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Concerns About A Slowing Economy Grow
The Market Bull 2019

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The Market Bull – December 7, 2019

The major averages couldn’t hold their early gains finishing with small losses on little news as concerns about a slowing economy grow.

Certainly, the economic data of late has softened noticeably, both domestically and internationally. Leading to a growing chorus of pundits predicting recession next year. So far, I’m not one of them. While things can and do change, the data would have to soften significantly from here or we would need some sort of substantial exogenous shock to precipitate a recession in the next 6-months. The trade war certainly hasn’t helped and with the latest round of tariffs set to hit on Sunday affecting a broad array of consumer goods. You have to wonder who’s going to end up paying for the latest round as Trump seems unconcerned with respect to a resolution, leaving American consumers firmly in the crosshairs. That said there have been a number of notable economic reports of late starting with the Bureau of Labor Statistics November jobs report that handily beat expectations. Another report shows Chinese Copper imports hitting a 13-month high in November as factory activity surges. Copper has traditionally been a strong leading indicator of manufacturing and economic activity as there aren’t too many things that can be made without it. Additionally, despite Trumps comments about settling the trade war sometime after next year’s election. The Chinese continue to work on the problem as they recently reiterated promises of economic reform and a desire to reach an agreement. That said the trade war is taking an increasingly heavy toll both here at home and abroad as evidenced by the destruction of farm export markets and the recent banning by China of the use of American technology and software. Chinese exports continue to slip.

One of the more interesting, and thankfully drama free events of late has been the Fed’s highly unusual Repo Market operations since September. At 322+ billion at last count you have to wonder why? A number of ideas have been floated after the Feds balance sheet reduction programs drained 120 billion liquidity over the summer as various bond holdings were allowed to mature and roll off the Fed bloated balance sheet without the proceeds being reinvested. Given the 1.3 trillion of excess bank reserves held the last thing on anybody’s mind was some sort of liquidity crisis as that is what the Repo Market Operations suggest after the Fed stepped in aggressively when overnight lending rates briefly hit 10% a five-fold increase from the usual 2%. But we still have no real idea why or how this occurred.  The BIS or Bank of International Settlements has noted the following in a recent report. Moves by JP Morgan Chase in September that saw it reduce its money market and overnight lending facilities in favor of Treasuries. The 130 billion move saw the banks bond holdings jump by 50%. More than a few pundits have accused JP Morgan Chase of doing this for fun and profit at the Fed’s expense. The BIS report: September stress in dollar repo markets: passing or structural? Noted a number of irregularities including, it wasn’t a one-time passing shock as there are structural issues plaguing US short term financing mechanisms. Of the 4 dominant national banks involved in the Repo market JP Morgan was the only one that suffered a substantial collapse in its ability to lend because it diverted its liquid capital into Treasuries, deliberately. Another odd item noted in the report is that a number of significant hedge funds also jumped on the band wagon in the interest of fun and profit as well.

The real shocker was the BIS acknowledging that the financial system probably can’t function without substantial excess liquidity because the world’s central banks have painted themselves into a corner with trillions and trillions of funny money credit creation in the post crisis period. Given the importance of the Repo Markets in keeping the financial system operating smoothly, the lessons of the Long Term Capital Management crisis of 1996 and of course the Great Financial Crisis of 2007-2009 and one starts to grasp why the Fed intervened so aggressively. While so far very successfully, were not out of the woods just yet.

Standard and Poors 500 Index closed at: 3,135.96 down 9.95
NASDAQ finished the day: 8,621.83 down 34.70
Gold ended trading at: $1,465.90 up $.80


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