Three weeks ago we at NOTES FROM UNDERGROUND suggested the Fed needed to cut interest rates by 50 basis points in an effort to get ahead of the potential negative economic fallout from a DEMAND SHOCK caused by the Covid-19 virus. But the rate cut was to be presented with the caveat that this was an economic cut and financial considerations were not involved. If the demand shock from the VIRUS never materialized the cut would be RESCINDED. After announcing an emergency cut Tuesday Chairman Jerome Powell took a few questions from the media.
A CNBC reporter asked the key question: If an economic slowdown doesn’t materialize or the virus becomes contained would the FOMC pull back the cut? POWELL could have emphatically said, “YES,” but he danced around the question and answered with the non-committal “we always make decisions in the interest of the American people.” What a ridiculous answer.
When the G-7 issued its statement this morning it immediately caused me to wonder why even call a G-7 gathering, given the weak response to a potential pandemic crisis.
In response to this morning’s activity, I told some readers this can’t be all and if the FED were to go it alone and cut it would be as an effort to depreciate the DOLLAR. The great fear for the world’s central banks is that the recent strength of the DOLLAR versus many emerging market currencies could be a catalyst for a deflationary spiral as DOLLAR-DENOMINATED DEBT rises in financing costs, especially with the recent sharp drop in commodity prices. This cut was/is about the DOLLAR. Its collateral impacts are insignificant. The G-7 (Italy, Canada, U.K., Germany, Japan, France and the U.S.) Does anyone matter here but the U.S.? Not one iota.
But I warn: The poor timing of the FOMC announcement is a benefit for Bernie Sanders as it allows him to play to his and Elizabeth Warren’s supporters by noting how the Fed cares more about the financial assets of the rich than about the overall health of the economy. Who is this guy Jerome? Former Fed Governor Kevin Warsh asked a similar question in a Wall Street Journal op-ed last Thursday. Warsh challenged Powell over the delay of the FOMC reacting to the damage from the coronavirus (demand shock potential not to be minimized).
***On Monday, the Swiss National Bank released their financial results for 2019, in which they posted a $50 billion profit due to an increase from foreign equity investments. Again, in the greatest act of ALCHEMY ever the SNB PRINTS francs and sells them in the market for other foreign currencies and purchases equities in the denomination of those currencies. It’s all in an effort to keep downward pressure on the Swiss franc.
The SNB buys EQUITIES, not much sovereign debt. The article noted that the SNB also had a valuation gain of $7.2 billion on its GOLD HOLDINGS of 1000 TONS. One of my readers asked why SILVER has performed more like an industrial metal then a precious metal as last week the GOLD/SILVER ratio traded close to its all time high of 98.7 ounces silver to gold as the correlation algorithms make SILVER into an industrial metal. This correlates as much with copper as with GOLD.
So what it would take to turn SILVER into a store of value? What would monetize silver as it appeared to happen during the times of 1980 when the HUNTS tried to corner the market? My thought is that either China or Russia who have been voracious buyers of GOLD could turn to SILVER as a bi-metal view as offered up by the William Jennings Bryan “Cross of Gold” speech. The Chinese have a history of being on the SILVER standard in which Britain broke them off of with the OPIUM Wars and Boxer Rebellions, as a way of removing the stigma of a colonial past it would be revenge upon the prior colonial masters.
But I offer this: If the SNB wished to diversify its portfolio from paper assets to hard assets it ought to sell some EQUITIES as it owns $4 billion of APPLE, $3 billion of MICROSOFT and $1.5 billion of AMAZON as well as hundreds of billions more and buy $5 billion of SILVER to balance out its asset base.
The SNB has plenty of vault storage as well as no regulators about which to be concerned. As Dostoyevsky writes in the intro to Notes From Underground, I am a sick man,an angry man. To SNB President Thomas Jordan: I am a unbalanced thinker for hire.
Tags: Coronavirus, Federal Reserve, FOMC, Jerome Powell, SNB, Thomas Simons, U.S. Dollar
March 3, 2020 at 8:20 pm |
Yra- I realize Notes is a financial and not so much political blog, but trust me, only a very minor amount of Sanders voters know anything about the FOMC.
March 3, 2020 at 9:13 pm |
I agree but it will provide bernie with fodder nonetheless as how tghe system is rigged—thanks Chuck for your comments well received—
March 3, 2020 at 10:12 pm |
Yra
Wonderful piece.
Before silver becomes a store of value rather than an anodyne metal, I think we need to see a big explosion higher in gold first.
In the past two weeks, we have witnessed two 3-sigma market moves.
First, UST yields PLUMMETED with breathtaking speed and ferocity. Next up, stocks collapsed with S&P down nearly 500 points in a week.
In reaction to this inhuman volatility, the Fed finally blinked.
Gold had almost as spectacular a day as USTs. Almost.
From here forward, I think gold merits serious investment consideration, especially as yields likely move further lower, and possibly as thunderously fast as the past two weeks.
In my scenario, I think that if Fed cuts again by 25 bp at its FOMC meeting in 2 weeks, it will likely be the result of further stock shock, likely caused by more Covid psychosis.
Yields could collapse another 25/35 or more bps. If so, duration bonds are going to become very very hot potatoes. To continue to hold a US 10 yr with a yield, perhaps, of just 75 bp (way below the inflation rate), will require investors to adopt the mindset that economic Armaggedon is here.
Ok, fair enough. But if this is so, I think a lot of money may prefer, instead, the extraordinary value of gold.
ERGO, the conditions could be ripe for perhaps a 3-sigma move in gold towards $1800 by end of March.
So, while I find favor with your intriguing dot connecting between SNB and silver, I think gold will first have an upside explosion that finally triggers silver.
Silver peaked last Sept at $19.75 as gold peaked at $1575
Silver peaked at $20-21 in 2016 when gold peaked at just $1375.
If gold should explode higher, continuing its huge move today, into and after the FOMC, I think silver might finally catch up with some pretty epic intraday moves of 5/6/7% later this months.
But, only after gold has its moment in the sun.
Otherwise, your silver thesis is quite intriguing, even if SNB or the Chinese are not the likely suspects.
One last point….Ain’t no way anybody can buy $3/4/5 BN of silver
50MM Oz at $20 is a cool Billion. I don’t think anybody could buy that kind of physical supply below $20
Several billion of buying power would send silver into a 6-sigma move.
Great piece
Good night
Mike
March 4, 2020 at 3:20 am |
Since silver is today’s subject, my thoughts. I like to learn from history and from time immemorial gold and silver were the primary stores of value. Fiat currencies on the other hand have without exception limited lifespans. When I was in Zimbabwe some years ago, a young boy chased after me trying to sell a hundred trillion dollar note.
But between gold and silver, silver was the more used currency. A five dollar bill will get worn out faster than a 100 dollar bill because of usage. In several languages the word money is translated as silver. The silver gold ratio now is silly. Silver over the next 10 years will far outperform gold, which in its own right will perform spectacularly. The ratio between the two will adjust at some point to its historical 15 or 20 to one.
So why is Silver the Cinderella of recent times? I believe that there are those who have been accumulating an enormous cache of physical silver while capping paper silver. This has been going on in gold as well, but not to the same extent. Conspiracy theory to those who still believe we have free markets will protest? Follow the COT and see how markets respond. And if you own PM ETFs, be careful. Read the escape clauses in the prospectuses.
You can’t have QE, negative rates, Repo operations, if gold was to be $5000 or higher and silver $300. Who will have faith in the Treasury issued IOU? Or even Thomas Jordan’s plaything?
10 year yields below one percent and FF cuts won’t make you buy a plane ticket or another iPhone. Or pay off debt that globally is over 300% of a currently rapidly declining GDP.The Fed quiver is almost empty. And its blunted arrow is an aspirin prescribed for a virulently infectious agent, DEBT.
March 4, 2020 at 5:31 am |
Yra, silver is one of the cheapest materials on the planet, aside from maybe coffee, sugar, corn or wheat, I can’t find of anything, never mind investment, that is sooo much cheaper today than it was in 1980. Not real estate, land, stock market, cars, groceries, even the rarest of the precious metals, rhodium broke it’s 2008 high of $10,000/oz to a high of $12,500/oz, so silver has a lot of catching up to do in the family of metals.
Bosko
March 4, 2020 at 7:55 am |
Yra, regarding that question to Powell about taking back the cut if the virus fades or the economy doesn’t tank, surely the motivation for the rate smash is instead about trying to levitate stocks and cheapen the dollar. Why?
To quote Fed Chair Alan Greenspan (5/19), “A surprisingly large percentage of US income tax receipts are tied to a rise in US stock prices. When the US stock market just stops rising, not falls, but just stops rising, that puts pressure on the receipt side of the US fiscal picture, which no one is talking about.”
Further, overlaying S&P and Fed FRED charts shows that in recent years, US stocks have done nothing on balance except where USD is falling and/or Fed BS is rising (I mean the Fed balance sheet, not Fed speak lol). Especially ever since global CB’s began shrinking their net UST holdings consistently, during which we’ve already had two mini-crashes in US stocks now. Which both times forced the Fed to slash rates, devalue FRN’s and/or ramp its BS in order to fund USG and preclude a bigger stock crash, a matter declared as “national security”…
Or as Powell stated in answering, “We make decisions in the interest of the American people”. I suggest that broadly speaking he wasn’t prevaricating, Yra. What else can he do, sit idly by as US crashes and burns? Unless the US cancels entitlements and terminates the military, it’s frankly financially screwed (a technical term). So instead, Powell is acting as others did in similar circumstances in Argentina, Venezuela and Germany (eg., Von Havenstein).
That makes me feel good in the long run about real assets like physical gold & silver, and bad about UST and USD. Simple.
March 4, 2020 at 11:37 am |
Yra In keeping with your prior advice during another time of high volatility I bought some VIRT for a trade and It’s up 10% in a few days Based on my prior experience I believe it has further to run so others may want to take a look as this volatility is going to last for some time Thx TBM
March 4, 2020 at 9:38 pm |
Bigman—you are a high quality investor and get it—really good work as I have bought the exchange stocks also as volatility begets volume
March 5, 2020 at 10:05 am
Thanks for the compliment but the kudos go to you oh wise one. On silver/gold I agree with all which I warn may be a negative indicator. My understanding is that silver was used as money for commerce as it is a much harder metal and stood up well to wear also the traditional ratio of 15 reflects the actual ratio of the metals in the ground. Imagine that a standard based on reality. We are definitely in the twilight of the economic structure established after WW2. Breton Woods 2.0 will come sooner than many think. To not to have at least 10-20% of your nut in PM at this time is just foolish. FWIW TBM
March 5, 2020 at 6:32 am |
Have you been watching the relationship between Gold and Platinum? I think that correlation is more interesting to watch than Gold/Silver. If you haven’t been looking at that one, pull up a chart.
All of the domestic retailers are barely getting by. They are going to all need an emergency line of credit at 0%.
This time it isn’t the banks that need a bailout. It is everyone else.
Do you believe that Global Leadership is on top of this situation and currently discussing aggressive measures. Or are they going to be chasing this one from behind?
Are the Creatures from Jekyll Island helping the insiders liquidate on every pop? Something to consider.
March 5, 2020 at 8:15 am |
Trader B—-this is the worst POTENTIAL outcome asthe central banks begin to lose control and stumble in to how to combat the deflationary spiral that has been their life’s work—-in a fiat currency world with the world’s reserve currency making the role far different then the analysts worry about Japan is not the US and correlations are false based on the different roles in the world—if it is a sustained Demand shock —put on you Leon Russell hat—watch out now beware ,take care—this is not doom and gloom just reality —but for investors it is the question of what the central banks WILL DO to preserve their reputations that CNBC has spent the time telling us are so wise and dependable
March 5, 2020 at 10:19 am
yra – you quoting the quiet Beatle, no? I know little about investing but lots about rock n’ roll. Watch out now, take care, beware of greedy leaders….
March 5, 2020 at 11:28 pm
Sarjoy–you are right it was Harrison but also recorded by Leon Russell and the Shelter People—Beware of Darkness
March 5, 2020 at 8:50 am |
Yra/Trader B
I believe Yra makes a more compelling case for silver than platinum, at this time. Silver has a long history of being a monetary metal, even though it has traded like lead for the past few years.
Platinum, not so much.
The Covid-induced demand shock is evident in UST price action. We will soon see many weak companies in hard hit industries go under and/or restructure.
Oil and Gas
Third tier brick and mortar retail
Leisure Entertainment Travel Restaurants
Powell’s rate cut on Tuesday was NOT in reaction to or preparation for such economic calamities ahead.
No, he cut rates in response to chaotic market conditions that were causing more fear in a virtuously bad loop with continued Bad Covid news in Europe and now in US.
In short, expect to see a wave of bankruptcies in the immediate months ahead, especially as the US is roughly 6 weeks behind China in terms of the progression of Covid. Even though Covid deaths here will be far smaller than China, the economic slowdown will be real and painful and will make it further evident to the markets and to the Fed that we could be at the Zero bound by Memorial Day Weekend, in my view.
Such fear and loathing should finally put a real kick into gold
And, as the Great One, Wayne Gretzky, said of his success, the trick is to skate to where the puck will be, not where it currently is.
Yra’s Dark Recess Thought about silver is an extraordinary example of skating to where the puck may soon be (soon as in the next year, not necessarily tomorrow or next week), especially as gold should see a stampede towards new all time highs here in 2020.
Best
Mike
March 6, 2020 at 4:04 am |
Michael / Yra, a big headwind for silver prices relative to gold at present, at least in some currencies other than the weak dollar, is the forced selling of silver by many millions of small business owners in China who remain shut down by the secondary effects of the ncov. In total, they’re large owners of physical silver (not so much gold) and they’re offering up some significant volume. Need to keep an eye on this evolving situation. I just saw that legendary HF & FX trader John Taylor is on this same wavelength too.