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FOMC Questions and Answers


Bottom line, the Fed's move is more bullish for bullion than it is for stocks.

Questions. And Answers...

1) Are FOMC members a bunch of masochists, who consciously plotted and carried out a vicious one-two punch with a harmless jab of disappointment yesterday followed by a major monetary knock-out blow today?


2) Or did something come up within the reaction to yesterday's less than aggressive cut in the Fed Funds Rate that caused the Fed to take a more serious shot?

Could be.

3) Does the Fed Funds rate even matter anymore?

Yes and no.

4) Would it matter if the Fed Funds rate went to zero?

Perhaps not.

5) Is the Fed being less than aggressive with Funds because they feel a need to keep as many monetary arrows in their quiver as possible, with the belief that it has more shots to be fired in 2008?


6) Is $44 bln in term liquidity enough to fill the hole blown into the financial system by the recent decline in the price of a wide range of credit derivatives, a hole that is already into the hundreds of billions, with trillions at risk if the situation were to tighten further?

No, not even close.

7) Will a dime of this money be ever end up being lent by U.S. commercial banks?

Likely, no.

8) Or is the Fed's announcement of a 6-month liquidity provision linked to the huge amount of commercial paper, which dwarfs the $44 bln add maturing matures in the first five months of next year?

Likely, yes.

9) Does the participation of the ECB and SNB and their currency swap liquidity indicate implicit support for the U.S. Dollar?

Not really.

10) Can the Fed be successful in fixing LIBOR, and re-establishing a relationship in the spread to Fed Funds?

Probably not, and if so, only for a very short time period.

11) Is the Fed capable of making term provisions permanent?

Of course, the Fed is capable of anything.

12) If so, would that work?

Of course, not.

13) And last, but far from least, we ask: is the Fed continuing to push the secular trend envelope in terms of becoming a more aggressive buyer of last resort, and take yet another step in the decades-long march towards ultimately being forced to detonate the Monetary Armageddon scenario, and use its final weapon to defend against a debt liquidation / credit contraction event? (See my book Gold Trading Boot Camp for more details on the Monetary Armageddon thought process, to be found at

And finally, last, but far from least - absolutely!

In terms of the number of questions I am asking today as markets gyrate wildly in response to the actions enacted by the Fed and the U.S. Treasury over the last week - that is just the tip of the iceberg.

In this Special Focus I make a few preliminary observations, given the potentially significant and dramatic swings we have seen this morning in the global capital markets, particularly as it applies to fixed-income and the commodities sector. I shine the spotlight on evidence presented by:

  • 1-Month LIBOR and LIBOR-Eurodollar spreads
  • The Kiwi Dollar against both the USD and Japanese Yen
  • Gold and Gold relative to the U.S. equity market
  • The Commodity Research Bureau Index
  • The spread between the 2-Year Treasury Note yield and the 3-Month Eurodollar Deposit Rate.

First I note LIBOR, which has reversed hard and is back down towards 5%, as evidenced in the chart on displayed below, having dumped 20 basis points from new mini-move highs near 5.25% yesterday.

However, the med-term 50-Day exponential moving average remains tilted to the upside, yield-wise, suggesting that it will require a close below 5% to confirm that a short-term fix is in place.

Click here to enlarge.

Perhaps more telling is the action in the end-1Q (March contract) spread between the 3-Month Eurodollar Deposit Rate and the 1-Month LIBOR, as evidenced in the chart below. I spotlight the fact that while the spread has narrowed today, it is only back down to the highs set in August, and thus remains historically wide - indicative of continued liquidity distress.

Indeed, I wonder, might the complete blow out to a new high at a level twice that seen in August have been cause for today's Fed move?

Click here to enlarge.

I observe the renewed levitation in the Kiwi Dollar, suggesting that in terms of pushing the envelope towards Monetary Armageddon on the longest term basis, the commodity sector will be the ultimate beneficiary of the secular message being delivered by the Fed.

Moreover, the momentum indicators exhibited in the chart have realigned towards the bullish side in full support of todays upside technical breakout.

Click here to enlarge.

Further, I observe the upside breakout in the all-important Kiwi-Yen relationship. The downtrend line that has defined the yen carry contraction decline since the pre-August peak has been violated in concert with a return to positive territory in medium-term momentum.

Click here to enlarge.

More acutely the bottom line reads bullish for bullion, amid the continued march towards Monetary Armageddon, and intensified monetary (and fiscal) debasement of all paper assets. Evidence the simple monthly closing price plot of spot Gold, which is poised to finish December (and the year) at a new all-time record closing high, above $800 per ounce.

In fact, after dumping by $20 in disgust at yesterday's lame Fed policy statement, Gold has soared to a new high today, on the back of the end-year liquidity provision, and more so, the macro-secular message delivered via this morning's coordinated global central bank move.

Click here to enlarge.

Indeed, relative to paper assets defined by the U.S. equity market specifically, despite being at a record nominal new price high, Gold remains cheap, compared to the S&P 500 Index, as evidenced in the long-term monthly overlay chart shown below.

Bottom line, the Fed's move is more bullish for bullion than it is for stocks.

Click here to enlarge.

Amid strength in Gold relative to stocks, and the Kiwi Dollar relative to the Japanese Yen, on the back of a coordinated global central bank liquidity provision we should not be one bit surprised to find the entire commodities complex at a new all-time high as evidenced in the monthly chart of the CRB Index, on display below.

Click here to enlarge.

And finally, in full support of all our macro-market thoughts, I note that despite the nominal rise in the US 2-Year Treasury Note yield, the spread to the 3-Month Eurodollar Deposit Rate remains at an historic low and is poised to finish the week all the closer to a very wide 200 basis points, as seen in the weekly chart below.

Click here to enlarge.

The chart above indicates two things:

First, the rise in Treasury yields and Deposit Rates was broad, coming across the maturity spectrum, and was not centered in the short-end of the U.S. Yield Curve, meaning it was corrective in nature, and does not imply a full-blown trend reversal.

Second, expectations involved in pricing future Fed rate cuts have not changed.

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