When Will Traders Admit We’re In A Recession?

April 15, 2020

* the dollar fights back in the overnight markets

* The boys in the band come back to work….  UGH! 

Good day… And a Wonderful Wednesday to you… This’ll be the last Pfennig this week, as I have been summoned by my oncologist to her office tomorrow, bright and early…. I told you Monday that I had scans last week, and in those scans they saw the tumor in mouth had grown (I could have told them that!), but no other signs of cancer in me, which is good…. 7 weeks ago, I stopped taking my old chemo because it had come to its end of usefulness in me. And, the fact that I need 4 weeks without it to rid it from my system. On the 5th week, the tumor in my mouth began to grow again… And on the 6th week, with it getting big in my mouth once again, I began my new chemo drugs…. Hopefully these drugs have the same luck the previous 4 did, when they immediately shrunk the tumor down to nothing…. So, anyway, my oncologist wants to see me, since it’s been 4 months since she last saw me…. My fave Pink Floyd song greets me this morning: Comfortably Numb….

OK… What began yesterday, as a thought that the dollar’s days as the kind of the hill were nearing an end, were prolonged, but not buffeted in yesterday’s trading…. The currencies gained a little VS the dollar on the day, not giving up its overnight gains one iota, and Gold also gained VS the dollar closing up $3 on the day, to close at $1,725…. A nice strong number, eh?

However, in the overnight markets, the dollar climbed back up on the hill, and began kicking sand in the faces of the currencies and Gold.  This was a reaction to the big gains in the stocks here in the U.S. yesterday…. As if, everything is fine and the all-clear horn has sounded…. NOT!  So, In my opinion, we’ll have to go through these rallies even though, in my mind we have entered a bear market for stocks….  Don’t just take my word on that, let’s listen to what economist, Ken Rogoff of Harvard, had to say about the economy. 

“The short-term collapse… now underway already seems likely to rival or exceed that of any recession in the last 150 years.” – Ken Rogoff taken from the Daily Reckoning.com  

OK. let me see if I understand what Ken Rogoff is saying here….  That the economy is “likely” to rival or exceed any recession in the last 150 years… that would include the Great Depression, right?  Oh my! Say it ain’t so, Joe!

And Bill Bonner reminds us all the time about the Dow-to-Gold ratio. It shows us how much the Dow is worth as priced in real money – gold.

The ratio hit a peak over 40 in 1999. Since then, it has come down.

It’s now at 14. But it still has a long way to go before it reaches its historic “rendezvous with destiny” below 5. That’s where the real bottom will come. – Bill Bonner  

A couple of years ago, I wrote an article for the Dow Theory Letters, and in it I showed the numbers for stock market performance during recessions, and the outcome was not good folks… Which tells me that whenever we get around to agreeing that the economy is in a recession, that the stock jockeys will wake up to smell the coffee….

The reason I’m spending some time this morning talking about stocks is that when we saw stocks drop like a rock from a cliff last month, the Fed panicked and cut rates down to near zero… So, what will the Fed do when stocks slip again?  Well, if you ask me, and I know you didn’t, but you’re going to hear from me anyway….  The Fed will resort to cutting interest rates below zero, into negative territory…. 

And I just don’t see that being a good thing for inflation, stocks, or the dollar….  I’m just saying… I talked about it yesterday, the possible end of the strong dollar trend…  This is the scenario in which that could all take place. 

In talking about an end of the strong dollar trend, whenever that may be, and could be now, I know a lot of people will say, but everyone has an economic problem, why buy their currency? Well, you see I don’t see this as a sell dollar / weak economy VS buy “x”/ strong economy…. I see this simply as traders exiting the dollar and throwing a dart at the board of currencies to see which one they buy…. Of course the euro will get a lot of love being the offset currency to the dollar, but I doubt we’ll see the euro go on runs like it did in 2003, & 2004, when it began its climb to 1.53 in 2008… But, it will slowly add to its current levels…. That’s all IF the dollar is indeed ready to give up the strong dollar trend it has been sailing on for 9 years!

In the past you could use fundamentals and they would tell you where to go when selling the dollar…. The Aussie and Kiwi currencies were the darlings of the last weak dollar trend, when they both reached 100% gains, doubling their prices…. Both of these currencies had much higher interest rates than the dollar, and they had China booking 10% plus annual GDP’s so the raw materials to China were almost on a conveyer belt! That’s obviously not the case any longer, in China and the Antipodeans…. 

Back in the day, the price of Oil was also bumping higher as the dollar dropped…. Remember $105 Oil? Well, when Oil’s price was rising, so were the currencies of Norway, Canada, Brazil, Russia, Great Britain, and Mexico…. And in Mexico, Brazil and Russia, you also had a nice yield coming your way too boot! And again, that obviously isn’t the case any longer, but….  You can still find positive yields in Russia, Brazil and Mexico….    Oh!…. and the price of Oil has slipped below $20 to $19.62 this morning…. I said a couple of weeks ago that I thought the price of Oil appeared to be heading to $15….  

I was wondering the other day, just when the boys in the band were doing to show up… I realize that they had all been sent home for “home sheltering”…. For they had not been seen in days…. And I sure hope they were practicing personal distancing when coming back to work, but come back they did yesterday, as Gold went on a tear early and climbed to $1,769, only to be brought back down by the boys in the band….

And the shiny metal is down $7.50 in the early trading today…. Now, on Monday that early trading selling didn’t upset Gold’s applecart, and at the end of the day, the applecart was full of apples!!  So, if the boys in the band want to continue to tune up their instruments, maybe Gold can turn this around today too!  If not, mark it down to an asset going back to fill in the gaps….  That’s how I’m looking at it right now…. 

The U.S. Data Cupboard gets back into the data prints business today, with key reports like  March Retail Sales, and Industrial Production along with Capacity Utilization. I don’t believe any of these are going to be good, strong prints, although, March was split in half regarding the shutting down of the economy, as it really didn’t begin in earnest until  after the Ides of March… 

Hey, recall yesterday’s FWIW with the run on the credit union for their cash? Well, apparently it’s beginning to happen all over, as I read a report of banks in the U.K. seeing runs on cash…. Seems individuals are getting the message that this recession if Global, and will not be a “V-Shaped recession”…. 

And before we head to the Big Finish today…. I’ve got to say this about what happened yesterday regarding the COVID-19 virus…. I was 100% in favor of halting the payments to the World Health Organization (WHO)…. There’s some very serious charges being thrown out there against the WHO, and George Soros, and Bill Gates…. I would think we would want to know all the facts before any more money is sent their way….

Suggested reading in case you want to find out more would be: Google: Robert F Kennedy, Jr.  Bill Gates….  I don’t think you’ll like what you read, but it has to be read to know where I was going with my last statement…. 

To recap….  The currencies and Gold continued their upward moves VS the dollar yesterday, but in the overnight markets, the dollar has fought back, and we begin today with Gold down $7.50, and the currencies having given back some of their recent gains. Chuck reminisces about his days writing for the Dow Theory Letters…  And then throws a grenade from left field, regarding the World Health Organization….

For What It’s Worth…. While I don’t believe that I could be accuse of “going to the well too often” I have been using the Wallstreetonparade.com site quite a bit lately…. It’s because Pam & Russ Martens do a bang up job of telling like it is, without pulling any punches…. And today’s article from them does just that, once again, as they talk about Banks / off balance sheet items/ liquidity/ repos and more, and can be found here: https://wallstreetonparade.com/2020/04/three-of-the-biggest-banks-on-wall-street-have-7-4-trillion-in-off-balance-sheet-exposures/

Or, here’s your snippet: “In the past few weeks everyone from Fed Chair Jerome Powell to U.S. Treasury Secretary Steve Mnuchin to former Fed Chair Janet Yellen to bank analyst Mike Mayo have appeared on TV to tell the American people that the big banks on Wall Street are well capitalized. To put it in Janet Yellen’s exact words on CNBC last Thursday, “we have a strong, well capitalized banking system.”

These folks have to keep repeating this mantra to the public because the public is increasingly getting curious as to why the New York Fed has had to pump a cumulative $9 trillion in cash to these Wall Street banks, since September 17 of last year, if they are so well capitalized. Can big banks actually be well capitalized and have no liquid money to make loans – the key function of a bank? As we have regularly noted, the Fed’s trillions of dollars in cash infusions to the banks began months before there was any coronavirus COVID-19 outbreak anywhere in the world.

The reality is that the U.S. banking system only looks well capitalized if federal regulators, banking analysts, and the mainstream business press put blinders on and don’t look at what’s hiding in off-balance sheet items at the banking behemoths on Wall Street — the same fatal mistake they all made in the years leading up to the 2008 collapse.

Why are off-balance sheet items such a huge red flag on Wall Street? We’ll let the researchers who wrote the autopsy on the 2008 financial collapse for the Financial Crisis Inquiry Commission explain. They wrote:
“For example, as of 2007, the five major investment banks — Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley — were operating with extraordinarily thin capital. By one measure, their leverage ratios were as high as 40 to 1, meaning for every $40 in assets, there was only $1 in capital to cover losses. Less than a 3% drop in asset values could wipe out a firm. To make matters worse, much of their borrowing was short-term, in the overnight market—meaning the borrowing had to be renewed each and every day…And the leverage was often hidden—in derivatives positions, in off-balance-sheet entities, and through ‘window dressing’ of financial reports available to the investing public.”

That last sentence perfectly describes what is going on today – except that it’s worse today than it was in 2008.”

Chuck Again…. These folks at Wallstreetonparade.com are good, and they tell it like it is, Aaron Neville style…. And I totally appreciate that, for that’s my bag baby! 

Currencies today 4/15/20 American Style: A$.6337, kiwi .6020, C$ .7135, euro 1.0935, sterling 1.2510, Swiss $1.0375, European Style: rand 18.6605, krone 10.4755, SEK 9.9926, forint 321.00, zloty 4.1520,    koruna 24.6200, RUB 73.19, yen 107.38, sing 1.4222, HKD 7.7503, INR 75.88, China 7.0494, peso 23.86, BRL 5.1870, Dollar Index 99.37,   Oil $19.62,   10-year .68%, Silver $15.52, Platinum $780.65, Palladium $2,231.53, and Gold… $1,718.50

That’s it for today…. Not so wordy today, eh?   Well, Pfennig Tradition would have called for me starting the letter today with the song Tax Man by the Beatles, but…. Tax Day has been moved to July this year, so I’ll have to save that for when 2020’s Tax Day comes….  The heart doc’s office called me yesterday and apologized for failing to call on Monday, and set the Zoom meeting for this morning….  I bundled up in a hoodie and went outside to sit in the sun for a while yesterday…. The weather here has been so crappy lately, that even at 50 degrees the sun felt warm and good! Again, I’ll say that I’m amazed that Americans have all towed the line with this stay at home thing….  You  don’t think ….Nah, that couldn’t be behind this, Chuck!, Oh Shoot Rudy, I’m going to throw it out there to see if it sticks…. This has been good practice for civil obedience hasn’t it? And the National Guard didn’t even have to patrol the streets!   There! I said it!  Ok…. Steely Dan takes us to the finish line today with their song: Deacon Blues….  that’s one of those songs that you’ll have in your head all day now….  I hope you have a Wonderful Wednesday, and please Be Good To Yourself!

Chuck Butler