Limit Down

March 9, 2020 Cincinnatus

Oil, Stocks, and Interest Rates are all lower.

Oil opened lower after Saudi Arabia flooded the markets and are promising to increase production.[1][2] As of 2:30 PM Central Time, West Texas International (WTI) Oil is down 25% to $30.94 and Brent is down 24% to $34.25.[3][4] This follows the crown prince of Saudi Arabia, Mohammed bin Salman, arresting members of the Saudi ruling class and having a dispute with Russia over manipulating oil prices higher over the weekend.[5][6] This hurts the US oil shale industry which needs oil to cost $50 to remain profitable and pay off their debts.[7]

Stocks opened up and were stopped out down more than 7% after futures were halted overnight at a loss of 5%. Stocks can be halted for trading by regulators if they decide that the price is declining too fast: 15 minutes for 7%, 13%, and 20% declines. They can be halted at 5% in overnight trading.[8][9]

Some investors may be selling their good stocks to make up for the losses from their bad stock and oil holdings or from fear of further losses.

Surprise! Surprise! The Fed has decided to meet declining stock and oil prices by artificially increasing demand by printing money and lowering interest rates.

The Federal Reserve Bank of New York’s Open Market Trading Desk announced that they would do $150 billion daily repo operations because, “these adjustments are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures[…]”[10][11]

Continuing, they state,

“Beginning with today’s operation and through March 12, 2020, the Desk will increase the amount offered in daily overnight repo operations from at least $100 billion to at least $150 billion. In addition, the Desk will increase the amount offered in the two-week term repo operations on Tuesday, March 10, 2020 and Thursday, March 12, 2020 from at least $20 billion to at least $45 billion.”

Only $75 billion was the original amount offered to stave off the emerging crisis in September. They were originally supposed to end on October 8th, 2019.[12]

Interest rates on US treasuries are lower again as of 1 PM Central time:

5 year: .463%[13]

10 year: .5%[14] low of .318%[15]

30 year: .895%[16]

With the quarintines from the coronavirus halting production[17] and trade (less oil demand) and monetary inflation being the Fed’s only tool, price inflation is guaranteed somewhere; because, either the Fed prints and destroys the currency or they watch stocks collapse.

“I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.” -Jerome Powell, Chairman of the Federal Reserve, then member of the Board of Governors, Oct 2012 Federal Open Market Committee Meeting.

Even if the Fed re-inflates stocks to avoid a bust, the dollar, by which stocks are measured, may decline in value against gold.

“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” -Ludwig von Mises, Human Action, pg. 570.

Gold broke the $1,700 price level in overnight and early morning trading and ended the day up $7 at $1,680. There is never a limit down so long as there is a physical dealer, coin shop, or pawn store in your area. The upside is only limited if the Fed raises rates and stops printing money.

US Stocks ended the day down:

Dow Jones: -2,014 (7.79%)

S&P 500: -225.81 (-7.6%)

Nasdaq: -624.94 (-7.29%)

European stocks crashed the most since Lehman Brothers’ bankruptcy.[18]

[1] https://www.npr.org/2020/03/08/813439501/saudi-arabia-stuns-world-with-massive-discount-in-oil-sold-to-asia-europe-and-u-

[2] https://www.zerohedge.com/commodities/saudi-arabia-starts-all-out-oil-war-destroys-opec-flooding-market-slashing-oil-prices

[3] https://www.cnbc.com/quotes/?symbol=@CL.1

[4] https://www.cnbc.com/quotes/?symbol=@LCO.1

[5]https://www.zerohedge.com/geopolitical/mbs-widens-purge-dozens-saudi-royals-army-officials-swept-after-powerful-princes

[6] https://www.zerohedge.com/energy/putin-dumps-mbs-breaks-opec-oil-alliance-initiates-war-us-shale

[7] https://www.dallasfed.org/research/economics/2019/0521