Five Things: Fed Fires Final Bullet; Market Shrugs
By Kevin Depew Mar 19, 2009 3:19 pm
Time to pass the collection plate.
The word came down like a sermon delivered at dawn from high up on a hotel balcony. Which is the kind of thing that when you hear it, depending on your state of mind, you can't quite be sure whether to seek out the collection plate or call the police. For reasons that aren't quite clear, we quickly chose to seek out the collection plate:
"US central bankers decided yesterday to purchase $300 billion of Treasury securities over the next 6 months, concentrated in the 2-10 year part of the curve, and to more than double mortgage-debt purchases to $1.45 trillion."
But so what? That's less than a third of this year’s Treasury borrowing requirement. And I suppose that's why the Federal Reserve's desperate decision to step into the open market and buy Treasuries was greeted on Thursday with a collective shrug. Pass the collection plate. Just another sad sermon from a shambling Linkhorn of a preacher.
"I ain't a playin' the whore to no man," preacher Fritz Linkhorn said in Nelson Algren's novel, A Walk on the Wild Side, even though the question itself had been posed by no one.
2. Hyperinflating?
So this desperate move by the Fed, the final bullet so to speak, this is clearly hyperinflationary, right?
Not by a long shot.
Here's the thing: When the Treasury issues debt, it takes liquidity out of the market as cash is swapped for Treasury bonds, bills and notes. When the Federal Reserve buys those Treasuries from the dealers, it is injecting liquidity back into the market. But, because the Fed's announcement will cover less than a third of Treasury issuance this year, all that is taking place is that the Fed is desperately trying to at least reduce the amount of liquidity the Treasury is sucking out of the market.
But wait - there are other, more complicating factors at work.
Household net worth has declined by roughly 20% since peaking in 2007, according to the Fed's own figures. Household "wealth" fell by $5.1 trillion in the fourth quarter alone. Combined with rapidly increasing household savings, the Fed, by moving to artificially suppress interest rates, is inadvertently quashing the very risk appetites it desperately needs to motivate in order to kickstart its own ongoing Ponzi scheme.
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2009-03-19 15:37:01
The Final Bullet
Toddo always says the final bullet would be inward and this is it.
The license to print money was something we used to say as a compliment to a thriving business. Now, the Fed has taken a whole new meaning to that statement.
The license to print money was something we used to say as a compliment to a thriving business. Now, the Fed has taken a whole new meaning to that statement.
2009-03-19 15:56:26
Kevin, I'm sure you'd stated this many times in many different forms, but just for clarification, what exactly would you want the Fed and Treasury to do to get us out of this mess. Specifics. And if you want to reference a previous article, please do.
Thanks.
Thanks.
2009-03-19 16:15:06
The Final Bullet
Final bullet directed inward? Not sure I understand the usage. Does it mean "directed at just the US?" or a specific section of the economy? or (shudder) "Hasta la vista, Baby."
2009-03-19 16:25:52
The Final Bullet
I would say that what happens here, will have an effect around the world. Why wouldn't we take our medicine instead of making the problem worse by doing the same thing we did to get there in the first place?
That was the last drink in the bar, and we drank it. We sold the car crash and bought the cancer. But the car crash still happened, and we still have the cancer.
That was the last drink in the bar, and we drank it. We sold the car crash and bought the cancer. But the car crash still happened, and we still have the cancer.
2009-03-19 16:44:55
Global leaders will look at the U.S. as arrogant for basically saying f you, we will devalue our currency to do what's best for us aka protectionism. This will spark a dominoe effect of us losing trading partners and our stronghold over the globe will slip.
Is it premature to believe the only way this will end is through war?
Is it premature to believe the only way this will end is through war?
2009-03-19 17:01:44
So...
Kevin,
So...you seem to be saying that the FEDS efforts to create inflation aren't going to work and that we will be in a deflation trap like Japan but worse because we are only now starting to save and pay down debt; whereas the Japanese already had savings when they deflated.
The FED is attempting Reflation by buying treasuries and mortgage backed securities, however, it is not nearly enough by a third. Interest rates will continue to go lower, people will save more, pay down debt, assets will continue to deflate, and the money supply will continue to contract. Consumption will be lower, return on ivestments and profits lower, which will lead to more pay cuts and/or layoffs, etc.
Regardless of a rise in prices of small multiplier effect or micro items such as energy, healthcare, taxes; the huge losses or deflation in large multiplier or macro items such as home equity, investment / retirement funds, net worth, risk of unemployment make people risk averse to spending on anything but inelastic necessities which do not increase the money supply or it's velocity despite their inflated prices.
Do I have that right?
Deflation eventually leads to a deeper recession or a depression, correct?
So...you seem to be saying that the FEDS efforts to create inflation aren't going to work and that we will be in a deflation trap like Japan but worse because we are only now starting to save and pay down debt; whereas the Japanese already had savings when they deflated.
The FED is attempting Reflation by buying treasuries and mortgage backed securities, however, it is not nearly enough by a third. Interest rates will continue to go lower, people will save more, pay down debt, assets will continue to deflate, and the money supply will continue to contract. Consumption will be lower, return on ivestments and profits lower, which will lead to more pay cuts and/or layoffs, etc.
Regardless of a rise in prices of small multiplier effect or micro items such as energy, healthcare, taxes; the huge losses or deflation in large multiplier or macro items such as home equity, investment / retirement funds, net worth, risk of unemployment make people risk averse to spending on anything but inelastic necessities which do not increase the money supply or it's velocity despite their inflated prices.
Do I have that right?
Deflation eventually leads to a deeper recession or a depression, correct?
2009-03-19 17:19:03
Link
Very interesting article and extensive analysis from December 2002 arguing that the 2001 crash did not indicate a 1930's decade because:
1. Protectionism was not occuring.
2. Deflation was not present.
3. Financial markets and credit facilities were healthy.
Ooops...I think these three are here now.
The article has information on European markets in the 20's, hyperinflation in Germany, and deflation during the depression.
http://www.gold-eagle.com/editorials_02/taylorb121402.html
1. Protectionism was not occuring.
2. Deflation was not present.
3. Financial markets and credit facilities were healthy.
Ooops...I think these three are here now.
The article has information on European markets in the 20's, hyperinflation in Germany, and deflation during the depression.
http://www.gold-eagle.com/editorials_02/taylorb121402.html
2009-03-19 17:26:25
The final bullet is ...
Buying debt of foreign governments.
If you read Mr. B's playbook, that is step #9.
We are at step #8, so that is troubling to say the least.
If the Fed announces plans to buy foreign debt, we really are at the last step.
If you read Mr. B's playbook, that is step #9.
We are at step #8, so that is troubling to say the least.
If the Fed announces plans to buy foreign debt, we really are at the last step.
2009-03-19 17:30:47
The Naked Gun
"I know what you're thinking. Did he fire six bullets, or just five? ...in all the excitement, I kinda lost track myself. There's just one question you got to ask yourself: do I feel lucky?"
* Ubiquitous TV / movie trailer narrator intones: "Helicopter Ben IS Harry Callahan, risen again in an All New episode of Scary Tactics!" * OK, I'm picturing it...
NOT. More like Lt. Frank Drebin, surely. Or that leprauchan that hawks Lucky Stars.
But was this "the final bullet" really?
Conventional wisdom opined ("everyone knew") that the Fed was already out of bullets. So when Son of Final Bullet (or was it Son of Sam) magically appeared yesterday and goosed the sellers, they jumped. "Everyone knows" that Hollywood - er, Washington - can always engineer another Friday the Thirteenth (or Wednesday the Eighteenth).
Except today, did the bears wake up and decide the goose was only a little duck, and that shotgun on the sidewalk was close enough to pick up after all?
Treasuries took off yesterday and yawned today, yet a new $300 Billion Buying Gorilla in the room should propel prices up up up. Financials and real estate dove back into Pandit Pond. But gold continued its ballistic trajectory. Does that momentum imply the implosion of equity markets? Surely, you're not saying the gold shorts are more spooked than others?
Avoid alliteration. And don't call me Shirley.
* Ubiquitous TV / movie trailer narrator intones: "Helicopter Ben IS Harry Callahan, risen again in an All New episode of Scary Tactics!" * OK, I'm picturing it...
NOT. More like Lt. Frank Drebin, surely. Or that leprauchan that hawks Lucky Stars.
But was this "the final bullet" really?
Conventional wisdom opined ("everyone knew") that the Fed was already out of bullets. So when Son of Final Bullet (or was it Son of Sam) magically appeared yesterday and goosed the sellers, they jumped. "Everyone knows" that Hollywood - er, Washington - can always engineer another Friday the Thirteenth (or Wednesday the Eighteenth).
Except today, did the bears wake up and decide the goose was only a little duck, and that shotgun on the sidewalk was close enough to pick up after all?
Treasuries took off yesterday and yawned today, yet a new $300 Billion Buying Gorilla in the room should propel prices up up up. Financials and real estate dove back into Pandit Pond. But gold continued its ballistic trajectory. Does that momentum imply the implosion of equity markets? Surely, you're not saying the gold shorts are more spooked than others?
Avoid alliteration. And don't call me Shirley.
2009-03-19 18:01:55
Link
Eric,
Thanks for the link (got it to work by removing the space within it - I assume you had to put the space in there to conform to MV posting restrictions on "word length"). An interesting piece, if a bit rambling.
To the three conditions you summarized I wonder whether a fourth is developing:
4. Political chaos.
The list of troubles elsewhere is long and growing, and a lot of "Tea Parties" are happening throughout our country.
Thanks for the link (got it to work by removing the space within it - I assume you had to put the space in there to conform to MV posting restrictions on "word length"). An interesting piece, if a bit rambling.
To the three conditions you summarized I wonder whether a fourth is developing:
4. Political chaos.
The list of troubles elsewhere is long and growing, and a lot of "Tea Parties" are happening throughout our country.
2009-03-19 18:36:25
"That's less than a third of this year's Treasury borrowing requirement"
Surely you don't think that this money laundering scheme will stop at a paltry 300 billion do you Kevin.
One day history will record this as a momentous day when we passed the point of no return in the destruction of our economy and our country (as we knew it)...even if the American people are totally oblivious to it.
This act of printing money to 'buy' debt is huge for what it portends. There are no longer any constraints on our road to ruin. The tracks have been greased and the train has left the station.
With the Fed now supporting the price of treasuries will the Chinese (and the rest of our creditors) take this opportunity to start to unload?
This has opened a Pandora's box so large that I don't think people truly comprehend where it could lead.
2009-03-19 20:26:50
How about doing no harm,reducing wasteful government spending, letting failing companies fail, and allowing the greatest debt bubble in history to gradually deflate? And by the way, it would be best not to create any protectionist policies or trade wars.
2009-03-19 20:28:56
"That's less than a third of this year's Treasury borrowing requirement"
Right. Please note that the Weimar hyperinflation took several years to develop.
2009-03-19 21:00:43
Bella cosa e' una battaglia!
I have been considering this too: The ultimate solution to the excess capacity that built up during the Depression was WWII But nowadays, who would make for a formidable enough enemy to the US? Besides China, that is... Wait a second!!!
2009-03-19 21:54:49
TD analysis
Pep,
What do your TD charts say about the current market status? Do we turn and go down to the 593 target or is there some upside bear trap left. I noticed Mish's EW analysis has him expecting more upside.Thanks in advance.
What do your TD charts say about the current market status? Do we turn and go down to the 593 target or is there some upside bear trap left. I noticed Mish's EW analysis has him expecting more upside.Thanks in advance.
2009-03-19 22:20:15
GD, act II
There it is: while we keep to argue at whether markets are following '29's pattern or not and the prospects of hyperinflation, we have already entered the second fase of the Depression: currency wars.
This is the first move in the race to debase currencies. Euro will be a laggard, until it's torn appart by members fearful to miss the devaluation train.
More and more is seems like the end of the world happened and nobody noticed.
This is the first move in the race to debase currencies. Euro will be a laggard, until it's torn appart by members fearful to miss the devaluation train.
More and more is seems like the end of the world happened and nobody noticed.
2009-03-19 23:48:38
TD analysis
Since 2007, we've gone through three complete Buy Setup/Countdown Sequences (daily timeframe), several more Buy Setups. We opened above yesterday's high today, so as long as we close Friday above 753.9 we'll have completed the first Sell Setup in SPX since October 2007. But it isn't (yet) a Setup with prospects for completing a Countdown. Matt Theal, in his MV Weather Report, included the following:
Here's what Professor Kevin Depew said on today's Buzz and Banter.
âJust wanted to walk through some important DeMark sell setups I'm seeing in the market. Today the SPX cash and futures are both on bar 8 of 9 potential sell setup. Because the high of bar 8 (today's bar) has exceeded the highs of 6 and 7, that is enough to perfect the 9 tomorrow. All we need for the 9 is for it to close above the close four bars earlier, which was 753.89 basis the cash.
âThe SPX sell setup is occurring below the TDST line, all the way up at 869.89, and this increases the probability that this move to form a sell setup has been counter-trend in nature.â
In other words, we may see the expected 1-4 bar (i.e. next week) reaction to a Perfected Setup (in this case, would be downward action) exacerbated by a resumption of the Ursa Major Trend.
Here's what Professor Kevin Depew said on today's Buzz and Banter.
âJust wanted to walk through some important DeMark sell setups I'm seeing in the market. Today the SPX cash and futures are both on bar 8 of 9 potential sell setup. Because the high of bar 8 (today's bar) has exceeded the highs of 6 and 7, that is enough to perfect the 9 tomorrow. All we need for the 9 is for it to close above the close four bars earlier, which was 753.89 basis the cash.
âThe SPX sell setup is occurring below the TDST line, all the way up at 869.89, and this increases the probability that this move to form a sell setup has been counter-trend in nature.â
In other words, we may see the expected 1-4 bar (i.e. next week) reaction to a Perfected Setup (in this case, would be downward action) exacerbated by a resumption of the Ursa Major Trend.
2009-03-20 00:16:28
Wages
We are already there, yrcw just renegotiated their contract (ratified in january). I don't understand why the Fed just doesn't get it. Maybe 5 Things should be required reading before Fed meetings, lol.
2009-03-20 06:53:44
TD analysis
Why don't you two go back to watching the world poker championships...............this cyber gambling you call "trading" is over. Reality is knocking.
2009-03-20 08:58:00
Hey tommi
Can't you read? I was asking Pep. Your moronic comment replies have been noted. From now on you will be ignored.Try Craig's list and clutter their bandwidth.
2009-03-20 09:48:52
empty toolbox
Your question assumes that the FED/Treasury have the ability to fix things. Your model is mechanistic- the car broke down, replace the broken part and motor on. What if the model is that of the alcoholic who arrives at the Dr. after 60 years of abuse- there is no cure. His death pains, however, may be eased by compassionate treatment.
2009-03-20 09:50:31
Final Bullet??
Hardly -- printing money is the easiest thing to do. Expect a lot more when the current round doesn't change anything. This is just the opening shot.
Dam the torpedoes - more paper, more ink!
Dam the torpedoes - more paper, more ink!
2009-03-20 10:11:37
Fight, and don't fight, the FED
Americans under age 80 simply have not formed the synapses that would enable them to intuitively understand Deflation. Like Geithner, and the investment greats who are now failing, Inflation is wired in. While Deflation now holds the upper hand, it makes sense to hold a small amount of highly leveraged "bets", like junior gold and silver shares, because the Govt. is capable of anything, including changing the rules.
2009-03-20 12:13:13
Are there any safe currencies? With this global downturn and all global economies so connected, it would seem all fiat currencies will lose their perceived value. Rush to hard assets? Possibly, but what happens during the hysteria of trying to accumulate those?
2009-03-20 13:06:52
Deflation, Inflation?
Pepe,
Excellent articel.
I think people are forgetting that deflation and inflation happen in waves (as you pointed out).
Right now peoples assets are falling quickly, and yet they are concerned about small areas of inflation (penny wise but pound foolish).
The key right now is to preserve ones wealth.
I am concerned that in the future there will be plenty of inflation. It could be the second edge of a double edge sword.
First we cut you by devaluation of your assets with deflation. Then when your wealth is decreased, then we bring around the other edge (in the future) and cut you again with inflation.
This is really a reduction in the standard of living due to the debt bubble. First the debt get destroyed and Mr Market re-values everything to fair value (or temporarily below). Then to pay for the governments new and improved debt, and the fact that we product few tangible goods of real value, the cost of everything will have to go up.
The solution is investment in future growth and new industries, not Willie-nilly spending like the "berries" want to do.
Excellent articel.
I think people are forgetting that deflation and inflation happen in waves (as you pointed out).
Right now peoples assets are falling quickly, and yet they are concerned about small areas of inflation (penny wise but pound foolish).
The key right now is to preserve ones wealth.
I am concerned that in the future there will be plenty of inflation. It could be the second edge of a double edge sword.
First we cut you by devaluation of your assets with deflation. Then when your wealth is decreased, then we bring around the other edge (in the future) and cut you again with inflation.
This is really a reduction in the standard of living due to the debt bubble. First the debt get destroyed and Mr Market re-values everything to fair value (or temporarily below). Then to pay for the governments new and improved debt, and the fact that we product few tangible goods of real value, the cost of everything will have to go up.
The solution is investment in future growth and new industries, not Willie-nilly spending like the "berries" want to do.
2009-03-20 13:11:10
Deflation, Inflation?
And not to mention the potential energy tax that oil could create in 2011,13,15?
We shall see which scientists have been correct in their forecasts.
As I mentioned the answer is to fire up the engine room and get as much growth going as possible in real tangible sectors, and create new industries such as in the green sector.
We shall see which scientists have been correct in their forecasts.
As I mentioned the answer is to fire up the engine room and get as much growth going as possible in real tangible sectors, and create new industries such as in the green sector.
2009-03-20 13:50:18
treasury debt
you write: 'Here's the thing: When the Treasury issues debt, it takes liquidity out of the market as cash is swapped for Treasury bonds, bills and notes. When the Federal Reserve buys those Treasuries from the dealers, it is injecting liquidity back into the market. But, because the Fed's announcement will cover less than a third of Treasury issuance this year, all that is taking place is that the Fed is desperately trying to at least reduce the amount of liquidity the Treasury is sucking out of the market.'
this conveniently leaves out the fact that the money isn't disappearing into a black hole at the treasury - it will spend the money quicker than you can say 'what happened?'.
therefore, the supply of money in the economy overall will indeed increase by the amount the Fed monetizes. in fact, as soon as the downturn in economic activity stabilizes, the fractionally reserved system's multiplier could then potentially transform $300 billion in money growth into $3 trillion in money growth.
money TMS is growing at a 10% annualized rate at present - there is ALREADY 10 % MORE money in the US economy than a year ago. the fact that prices are falling has nothing to do with whether the authorities are inflating or deflating the money supply - they are inflating it at an increasing rate at present.
this conveniently leaves out the fact that the money isn't disappearing into a black hole at the treasury - it will spend the money quicker than you can say 'what happened?'.
therefore, the supply of money in the economy overall will indeed increase by the amount the Fed monetizes. in fact, as soon as the downturn in economic activity stabilizes, the fractionally reserved system's multiplier could then potentially transform $300 billion in money growth into $3 trillion in money growth.
money TMS is growing at a 10% annualized rate at present - there is ALREADY 10 % MORE money in the US economy than a year ago. the fact that prices are falling has nothing to do with whether the authorities are inflating or deflating the money supply - they are inflating it at an increasing rate at present.
2009-03-20 13:54:02
De'Nile Is A River In Egypt
Pepe,
Friends of mine have lost six figures in their 401Ks. So what do they do, they go out and buy a new car. And they have small kids who someday will need to go to college.
The gardeners are still busy cutting their lawns, housekeepers are cleaning, etc. And these people are not rich.
I think not everyone has gotten the idea, that this time it will be different, yet.
Strange days indeed.
Friends of mine have lost six figures in their 401Ks. So what do they do, they go out and buy a new car. And they have small kids who someday will need to go to college.
The gardeners are still busy cutting their lawns, housekeepers are cleaning, etc. And these people are not rich.
I think not everyone has gotten the idea, that this time it will be different, yet.
Strange days indeed.
2009-03-20 15:33:44
Fed buying Bonds
When the Chinese said they were concerned about their Bond holdings, what I heard them say is that they were not going to buy any more. So now we are stuck with âUncle Bens Pay Day Loan and Cash Advance Emporiumâ Lending money to his favorite sucker.
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