Negative Data Prints Sends The Dollar To The Woodshed…

Rocktober 21, 2019

* No ironed out BREXIT Deal yet, but sterling keeps rallying!

* Have traders decided to sell dollars outright? 

Good Day… And a Marvelous Monday to you! Oh, woe is me… What a horrible weekend, sports wise, for me this past weekend… Both my Missouri Tigers and St. Louis Blues lost on Saturday… And both losses were very ugly… I had quite a few texts and emails from people wanting to know what happened to MIZZOU… I came up with this: There are coaches who have mastered the art of keeping 18-20 year olds playing at a high level… Barry Odom isn’t one of those… at least not yet… When a team comes out uninspired, that’s the coaches fault… I’ll say no more… We had a very scary incident on Thursday night… My granddaughter, Evie, (1 week old) had to be taken to the hospital for a breathing problem, then to the world famous Children’s Hospital ICU for the next 3 days… She’s doing well, and back home… But nerves were shaken, to say the least! Neil Young greets me this morning with his song: Southern Man… (which then got Lynyrd Skynyrd to write Sweet Home Alabama)

Well… I left you last Thursday with hope that the BREXIT deal that PM Johnson came up with would pass Parliament this past weekend… But, hopes for a passing were dashed when a Johnson ally, the Northern Irish, voted no to the deal… Uh-oh… I wonder if PM Johnson thought about not counting his chickens before they were hatched? It might still get done before 10/31… Currency traders seem to believe that will happen, as the keep marking up pound sterling…

The Currencies, as a whole, were better bid on Friday, the euro kept moving higher in the 1.11 handle, sterling is within spittin’ distance of 1.30, and so on… Gold, lost $2 on Friday (actually $1.90) And still remains threatened by a correction to the run up in price in September. But, that may be, and may come along, and if it does, it will present itself as an excellent buying opportunity… For that will be all it is… a correction… And corrections, soon get turned around quickly, and harshly… That’s not a good thing for Treasuries, or the financing of our ever-growing debt, for which Treasuries are used, but it sure is good news for Gold holders…

I saw a graph last week that showed the chart direction for World Treasury Holdings, and World Gold Holdings… The Treasury holdings look like they are digging a hole to China they are sinking that quickly, while the Gold holdings look like they are a moon shot higher!

The Fed keeps pumping money into the repo market… I saw last week that the Fed doesn’t care to have their newly created money, be referred to as: “created out of thin air”… They prefer “newly created electronic funds”… Ahhh, nothing like Fed speak, in an attempt to confuse people into not know what the hell the Fed is doing, right?

I’ve had quite a few readers ask me to explain the repo market…
OK… so here goes…. Let’s say we have Bank A, and on any given day, may need cash to make certain that they have the proper reserve requirements, or whatever… They can go to the repo market and there, find another Bank to lend them the cash for that day, and in return Bank A sends them collateral, which is usually Treasuries, since they can move so easily through the Fed system that every bank that has a bond dept. has in their back office.

And then the next day the lending bank, sends the bonds back to Bank A, VS the principal plus interest and the trade is done… Bank A “repurchases their bonds”, thus the shortened “repo market”

You may say to yourself, how does Chuck know repos too? Ahhh, grasshopper, at one time in the early 80’s I was on the repo desk at Mark Twain Bank! I did repos all day long! Just another notch in the belt of jobs I’ve held in the investment industry through the years!

What happened last month was that a few banks came to the repo market and found no one would lend them money at the usual 2% rate… The lenders wanted 5, 6, 7,8, 9, and 10% for these overnight loans, and the banks that needed the cash took them…

Well, this freaked out the Fed, and the next day they interjected liquidity in the form of tens of Billions of dollars… This had gone on for 2 weeks, when last week the Fed announced that they would buy Treasury Bills from these banks that needed cash… Now, grant you this isn’t all-out Quantitative Easing (QE), but it sure is QE, Jr. And that’s where we are today… The Fed is back in the bond buying business, but we’re not allowed to call it QE!

Since September 4, 2019, the Fed’s balance sheet has grown by $253 Billion, and is back to bumping into the high the balance sheet was before Quantitative Tightening began… All this increase is due to the Fed adding liquidity to banks that remain unnamed… Which I feel is a crime!

So, you may recall me questioning the idea that Banks were supposedly flush with cash… And if that was the case, why has the Fed had to start buying bonds again to give these banks cash? Tell me lies, tell me sweet little lies… Tell me lies… (Stevie Nicks) I would have to think that these banks were not flush with cash to begin with, and this strong and robust economy has been nothing but a pack of lies!

How dare the Fed to tell us lies! I just can’t get over this folks… I know the government twists the data prints in their favor, and I know the Fed manipulated yields lower at one time, but lie to us? As I said last week either the Fed is lying to us or they are being very disingenuous…

And then I have one more question… When did the Fed’s mandate change to providing liquidity for Wall Street’s largest banks? Did I miss the memo? I do have a stack of paper on my writing desk that I haven’t gone through yet… Maybe the memo is there? Let me check…. (can you hear the jeopardy theme music playing?) OK, back now, and no it wasn’t there! I’m beside myself right now at the brazen attitude the Fed is taking… They go “off road” to help Wall Street, and they don’t have to tell us who received help, nor will they let us call it Quantitative Easing… I’m sorry if I seem to bent out of shape this morning over this, but quite frankly, someone needs to be, and I take it upon myself to be that person, because if I wait for someone else to call them out like this, it won’t get done! 

So… the rally in pound sterling sure has been quite impressive, but it’s built on rocky ground folks… So be careful here… This move is similar to the moves we’ve seen previously with the Indian rupee and Brazilian real, when they rallied because a political campaign was going the way currency traders thought best. Those rallies were short lived, after the campaign was over…  Like I said above, the BREXIT deal could still get done before 10/31, and thus the sterling rally…  

Recall last week when I talked about how traders were torn between needing the dollar to go down, which would cause the euro to go higher…  They didn’t want to reward either currency right now.  Well, for the last 5 days, the dollar buying has pretty much stopped. At this point I don’t think there’s any real amount of dollar selling, but there’s been some, which has the euro looking healthier…  Oh, and just to follow up from last Thursday, the euro wannabes continue their stealth-like rally…  

One of the reasons for the dollar to be sold the last 5 days, was the weak Data… The U.S. Data Cupboard was not kind to the dollar bugs last week, as we saw negative prints of Retail Sales and Industrial Production!  Not just weaker, but negative prints!   The Fed heads have to have seen this data and set about shaking in their collective boots! 

This week’s Data Cupboard is pretty barren until Wednesday, when we’ll see the color of September Durable and Capital Goods Orders… I won’t go all in on my views of CAPEX (Capital expenditures) again… I’ll just mention once again that you can’t have a strong and robust economy without CAPEX being strong…  And it hasn’t been strong in a couple of years!

Before I head to the Big Finish today… I’ve received quite a few emails from readers asking me my opinion of MMT (modern monetary theory)… Or as most people with half a brain call it… “magic money tree”… I struggled with talking about this because it could become quite political, and you know me I try to stay away from talks about politics… But… since this, which was once though of as ridiculous, now is being taken more seriously… Why? I have no idea… So, my good longtime friend, John Mauldin was talking about MMT this past week, and I thought, why should I bash my head against a wall, when I can just tell you how John explained it?

Here’s John…. “MMT is a revival of an early 1900s idea called chartalism. It states that monetarily sovereign countries like the US, the UK, and Japan aren’t constrained by revenues when it comes to federal government spending.

In other words, governments don’t need to tax or borrow because they can print as much currency as they want.”

Chuck again… Well, I know, it certainly feels as though we’re already doing that, but trust me on this, we’re nowhere close to the amounts of debt we would incur, under magic money tree!

To recap…  The data last week was just downright awful, and that sent the dollar to the woodshed for the past 5 days. Gold is fighting to keep the “correction” from happening, but Chuck is afraid that a correction is on the way.  BREXIT was supposed to have been put to bed by today, after a Parliament vote this past weekend, but there was a fly in the ointment, and it’s delayed once more… Pound sterling traders have their hands in the air, and just don’t care!  

For What It’s Worth… Well, I spent a lot of time today on the Fed, and the lack of liquidity problem, and so forth, so when I saw this article it only made sense that today, it’s FWIW worthy… It’s an interview with Fed NY Head, the Fed region that’s providing the “newly created electronic funds” and it can be found here:

Or, here’s your snippet: “New York Fed President John Williams said Thursday that the central bank was closely monitoring its measures to soothe pressures in funding markets, and could adjust its plans.

Since funding markets seized up last month, the U.S. central bank has regularly intervened to provide liquidity, offering daily repurchasing agreements to lend out funds to market participants thirsty for cash and announcing $60 billion of bill purchases at least through the second half of 2020.

The New York Fed has come under fire recently for not acting swiftly to calm down short-term funding markets, with the so-called overnight repo rate shooting as high as 10%, four to five times above its usual levels. The repo market is where hedge funds and banks lend funds in return for collateral such as Treasurys or government-sponsored mortgage bonds.

The surge in repo rates briefly tugged the central bank’s benchmark interest rate above its preferred range, raising questions as to whether the Fed was losing its grip on monetary policy.

Williams said the central bank had anticipated some strains, but that “the size of the reaction in the repo markets were well outside the range of recent experience.”

Chuck Again…. Well, if Mr. Williams thinks that this little speech by him will put my mind at ease, he’s got another thing coming… ala Judas Priest!

Currencies today 10/21/19 American Style: A$.6875, kiwi .6410, C$ .7630, euro 1.1165, sterling 1.2980, Swiss $1.0152, European Style: rand 14.7832, krone 9.1075, SEK 9.6112, forint 295.67, zloty 3.8332,   koruna 22.9683, RUB 63.73, yen 108.57, sing 1.3610, HKD 7.8431, INR 70.63, China 7.0807, peso 19.13, BRL 4.1109, Dollar Index 97.24, Oil $53.40, 10-year 1.77%, Silver $17.72, Platinum $895.77, Palladium $1,768.76, and Gold… $1,491.62

That’s it for today…  Saturday night was our neighborhood block party, but it was spoiled by rain… too bad…  So… little Evie is back home after a nerve shattering night Thursday night, and then the rest of the weekend…  She’s so tiny… I can’t wait to hold her again, and tell her everything is OK…  I got a kick (pun intended) out of Braden at his soccer game on Saturday afternoon…  I’m going to see my oncologist this morning, after I hit send… I saw the radiologist’s report on my scans, but I want to hear my oncologist’s explanation of what I think was a no change report…  The Rolling Stones take us to the finish line today with their song: Wild Horses…   I hope you have a Marvelous Monday and please remember to Be Good To Yourself!

Chuck Butler