WEEKEND WRAP: Stocks Slammed As Fed Blunders Into Inflation Debate; Gold, Silver Punished; Bitcoin Reeling, Rocking, Rolling

Sunday, June 20, 2021, 12:27 pm ET

As expected, the major events of the week turned out to be the Federal Reserve's FOMC interest rate policy statement on Wednesday and quad witching options and futures expiry on Friday.

Investors struggled to find good reasons to stay in stocks as financial markets were roiled by the simplistic dot-plot chart supplied as an adjunct to the policy statement, in their Summary of Economic Projections [PDF], which included the (dot-plot) chart of FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate for the remainder of 2021, 2022, and 2023.

What concerned markets was the upward movement of seven of the 18 dots in 2022 off the baseline 0.00-0.25%, with five bumped up to 0.25-0.50% and two dots in the 0.50-0.75, suggesting that some members of the FOMC believe that the appropriate federal funds rate in 2022 would be higher than what prevails today and likely through the end of 2021.

More alarming, perhaps, was the upward thrust of the dots in 2023, where a mere five of 18 remained at the baseline 0.00-0.25, with nine of the dots clustered between 0.50 and 1.25%. The outliers were two dots at 0.25-0.50% and two more between 1.50 and 1.75%.

To the Wall Street casino players, this registered as a signal of changing sentiment on the part of the Fed toward normalization of interest rates in an effort to cool off inflation in what some are predicting to be an overheating economy. Resting on a razor's edge, the fear trigger in the subjective subconscious of the financial horde was pulled, sending stocks sharply lower at the inception of the policy release, a sentiment that did not relent for the rest of the week. The frightening reality was a telegraphed five-day selloff in blue chips (Dow Industrials) and general carnage across equity assets that was hardly contained to US markets.

Since the May 10 high of 35,091.56 to Friday's low of 33,271.93 the intraday loss for the Dow Jones 30 blue chips is 1,819.63 points, or, 5.185%. The Dow has closed below its 50-day moving average for three consecutive sessions as of Friday's close, which was the fifth straight negative finish for the Dow and the eighth close in the red in the past 10 sessions.

Chart-wise, the recent decline on the Dow was the second leg of a double dip off the top, the first part occurring from May 10-19. This second act began in earnest on June 7th. Despite Friday's bottom exceeding to the downside both the intraday and closing lows of the first leg, this segment has not yet found a floor. That will be determined beginning Monday and through near term trading sessions.

The other indices followed somewhat similar paths, though the NASDAQ inexplicably made gains on Monday, and even more so on Thursday, after the Fed's blooper. Friday's selloff sent the NASDAQ into negative territory for the week, though only by a small amount.

Offsetting Monday's gains with four straight sessions on the downside, the S&P 500 dumped nearly two percent, closing below its 50-day moving average on Friday for the first time since early March.

Mirroring the Dow, the NYSE Composite Index shed 3.30%, exceeded only by the Dow's 3.45% loss.

With stocks being shunned on the whole, Friday's options expiry set the dumpster ablaze. Friday's trading was punctuated by a deafening thud into the close. The S&P, for instance, dropped nearly 20 of its 55 points in the final 15 minutes of the session.

This, at the quarter's end in futures and options and nearing the end in the cash market, was the opposite of a short-covering boost for stocks. It was the flip side as holders of long positions capitulated, becoming sellers out of fear of being Monday morning bag holders.

In a related note, the FOMC also extended temporary US dollar liquidity swap lines with nine central banks through December 31, 2021. According to the Federal Reserve:

These swap lines allow the provision of U.S. dollar liquidity in amounts up to $60 billion each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de México, the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden) and $30 billion each for the Danmarks Nationalbank (Denmark), the Norges Bank (Norway), and the Reserve Bank of New Zealand.

These countries have had trouble securing enough dollar reserves during and after the COVID crisis to continue smooth operation of foreign trade. The takeaway from this move is that these countries are dealing with trading partners outside the US that are using other currencies (mostly yuan or euros) rather than the traditional US reserve currency in cross-border transactions. As more and more countries - like Russia - move away from the US dollar reserve currency standard, expect to see more liquidity squeezes and more swap lines extended by the Fed in a desperate attempt to keep the reserve currency plates spinning.

Also, the Fed increased the payout on overnight REPO loans to participating banks flush with cash from 0.01% to 0.05% (five basis points) as banks seek collateral with which to balance their books. The REPO market is deep in the bowels of the monetary system plumbing, but the kep point is that banks and other financial intermediaries have too much cash (which is a line item liability) and not enough collateral (assets).

All of this is causing disturbance in US and global structure, FX, and international commerce, exacerbating an already unstable condition persisting since February 2020.

Exceeding $8 trillion for the first time was the Fed's Balance Sheet as they continued their $120 billion in monthly asset purchasing ($80B in treasuries; $40B in MBS). Regrettably, nobody handed out FED $8,000,000,000,000 hats... yet.

With stocks under pressure, the treasury complex was rallying on the long end while selling off at the short end, flattening the overall curve, a significant development that usually precedes recessions. With 1-month, 2-month, 3-month, 6-month, and one-year bills conveniently parked at 0.01%, 0.02%, 0.03%, 0.04%, and 0.05%, as of last Friday (June 11), respectively, those same maturities ripped higher, to 0.05%, 0.05%, 0.05%, 0.06%, and 0.09% at Friday's close as bidders were bugged by inflation. On the long end, the 10-year rose from 1.47% to 1.57% by Wednesday, then reversed course and closed lower, finishing up at 1.45%, a two basis point trip.

The 30-year was much more of an interesting situation, in which the bedrock of the long term global bond market, the 30-year bond, gained from 2.15% to 2.20% on Wednesday, but then rolled off the table, ending the week at 2.01%, the lowest rate since February 12, matching that rate, all of which points to tightening financial conditions, as banks are unwilling to lend despite having an excessive amount of cash in their coffers.

Simply put, US credit markets have overindulged on debt for too long and are tapped out, constipated with scanty liquidity and near-zero money velocity. Having had only one solution to every crisis since 2008, the Fed has kept the QE spigot open for too long and the system is freezing up.

As usual, when credit becomes the issue, we turn to the faultless analysis of Doug Noland at the Credit Bubble Bulletin for further insight:

The spread between two and 30-year Treasury yields closed Tuesday's (pre-meeting) session at 202 bps. In a mad scramble to unwind "curve steepeners," this spread had contracted 26 bps to 176 bps by Friday's close. The five to 30-year spread sank from 140 to 113 bps.

Suddenly, it will matter that Beijing is determined to slow system Credit growth, putting China's Bubbles in serious jeopardy. Chinese Credit stress matters. It matters that some of the major apartment developers are facing liquidity challenges. Huarong and the other huge asset managers matter. The possibility that Beijing may allow a major financial institution to fail matters tremendously.

Ten-year Treasury yields below 1.50% are sending a signal: there are Bubble fragilities that will impede any effort of policy normalization. QE is here to stay. And after a week of big commodity price drops, it will be easy for some to now dismiss inflation risk ­ or even assert yields indicate prospective deflation. And while bursting Bubbles would surely exert disparate disinflationary pressures, thinking one step ahead I ponder the consequences of the Fed's policy response to the next crisis. I actually doubt it will be that far out into the future. And there are decent odds Trillions of additional liquidity will hit an economy already demonstrating powerful inflationary dynamics.

June 18 ­ Dow Jones (Michael S. Derby): "The Federal Reserve Bank of St. Louis President James Bullard said the economy is seeing more inflation than he and his colleagues had expected, and noted that while there is substantial uncertainty about the outlook, it could lead to a rate increase next yearŠ 'The inflationary impulse, I think, is more intense than we were expecting,' Mr. Bullard said. 'You could see even some upside risks to the inflation forecast, but that's okay' given that the central bank had hoped to get inflation back up over 2% for a time to make up for extended periods of falling short of that goal, he said. At the Fed meeting, officials projected 3.4% inflation this year, up from the 2.4% forecast made in March. Mr. Bullard also noted that Chairman Jerome Powell opened the doorŠ to a central bank debate on paring back on bond-buying stimulus efforts."

WTI Crude Oil rose from $70.88/barrel to a high of $72.15 Wednesday, ending the week at $71.50. With prices in the Saudi comfort zone and North American rig count at 587 (up from 283 a year ago), the US economy re-opening, and summer driving season about to commence, oil prices continue to ramp higher, putting net damper on small business and consumer leisure travel. The US national average gas price at the pump moderated slightly from a high of $3.09 on June 10 to just below $3.06, though higher oil prices and any disruption in supply could cause gas and other distillates to rise once again.

Overall, higher gas prices act as a tax on consumers and business, feeding into the inflation narrative. Moderation could occur if the Saudis ramp up production at these price levels, which are very productive for their economy, but that may not be felt downline for months. Expect oil and gas prices to remain high until such time as the economy begins to falter or there's a wholesale correction in stocks. For now, prices at the pump are manageable and unthreatening to the "recovery" meme.

Gold and silver took a beating over the week, both prior to the Fed announcement and afterwards. Gold, which was over $1900 as recently as June 2nd, nosedived from $1877.64 all the way down to $1,764.34. Silver was similarly mistreated, falling from $27.92 to $25.80, an eight-week low.

While wholesalers on the COMEX and the LBMA fixes were hauling down precious metals prices, retail continued to be hot, with significant signs of shortages in select silver and gold coinages and bars. Many items were available for immediate sale on most online dealer sites, though just as many or more in the same categories were out of stock. Shipping times were largely static, with most available items shipping immediately or within a week to two weeks.

Notably, Scottsdale Mint, a metals fabricator, continues to post a notice that orders are not shipping for four to eight weeks and longer for Eagles, Buffalos and Maples.

Money Daily's weekly survey of eBay prices determined that demand remains strong in silver while gold prices fell in concert with spot, though premiums are still quite high, especially on gold coins.

Here are the most recent prices for common gold and silver one ounce items sold on eBay (numismatics excluded, shipping - often free - included):

Item: Low / High /Average / Median
1 oz silver coin: 40.25 / 47.90 / 43.66 / 43.82
1 oz silver bar: 39.45 / 54.95 / 44.15 / 41.38
1 oz gold coin: 1,882.72 / 2,033.50 / 1,944.72 / 1,949.78
1 oz gold bar: 1,843.41 / 1,932.78 / 1,870.16 / 1,865.24

Indicating that the r/wallstreetsilver apes (now 113,000 strong) are still working to wreck the COMEX and may have done so already, as retail, immediate shipping prices on eBay have decoupled from the futures and LBMA standards. While silver was losing more than two dollars an ounce at the wholesale level, the Single Ounce Silver Market Price Benchmark (SOSMPB) rose dramatically over the past week from $41.68 to $43.25. Retail demand may become even more relentless as dissatisfaction with US currency and government policies push people toward alternatives and financial safety nets.

Along the lines of that trend, Bitcoin has been frolicking in a range from $33,000 to $41,600 for the past week. In what's becoming something of a regular feature, Bitcoin fell hard Saturday night into Sunday morning, bottoming out $33,347 at 8:20 am ET. Regulators in developed nations continue to eye Bitcoin with grave suspicion, spreading as much fear and resentment for the digital alternative to fiat currency as possible. Meanwhile, new developments in blockchain technology are fomenting a worldwide movement toward cryptocurrencies, with Bitcoin remaining the clear leader.

El Salvador was denied assistance in implementing Bitcoin as legal tender alongside the US dollar by the World Bank and IMF, a development that knowledgable parties had expected. There are rumblings from other Central American countries concerning Bitcoin adoption, if not by government rule, the people of the various countries in the connecting route between North and South America and many Caribbean nations are warming to the prospect of decentralized currency and seeking technological innovation. Developers and entrepreneurs are beginning to beat a path to El Salavador and Guatemala as well as to Texas, as China begins dissuading Bitcoin mining.

The price of Bitcoin on a day-to-day basis is not the whole story of Bitcoin. The original cryptocurrency, now 12 years old, continues to fascinate and attract freedom-seeking individuals and companies from all walks of life and business segments.

Bitcoin is not going away nor will it be regulated out of existence. For every developed nation that bans, regulates, or demonizes the crypto, there are developing or emerging-market nations seeking to engage with it.

The US economy is not as well as mainstream media and financial pundits would like you to believe. The desperation and confusion at the Fed was revealed for all to see this week and the steady decline on the Dow and in stocks in general have given pause to many a would-be stock enthusiast. Built on the shaky ground of an unbalanced economy, an untrustworthy press and incompetent government and monetary officials, the United States sits precariously on a ledge overlooking a currency and liquidity abyss. This summer - which began today - should prove one of the more dynamic and explosive seen in years.

Wishing one and all a pleasant, profitable summer,

That's the WEEKEND WRAP.

At the Close, Friday, June 18, 2021:
Dow: 33,290.08, -533.37 (-1.58%)
NASDAQ: 14,030.38, -130.97 (-0.92%)
S&P 500: 4,166.45, -55.41 (-1.31%)
NYSE: 16,143.95, -267.70 (-1.63%)

For the Week:
Dow: -1189.52 (-3.45%)
NASDAQ: -39.05 (-0.28%)
S&P 500: -80.99 (-1.91%)
NYSE: -550.98 (-3.30%)

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