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Repo Rumpus Foreshadows a Short Squeeze on the Dollar

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[I am leaving this essay up over the weekend to increase its exposure. RA] The Fed’s so-far $128 billion intervention in the repo market slipped off the Wall Street Journal‘s front page by evening, hardly a concern. Don’t be surprised if years from now the squeeze on short-term borrowers that caused this flurry of excitement is recalled as an early warning sign of the banking system’s coming collapse. On Tuesday, there simply weren’t enough dollars around to keep short-term loans rolling.  This implies that the dollar short-squeeze I first wrote about in Barron’s and the San Francisco Examiner more than two decades ago may have begun.

This time the Fed handled the problem without breaking a sweat. The next time, however, the cost might run into the trillions. Which is to say, more money than even the central bank can come up with on short notice. The banks won’t open the next day, nor will credit card transactions clear. There is no way that even a very prudent person can completely protect him or herself from the fallout, but it seems likely that those who hold Treasury paper and bullion as insurance will fare better than those who don’t.

A Curious Thing

Regarding the run on repos, it is curious that a dollar shortage developed in one specific market at a time when dollars remain almost inexhaustibly available in so many others. Mortgage money is not tight, nor are 0% teaser loans for any credit card holder who is not in prison. Big companies have no trouble borrowing billions of dollars to buy back their shares. But borrowers in the repo market? They are potentially like short sellers of a stock that has suddenly become unavailable.  Which is to say, they will be dead ducks on that inevitable day when even a slight whiff of panic wafts through the Battery.

Although these paper-shufflers probably don’t give much thought to the aggregate size of the borrowing they do, it amounts to something like a quadrillion dollars. That is the notional size of the derivatives market, and every dollar of it is tied in some way to all the other dollars. But why even worry about such things? To calm everyone’s nerves if there’s a run on bank reserves, the Fed can simply sacrifice Goldman Sachs or some other financial biggie the way it did Lehman on September 15 (!), 2008.

Bullion Will Move

It’s hard to imagine that gold will sit still when this drama unfolds. Usually a rising dollar weighs bullion down. But notice that the two have been ascending in tandem since June. Is this very unusual dynamic foreshadowing a crisis ahead?  Regardless, gold looks like bargain-priced insurance at current levels. It actually went down Wednesday as Wall Street smugly contemplated a rescue seemingly well done by the Federal Reserve. We kid ourselves to think this will be the last of it.

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$AAPL – Apple Computer (Last:220.95)

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Judging from the way AAPL gapped through the 217.63 ‘hidden’ resistance shown in the chart, the stock seems all but certain to achieve a 242.48 rally target derived from the same pattern. This implies the broad averages are about to move sharply higher as well and that any ideas we might have harbored about stockpiling put options should be put on hold, at least for the time being.  The rally would equate to a gain of about 8.5% in the value of Apple shares. If the Dow were to move up only half as strongly, it would be sitting at 28,290, exactly 1153 points above current levels.

The bullish technical picture is at odds with data suggesting the global economy is slipping into a recession or worse. Housing and autos have peaked in the U.S., and so, probably, have corporate earnings. To make matters worse, share buybacks have tapered off as surplus funds repatriated to the U.S. under Trump’s favorable tax rules have dried up.  It is natural to want to load up on puts under the circumstances. However, given Apple’s bellwether status, the chart is telling stock-market bears to be patient.

Hold Off on Bullion

And gold bulls as well. A resurgent bull market is certain to put bullion and mining shares under pressure, interrupting the powerful rally begun late in May. They have held up well so far and on Tuesday even gained some ground with the Dow up 227 points. This is a very bullish sign, and it provide reason to think the precious metals sector will hang tough if there’s a blowoff coming in the stock market. However, if you plan to buy bullion aggressively, you may get better prices by waiting for 2-3 weeks. ______ UPDATE (Sep 17, 6:17 p.m.):  My immediate outlook is still quite bullish, but we are monitoring the stock’s vital signs closely because of the drubbing it took last week. This chart shows a rally pattern smaller than the one projecting to 242.48, with a feeble uptrend that has triggered a theoretical buy signal at x=220.33 and minimum implied upside to p=223.65. If AAPL is going to get to 242.48, or even to the 230.27 target of the smaller pattern, it will need to push past 223.65 with little strain. _______ UPDATE (Sep 19, 5:34 p.m.): No surprise here: The rally reversed from 223.76, just 11 cents from the Hidden Pivot resistance I’d noted above. If as expected AAPL blows past, look for a further run-up to at least 230.27. You can short there aggressively if you’ve caught a profitable piece of the ride north.

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$TNX.X – Ten-Year Note Rate (Last:1.78%)

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Interest rates on the Ten-Year Note still have a long way to fall if they are going to achieve the 0.73% target shown in the chart (see inset).  Although it is mildly bullish that they have bounced from well above the 1.30% Hidden Pivot target given here earlier, the rally would have to hit 2.18% to turn the weekly chart bullish. For now, though, we’ll need to respect the uptrend because it has in fact turned the daily chart bullish via an impulse leg surpassing two prior peaks recorded last month. If without pausing for breath it exceeds a third at 1.79% that occurred a month ago, that would imply the upward skew in rates is about to get legs, presumably with a move to at least 2%. We’ll spectate for now, but our goal is to get short when it looks like it’s about to sputter out. _______ UPDATE (Sep 12, 8:40 p.m.): This morning’s trampoline bounce sent rates on the 10-year into a steep climb, surpassing the 1.79% benchmark noted above and generating a quite-bullish impulse leg on the daily chart. We’ll need to see a correction before we try to determine whether this rally is likely to get legs, but it is strong enough already to suggest that the 1.43% low will endure for a while. _______ UPDATE Sep 18, 11:15 p.m.): A rally that touched this green line has signaled more upside over the near term to at least p=1.86% and possibly as high as 1.98%.

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$GDX – Gold Miners ETF (Last:27.59)

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DXY – NYBOT Dollar Index (Last:98.10)

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