Something Wicked This Way Comes

Source: Michael Ballanger for Streetwise Reports   09/24/2019

Precious metals expert Michael Ballanger dissects the recent Federal Reserve injection of liquidity into the market and contemplates what could be behind it.

Ill winds mark its fearsome flight,
And autumn branches creak with fright.
The landscape turns to ashen crumbs,
When something wicked this way comes… (Ray Bradbury)

There is a certain maneuver in military strategy that involves the act of conveying a warning to an opposing captain by way of firing a missile or (in ancient times) a cannon ball across the bow of his ship. It was akin to the throwing down of the gauntlet or slapping a man across his cheek with one’s glove and represents a signal that one is prepared to do battle. Your response will be “coming to” and hoisting a white flag if you are not willing to engage.

Last week, the Good Ship “MMT” (Modern Monetary Theory) had two such events with the first being the revelation that the U.S. Justice Department was invoking the RICO statute to indict our old nemesis, JP Morgan, alleging that it conspired to manipulate the gold market and in doing so, named senior managers as masterminds of the scheme. What was the shocker was NOT the indictment itself but rather the fact that they brought in RICO. RICO (RICO Act) stands for “Racketeer Influenced and Corrupt Organization Act” and “focuses specifically on racketeering and allows the leaders of a syndicate to be tried for the crimes they ordered others to do or assisted them in doing, closing a perceived loophole that allowed a person who instructed someone else to, for example, murder, to be exempt from the trial because they did not actually commit the crime personally.” It allows prosecution of large criminal organizations such as the Cosa Nostra or Mafia and for it to be brought to bear upon a major legendary American bank is nothing short of astounding and a seriously large and menacing projectile whizzing across the bow of financial market complacency.

The second cannon ball to soar across the bow of investor confidence was of even greater significance. Tuesday morning, the first day of the FOMC meetings, the Federal Reserve undertook a $53 billion “repo” operation, which was effectively a Herculean hypodermic injection of liquidity into the banking system, and before all those “WTF?” bubbles go sailing around the blogosphere, operations of this magnitude are only done as “emergency measures” such as market crashes or the seizing up of the interbank lending facility such as was happening in 2008. I was on a train when my news feed lit up and my first and near-automatic response was “Someone is in trouble.”

Now, there have been no official reports of anyone “in trouble” but the response of traders to this news was predictably and frustratingly robotic but why shouldn’t it be? There are no humans left to trade anymore. The algobots that implement pattern recognition software were searching out “Fed rate cute” and “Trade war moderates” as their cue to buy stocks and having found nothing ominous in neither a major banking leviathan charged under the RICO Act nor a $53 billion repo (the first since the 2008 subprime meltdown), went on their merry way of buying any and all dips because “the Fed has their back.” The days of my unbridled self-flagellation and distemperate outbursts, the nature of which subsided dramatically after gold broke out above $1,375, have crept back into the room and are threatening to dishevel me, a condition not appreciated nor tolerated by those around me. Emotional chaos is nigh, and it is not good.

At the risk of sounding like an alarmist, I am so concerned with the liquidity scramble that is being undertaken by the banks that I fear that there lurks a large ticking time bomb ready at any minute to derail the current stock market rally, which is within a chip shot of all-time highs for the S&P. It really isn’t all that surprising that stocks are being bid higher; there isn’t really an alternative for the young money manager trying to preserve wealth. The usually wrong majority have been avoiding bonds like the plague despite the 30-year Treasury up nearly 10% year-to-date, while the traders continue to trade the big names despite softening macro conditions. Collapsing German PMIs, weakening forward guidance, Fedex warnings—these are all symptomatic of “The Wall of Worry,” a phrase that was relevant back in the pre-PPI (or at least limited PPI) days, when humans made investment decisions.

Today, there is no “Wall of Worry” that bull markets climb but there IS a “Cliff of Confidence” that is the Fed. Markets are scaling the “Cliff” because no matter how bad the outlook, there is ALWAYS a bid. Even last December when things looked irreversibly bad, the “Invisible Hand” of Smilin’ Stevie Mnuchin came to the rescue and investing since then, as they say, has gone “swimmingly.” Despite all just opined, I remain alarmed and on the “dedicated defensive.”

There are a few of us around that recall the words of Ben Bernanke in the early stages of the banking crisis of 2008 when he described the subprime contagion as “contained.” For this reason, when I see Jay Powell saying that the REPO liquidity injections are not to be misconstrued as a “policy tool,” I am reminded of that famous joke, “How can you tell if a central banker is lying?” Answer: “His lips are moving.” The Fed does NOT inject vast sums of cash into the banking system if everything is going “swimmingly well”; it does so usually during times of stress when one or more member banks are in trouble due to a default or a trading mishap. We have heard absolutely nothing this week as to exactly WHY the overnight lending rate spiked to 10% but you can be that someone did not want to give up any “liquidity” unless they got a big fee for doing so—meaning—someone or someTHING needed liquidity real bad.

So now that I unabashedly patted myself on the back (choosing to carefully ignore premature stab at the TVIX and SPY puts), you all want to know, I am sure, where we are headed from here and no better way than to look at the chart of December silver posted above. I see a test of the highs of September 4^th in the cards for the following reasons:

• RSI is in neutral trending higher