Baltic Dry Index. 2131 -61 Brent Crude 64.28
Spot Gold 1517
Never ending Brexit now October 31,
maybe. 39 days away.
Trump’s Nuclear China Tariffs
Now In Effect.
USA v EU trade war postponed to
November, maybe.
Alan Schwartz, CEO Bear Stearns, March 12, 2008.
Bust March 16, 2008.
Lifeboat time! Something has gone badly
wrong in the US financial system (again.) Is it 2007-2008 all over again? Does
history repeat?
The banks have stopped lending to each
other again or worse, despite supposedly having 1.4 trillion of excess
reserves, have run out of money, to over simplify.
Or did “the next Lehman” arrive last
week? Over the next month, we are all about to find out.
If we are just about to repeat
2007-2008, our starting point is far worse. Corporations loaded up on massive
debt, much of it used to insanely buy-back stock to inflate the share price. Our
central banksters start off almost out of ammo, with interest rates near zero
bound, or in Europe and Japan negative.
Of passing interest here, is a negative
interest government bond still good collateral?
Below, while the Fed’s sticking plaster
will hold for now, what about next month, the regular death month for stocks?
If the Fed has to go to negative interest rates as President Trump wants,
initiating yet another round of quantitative easing, how high will gold and silver go?
How the Fed’s funding struggles highlight the fragility of Wall Street confidence
By Sunny
Oh and Joy
Wiltermuth Published: Sept 21, 2019
8:17 p.m. ET
When obscure
corners of the financial markets that are typically considered mundane draw
outsize attention on Wall Street, it is always cause for investor concern.
That was the
case last week when surging overnight borrowing costs laid bare cracks in a key
Wall Street funding mechanism, which left many scrambling for cash and the New
York Federal Reserve responding by injecting hundreds of billions of dollars
into the financial system to restore calm.
In other
words, this was no ordinary week in financial markets and more than a few
investors were seeing shades of the 2008 financial crisis, reigniting
decade-old nightmares of a systemic funding chaos.
“My initial reaction was fear,” said Hugh Nickola, head of fixed income at Gentrust, and a former head of proprietary trading of global rates at JP Morgan. “There’s really nothing more important than the functioning and transparency of financing markets.”
The sudden spotlight on the short-term “repo” market easily overshadowed Wednesday’s highly anticipated Fed decision on monetary policy, where the U.S. central bank cut federal-funds rates by a quarter-of-a-percentage point to a 1.75%-2% range in a divided 7-3 vote.
Rates on short-term funds, that are typically anchored to fed-funds rates, briefly became unhinged, spiking to nearly 10% on Tuesday.
See: Here are 5 things to know about the recent repo market operations
Nickola said his worries only receded after the Fed started to intervene with a series of short-term funding operations that kicked off Tuesday and totaled nearly $300 billion for the week. On Friday, the central bank tightened its grip on rates ahead of the end of the quarter, when liquidity can become scarce, by extending its daily borrowing facilities through at least October 10, and unveiling three, 14-day term operations.
The short-term rate spike also raised concerns about the potential for the funding tumult to shake consumer confidence, at a time when financial markets often are viewed as a barometer of the economy’s vitality.
----“Right now, it is corporate confidence” that is weakening, he said.
Guy LeBas,
chief fixed-income strategist at Janney Montgomery Scott, also sees reason to
fret due to continuing Wall Street liquidity woes that could seep into the real
economy.
He pointed
to three factors that still leave the money-market plumbing fragile: heavy U.S.
Treasury borrowing to fund the widening fiscal deficit, a flat-to-inverted
yield curve, and a regulatory environment that limits the ability of banks to
absorb government debt.
LeBas thinks
overnight funding operations alone won’t be enough to keep credit flowing over
the longer run.
Wall Street
primary dealers are tasked with helping to execute financial operations for the
U.S.
Treasury and the Fed and LeBas cautioned that they could run out of cash
around the first quarter of next year, unless the Fed makes a series of
aggressive cuts to short-term rates or launches a more permanent effort to
expand its balance sheet, known on Wall Street as quantitative easing or bond
buying.
“I’m not
here to tell the Fed what to do,” LeBas said, adding that when banks run out of
balance sheet it can lead to sales of assets like corporate debt or force banks
to pull back from lending to businesses and individuals. That’s exactly what
the Fed wants to avoid because a retrenchment in lending can have the effect of
amplifying economic downturns.
“If the Fed
does not act with rate cuts or QE, that’s the most obvious way this problem
affects the real economy,” he said.
The
overnight repurchasing rate, or the amount banks and hedge funds pay to borrow
to finance their trading operations for a single day, peaked earlier in the
week at three to four times their usual levels of around 2% (see chart below).
More
Opinion: Stock market’s eerie parallels to September 2007 should raise recession fears
By Sven
Henrich Published: Sept 21, 2019
3:29 p.m. ET
Fed watchers may have just witnessed Powell’s ‘Bernanke moment’
Read this paragraph carefully in light of the Fed’s latest rate cut:Since last year real GDP growth in the U.S. has been slowing. The chair of the Federal Reserve has been signaling that while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including an inverted yield curve, have been ignored and stock markets continued to make new highs in July. In August a correction took a place and subsequently a rally ensued into early September. On September 18 the Fed cut rates.
Sound familiar? It fairly describes market and economic conditions in the U.S. over the past couple of months. Except that this paragraph would be as true for the U.S. economy and stock market in September 2007 as it is today. Consider that 12 years ago the yield curve was inverted and U.S. economic growth was markedly slower than it had been in 2006. Yet the Standard & Poor’s 500 SPX, -0.49% made a new high in July 2007 (same as 2019), there was an August correction (same as 2019), and then the Fed cut rates on September 18 (ditto — same day even).
U.S. stocks proceeded to make another marginal high that October — and that was it. Lights out. We all know what happened next.
It seems we are at a curious moment in time. Parallels to late 2007 are running through the markets now. This doesn’t mean the market’s fate will play out as it did then, but the ingredients are there and all that’s needed is a trigger. Perhaps the trigger was the attack on Saudi oil installations last weekend. It’s too early to tell, but clearly this is something to keep in mind.
Markets topped in October 2007 following the Fed’s September rate cut. That November, Ben Bernanke, then Fed chair, said there wouldn’t be a recession. According to a November 2007 Reuters report, Bernanke told a congressional committee: “Our assessment is for slower growth, but positive growth, going into next year.” The U.S. economy entered recession in December 2007.
More
https://www.marketwatch.com/story/stock-markets-eerie-parallels-to-september-2007-should-raise-recession-fears-2019-09-18
Goldman Sachs says the market is about to get wild in October
Key Points
- Stock volatility has been 25% higher in October on average ever since 1928, according to Goldman equity derivatives strategist John Marshall.
- Big price swings have been seen in each major stock benchmark and sector over the past 30 years, with tech and health care being the most volatile groups, Goldman said.
- “We believe high October volatility is more than just a coincidence. We believe it is a critical period for many investors and companies that manage performance to calendar year-end,” Marshall said.
- For investors taking a breather from the chaos in August, buckle up as the market is about to go crazy again, Goldman Sachs warned.
“We believe high October volatility is more than just a coincidence,” John Marshall, equity derivatives strategist at Goldman, said in a note Friday. “We believe it is a critical period for many investors and companies that manage performance to calendar year-end.”
----But things could get chaotic again as earnings season kicks off, which should exacerbate a shift in investor sentiment.
“Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and management gives guidance for the following year,” Marshall said.
Seasonality is also strong in single stock volatility as earnings and other events tend to lead to bigger moves, the strategist noted.
“Not only are earnings day moves rising relative to average daily moves, but October tends to be the quarter with the largest absolute earnings day moves for U.S. stocks,” Marshall said.
The VIX swung to its highest level of the year in August as the trade war escalated, fanning fears of a recession. The Dow Jones Industrial Average suffered its worst day of the year on Aug. 14 when the bond markets flashed their biggest recession signal.
“It is hard for us, without being flippant, to even
see a scenario within any kind of realm of reason that would see us losing one
dollar in any of those [CDS] transactions.”
Joseph J. Cassano, a former A.I.G. executive,
August 2007, on Credit Default Swaps that wiped out A.I.G in 2008.
The monthly Coppock Indicators finished August
DJIA: 26,403
+52 Down. NASDAQ: 7,963 +59 Down. SP500: 2,926 +53 unchanged.
An inconclusive month, but all three shows signs of weakening.
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