Well, for those waiting for a “tell” of stress in monetary plumbing issues, there is nothing like a blink by major banks. Like “primary dealers” not wanting to fund each other’s short term needs. 

This actually happened last week and continues through this week, so far. It’s a difficult story to simplify so please excuse us for having a go.

The shortest term lending rates among this privileged group is an overnight rate, usually it’s about pledging some quality “collateral” to keep order, allowing all to efficiently settle their current short term commitments. 

The duration is so short and the collateral of such “high quality” (High Quality Paper!) that the rate, generally, remains in line with the US Fed funds rate, about 2%ish right now.

Last week, these major “players” decided they weren’t going to play, or lend each other anything, at 3%, 4% and at one stage up to 10%, until The New York Fed came in and saved the day, again, then the next day and so on. The first day alone was USD 52BILLION!!!! More than a week ago. 

Just like that, QE …..IT’S BACK!!

We thought, wow, the last time we saw this type of market disruption and intervention was……… 2008!

So what do they (primary dealers) know now that the market doesn’t? We’d guess quite a bit more, as usual.

Lets not forget, as its been written many times in these musings, most major participants are aware of such goings on way before a central bank tells you everything is ok, just before hell freezes over.

This is how it looks.

And longer term.

Anyway, as usual over the last 10 years, it’s probably nothing, again.

Nothing to see here, move on.

Then there’s this:

Even with the overvaluation in most share markets, a looming global recession and issues in critical financial “plumbing”, should we now prepare for the rocket upward? 

There may even be two. 

A Fed move back to 0% rates (the above rocket) and a China trade deal, at the right time, is Trump’s only chance of re-election, in our opinion.

Why? Economics (the price of stuff and earning enough to pay for it) still matter to people, no matter how you frame it!  We’ll soon discover this in Europe, people will react when they realise they’ve been sold a continuingly deteriorating rusty clunker, dressed up as a Benz, that costs a lot of money to run and they’re not going to be happy.

The solution? Same as in the US, promise more free shit unless war intervenes and then all bets are off. 

At this point war looks unlikely as any potential adversary of the US knows all they need to do now is just sit tight.

From a portfolio management perspective, the China deal and US interest rates joining the negative club are the best hopes for the bulls. It could be a decent blow off if it lines up.

For the more cautious, take note of afore-mentioned events of the last week. Take note also of the time it took for capitulation in late 2008 from the first signs in 2007. For some astute analysts, the first signs this time round were back in May 2018.

Anyway, here we are, investors still chasing yield at any price and Australian Industry Funds making more noise for participation in long term infrastructure spends for the same end. No surer way to lock up investor capital.

The above mentioned rush for quality collateral could also be a reason for Gold comfortably sitting over AUD2200 and USD1500.

It’s amazing that the term “Tier one collateral” now includes gold, under new Basel 3 rules, according to the BIS (Bank of International Settlements).

The amazing part is, no one seems to care.

What might happen if investors actually recognised the value of holding more than 1% (it’s now much less) of their assets in physical precious metals? What about 10%?

What might happen? Chaos, is what. Absolute price chaos, a call on derivative players, recognition of who is swimming naked and, eventually, true price discovery.

For those that feel AUD2200 per ounce is too much to cough up for useless yellow metal, there is still silver!! 

Despite its recent run, it’s still unbelievable to us that it trades under USD20 per ounce… unless you understand the power of paper markets!! 

Silver 1 year:

Silver, a little longer out:

And for those waiting for confirmation of what is happening, nothing sums the Financial World and those reporting on it to mainstream punters better than this below.

With October looming large, how prophetic might this below seem?