took a 9.5% position in the company’s stocks and purchased a royalty stream on several of the company’s mining claims.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.

Tesla, Gold And Coronavirus – Fraud And Global Depression

To say the current stock market is in a bubble is an insult to the word “bubble.” Tesla experienced an insanely idiotic stock price move after reporting “shock and awe” headline numbers for revenue and EPS which “beat” estimates – estimates that had been lowered by analysts throughout 2019. But as always there’s plenty of dirt in the details which point to a reality that is far different than is represented by headline numbers and Tesla’s highly orchestrated earnings presentation.

There’s just no telling when this Electric Tulip will inevitably crash. But, as with any investment bubble the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror.

Meanwhile, the physical gold market which underlies the complicated web of paper gold derivatives continues to push the gold price higher despite aggressive efforts by the western Central Bank and bullion bank price management team. In fact, data from the BIS indicates that the BIS had a heavy hand in the effort to cap the price-rise of gold during January using its physical gold swap and leasing transactions.

Paul at Silver Doctors invited me onto its podcast to discuss these issues

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

Printed Money Blowing The Bubbles Even Bigger

The total US stock market valuation  at $33.9 trillion is 157.4% of the last reported GDP. It’s the highest market valuation ever. The more the policy-makers try to pump and jawbone the market higher, the worse the consequences will be on the downside when the rug is pulled out from under stocks. The trigger could be anything. Eventually the market will acknowledge and accept the fact that the economy is getting worse and earnings will continue to decline. But fundamental reality is just one of many possible catalysts that will cause a painful drop in the stock market.

For now the rising stock market is shaping the Wall Street narrative being  transmitted through the mainstream media that the economy is in good shape. Funny thing about that – the stock market is not the real economy. But this is:

To be sure, rising stock prices enhance the wealth and spending capacity of the top 1% who own stocks outside of their retirement funds. But that wealth does not “trickle down” to the average middle class household (everyone below the top 1% wealth demographic). Let’s look briefly at some facts.

I’ve been making the case for quite some time that freight shipping volume is a valuable tool by which to gauge the relative level of economic activity:

The Cass freight shipment volume index tanked nearly 8% YoY in December. This number includes the growth in online shopping fulfillment deliveries and would have been worse if online shopping was not taking market share from brick/mortar stores. The index has fallen to its December 2009 level, which is part of the time period that the NBER has declared the economy to be in a recession.

The Cass data is reinforced by the sharp decline in the Baltic Dry Index. The BDI measures global ocean freight shipment activity and is considered a leading indicator for global commodities and raw materials demand. This includes incoming/outgoing vessels to and from the U.S. Not only is the global economy, including the U.S. growing weaker, the IMF has slashed its global economic growth outlook for 2020 and 2021.

The Conference Board’s Leading Economic Index released Thursday showed a 0.3% drop vs the 0.2% decline expected. The index has now declined in five of the last six months of 2019. Without the large run-up in the stock market, the index would have fallen even more. Rising unemployment claims (hmmm…) were the largest contributor to the decline. YoY for December the index gained just 0.1% – the weakest YoY change since November 2009.

One of the false narratives being promoted by talking heads and Wall St. is the idea that the consumer is still strong. Wrong. Consumer spending over and above necessities is being driven by the easiest access to credit in my lifetime. Evidence of this is the rapid growth in auto, credit card and personal loans. And in fact more than a third of all households report using credit cards to make ends meet every month.

But as evidence of the deteriorating condition of the consumer’s financial health, Discover’s (DFS) stock plunged 11.1% on Friday despite “beating” earnings estimates. The dagger in Discover’s quarter was loan charge-offs, which jumped to 4% of the outstanding balance. This is the highest charge-off rate since DFS’ charge-off rate peaked at 5% during the financial crisis. Delinquency rates are also accelerating. On a YoY basis for Q4, 30+ day delinquencies were up 11% while 90+ day delinquencies jumped 13%. For credit card loans, 30+ day delinquencies were up 14% and 90+ day delinquencies soared 15%.

In fact, loan loss reserves are starting to rise at a double-digit rate at many banks and finance companies. The average consumer is stretched, a fact that shows up in the numbers that never get reported in the mainstream media or Wall Street. The last time bank financials evidence rising consumer borrowing distress like this was in late 2007. We know how that played out. This time around the bubbles are bigger, the fraud is better disguised and households and policy-makers are even less prepared for the inevitable.

This is why gold is up 24% since May 2019, outperforming the stock market and most other financialized or commodity investments. No, it has very little to do, if anything, with coronavirus fear. But it’s why the western Central Bank and bullion bank gold price managers are having a difficult time containing the rising price.

“Rates Were Pushed Off The Cliff By The Central Banks”

The title quote is from Tad Rivelle, Chief Investment Officer of TCW (Los Angeles based fixed income management company), who manages one of the largest actively managed bond funds. He goes on to comment about the implications of the negative rate policy that has been implemented by Japan and the EU: “Credit markets look late cycle, manufacturing looks pretty late cycle and corporate profitability, as well. So the proliferation of negative rates may also suggest that central bank policy has reached exhaustion. It’s almost like negative rates are the last thing central bankers are trying to make it work.”

Many investors and market observers wonder why the Fed/Central Banks just can’t print money forever and drive the markets even higher. The answer can be found in the law of diminishing returns. When Central Banks print money – in our case dollars – at a rate that exceeds the amount of wealth produced to “back” that money printed, it begins to diminish the value of each extra dollar created. As the system becomes saturated with dollars, the Central Banks then try to force the market to use the oversupply of currency bu taking rates negative. This problem is reflected in the velocity of money (the number of times each currency unit changes hands):

That chart is the essence of the law of diminishing returns as it applies to the money supply. Think of it as the “productivity” of each dollar in the system.  Greenspan initiated the paradigm of using money printing to “fix” credit market and stock market problems.  These “problems” were in fact the market’s price discovery and risk discounting mechanisms . He was given the name “Maestro” because seemingly fixed economic and financials problems, though all he really did was defer their resolution.

In fact, Greenspan used money printing to paper over the underlying system structural problems going back to the market crash in 1987.  Greenspan, who was installed as Fed Chairman two months prior to the crash, confirmed that the Fed stood ready “to serve as a source of liquidity to support the economic and financial system.”

In effect, the chart above reflects the fact that a large portion of the printed money, rather than circulating in a chain of economic transactions, sits stagnant in “pools.” As an example, the money printed and given to the banks in the first three QE programs sat in the Fed’s excess reserve account “earning” a tiny rate of interest which is nothing more than additional printed money used to boost bank earnings and give the banks no-risk, unearned cash flow.

As printed money sits idly, the Central Banks artificially lower the “cost” of money, which is also known as the interest rate, thereby making an attempt to force money into the system and incentivizing companies and consumers to use this money by making it nearly costless. Currently Central Banks are cutting interest rates at the fastest pace since December 2009.

Lowering rates toward zero is a temporary fix – i.e. it only serves to defer the inevitable economic bust cycle. But an oversupply of currency which can be used – or borrowed – at little to no cost also ushers in credit bubbles which become manifest in the form of the various asset bubbles, like the housing and stock bubbles, or is used for purposes which do not create economic value. The best example of the latter is when corporations borrow money at near-zero interest rates and use that borrowed money to buyback shares. There is absolutely no economic benefit whatsoever from share buybacks – none, zero – other than for the corporate insiders who dump their shares into buybacks.

This brings me to the quote at the beginning from Tad Rivelle: “the proliferation of negative rates may also suggest that central bank policy has reached exhaustion; it’s almost like negative rates are the last thing central bankers are trying to make it work.” The velocity of money chart is evidence that printing money and forcing interest rates to zero are measures which eventually fall victim to the Law of Diminishing Returns.

The Central Banking policy of near zero and zero interest rates combined with unfettered money creation has lost its “traction.” We are approaching the point at which money printing will not produce the intended effects. In response “rates have been pushed off a cliff by Central Banks.” It’s been acknowledged that Trump discussed negative rates with Fed Chairman Powell just a few weeks ago.

The imposition of negative interest rates on the financial system perversely turns the laws of economics inside-out. Ironically, perhaps fittingly, it’s a desperate act of economic treason that will boomerang back and decapitate the global economy, including the U.S. This reality is already reflected in the rapidly contracting manufacturing reportsand the confirmed by the freight transportation data, which have been collapsing for the better part of the last year.

The commentary above is from a recent issue of the Short Seller’s Journal. Despite the melt-up in the stock market, several stocks are sectors are diverging negatively and I have presented some short ideas that have been making money – Lending Tree (TREE) is a good example.  To learn more follow this link: Short Seller’s Journal information.

 

 

Junior Exploration Stocks Are Generationally Undervalued

Gold and silver are set up potentially for an explosive move, fueled by the inevitable escalation of Central Bank money printing. The Federal Reserve has led the charge on this account over the last three months as the financial system has begun to veer off the rails.

Currently, the Fed is printing money at the fastest rate in its history. The brown stuff is hitting the fan blades in the financial system.  By mid-January the Fed’s balance will be close its all-time high.  Fiat currency devaluation aka QE aka money printing is like rocket fuel for gold and silver.

A lot of mining stock analysts are drooling over the charts of the large cap stocks. And kudos to Crescat Capital for sharing the chart of above (with my edit in yellow). But the junior exploration “venture capital” stocks are the most undervalued relative to the prices of gold and silver in at least the last 19 years, which is the amount of time I’ve been involved in the precious metals sector.

Last Thursday gold  spiked up $14 before the stock market opened. But when Trump tweeted that a trade war “Phase 1” deal was close, gold went $20 off the cliff.  However, February gold closed flat vs Wednesday’s close and March silver has reclaimed the $17 level.  It’s a big positive that the “Phase 1” trade deal was signed because now Trump won’t have the ability to jerk the markets around with his silly “positive trade talks” tweets.

More important to the gold bull market, the Fed once again expanded the repo money printing QE operations. Early today (Thursday, December 12th) the Fed announced an additional $275 billion in repo operations around year-end. Adding all of it up, the Fed will be pumping half a trillion dollars into the repo system over year-end. This is unequivocally due to bank assets melting down and the need to finance new Treasury debt issuance.

The Fed’s re-liquification program will be given creative names – anything but “QE.”  It started off with “balance sheet expansion” but that term was abandoned because of its transparency. The best one I’ve heard so far is “yield curve capping operation.”  Watching Jerome Powell try to camouflage the Fed’s money printing  is like watching a baby  smoke a cigarette.

It’s a good bet that eventually the repo activity will be converted into a permanent “QE” money printing program.  The best way to make this wager  is via the precious metals sector.

The Fed’s Repo QE: The Underlying Problems Are Escalating

Pressures are already building on the financial stability front that will make the next economic downturn messier than anticipated.” – Bill Dudley, former President of the NY Fed

I get irritated when I see mainstream media and alternative mainstream media parroting the propaganda used to cover up the truth. This morning Zerohedge echo’d the “corporate tax payments liquidity squeeze” narrative first used back in September to justify the re-start of the repo QE program. I would have thought that idiotic excuse would have been proved wrong after this:

It’s truly amazing that Fed officials come clean after they leave their post at the Federal Reserve. We’ve seen this dynamic for sure with Greenspan. Not so much with Bernanke, but I always considered Bernanke to be a bad liar and it seems that he’s chosen largely to fade from public exposure. Ditto with Janet Yellen.

Bill Dudley, however, is a former partner of Goldman Sachs and thus highly intelligent (as is Greenspan – Bernanke and Yellen not so much). Dudley clearly sees the writing on the wall. Now that he’s not in a position at Goldman in which it’s advantageous for him to promote stocks in exchange for big bonuses, or at the Fed where it’s politically correct to rationalize a bullish narrative (“Fed-speak”), he’s coming “clean” per the quote at the top.

The Fed’s current posture, based on the Fed officials’ weekly speeches ad nauseum, is that the economy is healthy with moderate growth and a strong labor market. If this is the case, however, why is the Fed printing money on a monthly basis in an amount that is close to the peak monthly “QE” after the financial crisis?

The question, of course, is strictly rhetorical. In fact the Fed once again quietly increased the amount of money it is printing and handing over to the banks. On November 25th the Fed released an updated repo operation schedule which showed additional repo operations totaling at least $50 billion. The Fed has also made its website less user-friendly in terms of tracking the total amount by which the repo operations have increased since the first operation in mid-September.

The 28-day repo QE for $25 billion that was added to the program Nov 14th was nearly 2x oversubscribed this morning, which means the original $25 billion deemed adequate 3 weeks ago was not nearly enough – a clear indicator the problems in the banking system are escalating at a rate faster than the Fed’s money printing operation. Just wait until huge jump in subprime quality credit card debt that will be used to fund holiday shopping begins to default in the first half of 2020…

The chart to the right shows the Fed’s repo schedule posted on September 23rd on the top and the latest repo operation schedule on the bottom. I suspect this won’t be the last time the Fed will increase the amount of its “not QE” QE money printing. Additionally, the Fed refuses to identify the specific banks which are receiving most of the repo money. One obvious recipient is Deutsche Bank, which is quietly shutting down a large portion of its business operations and is likely technically insolvent. Per a 2016 IMF report, DB is highly interconnected to all of the Too Big To Fail banks (JPM, GS, C etc). This means inter-bank loans and derivatives counterparty exposure, among other financial connections. Aside from the DB factor, as I detailed last week with deteriorating leveraged loan/CLO assets held by banks, I am convinced that the “repo” money is needed to help banks shore up their liquidity as loans and other assets begin to melt-down. This is quite similar to 2008.

For more insight into the truth underlying the Fed’s renewed money printing operations, spend some time perusing articles like this from Wall Street On Parade.

What Is The Fed Hiding With Its “Repo” Operations?

I’m not sure why Trump continues incessantly to harangue the Fed about cutting the Fed Funds rate. The Fed is printing money and sending it to the stock market via the banks. It’s a much more effective policy tool to accomplish Trump’s number one policy agenda, which is to drive the stock market inexorably higher.

I put “repo” in quotes because the term is a thin veil for what is indisputably the return of “QE” money printing.   The statement posted on the Fed’s website announcing the $60 billion per month T-bill purchase operation “explained” that the move is “to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.”

I use quotes around “explained” because the policy statement is nebulous. The non-reserve liability on the Fed’s balance consists primarily of the money it prints and releases into circulation. Increasing “non-reserve” liabilities is a fancy term for “printing money.” The T-bill “operation” is funded by printing money. The Fed transmits this money into the banking system – not the real economy – by purchasing the T-bills. Presumably as the T-bills mature, the Fed receives the new T-bills printed and issued by the Treasury used to refinance the existing T-bills. The T-bill operation permanently injects money into the financial system.

I surveyed some friends/colleagues who know at least as much as I do about money market fund operations.  None of us can figure out  the nature of the potential  “money market pressures” referenced by the Fed.  Perhaps the Fed fears a run on money market funds by corporations and the public?  Anyone…Bueller?

The original repo operations in September were supposedly to address third quarter-end liquidity pressures because corporations need cash to pay taxes.  Since the passing of the third quarter, the repo operations have escalated to more than double the size of the original repo operation.

I’m not the only one who has noticed the Fed’s furtive behavior. Pam and Russ Martin – Wall Street on Parade –  encountered the same roadblock I ran into this past weekend when I tried to pull up the Markets & Policy Implementation and the repo operations web pages: “Site Maintenance – the page you are looking for is temporarily unavailable.”  The pages were “temporarily unavailable” all weekend.

I have yet to encounter one reasonable explanation for the reimplementation of money printing – money printing which accelerates in size and frequency almost weekly.  Make no mistake, the Fed-apologetic  Wall Street analysts have no clue what’s happening or why.

We know that the Fed used printed and Taxpayer money to bail out the banks in 2008.  These “Too Big To Fails” would have collapsed without the bailout.  The Fed is going out of its way – with help from the Wall Street and media sycophants – to obscure the truth.  But it’s pretty obvious, at least to me, that big bank balance sheets are starting to melt down again.

Stocks Bubble Up From More Money Printing

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

“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.