It’s more than Halloween that makes the month of October so scary.

Ever heard of the “October Effect” – that self-fulfilling expectation that stocks predominantly decline, and even tank, in October?

With the Fed’s recent “easing” move to print $60 billion per month in support of U.S. bond, repo, and hence stock markets, I bet Powell was thinking the same thing.

October has historically been a bad month, most notably the Panic of 1907; Black Tuesday (1929); and Black Monday (1987) when the Dow plummeted 22.6% in a single day. And let’s not forget Black October (2008) when the Great Financial Crisis roared like a bear.

That said, this October might sneak by without too much ticker drama. After all, $60 billion in printed dollars ought to buy something.

Let’s discuss…

An Eerie Silence This Week

It’s likely that the Fed just artificially preempted any otherwise normaltendencies for natural markets to actually reflect the horrific economic data in the real world.

We are currently witnessing the last shots of an epic battle between market reality and central bank intervention.

This month there is an eerie and blatantly paid-for silence, despite numerous reasons for a bearish growl. Global growth is sliding (especially in China); the U.S. dollar is tumbling; bond markets are rigged; and stocks and bonds are consolidating towards a tipping point of which the Fed is all too aware.

Can a money printer defy these otherwise appalling facts? And if so, for how long?

For starters, there will be no Fed speak this week, as the Fed heads into a blackout period ahead of its October 30 rate decision.

Keep your eyes out for another Fed Red Day at the end of the month – that’s what happens when the Fed lowers rates and markets fall (rather than jump for joy) by the close.

So far in this loosening pivot of 2019, we’ve seen one full-fledged Fed Red Day and one very close call – a few basis points away. Investors have not really applauded these “stimulative” rate cuts, which is a flashing yellow light of concern.

Is the Fed running out of magic dust?

All we can do for now, to see if this trend increases, is watch how the market reacts to any month-end rate cut. For this week, all eyes will continue to be on China, the Brexit seesaw, Middle East tensions, and U.S. politics.

These Fed-lead markets may be silent, but pins here and abroad continue to drop – and we hear them loudly.

Wrap them all up into a neat little package, and we have a ticking time bomb that will be heard around the world – not if, but when central banks inevitably lose their arrogant war against math, history, and common sense.

Why inevitable? Because printing currencies out of thin air to solve a debt crisis is not a solution, but a fantasy whose narrative is slowly losing credibility.

Noise Behind the Eerie Calm

Silently and in the background, lots of things are happening and they’re not good – not good at all.

Economic momentum continues to slow; retail sales continue to slow; capital goods orders continue to slow; purchasing manager data continues to decline; industrial production continues to weaken; and consumer inflation expectations have fallen to the lowest level since 1979.

Without too much fanfare from our fairytale media last week, the International Monetary Fund (IMF) lowered its global growth forecasts, again, thanks to rising trade barriers and heightened uncertainty.

China negotiations stalled and Brexit ended the weekend uncertain, as the European Union enters its first of likely many divorces to come.

Pretty scary by any normal measure.

Yet stock markets remain near historic highs. That’s because in a central bank-created Twilight Zone, odd things happen…

Such as when the world’s two largest central banks (in the U.S. and China) agree to disagree. During those silent periods just ahead of past recessions, the largest central banks worked together to stave off a downturn.

Not this time. The silence is deafening.

Meanwhile in China (the big red gorilla in the room), growth is flat out dying. Given that China is responsible for more than 40% of global growth, this is a problem for all of us, like it (China) or not.

U.S. Dollar

Here in the U.S., our dollar is quietly tumbling too, breaking its 100-day moving-average support for the first time since late July. Needless to say, printing 60 billion of those dollars out of thin air each month tends to dilute a currency – like adding too much water to a glass of lemonade.

The bulls, however, will rightly point out that a global flight-to-quality scenario will help the U.S. dollar along with the perceived thaw in U.S./China and Brexit animosity.

At least that’s what’s reported. That’s why gold is temporarily pulling back – a spring-like thaw.

But it’s not spring; it’s October. And despite a day or two of headlines, the trade cold war is not thawing; nor is a flight to U.S. markets one of “quality.”

First, here’s what’s really happening with the U.S. dollar. For each one the Fed prints, the money supply rises while the strength of the overall currency falls.

Were the U.S. not the world’s reserve currency or the imposed “bully” currency of oil trades (the Petrodollar) and bank settlements (SWIFT accounts), the U.S. dollar would be a laughing stock rather than a “quality” safe haven.

Those who understand this, further recognize gold as a safer bet and “haven.”

I’ve written at greater length here on the U.S. dollar as well as here on gold.

Meanwhile, confidence in the greenback is currently waning. The data is soft. Reality is kicking in.

Furthermore, there are a number of related “woes” whistling through the bond pits.

Front Running the Fed – Another Unseen Scam in the Rigged Bond Pits

As for woes in the bond market, the spoiled Wall Street nephews of rich Uncle Fed are in a pickle.

You see, for months the overpaid and perennially bailed-out brats of Wall Street have been sending out warnings to the Fed (most notably in the repo markets) that their rich uncle better print them some more spending money, and fast!

No surprise there. Normally, when Wall Street whines, the Fed always pleases. That’s not just a moral issue; it’s a moral hazard…

That’s why traders and hedge fund jockeys as well as broker dealers and banks have been front running 10-, 20- and 30-year Treasury bonds in the futures markets. They have habitually assumed that when Uncle Fed dishes out more QE (printed money) as in October, that those funds will be used to purchase all manner of long-term Treasuries – and hence send their prices up, way up.

This is basically an easy front-run trade, as close to an insider (yet legalized) scam as one can imagine. (I’ve seen tons of these since 2008. Heck, I used to profit from them myself.)

That’s why banks and broker dealers have recently been piling over $160 billion into these otherwise low-yield long-duration Treasuries. They’ve been waiting for a big fat Fed “bid.”

But in a sudden plot twist to Wall Street, this time the rich Uncle Fed used its money printer to bid (buy) six-month, short-duration T-Bills rather than the longer duration Treasury Bonds now gathering dust at the big banks.

In short, Powell just denied his spoiled nephews out of some free ice cream. The big banks are now sitting on tons of long-dated Treasuries, which the Fed – at least for now – is not buying!

This is clear twist in the rigged game between Wall Street and the Fed.

Wall Street was expecting a big price move in long-dated Treasuries, which they were front-running and then planning to dump once they booked their profits after a Fed buy order masquerading as QE.

But who were the banks gonna dump those pumped-up Treasury bonds on once they booked their profits? Well… the Fed itself, thus biting the hand that feeds them.

Thus, as banks play with our financial system to deepen their own pockets, the old game of collusion (of which JP Morgan is currently facing penalties/charges) is unwinding.

Wall Street is effectively guilty of a hidden yet complex racketeering scheme which has artificially driven interest rates down lower and longer than natural markets forces once allowed, and all of this is based on insider scams few folks understand.

So, there you have it: More proof of a totally rigged to fail market, one pieced together by insider scams masquerading as free market trades among our so-called “stewards” at the big banks and the Fed.

And now you see how difficult it is to track and time these rigged markets, as such insider scams prevent us from quantifying the oh-so-critical moves in interest rates, upon which the entire stability of our grotesquely inflated securities markets hinge.

We simply don’t have a “scam” tracker. Instead, we track market reactions by the day, hour, and minute so that you know what’s happening and how to prepare.

But this much we do know from last week. The IMF warned that bond funds are vulnerable to liquidity shocks, i.e. sudden dollar shortages, which I addressed here.

According to the IMF, that means bond funds could have difficulty repaying investors promptly if volatility increases, and that could “potentially destabilize the global financial system.”

Read that again: Potentially destabilize the global financial system. This is the IMF speaking, not just me.

Bonds are in a bubble, with now $15 trillion worth trading at negative yields – that’s about 25% of the total debt issued by governments and companies globally, according to the Financial Times.

Fast forward to the maturity of these instruments. Global institutional investors holding negative-yielding bonds to maturity will receive (combining negative interest + principal) less than they paid.

Which is to say that when some institution somewhere yells “fire in the theater,” there won’t be enough liquidity (i.e. buyers of these lemons), thus prompting what the fancy lads call a liquidity crisis.

In other words, the exit door in that burning theater will be the size of a mouse hole. Prices will burn.

High-yielding bond funds are particularly exposed. Daily redemptions? Easy liquidity? Forget it.

Timing for All This

When it comes to predicting just when and how the collusion scam I’ve described above will indeed run out of gas, we are not here to forecast precise dates, as that is an impossible task.

In simple speak, it’s hard to time dirty tricks.

What we can do is track what the markets are telling us, find the telltale signals and then translate those signals back to you. That is why the market’s reaction to (1) “accommodative” money printing and (2) equally “accommodative” rate cuts (the pivot of 2019) are so critical.

We are watching this market response with eagle eyes.

That is, as the Fed’s two magic bullets slowly (and currently) lose their velocity, power, and “punch,” after over a decade of bubble creation and normal price discovery distortion, we know that once the central banks run out of this ammunition, nothing will protect them (or the markets) from the bear waiting in its cave.

For now, and despite the continued stimulus effect of these tiring yet still “magical” bullets, we believe that risk far outweighs the potential rewards in these topping, rigged and highly distortive markets.

Hence our warnings, suggestions and cash recommendations, including the most recent one, here.

Your Questions

We’ve been getting tons of great reader questions this month in reaction to our various articles on everything from the repo markets, stock buyback scams, and money printing to German lessons – so many that we’ve decided to write a special piece this week exclusively addressing your questions, as they are questions shared by so many readers and so highly relevant.

Keep your eyes on your inbox.

In the interim, stay informed and be careful out there.

Sincerely,

 


Matt Piepenburg


Comments

4 responses to “An Eerie October Silence, Dollar Woes, and More Rigged Scams in The Bond Market”

  1. Thanks again. Great analysis. Just good common sense and looking at the facts which is something 99% of “investment advisors” don’t do.

  2. I have a vision problem. I’m 85 years old. So are my eyes.
    I try to print out important info because it’s easier on my eyes.

    But it doesn’t work work with you. I can’t get the whole article.

    Can you help? I love your work.

    Robert B.

  3. IS THE FED RUNNING SCARED, OR DOING EXACTLY WHAT IT WAS DESIGNED TO DO. I WONDER………………

    ANDREW JACKSON’S FAREWELL ADDRESS:
    “The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations…..”

    Rep. Louis T. McFadden, June 10, 1932:
    “When the Federal Reserve act was passed, the people of the United States did not perceive that… the United States were to be lowered to the position of a coolie country which has nothing but raw materials and heavy goods for export; that Russia [China, India…] was destined to supply the man power and that this country was to supply financial power to an international superstate — a superstate controlled by international bankers and international industrialists acting together to enslave the world for their own pleasure.”

    THOMAS JEFFERSON:
    “If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around then will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied.”

  4. Congrats on the work you have put into this, I’m one who lost heavily in the mid 70’s/80’s ( $1/2 billion) and I can certainly see this one coming and preparing for it for both self and to be able to assist those 50 years and under who have never seen any real tough times before, the 08/9 was nothing to the coming terrible crash, now with everyone printing money to get through tomorrow, will eventually bite us where it hurts, keep it up Matt.

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