Welcome back to What’s Happening Now, our Monday wrap on what you need to know for the week ahead as we fast-forward toward year-end 2019.
Double Trouble – The Fed Doubles Up on Repo Liquidity
What we’re about to share with you pretty much sums up the “new abnormal” which effectively and all but semi-officially defines our securities market as a “Fed market.”
Namely, I’m referring to the Fed’s recently announced (yet media downplayed) intention to double up on Repo market intervention for the year end – by an additional $500,000,000,000!
Folks: That half a trillion dollars.
This is no small deal. If your catching up on the Repo markets, we described that whole distorted mess here, when September saw the overnight Repo rate spike to nearly 10%–a classic symptom of the ticking time bomb that the fancy lads call the US dollar liquidity shortage.
But now we’re talking half a trillion…
This is getting beyond ridiculous and merely serves as more proof that the Fed, rather than natural market conditions, determines the near-term fate of our otherwise broken bond and equities markets.
The old tools for measuring valuation and risk, be they price to book, price to sales, price to earnings or the myriad other indicators of a recession detailed here just don’t matter in any more.
Instead, and into the foreseeable future, where the Fed goes, the markets follow. Pretty sad. Pretty simple.
The Fed is expecting a massive shortfall in dollars/funds that could otherwise punish the financial system by year-end and are thus planning to pump more fiat steroids to keep those interest rates low (and the U.S. Treasury yield curve upward sloping).
Such dollar shortages traditionally have a tendency to spike rates, and given how our debt driven “recovery” would end the moment rates rise, the Fed has literally no choice but to force natural rates (the cost of that unsustainable debt) artificially lower through more printed dollars.
Thus, and to assure a Happy New Year for all, the Fed plans a year-end injection of $229 billion in overnight lending and another $190 billion in longer-term Repo loans, according to the Financial Times – that’s on top of some $75 billion already provided for year end.
Merry Christmas from St. Powell…As for the bill, that painful invoice comes later.
But this new “gift” of printed cash comes as absolutely no surprise to us, as we predicted earlier this month-the Fed has no choice but to keep printing. And folks, you ain’t seen nothing yet…
“Whatever it takes” is now the bullish (insane) mantra adopted by Powell, following Mario Draghi’s lead at the European Central Bank (ECB). The simple fact is Powell doesn’t want this Christmas to look like last Christmas, when the markets tanked as intra-bank borrowing costs spiked to 6%.
No more of that.
The idea here is to staple the Repo rate to the floor via massive Repo funding, along with resumed Fed balance sheet expansion (i.e. money printing) to the tune of $60 billion per month since mid-October – all to keep this Twilight Zone market alive.
Consumers Cut Back
Here’s another not-so-healthy canary in the coal mine that popped up last week as we head into year-end.
Consumers are cutting back on discretionary spending, among the last pillars of strength holding up the real U.S. economy-the one the Fed pretends to manage by keeping Wall Street artificially alive like some broken Frankenstein.
U.S. retail sales were reported last Friday to have risen just 0.2% in November from October, well short of the 0.5% market expectations.
Heading into year-end, Main Street consumers are less confident than the C-suites on Wall Street and their rich (generous) Uncle Fed. The University of Michigan’s Consumer Sentiment Index hit 2-year lows in September and October of this year according to Bloomberg, falling from records set last July 15.
China Deal & Brexit- Maybe
Plus, there was more ‘iffy” news on China and the U.K. last week, two issues that the media has declared “near resolution” for month after month after month.
China agreed late in the week on the draft text of a Phase 1 Limited Trade Pact which would boost purchases of U.S. farm goods and suspend some tariffs on other U.S. goods in exchange for similar tariff cuts and delays on the U.S. side.
The markets, oddly, yawned on this news with stocks closing Friday basically flat. It’s hard to trust any of this – just a lot of big “maybe’s.”
Meanwhile, Boris Johnson is back in the U.K, clearing the path for Brexit to get done – maybe.
But hey, should markets ever get nervous, the Fed has its finger on the money printing trigger and another finger (or toe) on the rate suppressor, so why worry, just buy the dip, right?
I mean, hey–it has worked for every other dip since March of 2009, right?
Unfortunately, no one really knows how long this charade of Fed-driven “support” masquerading as a “recovery” will last, and thus markets continue to climb a wall of worry as Fundamental indicators scream recession at the very same time the S&P reaches new highs.
Crazy risk, ongoing reward. That’s where we’re at.
That’s also why we have no choice but to recommend cash buffers as per our Storm Tracker, below, to keep you from chasing these distorted tops too aggressively.
Think of us as the chaperone at the frat party. That is, it’s ok to drink a few beers (i.e. ride this stock market)-just don’t get drunk (i.e. don’t be “all-in”).
Uncertainty Reigns – But Who Cares?
The Global Economic Policy Uncertainty Index (an Index that tracks uncertainty in the global news media) is also hitting decade highs, but who cares? As uncertainty rages, the CBOE Volatility Index (aka the “fear Index”) sits at decade lows, for deep down, most investors naturally assume the Fed has their backs.
I mean, the money has to flow somewhere, right? Those ETF’s are getting fatter (and more dangerous) by the day as pension and 401K managers toss your forced dollars into the melting (up for now) caldron of crazy.
Whatever one thinks of these rigged markets, the rest of the world loves the U.S. as the best horse in the global glue factory. That’s another tailwind we have to accept. More foreign flows are further signs of continued support for our Frankenstein securities.
Ride the wave. It feels good, right?
But here’s one thing we also know from our years-upon-years of trading and investing: Tides rise and then tides fall. Volatility expands and then volatility contracts, over and over again. Low vol follows high vol. High vol follows low vol. You get the drift.
As for how long a rising tide will lift all boats, everyone from Ray Dalio to Stan Druckenmiller and Paul Tudor Jones is warning us it has to end sometime, and end very, very badly.
Somewhere in this Twilight Zone, we too are expecting a wake-up call, a reality check, one that will take this low volatility back up and markets back down, way down.
For now, however, low rates and more printed dollars continue to kick the recessionary can further down the road. No shocker there either.
We’ll know when it ends (and so will you) not based upon predictions made in theory today, but only when signals made in real time by the markets themselves, signals which such our Storm Tracker and Déjà Vuindicator, will tell us.
Critical Signals Tea Leaves & Black Swans
Think of Storm Tracker and Déjà Vu as your tea leaves to the future.
Storm Tracker informs of “the what” (i.e. the direction of global GDP, trends, leading indicators, yield curves and the like) while Déjà Vu informs of “the when” (i.e. when this Twilight Zone will end).
Heading into year-end, the central banks still have your back with Storm Tracker now at an annual low 34%, down from the mid-40’s just a month ago and thus holding near-term uncertainty in check as investors seem oblivious to the risks hiding behind the magical calming powers of the money printers.
With stocks in nosebleed territory, we’re tracking this indicator too – the SKEW “Black Swan Index,” an indicator that’s beating to an increasingly bearish drum.
SKEW is formally the CBOE Skew Index (Ticker: SKEW), which tracks demand for options that would pay out if the S&P 500 were to see a sharp, unexpected drop. SKEW is soaring as investors increasingly buy protection, hedge and insure against a stock market rout in a Twilight Zone gone awry.
Black swans approaching? Hmmmm…
Until then, stick to our signals, stay informed, stay patient and try to remember that magic is an illusion rather than a reality, no matter how awesome the trick or how high the current markets. Ride the wave for now, but with an ever-present cash buffer, for eventually the biggest short of your lifetime will come.
That’s where the real money is made.
Matt and Tom
4 responses to “DOUBLE THE TROUBLE-BUT DOUBLE THE FUN, FOR NOW…”
December 16 2019