| From: sense | 3/7/2020 4:30:41 AM | | | | | | What's Next For Markets ?
Low interest rates have allowed companies to borrow at low cost, but in the process they've taken on very large debts... and a lot of that debt has been used in bidding shares up to excessive and unsustainable levels. It has been assumed all along that the major risk for companies was in rates going higher... but, that's a risk which can be countered by a cooperative (or, defeated) Fed, and otherwise is a risk that that can be insured against... or it can, for as long as everything keeps working.
But, then, along comes coronavirus... and suddenly it turns out the biggest risks are simple business risks... so, no matter how low the cost of borrowing goes, the debt still might not be able to be repaid if business turns down enough that there's no money to pay the debt. The one thing that is certain, now, as the coronavirus expands at a HIGHLY PREDICTABLE rate... is that business is going to turn down. We were already in a "soft spot" in the economy... suggesting we were already six months into a "mild" recession, and just getting ready to come out of it... but, now, the coronavirus impacts, here in the U.S., have begun already.
The Fed has been goosing the stock market trying to keep prices high as a confidence building measure... and in the process has built a massive credit bubble, but that also leaves us poised with a huge bubble in stock prices... now with no reason to have confidence... and the excessively elevated stock prices and way too much debt to be managed are instead another reason to NOT be confident. Performance expectations now are going to be driven by real events... and not by "management" efforts... or monetary policy wizardry.
Monetary policy cannot and will not make the virus go away... so what happens next in financial markets is not something that can be prevented... it cannot be stopped... leaving only a question of timing and pace.
We began to see that answered this week... with the fastest ever decline in the stock market. Already baked in is a much deeper, if not steeper decline ahead... very likely to become self re-enforcing. It will take at least a couple of months for things to begin to shake out with the virus... and the entire global economy will be held hostage to that timing.
Just wait until the first corporate bond fund is forced to "gate" their fund as redemptions soar. You will then hear a loud sucking sound coming out of the whole corporate bond mutual fund and ETF complex. This is a surely a flow of funds disaster waiting to happen.
The linked article makes a good case that lowering rates much more, from here, will only make things worse. But, to a feckless Fed, the pressure to be seen "doing something" will probably prove irresistible. However, unless the Fed has some magic that can stop the spread of the virus... it won't matter much anyway...
This is going to happen... it is already happening...
With VIX Hitting 50, The Fed Must Now Step In Or A Catastrophic Crash Is Inevitable
"this time around things are much, much worse than 2008, particularly as the whole economy effectively cantilevers off multiple financial market bubbles. For when the equity market begins its long descent in the elevator and Vix begins to spike upwards, as it has begun to do in recent days (see chart below), we would expect corporate bond spreads to eventually explode higher."
Said otherwise, "companies that are already likely struggling with the profit-crushing effects of the coronavirus will see a cascade of defaults and bankruptcies and the economy will be plunged into deep deflationary recession. The coronavirus will be blamed, but it is the tottering pyramid of financial cards built on sand, constructed by the Fed, that is to blame. It's the Fed's fault."
And just in case anyone skipped right to the conclusion, here it is in one sentence and one chart: unless the Fed manages to hammer the VIX as it always has in the past decade, and puts the "coronapanic" genie back in its bottle, the credit bubble - the biggest ever - is about to burst and wipe out the global economy in the process. |
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| To: sense who wrote (1989) | 3/7/2020 5:44:57 PM | | From: sense | | | | Paying close attention to gold and silver trading this week....
Three issues worth noting...
One, I mentioned yesterday, in Basel III having already altered the relationship between gold and commercial banks interest in owning it... that shift also changing the nature of their interest in manipulating it, which now has two drivers: One in the suppression trade purely in the interest of commercial banks enabling themselves in accumulation at depressed prices (ongoing for over two years already), and one in the central banks long term and ongoing interest in controlling the relationship between gold and money market functions, by trying to cap market perceptions that gold (and silver) are real money... while currency is far more tenuously accepted as simulated money, only as long as its performance relative to real money is managed in a way that sustains the (incorrect) perception that fiat paper currency is good money.
Two, both gold and silver, along with all other commodities and financial products, will be seeing increased volatility as a dramatic reversal in markets occurs, from here. The metals, along with other things, are broadly overly-hypothecated as simulated investments... and as the investment markets crash, there will be knock on effects forcing liquidations of investments in all classes, accelerating as funds struggle with account redemption accelerating... and as traders struggle with margin calls. A dealer failed in Chicago already this week, causing a significant ripple in the markets as their positions were unwound. The "paper" trade in the metals is what sets the market price... but you are likely to see liquidation continuing in the markets, that will probably include those paper assets... and you might see an acceleration in the divisions already emerging between "paper" bets on prices, and the prices of real metals... more as central bank policy is forced to shift from the constant constraint of liquidity relative to the span of economic activity (the reason we see the Repo market exposing market illiquidity)... to forcing real expansions of liquidity. Only when that occurs will inflation begin to relieve some of the burden of the overhanging mass of debt... but it will not do that without the PERCEPTION shift occurring... with the markets recognizing an inflationary drive sufficient to quell the deflation. That won't occur only with rates falling, as we're entering a depression, as no one wants to owe more, take on more debt... no one wants to borrow more money... when they can't pay what they owe now. The path is not linear... there isn't a smooth curve in a transition between one policy and another. Expect to see discontinuous shifts in policy... driven by dramatic drivers of change... only occurring when the dramatic events force discontinuous change in choices.
Three, is that in the ongoing market impacts emerging in the wake of the spread of the coronavirus... gold is still suffering, along with silver, from central bank price suppression... but silver also has the direct issue, more than the financial aspects of an entry into a recession or a depression, that supply chain disruptions resulting from the virus will not only be impacting manufacturing in the short term in China now. So, while...
Silver got hammered early in the week along with gold...
Only gold regained the manipulated downdraft by the end of the week, while silver did not.
That leaves the gold-silver ratio in a steady climb:
It's already the highest it has been since 1991... and it is likely to go much higher... driven by the divergence in demand drivers: Gold has already been RESTORED as HARD MONEY by banks in Basel III... even while they've carefully failed to tell the markets that has already occurred, to facilitate their own accumulation of gold through market manipulations giving them lower prices. Silver, instead, has a very large segment of its market demand tied to industrial uses... while more than 80% of industry is already idled now in China, which is the global center of electronics manufacturing... and even as the rest of the world lags in virus impact, it is already seeing supply chain disruption from coronavirus impacts in China.
Even if China were to recover soon... even when it does... the rest of the world won't be there with the prior level of consumer demand to support the restoration of Chinese industrial production. Silver demand WILL BE following the demand destruction in the electronics industry and in consumer markets, for now.
However, before the emergence of the virus, and the immediate depression of industrial demand resulting from it, silver supply from storage and mining production were ALREADY rapidly backing into a significant under-capacity. That fact was already slated to be realized by markets within a year or two. Miners, having been starved of investment capital for a decade, would soon have been unable to produce a sufficient supply of silver to meet the steady state demand, much less supply to enable growth, as a century long overhang in a massive market surplus of stored metal has gradually been wound down. With the market only now reaching that point where a new balance with mine demand will be required... as the overhang in supply is eliminated... we're instead forced into an extreme contago... as a huge portion of silver demand is now dead, and will be for as long as electronics manufacturing is shuttered.
The longer the virus sustains its impacts... the more dramatic the short term impact in silver will become. But as the virus is merely the catalyst, not the driver, of long overdue economic change... the timing issues might not be that linear in relation to resolution of the issues with the virus. Entry into a sustained economic downturn now, as is increasingly likely... will ensure sustained demand destruction in silver markets... while growing the future risk of significant and sustained shortages on the other end of the dynamic. When manufacturing activity does turn higher again... then, it might take a couple of years for mining activity to ramp up to meet the growing and unmet demand. |
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| To: sense who wrote (1990) | 3/7/2020 6:30:36 PM | | From: sense | | | | Sprott: I am not sure we’re done on the downside
I am not sure we’re done on the downside in stocks just yet, and I still see the risk of lower lows across the precious metals and miners complex. However, if that happens, I expect the Fed and the other central banks to throw the kitchen sink at stocks and bonds and sacrifice the dollar in the process. This is the scenario I have been citing for years now that would blow the lid off of precious metals and miners. When the Fed rides to the rescue in stocks and/or caps long bond yields, then Gold, Silver, and the miners will explode higher to numbers you can hardly imagine… in my humble opinion.
Metals and Miners Just Waiting for the Fed to Unleash QE on Steroids?
Sure, but what that leaves unanswered... is the question of WHEN... with some rational reason for the expectation in timing.
"Just Waiting"... is not a clarion call to action...
I think Sprott's view doesn't properly consider the limits, for now, on the Fed's ability to do anything that will actually work to alter the vector in the economy now. The viral pandemic prevents monetary policy from changing anything that matters that much... REAL market functions are going to dominate, for now...
Look at the performance of gold and silver in 2008 - 2009... and ask what's different now ? We're still early in the entry to an "financial crisis" type economic reversal... but the reversal now is inevitable... and it should be much larger than the event in 2008 - 2009...
The key difference between gold and silver now... isn't about 2008 - 2009.... but the subsequent divergence between gold and silver... that all coming post 2011... which corresponds to the implementation of the altered drivers coming out of Basel III... restoring gold's position as a tier one monetary asset...
The market thinks gold and silver are being bid now on the expectation that the Fed will need to go Hong Kong with helicopter money ?
But we've seen solid proof already in the last week that the price suppression continues, and continues in spades...
So, that change in market drivers for gold and silver might happen... but... it hasn't happened yet... and it is UNLIKELY that it will happen in a meaningful way (meaning in a way that is not intended only to manipulate performance expectations) ... before there is any chance at all that it will matter. And that means it won't occur until AFTER the REALITY in the ACTUAL MARKET DRIVER now, in the viral contagion risks, are well contained, if not controlled... and then, when the economy is once again in a position from which it CAN mount a resurgence... then you should expect to see those policy shifts occur...
Don't expect to see any change in course that matters... before we're at or near the bottom in the market crisis... The Fed is unlikely to play the "catch a falling knife" game with the markets... rather than work with the trends as they emerge... to ensure their inputs do occur in a context that CAN matter...
I think gold is bid now... because the banks expect (ie., they already know) that the "exit" from our current economic difficulties will require a "monetary reset"... one that re-monitizes gold... and does that at some significantly higher price. Just as occurred in 1971... when gold went from $45 to $850... Today, that same 20x means gold at $28,000... but the accounting for the mass in money creation since then... dictates something more like $50,000 to $80,000 gold... or something much less than 100% backing.
But, that, also... means they'll continue to suppress the price... try hard to tie it to the markets and take it down as occurred in 2008... to enable them in accumulation from LOWER prices... |
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| To: sense who wrote (1992) | 3/7/2020 10:15:43 PM | | From: sense | | | | Of Liquidity Shortages and Collateral Damage
This Is The Problem
[I've edited a couple of quotes from the article... and greatly expanded them in context]
IF rate cuts were expected to be effective, long end bond yields would be rising sharply now.
They are not, to put it mildly.
Long end rates have collapsed along with the short end: Therefore, the same thing that is driving the Fed to a rapid series of rate cuts now, shows the market is expecting this to be a long-lasting negative.
On a day like today, the telltale, massive – and global – rush into... bonds across the spectrum of maturities... has to be a rush to obtain: pristine repo collateral.
This is a continuation of, and an ACCELERATION of the Repocalpyse... the problem erupting into and driving the entire bond market now... it is an extended indication of the lack of sufficient liquidity...
which liquidity has been "holding the market up" even while the requirement for collateral is GROWING as the quality of collateral collapses. That quality issue leaving funding needs unmet in the open market is what drove the need for the Repo operations in the first place.
The only thing stopping the system locking up now is the RATE at which the bond market change is occurring... and the decline in the bond market at the current RATE... has obvious limits. When those limits are reached... the decline that is occurring in bonds provides no more potential for relief... and then... we launch into the abyss... in the stock market... when the support structure fails, and has nothing more to give.
The problem is two fold: even if you can afford to get it, and do get the collateral to back the prior need... 1. the requirement is a moving target that's accelerating, and 2. it won't solve the problem anyway... as the problem now is tied to the FACT of the reversal in the markets, which is a decline that isn't controlled by the monetary "pump" inflating the market... but by the coronavirus reality deflating the market... so the demand for collateral to backstop shrinking values is growing faster than the supply can grow... in a circumstance where the DRIVER of the problem isn't controlled, or controllable, and cannot be "resolved" by changes in monetary policy... There's not enough "Repo" or "collateral" available... to make a market that's going down for REAL REASONS... go up instead.
It's over... the stock market bubble is popping... and its not just the stock market... the REAL economy is going down as a REAL contraction of activity occurs now... so the masses of BBB quality loans that have thus far fueled the stock buy backs and inflated the stock market bubble... are probably going into default... which is what the "Repocalypse" has been about... with the lack of liquidity driven by declining asset quality being only the tip of that iceberg... |
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| To: sense who wrote (1993) | 3/7/2020 10:59:17 PM | | From: sense | | | | "We Are In An Adverse Feedback Loop": How To Track The Coronavirus Hit To US Consumer Spending
"We believe that we are in the very early stages of the adverse feedback loop. In our baseline forecast, we are assuming that it does not spiral. However, it remains a significant risk and we believe it is prudent to monitor it very closely."
My opinion ?
Articles like these bend over backwards to look backwards... avoiding the obvious in the change that is occurring now, still very EARLY on the curve... when what's ahead is predictable as can be...
A ship that doesn't leave... can't arrive...
Shipments from China are ONLY NOW slowing down... because it takes 27 days for ships that are saving on fuel costs in steaming to arrive. And that has arrivals in LA already down 25%. Metrics in China show activity there declined by 80% and more... and the lag still applies in impact here... so there won't be arrivals here when there's nothing departing to arrive... imposing about a month of built in delay... so the next two or three weeks will see ongoing steep declines in arrivals... while activity in China is NOT coming back on line as they'd like us to believe...
Separately, "just in time" inventory management... is running out of time... Inventories were ALREADY low... and now they can't possibly be replenished for at least two months... and probably longer... even if China rebounds... we're only now where China was in late January...
The article notes consumers key off stock markets... I just noted in the prior post that the SOURCE of recent stock market support has been the bond market... and that support has only a day or two of potential to continue fending off a major market decline... a crash that dwarfs 2008 is LIKELY... this coming week.
What can be done to prevent it, now ? Nothing I can see... Even a big move higher in stocks right now... rather than "rescuing the market" will only be amplifying the amplitude of the swings... making even steeper and more accelerated declines more likely in their wake... as the bond market fails to enable support.
I think the issue is not just "an adverse feedback loop" in consumer behavior, including in the stock market this coming week... which will be an issue... but ALSO an actual imposition of an area of reverse command... which virtually ensures that as rates decline... lower rates make things WORSE rather than better... and I expect that will begin to become apparent early this coming week... |
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| From: sense | 3/8/2020 12:22:25 AM | | | | | | Of Investors, Geopolitics and Oil Prices
With stock markets imploding... bond markets are being disrupted... making the near term and long term impact on funding for America's oil frackers still uncertain... so sustaining America's oil independence in the future and growing America's role as an exporter... will depend on fracker's ability to continue reducing costs... and Wall Street's ability to sustain access to funding supporting their efforts.
Then, the current question is, with an already significant global demand contraction under way, that is going to be expanding to a still uncertain magnitude... and now, with BOTH Russia and Saudi Arabia engaged in a good old fashioned gas war... how low will oil prices go... and how FAST will they go there ?
On Friday, Russia Attacks:
Putin Launches "War On US Shale" After Dumping MbS & Breaking Up OPEC+
"The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2." Putin has just effectively made an enemy of crown prince MbS in order to start a war on America's shale oil industry...
The Kremlin had decided that propping up prices as the coronavirus ravaged energy demand would be a gift to the U.S. shale industry. The frackers had added millions of barrels of oil to the global market while Russian companies kept wells idle. Now it was time to squeeze the Americans.
Heading into Friday's critical session, OPEC had been pushing for an additional 1.5 million barrels per day of cuts, reducing production by 3.6% of the world's total supply, which would have required Russia and other non-OPEC states (but mostly Russia) to contribute 500,000 bpd to the extra cut.After five hours of polite but fruitless negotiation, in which Russia clearly laid out its strategy, the talks broke down. Oil prices fell more than 10%. It wasn’t just traders who were caught out: Ministers were so shocked, they didn’t know what to say, according to a person in the room. The gathering suddenly had the atmosphere of a wake, said another.
Russia's Plan: unlike the rest of OPEC+, "Russia's budget is better prepared for lower oil than six years ago." As such, the Kremlin can now sit back and wait as one after another OPEC nation gets "Venezuela'ed", and its production permanently taken offline amid social unrest, resulting in far lower long-term output.
On Saturday: Saudi Arabia Strikes Back
Saudi Arabia Starts All-Out Oil War: MbS Destroys OPEC By Flooding Market, Slashing Oil Prices
In Nov 2014 the Saudi's decided to break apart OPEC, and flood the market with oil in a failed attempt to crush US shale producers (who survived thanks to generous banks extending loan terms and even more generous buyers of junk bonds), which nonetheless resulted in a painful manufacturing recession [Ed. lower oil prices DO NOT cause recessions in manufacturing] as the price of Brent cratered as low as the mid-$20's in late 2015/early 2016.
On Saturday, Saudi Arabia launched its second scorched earth, or rather scorched oil campaign in 6 years. And this time there will be blood.
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Having not just fallen off a turnip truck... What I see instead of a "war" between Saudi Arabia and Russia, is that the two of them are now cooperating in trying to drive other producers out of the market... at the same time that real events make oil prices largely unresponsive to supply constraints anyway...
What no one seems to know, at this point... is how to target that level of production that will allow a sharply falling demand to meet supply at a point of balance that makes sense.
The news as presented, along with the news NOT being presented on the virus impacts on global demand contraction thus far, still appears to guarantee an ongoing price decline...
My guess is... demand is going to fall far faster than supply contracts... even without the removal of any prior constraints on supply... the price will decline. In the degree there is real effort to remove constraints and accelerate production... prices will fall farther and faster...
Can Saudi Arabia open the spigots and put the oil price low enough... that Russia isn't making any money from their unrestrained production ?
Probably they can. Will they ?
The nature of the events unfolding in the last week... suggests that they might well try... |
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