Fed Head Brainard Says, “It’s Just A Simple Imbalance”…

September 26, 2019

* The dollar climbs back into the lead chair… 

* Draghi to give farewell speech… One more chance to diss the euro! 

Good Day… And a Tub Thumpin’ Thursday to you! I did a 180 yesterday, and came back around to feeling human again… And just in time for the weekend, YAHOO! My beloved Cardinals are in a bind, with just 3 more games to play, they still haven’t tied up the National League Central Division… After the 19 inning marathon Tuesday night, into Wednesday morning, they didn’t have any pitchers that hadn’t been used the night before… and on top of that, it was a day game, not a night game with a few extra hours of rest! I’m not happy about this trip to Arizona… and I doubt the Cardinals are either! The Four Tops greet me this morning with their song: Reach Out, I’ll Be There…

So… with me feeling more alive yesterday, I got to do more reading… and researching… and looking under hoods, etc. I did see something, and wondered what caused it… I saw a blurb about how the markets are finally looking at the Fed’s injection of cash nearly every day now for a week, and their re-introducing term repos, as it should be looked at…. Like it’s a different form of Quantitative Easing…

So, lets’ see… In Quantitative Easing / QE, the Fed printed new money and bought bonds…. They did this, so they say, so that the banks would have ample liquidity to make loans, etc. and at the same time get rid of their bonds that had bad loans attached to them… Or just plain Treasuries… So, now let’s look at this repo thing… The Fed is printing new money again, and taking bonds for collateral in short term deals…. Not much different than QE, right? The thing that gets my goat is this…

Long ago, when currencies first were floating, it was thought, and rightly so, that when a country’s Central Bank printed new money to add to the existing money supply, they were diluting the existing money supply’s value… And that would hurt the value of the respective country’s currency… Remember a few years ago when the Fed was printing so much money that they sopped reporting was the money supply number was?

Now, why do you think they did that? Was it because they were narrowing the money supply? HA! So, why doesn’t all this money printing and adding to existing money supply not hurt the dollar? It should be but it’s not! Not one iota of dollar weakness has come about because of this explosion of money supply… You see, I don’t care if the Fed doesn’t report Money Supply numbers any longer… All I have to do is look at the daily injections of cash to the repo market, to know just how much the Fed has added in the last week!

Oh, by the way… The Fed has a $400 Billion plan to rescue the repo market… $400 Billion people! That a Billion with a Capital B, as Ronald Reagan used to say! Hey! I don’t make this stuff up folks! Go ahead and Google $400 Billion Fed plan to rescue the repo market and see what you get, if you think I’m making this stuff up!

So, what happens when they’ve spent all $400 Billion and the banks still need cash? Well, in the old days you would say, they’d just turn on the printing presses again… In today’s digital world, it’ll be numbers entered into a computer that says, Bank A, gets $100 Billion, and so on… The money supply will simply go parabolic, if you will!

OK, enough on that… The dollar still holds the conn over the currencies, but not the metals… The Bond boys are still keeping the 10-year’s yield very low… And oh, remember last week when I have you all that I know about the Oil sector? And I told you that the rig counts here in the U.S. had dropped dramatically? According to the Dallas Fed Reserve’s Oil survey… “Activity in the oil and gas sector declined in third quarter 2019, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—fell to -7.4 in the third quarter from -0.6 in the second quarter. Oilfield services firms drove the decline, with their business activity index slumping to -21.8 from 6.6.”

Hey partner! You don’t have to call me Mr. Tex… Just Tex will do just fine! HA And soon the price of Oil is going to be ratcheting higher, as the heating oil season draws nearer and nearer…

OK, I don’t want to stir up my bursitis so I’ll stop slapping myself on the back for seeing that one before everyone else did! See? Like I said, I did a 180 yesterday!

In another engineered take down of Gold yesterday, the price manipulators said, “neener, neener, neener, we don’t care what the Courts do to us we get a get out of jail free card as long as we keep the support for the dollar going” And they took Gold down by $27.90 on the day… Remember a couple of years ago, when I said I don’t care what the price manipulators do any longer, I’m sick of their blatant moves, and I’m just not going to give them the time of day any longer… For maybe if everyone stopped writing about them, they would stop!

Well, I’ve lost my way again, due to new developments with metals traders getting taken to court, and so on… I really don’t want to have to write about the price manipulation going on… trust me on that one!

I had to laugh this morning at two headlines for articles  One dated 9/24 said, “Impeachment talk sends dollar down”… Then on 9/25 the same site, said, “Impeachment causes safe haven flows to dollar”…    OK, which one should investors pay attention to?   Well, the first one is correct, but they should have said, the dollar should go down…   And the second is also correct in that there are safe haven flows, but there’s only one safe haven that’s being bought… It’s dollars…  

Shoot Rudy, not even U.S. Treasuries are being bought as safe havens, as witnessed by the jump in the 10-year’s yield yesterday from 1.65% on Wednesday morning to 1.72% today… Remember, with bonds, as the yield goes higher the price of the bond goes lower… representing selling… 

We have outgoing European Central Bank (ECB) President Mario Draghi on the speaker circuit today… I would bet a dollar to a Krispy Kreme that he gives us a historical look at his leadership of the ECB, and talk about how he guided the PIIGS through their darkets hours, and kept the light on for more growth from the other Eurozone countries not named Germany. I doubt he’ll talk about how every chance he got he threw the euro under a bus… Or anything else that went bad, choosing to point out his successes only… It’ll be a short speech, if that happens… if you get my drift… OK, Mario, one final chance to make amends with the euro? Can you do that?

The U.S. Data Cupboard doesn’t have much for us today, but what it does have will be interesting, in that the final revision of 2nd QTR GDP will print today… Recall that the last revision was downward, as was the revision prior to that… The most recent revision took 2nd QTR GDP down to 2.0%… Recall, that I said that I thought it should be more like 1.5%? Well, I guess we won’t see it down that low for the 2nd QTR, as it looks like this 2% level is about right… The 3rd QTR will be the one that will end up being 1.5% or lower…. That’s my thought on that!

To recap… The dollar is back with the conn over the currencies… And it makes no sense to Chuck, who once again, proves how old he is, with his take on money supply and the dollar… Gold got taken down by $28 on the day, not by any change in attitude about owning Gold, just a regular engineered take down by the price manipulators, who chanted taunts at the regulators and courts!

For What It’s Worth… Well, I’ve spent quite a bit of time this week talking about the Fed and their injecting liquidity (cash) into the repo market, and how what they are doing is very similar to QE…. Well, this article on Zerohedge.com talks about all that and thought it was FWIW worthy this mroning… You can find it here: https://www.zerohedge.com/economics/dollar-liquidity-crisis-accelerates-month-end-nears-record-92-billion-demand

Or, here’s your snippet: “Following the major ‘over-subscription’ for liquidity this morning, NYFed has decided to dramatically increase the scale of its bailout for both overnight and term repo:

The 14-day term repo operation will have an aggregate limit of $60b (prior similar operation Tuesday had a $30b limit).

The overnight repo operation will have an aggregate limit of $100b (most recent such operation Wednesday had a limit of $75b).

This big increase comes just minutes after Fed Governor Lael Brainard tried to clam nerves by claiming that the recent spike in overnight lending rates, which prompted the central bank to inject billions of dollars of liquidity into the market, was the result of a “simple imbalance” of supply and demand — and not a sign of deeper distress in credit markets.

“It may simply be that we’re close to the lowest level of reserves that are necessary for the conduct of monetary policy,” Brainard said Wednesday in testimony before the House Financial Services Subcommittee on Consumer Protection and Financial Institutions.

“It does pose questions about whether reserves in the system do need to be allowed to grow again.” — Lael Brainard.

In 2008, “counter parties pulled away fromeach other,” Brainard added. “Today we’re in a different environment.”   

As we noted previously, some banks appear to have been simply waiting to get closer to the quarter end before tipping their cards: after all, just like the Discount Window, the repo operation has become the modern “stigmatizing” equivalent, and if reporters or clients get a whiff that a bank is in a dire liquidity state, the consequences could be dramatic.

Never mind though, it’s probably all transitory.”

Chuck Again…  I loved that last line…  Yeah, according to Brainard we should just forget about it and move long for these are not the droids we’re looking for…   And her making that statement just makes me worry about this liquidity crunch even more! 

Currencies today 9/26/19 American Style: A$ .6762, kiwi .6308 , C$.7543, euro 1.0930, sterling 1.2338, Swiss $1.0058, European Style: rand 14.9791, krone 9.0763, SEK 9.7538, forint 305.95, zloty 4.0130, koruna 23.6487, RUB 64.12, yen 107.67, sing 1.3812, HKD 7.8382, INR 70.71, China 7.1233, peso 19.55, BRL 4.1638, Dollar Index 99.08, Oil $56.41, 10-year 1.72%, Silver $17.91, Platinum $931.01, Palladium $1,658.26, and Gold… $1,507.26

That’s it for today…  and tomorrow…  The Cardinals are in a very tight race, so tight, Tupperware would be proud!  Only 3 games to go… Can they hold on?  The next time we talk on Monday we should know!  Ok, I saw my regular doctor yesterday, and he told me that I must have done something right in my life because I have lived for 12 years with Stage 4 cancer… I told him that he wouldn’t believe the number of people throughout the world that pray for me…  and  then  I cracked him up when I said, “I call it better living through chemistry”…  I’ll be seeing a wound specialist in two weeks, for my leg… Finally!  Billy Paul takes us to the finish line today with his great song: Me & Mrs. Jones…  I hope you have a Tub Thumpin’ Thursday today and Fantastico Friday tomorrow, and please Be Good To YOURSELF! 

Chuck Butler