3rd Quarter Economic Update

SUMMARY

The 3rd quarter ended with great volatility which continued into the first two weeks of the 4th quarter. US stocks fell sharply in the first week of October due to concerns of slowing US manufacturing; all three major indexes have been negative for the past 12 months.  The second week brought news of potential succession of the trade war between the US and China, after which the stock market recovered.  Many large players have withdrawn their participation in Facebook’s new Libra crypto currency.  Political unrest continued around the world, especially in Hong Kong.  Brexit didn’t break in the third quarter, but Boris Johnson struck a deal with the EU on Oct 16th and brought it to Parliament for approval, but the deadline is less than two weeks away.  While everyone was watching the trade wars, global markets and political events, there was much under-reported central bank action, and a brand new international wire system also came online.

U.S., China Move Forward on Trade (10.11.19) WSJ

https://www.wsj.com/articles/trump-strikes-upbeat-notes-on-trade-talks-11570804097

Facebook’s Backers of Libra Reconsider Their Involvement (10.1.19) WSJ

https://www.wsj.com/articles/visa-mastercard-others-reconsider-involvement-in-facebook-s-libra-network-11569967023

Glenn Beck Issues Fiscal Warning Just Like he Did Before the 2008 Financial Crisis Something is Very Wrong (9.19.19) The Blaze https://www.theblaze.com/glenn-radio/federal-reserve-repo-market?utm_source=Sailthru&utm_medium=email&utm_campaign=Daily-Newsletter__PM-Final%202019-09-19&utm_term=TheBlaze%20Daily%20PM%20-%20last%20270%20days

 

CENTRAL BANKS

In early September, The Federal Reserve voted to cut interest rates by a quarter-percentage point for the second time in two months, due to rising concerns of a global slowdown.  The WSJ reported:

For first time since 2008 the central bank injects funds into money markets after a sudden shortage of cash.  For the first time in more than a decade, the Federal Reserve injected cash into money markets Tuesday to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash. The federal-funds rate, a benchmark that influences borrowing costs throughout the financial system, rose to 2.25% on Monday, from 2.14% Friday. The Fed seeks to keep the rate in a target range between 2% and 2.25%. Bids in the fed-funds market reached as high as 5% early Tuesday, according to traders, well above the band.  The New York Fed moved Tuesday morning to inject $53 billion into the banking system through transactions known as repurchase agreements, or repos. (The repo market is where one bank will borrow from another bank on a short term basis usually overnight, because it doesn’t have enough cash at a higher interest rate.)  The bank said Tuesday afternoon it would inject up to $75 billion more on Wednesday morning, but many in the market were looking beyond that decision.

The infusing of cash into the overnight banking system, which the Fed said they would continue to do until Oct 9th, is a clear indication of current and future troubles, however, this action has infused the banking system with sufficient cash, at least for the short term.  The Federal Reserve will extend its cash injections into overnight lending markets for at least another month, after pumping in more than $330 billion since mid-September, as banks face a wave of Treasury bond sales this week, amid a near-record budget deficit and ongoing concern over the strength of the U.S. economy.

In addition, “The Fed plans to buy $60 billion of Treasurys per month, and many are wondering if it is leading the charge back into quantitative easing, often known as money printing,” – WSJ.

The San Francisco Fed made the following concerning, and hopefully not prophetic, statement, “negative interest rates are a viable tool to provide stimulus to economies that need it, and the U.S. might have benefited from using it during the financial crisis.”.

The entire concept of negative interest rates is already hard to understand, the WSJ reported that, “The European Central Bank is about to start lending to some banks at less than it pays them for putting money on deposit.  The ECB said last week that it would both pay a higher rate of interest on deposits and charge a lower fee for lending, both under strict conditions. On the deposit side, the introduction of what the ECB calls “tiering” allows banks to avoid the penalty rate of minus 0.5% on deposits of excess reserves.”

Finding Meaning in Quantitative Easing (10.11.19) WSJ https://www.wsj.com/articles/finding-meaning-in-quantitative-easing-11570872601

Fed Paper Says Negative Rate Policy Can Provide Real Stimulus (10.15.19) WSJ

https://www.wsj.com/articles/sf-fed-paper-says-negative-rate-policy-can-provide-real-stimulus-11571158871?mod=hp_lista_pos4

Fed Extends Repos Until Nov 4 Dealers Brace for $193 Billion in Treasury Sales (10.7.19) https://www.thestreet.com/investing/fixed-income/fed-extends-repos-until-nov-4-dealers-brace-for-193-billion-in-treasury-sales-15116925

Fed Intervenes to Curb Soaring Short-Term Borrowing Costs (9.17.19) WSJ

https://www.wsj.com/articles/fed-to-conduct-first-overnight-repo-transactions-in-several-years-11568729757

Another Coming Recession Federal Reserve Funds Banks Billions, Market is Broken (9.21.19) TheBlaze

https://www.youtube.com/watch?v=bW7ZYc4w3ds&feature=youtu.be

Fed Cuts Rates by Quarter Point But Faces Growing Split (9.18.19) WSJ

https://www.wsj.com/articles/fed-cuts-rates-by-quarter-point-but-faces-growing-split-11568830081?mod=hp_lead_pos1

Big Banks Loom Over Fed Repo Efforts (9.26.19) WSJ https://www.wsj.com/articles/big-banks-loom-over-fed-repo-efforts-11569490202

A  New Central Bank Approach Pay Banks to Lend (9.17.19) WSJ

https://www.wsj.com/articles/a-new-central-bank-approach-pay-banks-to-lend-11568721602

 

A NEW INTERNATIONAL WIRE SYSTEM

The First Iranian English Economic Daily reported, “Governor of the Central Bank of Iran says Iran and Russia have connected their financial messaging services to handle two-way banking transactions.  Outlining details of his talks with the Russian delegation in Turkey, Abdolnasser Hemmati said banks in both countries are now connected through the Russian SPFS and Iran’s SEPAM. The initiative is to be used as an alternative to payments through SWIFT (Society for Worldwide Interbank Financial Telecommunication) for protection against third country sanctions.

Today the USD represents 60% of world reserves and 80% of global payments.  The reason this very significant is that the US has been able to influence and control any nation using US Dollars, by imposing sanctions and cutting off their ability to transact and wire money in and out of their country using SWIFT codes.  Iran and Turkey now have another way to wire money, effectively circumventing US and EU sanctions.  Reuters reported:

“Russian lawmakers on Tuesday backed the international use of a Russian alternative system for the global financial messaging network SWIFT designed by Moscow to eliminate the risk of Western sanctions.  Russia has held talks with China, India, Iran and Turkey about joint use of Russia’s financial messaging system, said Anatoly Aksakov, who heads the Russian Banking Association and a financial committee with the lower house of parliament.  “As the system has proved to be viable and efficient, it draws interest from both Russian and foreign players, it is proposed to give any legal entities, Russian and foreign, the possibility to use it,

SWIFT, was founded in 1973 and connects more than 11,000 institutions in over 200 countries and territories, it said on its website.  Moscow has also seen interest in joining the Russia-based system from Arab countries and is ready to start negotiations about creating a switch that would connect the Russian system with the European one, Aksakov said. 

This will greatly reduce the ability of the US, the EU and other nations to curtail rogue nations utilizing non-military economic options.  It will also reduce US control over world events and increase the influence and control held by Russia and other nations.

Banks in Iran, Russia Connected via Non-SWIFT Financial Messaging Service (9.18.19) https://financialtribune.com/articles/business-and-markets/99912/banks-in-iran-russia-connected-via-non-swift-financial-messaging

Russia Backs Global Use of its Alternative SWIFT System (9.9.19) Reuters

https://uk.reuters.com/article/russia-banks-swift/russia-backs-global-use-of-its-alternative-swift-system-idUKL8N2163BU

 

CURRENCY

The euro is down, the pound is up, and former partners are distancing themselves from Facebook’s new cryptocurrency Libra.  Gold & silver are up, but buyers of gold should beware as there are counterfeit gold bars being sold in world markets.

MasterCard, Visa, eBay, Stripe Drop Out of Facebook’s Libra Network (10.11.19) WSJ

https://www.wsj.com/articles/mastercard-drops-out-of-facebook-s-libra-payments-network-11570824139

Facebook Scrambles to Keep Libra on Track as Partners Waver (10.1.19)

https://www.wsj.com/articles/visa-mastercard-others-reconsider-involvement-in-facebook-s-libra-network-11569967023

Euro Drifts Toward Its Lowest Level Against Dollar in Years (10.3.19) WSJ

https://www.wsj.com/articles/how-low-can-the-euro-go-11570098097

Fake-Branded Bars Slip Dirty Gold Into World Markets (8.28.19)

https://www.reuters.com/article/us-gold-swiss-fakes-exclusive/exclusive-fake-branded-bars-slip-dirty-gold-into-world-markets-idUSKCN1VI0DD

 

RECESSION & DEBIT

Fannie and Freddie are being released from government oversight and have already been loosening lending requirements to allow more people who don’t meet qualifications to get mortgages.  This sounds eerily very familiar, maybe they should rent The Big Short and watch it to refresh their memories.  According to the WSJ:

Mortgage-finance companies Fannie Mae FNMA 3.26% and Freddie Mac FMCC 3.16%   will start keeping earnings as part of a Trump administration process aimed at moving the companies out of conservatorship and back into the private sector.  Fannie and Freddie are central players in the housing market, buying about half of all U.S. mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them during the 2008 crisis in a bid to stabilize the housing market as mortgage defaults mounted.”

The US economy is doing well, but there are signs pointing to lurking trouble, like General Electric freezing pension plans for 20,000 workers, the US staring its new fiscal year almost $23B in debt, the Federal Reserve printing and pumping hundreds of billions of dollars into the overnight bank and repro markets, and rising individual debt levels coupled with loosening lending requirements.

General Electric Freezes Pension Plans for 20,000 US employees in an Effort to Reduce Debt (10.7.19) Yahoo News |  https://www.youtube.com/watch?v=CarVrn3JyaA

General Electric to Freeze Pensions for 20,000 Workers (RTD Quick Take) (10.7.19) https://www.youtube.com/watch?v=UorlsmGFuAk&feature=youtu.be

1,015,736,491,184 Reasons to Have a Plan B (10.1.19) SMC https://www.sovereignman.com/trends/1015736491184-reasons-to-have-a-plan-b-25656/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=20191001_debt

The Fed, Banks Printing Money to Prevent Trouble Recession Will Come Soon (9.24.19) GB https://www.glennbeck.com/radio/the-fed-banks-printing-money-to-prevent-trouble-recession-will-come-soon

Fannie, Freddie to Retain Earnings (9.30.19) WSJ  https://www.wsj.com/articles/fannie-freddie-to-retain-earnings-11569851912

 

WORLD MARKETS

U.S. stocks rallied as banks and health-care companies reported stronger than forecasted 3rd quarter results, and a ceasefire was called on the US vs China trade war, at least temporarily.  Services, however, showed a sharp drop globally, and manufacturing also slowed.

The WSJ reported that, “The U.S. plans to swiftly impose tariffs on $7.5 billion in aircraft, food products and other goods from the European Union after the World Trade Organization authorized the levies Wednesday.  “For years, Europe has been providing massive subsidies to Airbus that have seriously injured the U.S. aerospace industry and our workers,” U.S. Trade Representative Robert Lighthizer said in a statement. “Finally, after 15 years of litigation, the WTO has confirmed that the United States is entitled to impose countermeasures in response to the EU’s illegal subsidies.”

Germany’s economy has been drifting toward recession for most of 2019, and their factories continue to preform poorly due to trade wars and Brexit..

Stocks Climb After Strong Results From Banks, Health Sector (10.15.19) WSJ

https://www.wsj.com/articles/u-k-pound-posts-gains-on-brexit-optimism-11571130220?mod=hp_lead_pos1

EU Warns of 5G Risks Amid Scrutiny of Huawei (10.11.19) WSJ

https://www.wsj.com/articles/eu-warns-of-5g-risks-amid-scrutiny-of-huawei-11570814799

Services Stumble Risks Sharper Global Slowdown (10.3.19) WSJ

https://www.wsj.com/articles/services-stumble-threatens-sharper-global-slowdown-11570094948

U.S. to Impose Tariffs on EU Goods After WTO’s Airbus Ruling (10.2.19) WSJ

https://www.wsj.com/articles/u-s-can-levy-tariffs-on-eu-exports-over-airbus-wto-says-11570025040

Stocks Drop on Worries About Growth (10.2.19) WSJ

https://www.wsj.com/articles/global-stocks-fall-amid-rising-fears-of-economic-slowdown-11570004904

Global Stocks Absorb Blow of Manufacturing Slowdown (10.1.19) WSJ

https://www.wsj.com/articles/global-stocks-fall-amid-rising-fears-of-economic-slowdown-11570004904

Germany on Brink of Recession as Factories Slump (9.23.19) WSJ

https://www.wsj.com/articles/germany-on-brink-of-recession-as-factories-slump-11569237721?mod=hp_lista_pos3

 

BREXIT

According to the WSJ, “Mr. Johnson made a significant concession earlier in October when he agreed that Northern Ireland could stay aligned to EU regulations, eliminating the need for regulatory checks on the island of Ireland, with checks being carried out when goods come from Britain into Northern Ireland.  In recent days, Britain has also proposed a special customs partnership that would allow Northern Ireland to effectively remain in the U.K. and EU customs union.

On Oct 16, the UK and EU struck an agreement. Prime Minister Johnson returned to the UK with the deal and parliament voted to approve it, however not the timetable of the deal for an Oct 31st exit.  Hence, although both sides would greatly benefit from this deal, its execution remains uncertain.

Johnson Brexit Deal Clears Hurdle but Timetable Rejected (10.22.19) WSJ

https://www.wsj.com/articles/boris-johnsons-brexit-deal-clears-vital-hurdle-in-parliament-11571768188

U.K. & EU Agree on Draft Brexit Deal, Paving Way for Key Vote (10.17.19) WSJ

https://www.wsj.com/articles/brexit-talks-are-dealt-a-blow-as-northern-irish-party-rejects-draft-11571294766?mod=hp_lead_pos4

Brexit Negotiators Edge Closer to a Draft Deal (10.15.19) WSJ

https://www.wsj.com/articles/eus-barnier-says-brexit-deal-is-still-possible-this-week-11571124007?mod=hp_lead_pos2

 

POLITICAL UNREST

Political unrest continues globally with rioting in Ecuador, Peru, Spain, Iran, Iraq, Russia and Hong Kong.  South Korea launched a ballistic missile, this time from a submarine, as a prelude to new talks with the US.  Turkey who continues to move away from the west towards Russia, started bombing Kurdish forces in Syria as the US declared it was exiting Syria.  The US then imposed more economic sanctions against Turkey, causing them to pause their attack.

Ecuador Begins Cleanup After Nearly Two Weeks of Deadly Protests (10.14.19) WSJ https://www.wsj.com/articles/ecuador-begins-cleanup-after-nearly-two-weeks-of-deadly-protests-11571089214

Spain’s Catalan Separatist Leaders Found Guilty of Sedition (10.14.19) WSJ

https://www.wsj.com/articles/catalan-separatist-leaders-sentenced-for-2017-independence-referendum-11571043234

Iraq Acts to End Deadly Response to Protests (10.9.19) WSJ

https://www.wsj.com/articles/iraq-acts-to-end-deadly-response-to-protests-11570464203

Peruvian Crisis Divides Political Class (10.1.19) WSJ

https://www.wsj.com/articles/perus-armed-forces-back-president-vizcarra-amid-constitutional-crisis-11569937062

One Hong Kong District Becomes a Combat Zone (10.1.19) WSJ

https://www.wsj.com/articles/one-hong-kong-district-becomes-a-combat-zone-11569953252

Turkey Agrees to Pause Military Operations in Syria (10.17.19) WSJ

https://www.wsj.com/articles/pence-leads-u-s-efforts-to-halt-turkey-offensive-in-syria-11571308486?mod=hp_lead_pos1

Turkey Begins Offensive Against U.S. Ally in Syria (10.9.19) WSJ

https://www.wsj.com/articles/turkey-begins-offensive-in-syria-11570627632

U.S. Officials Are Worried About Turkish Foray Into Syria (10.13.19) WSJ

https://www.wsj.com/articles/u-s-officials-are-worried-about-turkey-foray-into-syria-11570103533

North Korea Says it Successfully Tested New Submarine-Launched Ballistic Missile (10.2.19) Reuters https://www.reuters.com/article/us-northkorea-missiles/north-korea-says-successfully-tested-new-submarine-launched-ballistic-missile-idUSKBN1WH2GS

 

EU

Polish and Hungarian election results were another win for nationalism in Europe.  Poland and Hungary have been at odds with the EU for the last two years.  In Austria, another nationalist, former Chancellor Sebastian Kurz, won his election, continuing the rejection of EU establishment candidates across Europe.  German, French and other elections are coming up in the near future and the EU globalists parties are not faring well.

Poland’s Ruling Nationalists Look Narrowly Poised to Return to Power for Another 4 Years (10.11.19) WSJ https://www.wsj.com/articles/polands-ruling-nationalists-eye-new-term-as-voting-begins-11570953095

Austrian Conservative Sebastian Kurz Wins Election (9.29.19) WSJ

https://www.wsj.com/articles/austria-s-conservative-sebastian-kurz-wins-election-with-majority-of-votes-11569771495

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