The Fed Will Begin Buying Corp. ETF’s Today….

May 12, 2020

* Currencies trade in a very tight range on Monday

* But currencies and Gold are both on the rally tracks today! 

Good Day… And a Tom Terrific Tuesday to you! While the sun was out, the sky was blue, the day was beautiful, until you stepped outside, and found that the temperature was 50 degrees! YIKES! Like I said last week, I find it ridiculous to try to get Vitamin D with a jacket and hat on! But I sat outside with a jacket and hat on for over two hours yesterday, reading, and working crossword puzzles, which have become a daily thing for me…. I think they keep my mind sharp…. I’m probably whistling up the wrong tree here, but that’s what I think, and that’s all that matters! HA! Well, Major League Baseball has announced that they will take a proposal to start the season on July 4th to the Players union today, for acceptance…. That means that we could be watching, no fans in the seats, baseball by mid summer! YAHOO! That’s the best news I’ve heard in 2 months! John Lennon greets me this morning with his song: Whatever Gets You Through The Night…. Say what you want about Lennon, but in the end he was a prolific song writer….

Front and center today I want to apologize for the format of yesterday’s letter. I was so ready to get it out that I forgot to break it all up into paragraphs for you…. I can’t say it won’t happen again, but I doubt it will, as it’s never happened before now…. Again, sorry, for the awful presentation of the letter yesterday…. You would think that if you did something repeatedly for years, that it would be second nature to you, and there’s no way you would forget to do it…. You would think….

The currencies traded in a very tight range yesterday, and Gold lost $7 on the day, to close at $1,697… There’s just nothing to talk about with the currencies folks… They are following the dollar bugs’ lead, and will react based on the sentiment of traders and how they want to take the dollar for the day. Never mind thinking about any long-term trading trends, for now…. This is almost as boring to watch as night time TV without baseball, or hockey!

And this back and forth trade of Gold around the $1,700 figure, is beginning to give me rash… But it is what it is, and there’s nothing I can do about it, so I just sit here and wonder each day what’s it gonna be, above $1,700 or below $1,700? It’s lollygagging around $1,700 sure has given the procrastinators an opportunity to buy before Gold makes another $400 gap upward, like it did late last year…. For those of you who have missed class when I talked about this last week…. $1,700 has become the new $1,300 for Gold….

I just crack up at people that say, “Hey, I hear what you’re saying and it all makes sense, but when the walls begin to crumble, that’s when I’ll go out and buy some Gold.” I always respond to these thoughts with a thought of my own, and I say, “The problem with that is that you won’t be able to find Gold to buy, as everyone that saw all this coming already bought it up”….. I always get a “Oh!” on that thought, and an effort to change the subject….

OK… longtime readers know that I love to find other people that think like I do…. But I have to draw the line with the Fed coming on board with my thought that 1/4 to 1/3rd of the 33 Million jobs that have been shed through last week, will never come back…. The Fed said, “the results of recent Federal Reserve surveys suggesting 24.9% of all job losses amid the corona-crash will be permanent.

One of my fave reads each day, is the 5 Minute Forecast, put together by Dave Gonigam at Agora Financial…. So, let’s listen in to what Dave had on his mind regarding these permanent job losses in his “5” letter yesterday…

“Translation: A lot of people who’ve been booted out of the labor force these last two months won’t ever return.
And they won’t show up in the official unemployment figures.
In a recent interview with our executive publisher Addison Wiggin, Jim Rickards draws the distinction: “Unemployed doesn’t mean you don’t have a job. It means you don’t have a job and you’re looking for a job. You’re trying to get a job and you can’t find it.

“But if you drop out of the labor force, you say, well, good time to retire. I’m now retired. Or I’m going to sit on the couch and eat Doritos and watch, I don’t even know, Japanese baseball, maybe. You’re not counted as unemployed because you’re not looking for a job.”

Bottom line: “A lot of people are dropping out of the labor force. They’re not coming back.”

Sounds like a depression? Jim says that’s exactly what it is.”

Chuck again…. You know, there’s something to be said, for people that go out on a limb, and talk with logic and history…. I like those kind of people… I’m just saying…

I want to go in a different direction now, and talk about the debt here in the U.S. Did you know that last week we crossed $25 Trillion in our current debt? It wasn’t that long ago that we crossed $24 Trillion, but when you’re racking up Trillions in bail outs and stimulus, that really isn’t stimulus, you begin to climb the debt ladder that leads to tears….

Of course, if you’re a backer of the MMT folks… Modern Monetary Theory, then you don’t think of this climbing debt as a big deal…. What the heck, according to the MMT folks, we could just spend whatever amount we needed to, and sell Treasuries to finance the debt, and when the markets won’t buy all the Treasuries, the Fed will just print new dollars and buy them…. Yeah, that’s what MMT is all about folks, right there in a nutshell… Sound good? Well, everything has merit and will work, for awhile….

And then it doesn’t…. The dollar becomes a problem because there have been so many of them printed…. And that’s when the wheels come off that wagon, folks… Gold soars, and the dollar loses credibility…. In listening to an interview yesterday with Addison Wiggin of Agora Financial, and James Rickards, brought about something that I had forgotten about…. In 1977, you may remember this…. The U.S. dollar was getting sold like funnel cakes at a state fair, nobody wanted them, and Gold was soaring to new heights every day…. The U.S. Treasury tried to sell Treasury bonds denominated in dollars, but that went over like a lead balloon, and instead they had to issue them denominated in Swiss francs! Those were called “Carter Bonds”… Ring a bell?

We could see that happen again folks…. I’m just saying, it happened once, it can happen again!

Ok… as if there aren’t enough things to think about with the economy, etc. There’s this… Why on earth is the stock market rallying and the bond market telling us that we should be hunkering down? There’s a divergence here that’s difficult to explain, but I’ll give it the old college try! Oh, and by the by, did you see the earnings results from the 1st QTR last week?

Earnings were down BIG TIME in the first QTR, which leads me to believe that the stock jockeys are looking way beyond the current data… Because on top of all that you have consumers hunkering down. We’ll get April Retail Sales on Friday of this week, but since this is only Tuesday, let’s just take a stab at what they might show…. And let’s say Retail Sales were down 15% in April… Add that to the drop in credit card debt we saw last week, which was a 31% drop on an annual basis, from the previous month, and you’ve got the consumer-led U.S. economy gasping for air….

But…. The stock jockeys all think they’re smarter than the rest of us, and that we need to look to the future too…. I just can’t get my arms around the idea that the U.S. economy is going to spring forward like being shot out of a cannon when it’s opened up again…. So, I’m with the bond guys…. I always have been, having spent a good portion of my early career in a bond dept. And the bond boys say, that deflation is upon us, and most likely negative rates are on their way…. I think we’ll need to see a stock market sell off to set this deflationary / negative rates thought in play…. Because, once stocks start showing weakness again, the Fed will jump to its rescue, once again, but only this time they’ll find their quiver doesn’t have any arrows….. And that’s when we’ll see negative rates…. So, you can make a choice, isn’t that great? I mean really, isn’t that great that you’ll get to make a choice.? You can sit there and wait, or you can get up and groove…

No wait, that’s a different choice, this choice is between pinning your colors on the stock jockeys mast, or pinning your colors on the bond boys mast…. I think I’ve make it clear which mast my colors will be flying from!

Longtime readers know that this is where I bring in a Big Gun to back up what I just said about the economy not rebounding big time like the stock jockeys think…. And you would be right! I have the best economist going, in my book that is, David Rosenberg, giving us his two-cents on where the U.S. economy is headed….  

 With the global economy grinding to a halt because of the COVID-19 pandemic, economic conditions can’t get much worse than they already are, according to famed economist David Rosenberg, chief economic strategist at Rosenberg Research and Associates.

However, Rosenberg added that investors shouldn’t expect to see a significant recovery anytime soon. He said that they should position their long-term portfolio to reflect an environment of long-term stagflation.

“We’re going to be into a prolonged period of very soft economic growth. There is no rebound that is taking us back to where the economy was,” he said. “The new normal is going to be very constrained.” – David Rosenberg

Chuck again….  I pulled that from Ed Steer’s letter this morning that can be found here: 

OK, I told you yesterday that the Data Cupboard was basically empty until Friday, but we do have the stupid CPI (consumer inflation) report for April to print today, so it will be interesting to see what rot has formed on this data’s vine…. 

To recap…. The currencies traded in a very tight range yesterday, and Gold lost $7 on the day to close below $1,700. However Gold is back above $1,700 early this morning… Back and forth, is beginning to give Chuck a rash…. Chuck paints a picture of what it’s going to happen to move the Fed to go negative with rates…  And I know where here at the place where the FWIW article is, but I just wanted to say that this is a BIG DEAL so make sure you read it today! 

For What It’s Worth….  This is where I draw the line with the Fed’s activities folks…. Their bylaws say that they can’t buy Corp. Debt, and yet here we are…. This article on talks about the Fed’s entry into the Corp. ETF’s market today, and it can be found here:

Or, here’s your snippet: “

Last Monday, in response to a Gundlach tweet in which the bond king said “I am told the Fed has not actually bought any Corporate Bonds via the shell company set up to circumvent the restrictions of the Federal Reserve Act of 1913” the New York Fed announced on its website that it expects to begin purchasing eligible ETFs – most notably the LQD and JNK – as part of its emergency lending programs in “early May.”

And yet, day passed, and then another, and another, and suddenly early May turned into mid May and… still nothing.

Until today when the Fed announced late in the day that the facility designed to purchase eligible corporate debt from investors will launch on May 12, bringing the most controversial part of the U.S. central bank’s emergency coronavirus lending program – one which not even Bernanke dared to activate at the depths of the financial crisis perhaps realizing that there would be no extrication from that particular moral hazard – online following weeks of anticipation.

The Fed’s Secondary Market Corporate Credit Facility “will begin purchases of exchange-traded funds (ETFs) on May 12” the New York Fed website said, nearly two months after it was was first announced in late March, and served a key role in keeping financial markets relatively calm since then.

And speaking of Blackrock, the Fed also posted to its website the 66-page investment management agreement with BlackRock, the world’s biggest manager, which is incidentally also the world’s biggest manager of ETFs, and which last month said explicitly that it would front-run the Fed’s bond purchases, layering conflicts of interest upon conflict of interest, but who cares any more.

Blackrock’s compensation for doing something the N.Y. Fed’s desk is perfectly capable of doing itself (furthermore, since it only has to buy and never has to sell, the Fed can just hire any millennial on TweetDeck – they have precisely the required skill set; now if selling is ever required the Fed may have trouble finding traders that actually are familiar with that particular skill, but we digress).

Since such a role has neither custody risk nor transaction risk, we look forward to the Congressional hearings in which Larry Fink, that noble crusader for the common man, explains why US taxpayers had to pay him billions and billions for doing, well, pretty much nothing.”

Chuck Again….  And one more thing that I read this past weekend that ties in here… Guess who is a major stock holder of Black Rock?  None other than Fed Chairman Jerome Powell…. Now, if that’s true, and I have no doubts about the source I read that from, then  this whole program already has a 5-day old fish smell to it….  

Currencies today 5/12/20 American Style: A$.6511, kiwi .6102, C$ .7150, euro 1.0835, sterling 1.2347, Swiss $1.0299, European Style: rand 18.2870, krone 10.2263, SEK 9.8022, forint 323.57, zloty 4.2016,    koruna 25.4112, RUB 73.54, yen 107.43, sing 1.4156, HKD 7.7501, INR 74.75, China 7.0891, peso 23.94, BRL 5.7680, Dollar Index 99.97,   Oil $25.31,   10-year .72%, Silver $15.51, Platinum $772.39, Palladium $1,885.38, and Gold… $1.704.05

That’s it for today…  Well, I had lots to say today, so it was a good thing I got up early to write! HA! Seriously though… there are plenty of things to write about these days, so if the letter gets a little long, just remember it could be longer! Not much on my mind this morning, other than I sure hope the player’s union and the baseball owners can get together and come up with a plan to get baseball going again this year!  I sure hope they keep this in mind….  It’s far better to compromise and play than to be hard headed and not play….   Modern English takes us to the finish line today with their song: I Melt With You….   And with that… I hope you have a Tom Terrific Tuesday, and will Be Good To Yourself! 

Chuck Butler