U.K. Parliament Says “NO” On BREXIT Deal…

A Pfennig For Your Thoughts

Rocktober 23, 2019

* Currencies give back more of their Friday gains…
* Fed interjects nearly $100 Billion… this is getting crazy!

Good Day… And a Wonderful Wednesday to you! The World Series began last night, and the Nationals did something that few teams have been able to do… they hit Astros pitcher, Garret Cole…. I’ve always been a “National League Guy”, but I did pick the Astros to win it all… I just thought they would be playing the Dodgers… UGH! I received a few emails and notes from readers and friends, saying they were glad that my granddaughter, Evie, was OK… Thank you… One of my all-time fave bands greeted me with back-to-back, belly-to-belly songs this morning… When I turned it on Marshall Tucker Band was playing 24 Hours, and that was followed up with Heard It In A Love Song…. (It can’t be wrong!)

With no data to trade off of yesterday, the currencies drifted, albeit a bit lower, but drifted all through the day & overnight market… Gold eked out a $3 gain on the day, So, all-in-all a big nothing day here… Gold is up another $4 in the early trading today…

I wanted to point something out to those of you who scour the currency roundup with a fine tooth comb each day… The Dollar Index on 10/9/19 looked unbeatable and had just popped over the 99 handle, and traded that day at 99.04… On Monday this week (the 21st), the Dollar Index was trading at 97.24… And briefly on that day, it fell below it’s 50-day moving average… But recovered and has remained above it’s 50-day moving avg. since.

I wanted to point out something I learned a long time ago from a very wise trader… When assets are falling and go through their 50-day moving avg. , they normally go through it initially, then recover, and go through it again, and recover, and this may go on for a bit, before the asset finally falls through the avg. and keeps falling…

So, is this in store for the Dollar, which is represented by the Dollar Index? I guess we’ll all find out… But I would think that if that’s what usually happens then we could be seeing the beginning of a weak dollar trend…. I’m just saying…

The BIG NEWS came from the U.K. where the U.K. Parliament voted down the BREXIT plan presented to them by PM Johnson… I had a feeling that this would happen, and now it appears that unless someone can hit a 9th inning walk off home run, that the deadline of 10/31, to have a deal, will not be met… Recall that I warned you all who got giddy about the recent runup of pound sterling, to be careful here… And well, pound sterling got taken to the woodshed yesterday after the Parliament announcement.

From the looks of yesterday’s repo market action, JPMorgan was correct, at least for one day that is, the illiquidity got worse! The Fed had to interject nearly $100 Billion in newly created electronic funds (actual $99.8 Billion) and the Fed’s buying of T-Bills was oversubscribed by 5 times…

That means that there were requests from the banks to offer T-Bills to the Fed at 5 times the amount the Fed stated they would buy… So, do you think that the banks are really that bad off? I have to question the need for all this bond buying by the Fed… Seems to me, that the banks are seeing this as an opportunity to turn their T-Bill holdings to cash too easily. You see, a bank can make more lending money than they can owning a T-Bill…
Not that I think there isn’t an illiquidity problem… I’m just questioning by how much, and think the banks are taking advantage of the Fed’s panic…
I read this morning that China, too, is injecting money into their repo market… This news didn’t surprise me one iota, because the Chinese banks have been having illiquidity problems for months. You may recall that not that long ago, China lowered their reserve ratio for banks, thus freeing up cash…
When I was writing for the Dow Theory Letters (now defunct) I wrote an article that was written when the first of the Trade War tariffs were announced… I had a great cartoon in the letter, about Tariffs, showing a bulldozer with the world’s economy in its bucket, being carted off, and the name of the bulldozer was “tariffs”… I wrote then that a Trade War was not what the Global economy needed, and to this day, I was bang on with that statement…

I pointed out that the Great Depression had a lot of contributors and that the Smoot-Hawley Tariffs were at the scene of the crime… I doubt they teach that stuff in school any longer, but that’s a discussion for the Butler Patio, not here… The point I’m making is that it doesn’t surprise me that both the U.S. and China are experiencing illiquidity problems… The Trade War has upset the apple cart… I’m just saying…

Things were so slow yesterday, that I have two FWIW articles for you today! And here’s the first one… By now most people have watched the movie: The Big Short… In the movie they pointed out how the ratings agencies were as much to blame for the financial meltdown, as anyone was. And the question is being asked as to whether or not they can be blamed again…. Well, this article in the WSJ, but can be found on zerohedge.com (in case you don’t have a subscription to the WSJ) and it can be found here: https://www.zerohedge.com/markets/are-rating-agencies-complicit-another-massive-ratings-scandal-wsj-investigation-leads

Or, here’s your snippet: “Over the past two years, a key event many bears have cited as a potential catalyst for the next market crash, is the systematic downgrade of billions of lowest-rated investment grade bonds to junk as a result of debt leverage creeping ever high, coupled with the inevitable slowdown of the economy, which would lead to an avalanche of “fallen angels” – newly downgraded junk bonds which institutional managers have to sell as a result of limitations on their mandate, in the process sending prices across the corporate sector sharply lower.

As we discussed in July, the scope of this potential problem is massive, with the the lowest-rated, BBB sector now nearly 60% of all investment grade bonds, and more than double the size of the entire junk bond market in the US, and 3.4x bigger than the European junk bond universe.

Yet after waiting patiently for years for the inevitable downgrade avalanche which would unleash a zombie army of fallen angels and potentially spark the next crash, with the occasional exception of a few notable downgrades such as PG&E and Ford, this wholesale event has failed to materialize so far, something which the bulls have frequently paraded as an indication that the economy is far stronger than the bears suggest. But is it? And instead of the economy being stronger, are we just reliving the past where rating agencies pretended everything was ok until the very end, only to admit they were wrong all along, and then slash their rating retrospectively, too late however as the next financial crisis is already raging.

Well, according to a must-read expose by the WSJ, it appears that we are indeed doomed to repeat the mistakes of the past, because as the Journal’s Gunjan Banerji and Cezary Podkul observe, what was supposed to be a 2015 downgrade has dragged on for over 4 years… while the rating agencies appear to be purposefully looking elsewhere.”

Chuck again… this my friends is an excellent article, and after watching the Big Short, I can see this all happening again, but only this time with ratings on Corporate bonds…
The U.S. Data Cupboard is empty again today… Yesterday we saw Existing Home Sales for September, and they were down from August’s print. I don’t see a problem here yet… Mortgage applications though are falling each month, and here’s where the rubber meets the road with housing, folks… Mortgage rates have to be much lower than they previously were, so what’s holding people back? Could it be they are afraid to with all that’s going on in the economy? Hmmm…..

To recap… It was a real slow day on Tuesday, Gold found a way to eke out a $3 gain, but the currencies gave back some of their Friday gains… The U.K. Parliament voted down the BREXIT deal, and sterling got taken to the woodshed. The Fed interjected nearly $100 Billion into the repo market, and things here continue to get worse with each passing day!

For What It’s Worth… A week ago, everyone was euphoric about the news that the Trade Ward between the U.S. and China had reached a “Tentative Agreement” I warned everyone then that this “Tentative Agreement” could still fall through, and that it was a far cry from an Ironclad agreement. As time has come and gone, those that didn’t listen to me, learned the hard way… And now… There’s news that China is going to retaliate VS the U.S. with the WTO… That article was in Forbes, and it can be found here: https://www.forbes.com/sites/panosmourdoukoutas/2019/10/22/trade-war-china-uses-wto-to-get-even-with-the-us/#15e780dd50ae

Or, here’s your snippet: “China is using the World Trade Organization (WTO), an American-made institution, to get even with the US.
Beijing is seeking $2.4 billion in retaliatory sanctions against Washington for non-compliance with a WTO ruling in a tariff dispute against the US tracing back in the Obama era.

That’s according to a Reuters report, which states that America could face Chinese sanctions if it does not lift certain tariffs that violate WTO rules.”
Chuck again… I don’t see how this news is going to heal the Trade War negotiations… I also don’t see President Trump taking this news lightly… Oh, and the stock jockeys scrambled to find a bid for their stocks yesterday, once this news hit the wires…

Currencies today 10/23/19 American Style: A$.6842, kiwi .6407, C$ .7635, euro 1.1120, sterling 1.2869, Swiss $1.0104, European Style: rand 14.6830, krone 9.1605, SEK 9.6617, forint 296.02, zloty 3.8476, koruna 23.0620, RUB 63.67, yen 108.45, sing 1.3633, HKD 7.8424, INR 70.67, China 7.0760, peso 19.16, BRL 4.1030, Dollar Index 97.58, Oil $53.93, 10-year 1.73%, Silver $17.54, Platinum $891.05, Palladium $1,749.15, and Gold… $1,492.40

That’s it for today… Another pretty, but crisp day here yesterday… Again, fall is the best weather we get here… The only problem with fall is that Winter follows it! UGH! And longtime readers know me… I’ve got to go where it’s warm! Our Blues play tonight, it will be interesting to see if they can show they’ve overcome the Stanley Cup hangover, by having two consecutive good games… The hockey season is a very long one, so it’s not the utmost importance for the Blues to play good now, they have a long season to work it out, I just want to see if they can put the hangover behind them… Big Head Todd and the Monsters takes us to the finish line today with their song: Bittersweet… I hope you have a Wonderful Wednesday, and please Be Good To Yourself!

Chuck Butler
Creator & Editor of:
A Pfennig For Your Thoughts