Fed Watch Thread

[flow5]

Ok this is it. Someone (preferably of the less than multi-millionaire Wall Street marionette variety) in Congress has to look into the blatant bond churn-semen-flip (that was happening behind the scenes a few months ago and is now so blatantly in your face it is a slap to all US taxpayers) which has the Fed paying Primary Dealers billions in commissions for a trade that has absolutely no value added. And while we have been complaining about this for months, today just takes the cake. Below we present the entire list of permitted issues to be monetized by Frosty-Sack. Note that there were 29 CUSIP eligible for buybacks. What happened - the Primary Dealers flipped virtually the entire operation in the form of the just auctioned off 3 Year PQ7! This is half the entire Primary Dealer allocation in the bond auction that was completed on January 11 (whose technical original issue date was yesterday). One more 3 Year POMO, the next of which is on January 31, in which PDs flip a like amount, and the Fed will have monetized the entire auction, but in the process having paid at least a few hundred million of taxpayer capital to the PDs for absolutely no value added! This is a daylight robbery and has to stop.

ZEROHEDGE

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Capital Controls Roil Latin America Bond Markets by Evoking '80s Inflation
By Ye Xie and Matthew Bristow - Jan 18, 2011 8:00 PM CT

In Colombia, where the peso has gained 10 percent against the dollar since the end of 2009, the central bank is buying at least $20 million a day in the spot market. Photographer: Scott Dalton/Bloomberg
Latin American nations from Brazil to Peru are returning to currency and foreign investment controls that marked the 1980s era of hyperinflation.

Since the start of the year, policy makers across the region have increased dollar purchases to record levels, raised reserve requirements and curbed banks’ ability to bet against the dollar in a bid to stem a 29 percent rally in Latin American currencies since March 2009. Controls may stiffen, and other nations could join the “market-unfriendly” drive, said Alberto Ramos, an economist at Goldman Sachs Group Inc.

“In all these countries, if it continues, there will be the temptation to escalate the level of restrictions,” said Ramos, a former economist at the International Monetary Fund, in a phone interview from New York. “We cannot throw into the dustbin four decades of good economic research. Capital controls have serious economic costs.”

Local-currency bonds in Latin America lost 0.5 percent in dollar terms in the past three months, the first decline for the period since October 2008 in the aftermath of the collapse of Lehman Brothers Holdings Inc., according to JPMorgan Chase & Co.’s GBI-EM Global Diversified Index. Yields on Brazilian government notes due in 2017 jumped 111 basis points since the middle of October to 12.55 percent. The higher rates push up the country’s cost to roll over debt that equals 58 percent of gross domestic product, compared with 34 percent in South Korea.

Hyperinflation Era

Latin America’s economic turnaround that caused net private inflows to quadruple since 2003 and tamed price increases to record lows comes two decades after defaults spread from Mexico to Venezuela and inflation in Brazil climbed to as high as 6,821 percent in 1990. While governments are taking steps to limit spending, price rises and borrowing costs are picking up and could accelerate should currencies weaken, jeopardizing the nations’ progress, according to Bank of America Corp.

“Central banks view the level of exchange rates as the priority rather than using them to help slow inflation,” said David Beker, chief Latin America strategist at Bank of America. “Once you start targeting multiple objectives, the odds for policy mistakes increase.”

Developing nations outside of Latin America, from Thailand to Turkey, are also taking steps to slow currency appreciation, as near-zero interest rates in the U.S. and Europe, and the Federal Reserve’s buying of $600 billion in U.S. Treasuries attract inflows to higher-yielding assets.

Inflows Surge

Action to prevent asset bubbles and protect competitiveness has been concentrated in Latin America, where net private inflows surged to $203.4 billion last year from $57.5 billion in 2003, according to the World Bank. The region’s resilience, reflected in 2010 growth of 5.7 percent that was twice of the U.S., means inflows are likely to keep pressuring its currencies, the Washington-based lender said Jan. 12.

Latin American currencies rose 0.3 percent this year, extending its gain since March 2009 to 29 percent, according to a JPMorgan and Bloomberg index tracking six major currencies in the region.

Chile, which hadn’t bought dollars in the foreign-exchange market since 2008, announced Jan. 3 it would purchase a record $12 billion, equal to 43 percent of the country’s currency reserves.

In Colombia, where the peso has gained 10 percent against the dollar since the end of 2009, the central bank is buying at least $20 million a day in the spot market. Peru purchased $9 billion last year, the second-biggest amount ever, as the sol rose to a two-year high in October. The government also increased reserve requirements to lift the cost of short-term, overseas borrowing by local banks.

Brazil Real

In Brazil, where a 38 percent rally in the real since the end of 2008 caused the trade deficit in manufactured goods to double to $71 billion in 2010 from the previous year, the government and central bank have been most aggressive in taking measures to curb the advance.

Finance Minister Guido Mantega tripled to 6 percent in October a tax on foreign inflows. After the real strengthened to a two-year high against the dollar on Jan. 3, the central bank set reserve requirements to curb short selling of the dollar by local banks and sold $1 billion of reverse currency swaps on Jan. 13 in a bid to weaken the real. The government also authorized its sovereign wealth fund to place bets in the currency futures market.

The real, which has lost 0.8 percent this year, strengthened 0.4 percent to 1.6744 per U.S. dollar yesterday.

‘Cat and Mouse’

“In these games of cat and mouse, I think policy makers will probably lose,” said Simon Johnson, a professor of finance at Massachusetts Institute of Technology in Cambridge who was chief economist at the IMF from 2007 to 2008. “There is too much unregulated capital in the world, particularly in developed countries. These guys will find ways around various restrictions.”

Nouriel Roubini, the New York University economist who predicted the 2008 global financial crisis, said “intelligent intervention” is preferable to letting currencies gain.

“If you don’t do anything, your currency can appreciate more than is justified by the economic fundamentals,” Roubini said in a phone interview from New York on Jan. 7. “Excessive appreciation is a danger that can lead to loss of competitiveness.”

Latin America’s progress in lowering debt levels has given the region the credibility to implement the appreciation- fighting policies, said Simon Nocera, co-founder of San Francisco-based hedge fund Lumen Advisors LLC.

High Costs

Policies to stem currency gains are costly. Central bank dollar purchases helped push foreign reserves in six major Latin America nations up 16.5 percent last year to a record $527 billion as Brazil bought $41.4 billion, the most since at least 2008, according to data compiled by Bloomberg.

While the reserves helped cushion the capital flight during the global financial crisis, managing its $290 billion stockpile costs Brazil $20 billion a year since the country must issue debt to pay for the dollars it buys, according to Tendencias, a Sao Paulo-based economic research company.

“The cost of intervention should not be downplayed,” said Bank of America’s Beker. “It’s very expensive.”

Unlike their Asian peers, Latin American nations rely more on foreign investment to finance current account deficits, making their economies vulnerable to restrictions that could limit inflows, said Pierre Yves Bareau, who helps oversee $11 billion in emerging-market assets at JPMorgan Chase & Co. in London.

“There’s always a danger that by having capital controls, you can force some good capital to stay out of the country,” said Bareau, who favors currencies in Asia and Eastern Europe over the real and Chilean peso.

Interest Rates

Brazil’s current account shortfall will widen to 3.2 percent of GDP this year, the most since 2001, according to a Bloomberg survey.

The fight against appreciating currencies that Brazil’s Mantega dubbed a “currency war” last year may lead Latin American countries to resist raising interest rates, said Neil Shearing, an emerging markets analyst at Capital Economics in London. Chile unexpectedly left its benchmark interest rate unchanged last week.

While Asian countries including South Korea may allow their currencies to appreciate more to contain inflation, in Latin America “there appears to be a growing focus on shoring up competitiveness,” analysts including New York-based Michael Gavin and Roberto Melzi at Barclays Capital wrote in a note to clients on Jan. 13.

“There is a risk that central banks will allow themselves to become distracted or constrained in their core responsibility to control inflation,” the analysts wrote.

Accelerating Inflation

Inflation in Brazil reached a six-year high of 5.91 percent last year, up from a record low of 1.7 percent in 1998, and is forecast to remain above the government’s 4.5 percent target until 2012.

In Chile, one-year inflation expectations have soared to 4.3 percent, a five-month high and compared with almost zero in December 2009, since the dollar-buying plan was announced. The peso declined 4.5 percent this year, the most among 25 emerging market currencies tracked by Bloomberg.

Rather than taking more measures to limit appreciation, Brazil needs to reduce spending to allow the central bank to cut its 10.75 percent benchmark rate, the second-highest in the Group of 20 nations after Argentina’s, said Lumen Advisors’s Nocera. Chile, the world’s biggest producer of copper, should diversify its economy away from exports of the metal, he said.

“Sooner or later you pay the price” for stepped-up controls, said Nocera, a former IMF economist and fund manager with Soros Fund Management LLC. “You pay the price of lower growth or higher inflation.”

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ZEROhedge:

Creative Accounting" Makes Fed Insolvency Impossible
Submitted by Tyler Durden on 01/20/2011 09:34 -0500

Bank of AmericaFederal ReserveFederal Reserve BankFinancial Accounting Standards BoardSystem Open Market Account


To all who thought that the FASB gives leeway only to banks when fudging their numbers, and boosting their equity capital in ways previously unheard of, we have a surprise. The latest entrant in the "accounting gimmickry" club is none other than the Fed. And since the Fed is not auditable by anyone, it gives itself permission to change and bend the rules in any way it desires. Following on recent speculation that the Fed could in theory have a equity capital deficiency due to its massive asset book, and its tiny equity buffer, both discussed many times previously on Zero Hedge (here and here), the Fed recently announced as part of its January 6 H.4.1 release "an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively prevents it from facing a negative capital position even in the event that it incurs substantial losses."

Here is how Bank of America's Priya Misra explains this curious, and most certainly politically-motivated development: "The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.”

As a result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy."

And there you have it: instead of reducing the left side of the balance sheet upon the incurrence of losses, the Fed has decided to fudge the right side. And presto. No more possibility of insolvency ever again. Which only means that the Fed's now ridiculous DV01 of just under $2 billion will in no way prevent the world's biggest hedge fund from taking proactive steps to actually mitigate rate risk, and in fact will likely encourage it to gamble even more with taxpayer capital.

More from Bank of America:

Accounting change prevents a Fed “insolvency” scenario

Mounting concerns about Fed “insolvency” post QE2

The Fed announced an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively prevents it from facing a negative capital position even in the event that it incurs substantial losses. The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement of QE2 about the possibility of Fed “insolvency” in a scenario where interest rates rise significantly. These concerns have prompted some observers to suggest that the Fed may be unable to tighten policy sufficiently once the economy recovers, since doing so could result in a negative capital situation and the need for a Treasury “recapitalization,” thereby compromising the Fed’s political independence.

Fed required to remit profits to Treasury (not build capital)

Since 1947, the Board of Governors has required that the Reserve Banks remit nearly all net earnings to Treasury. Remittances are roughly equal to income from loans and securities holdings less operating expenses, interest paid on depository institutions’ reserve balances, dividends paid to member banks, and any amount necessary to top up the Fed’s capital.

Fed remittances have surged since late 2008, reflecting its aggressive balance sheet expansion in the context of nearzero term interest rates (Chart 1). The Fed could potentially incur losses, however, if short term rates rose such that the interest paid on bank reserves exceeded the interest income of the System Open Market Account, or SOMA portfolio.

Similarly, the Fed could face capital losses if it were to sell securities below their original purchase price (Chart 2). Note that the SOMA portfolio is not marked to market, but is reported on a par-value basis each week, so higher yields would only impact Fed earnings in the context of asset sales.

Accounting change prevents negative Fed capital situation

The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy. There will be no change to the current practice of remitting profits to the Treasury on a weekly basis, but the Fed will postpone any remittances if this line item becomes negative. In effect, any losses will be offset against future Fed remittances to the Treasury. In our view, this policy appears to be a clever solution to the Fed’s inability to provision for potential future losses by retaining earnings today. We expect it to mitigate – though not fully allay – concerns about Fed solvency.

And the full notification in the January 6 H.4.1 release:

The Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," has been modified to reflect an accounting policy change that will result in a more transparent presentation of each Federal Reserve Bank's capital accounts and distribution of residual earnings to the U.S. Treasury. Although the accounting policy change does not affect the amount of residual earnings that the Federal Reserve Banks distribute to the U.S. Treasury, it may affect the timing of the distributions. Consistent with long-standing policy of the Board of Governors, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed weekly to the U.S. Treasury. The distribution of residual earnings to the U.S. Treasury is made in accordance with the Board of Governor's authority to levy an interest charge on the Federal Reserve Banks based on the amount of each Federal Reserve Bank's outstanding Federal Reserve notes.

Effective January 1, 2011, as a result of the accounting policy change, on a daily basis each Federal Reserve Bank will adjust the balance in its surplus account to equate surplus with capital paid-in and, in addition, will adjust its liability for the distribution of residual earnings to the U.S. Treasury. Previously these adjustments were made only at year-end. Adjusting the surplus account balance and the liability for the distribution of residual earnings to the U.S. Treasury is consistent with the existing requirement for daily accrual of many other items that appear in the Board's H.4.1 statistical release. The liability for the distribution of residual earnings to the U.S. Treasury will be reported as "Interest on Federal Reserve notes due to U.S. Treasury" on table 10. Previously, the amount necessary to equate surplus with capital paid-in and the amount of the liability for the distribution of residual earnings to the U.S. Treasury were included in "Other capital accounts" in table 9 and in "Other capital" in table 10

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empirestatefx.com/featured/qe2-working-the-wrong-way-has-the-fed-redefined-the-mission/

What has gone wrong for Bernanke is the rise in rates. The 10 yr is approaching a record spread with the 2 yr: 273 bp where the record is 283 reached in Feb 2010.

Normally this spread is goodness for banks, as they can borrow short and lend long in the spread; but most of their mojo would come from mortgage lending, and new mortgage applications are “plumbing” 15 year lows.

So instead of profiting, they are seeing the value of homes drop, pressuring the asset values for their carried mortgage base.

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Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

01/03/11 0.11 0.15 0.19 0.29 0.61 1.03 2.02 2.74 3.36 4.18 4.39

01/20/11 0.15 0.16 0.19 0.27 0.65 1.07 2.06 2.81 3.47 4.36 4.60

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Gasoline at over $3.00 a gallon. Food industry price hikes. & the resulting inflation expectations in the financial markets. QE2 raised
prices, it did not generate new job growth. It was the wrong policy.

[vl]

In addition Flow... the mainstream consumer is literally exhausted. No amount of enticement will coerce someone in need of sleep and a moment's peace. That GAP in remediation without a real margin in rates will put the onus on the remaining servicing, which is at feasible lows if not below the cost to actually perform the servicing.
We've been reviving deflated big businesses for quite a while now. No sales, no pulse but look at the prices and who has the shares outstanding. No one WORTH possessing them relative to what it takes to recover an economy. It would be one thing to be sitting on tons of deflated shares of stocks and the choice to liquidate at a loss (freeing shares) or buying others to offset losses (moving shares). Instead... there is NO ACTIVITY beyond the major i-houses and banks.

Nothing's going to break here until the major houses do. Time wounds all heels, but I don't see the nation holding out until all the heels kick the bucket.

[flow5]

Agreed. Price pressures are being suppressed by manufacturers. Irrespective of our public & private debt burden, food & fuel costs will continue to become larger components of the CPI. A falling exchange rate is counterproductive, just like most current federal expenditures. It's a one-way collision course. Stocks will fall after QE2 is over.

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As legislators grapple with how to keep banks from engaging in risky, speculative behaviors, former Federal Reserve chairman Paul Volcker's views are clear: crack down on long-term investments.

The eponymous "Volcker Rule" proposes to prohibit banks from engaging in proprietary trading that is not on their clients' behalf, as well as limiting banks' investments in hedge funds and private equity. Supporters of the rule believe that such behavior helped contribute to the recent financial meltdown and that such restrictions will prevent a similar crisis.

Though specific legislation for the Volcker Rule is meant to be set by mid-September, ambiguity remains about how exactly the rule will be executed. A 79-page study released Tuesday by the Financial Stability Oversight Council, created as part of the Dodd-Frank Act, analyzed the ways in which the Volcker Rule might be applied.

Volcker himself told the Financial Times that the Council had made "a good honest effort" in adapting his rule, though his praise was intermingled with a certain amount of skepticism. In particular, he felt that regulators had perhaps "lost sight" of longer-term activities classified as merchant banking rather than proprietary trade. "

Potentially what is 'merchant banking' and what is a 'proprietary trade' needs some delineation, I think," he said.

One particularly tricky issue the council faces is how to analyze differences between long-term investments and short-term trades-- the Volcker Rule targets short-term trades. But according to Volcker, banks may engage in risky activities under the umbrella of allowable merchant banking that are just as potentially dangerous as short-term investments.

"I think the merchant banking provision should have been changed but that needs a little further work," he said in Financial Times. " I think the banking supervisors have an interest in that even without this proprietary trading rule and I think the merchant banking thing has to be looked at on its own grounds."

Goldman Sachs' $500 million Facebook gambit might be affected by such scrutiny regarding longer-term investments. Media attention has already led the bank to withdraw the investment opportunity from U.S. clients.

www.huffingtonpost.com/2011/01/20/volcker-long-term-investment_n_811708.html

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mis-matches from the short-term funding of long-term investments has more to do with monetary policy blunders.

[vl]

You touched on fuel costs... gasoline is $3.20 now in Michigan. That's a 70 cents increase since Thanksgiving. 70 cents on a 15 gallon fill-up is $10.50. Assuming a once-a-week purchase, that's another $500 people who aren't keeping ahead are dealing with. Since there are NO raises, assume that gets re-allocated from other expenditures that can be- like- restaurants, retailers and entertainment. The backdraft will absolutely put more floaters out-of-business and drive more hanger-on-ers to bankruptcy.

NO bank should be a work-in-progress today. EVERY bank should have it's "precision discipline" in-play and generating all of the income it can from the various sources this economy provides. Do you see that? I don't either. LOOK at two different variations on the same theme... Chase and Citi. Citi has more resources capable of delivering remedy to consumer America and hasn't. Chase ignored remedy, hired a bunch of ignorant glad-faces to replace seasoned personnel, foreclosed on military families and gave out hundred dollar bills to use their credit card and to open a new fee-ridden checking account. In short-- Citi's financial state shows pathetic leadership not utilizing it's grass root resources. Chase's incredible profitability demonstrates that a lack of ethics and a shady business initiative still rakes in bucks during a Depression.
NEITHER bank has demonstrated a lasting capacity to be worth our time and trust in our future and yet... they want to go back to mortgage lending without Lenders? How about... NO.

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This message has been deleted.

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From Fed run-offs to super-sized Treasury auctions
Tracy Alloway on Jan 21 12:24.

From RBC Capital Market’s Michael Cloherty:

As we discussed last week, the Fed is likely to start shrinking its balance sheet by allowing maturing Treasuries to run off as early as the fourth quarter. When the Fed redeems a Treasury, the Fed debits the Treasury’s account at the Fed. The Treasury keeps the majority of its tax collections in bank accounts across the country—when the Fed debits the Treasury account, the Treasury instructs those banks to wire cash to the Treasury account at the Fed, causing the Fed to debit that bank’s reserve account and credit the Treasury account. So, Fed redemptions mean that banks have fewer reserves and the Treasury has less cash.

Accordingly, the Treasury must make up for this cash shortfall by borrowing more from the market. When QE2 and the MBS reinvestment are completed, the Fed should own roughly $165bn of Treasuries that mature in 2012 and $205bn that mature in 2013. If the Fed does not roll over any of those Treasuries, the Treasury will need to come up with an extra $165bn in 2012 and $205bn in 2013. Meeting all of that need with 2s, 3s, 5s, 7s, and 10s would require all of those auction sizes to average $2.75bn larger than would otherwise be the case in 2012 and $3.4bn larger in 2013.

That additional financing need indicates how even Fed runoffs have a duration impact—the less the Fed rolls over, the larger the Treasury auction sizes and the more duration the market must absorb. As for the duration flowing to the market, there is little difference between the Fed’s selling Treasuries and the Fed’s allowing Treasuries to mature.

Alright, they’re not super-sized per se. But the duration impact is important.

Longer duration usually means more risk for bond investors, so not only will the US Treasury have to sell more of its debt to the market, it will have to sell what’s seen as riskier stuff too. So you can thank the Fed’s quantitative easing for some of that.

We say some, since the other thing going on here is an upcoming swathe of maturing Treasury coupons, thanks to the massive amount of short-term debt the Fed issued back in 2009 and 2008. And again, auction sizes will need to increase just to keep the cash raised with Treasury coupons from tailing off too hard, says the analyst:

The good news, however, is the that the US seems to have consciously shifted from that ‘Northern Rock’ sovereign funding model to issuing (stabler) longer-term debt.

But says Cloherty:

This surge in maturing debt would have been much worse if the Treasury had not made the decision to term out the average maturity of its debt. If 2yr and 3yr auctions had remained at their peaks of $44bn and $40bn and longer-term auctions had been cut instead, there would have been an additional $54bn of Treasuries maturing in 2012 and an additional $156bn maturing in 2013. The extension of the average maturity of the debt is only a temporary fix (those longer maturities will mature someday), but it has bought Congress a little time to address the structural budget deficit.

ftalphaville.ft.com/blog/2011/01/21/465841/from-fed-run-offs-to-super-sized-treasury-auctions/

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Gross Domestic Product (Friday, Jan. 28) – Having risen by an annualized 1.7% in Q2 and by 2.6%, we expect the U.S. economy to expand by a stronger 3.5% in Q4. The main reason behind the acceleration in the rate of growth is likely to be the increase in consumer spending (+1% q/q) and a positive contribution from net trade (exports at +1.2% q/q and imports +0.8% q/q). Public spending and investments are likely to increase at a modest pace. Should our estimate prove correct, 2010 GDP will grow by 2.9%. In 2011 we expect an acceleration of the rate of growth thanks to the new fiscal stimulus implemented by the Obama administration; our base scenario is that GDP may grow by 3.2% in 2011.
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BONDS ARE IN TROUBLE

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"Chase's incredible profitability demonstrates that a lack of ethics and a shady business initiative still rakes in bucks during a Depression"
===============
That's their legacy, CITI's too.

Our economic landscape will be dominated by STAGFLATION (higher levels of inflation & lower levels of personal consumption), or (business stagnation accompanied by inflation).

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Monetary Watch January 2011: Money supply firing on all cylinders?
Jan. 19 2011By MICHAEL POLLARO
Our monthly Monetary Watch, an Austrian take on where we are on the monetary inflation front and what’s next…

Headline Monetary Aggregates, Where We Are

The U.S. money supply aggregates based on the Austrian definition of the money supply, what Austrians call the True Money Supply or TMS, continued their recent surge, in December posting an annualized rate of growth of 38.9% on narrow TMS1 and 24.6% on broad TMS2. That brought the annualized three-month rate of growth on TMS1 and TMS2 to 22.3% and 18.1%, respectively, 8.6 bps and 2.7 bps higher than those posted in the prior month. No doubt some of this surge is seasonal, but as discussed below, clearly underpinned by the money printing efforts of not only the Federal Reserve but of private banking institutions too.

Turning to our longer-term twelve-month rate of change metrics – more indicative of the underlying trends – and focusing on our preferred TMS2 measure, we find that TMS2 saw another healthy increase, in December growing at an annualized rate of 9.9%. Not only was this a tick up from November’s 9.8%, but we think close enough to 10% to mark December as the 23rd time in the last 24 months that TMS2 posted a twelve-month rate of growth in the double digits. For new readers of the Monetary Watch, the last time TMS2 saw this kind of string was during the run up to the now infamous housing boom turn credit implosion, a time during which TMS2 saw 36 consecutive months of double digit growth.

In what could be a developing trend, M2, the mainstream’s favorite monetary aggregate, is finally starting to show some growth. In the three months ending December, M2 has grown at an annualized rate of 9.5%, bringing its twelve-month rate of increase to 3.6%. Yes, 3.6% is still a relatively low rate of growth, but it is up substantially from its March low of 1.3%.

As readers of this site are aware, THE CONTRARIAN TAKE posits M2 as a grossly misleading measure of the money supply. So the question is, why do we even care? The reason, because the mainstream cares. They think M2 is a perfectly fine measure of the money supply, including the world’s most powerful money printer, Chairman Bernanke. And as we argued in The Bernanke Arbitrage, when the world’s most powerful central banker, armed with the world’s largest printing press, the same central banker who seems to think that economic prosperity can be achieved by printing money, thinks that the rate of monetary inflation is “low,” even when its not, he’s apt to print even more. So, with M2 quite possibly on an upward trajectory, the question to ask is this – will an upward trajectory in M2 give Bernanke some pause, perhaps give him a reason to slow his QE efforts and in turn slow the growth in the money supply? We doubt it, not at 3.6%. In fact, given that core consumer price inflation is still low, the unemployment rate still high, the real estate market still on the ropes and, as Bernanke testified to the Senate Budget Committee on January 7th, municipal debt problems becoming a concern of the Federal Reserve, we could almost guarantee it. Clearly though it’s something to watch.

Money Supply Firing on all Cylinders?

At THE CONTRARIAN TAKE, we put a lot of effort into dissecting the components of TMS2. We think it’s an important tool in deciphering the underlying trend in the money supply. Our favorite component views are what we call TMS2 by Source and Economic Category, views which zero in on the who and the how behind the ebb and flow of the money supply. Under this view, monetary inflation can be reduced to two basic institutions and three primary venues:

•The Federal Reserve, via the issuance of what Austrians call covered money substitutes: the simultaneous issuance of on-demand bank deposit liabilities and bank reserves by the Federal Reserve, created through its purchase of assets, by writing checks on itself, and later, when those checks are deposited by the sellers of those assets in their respective banks, completing the issuance by crediting those banks’ reserve balances at the Federal Reserve for the full amount of the checks.

•Private banks, via the issuance of what Austrians call uncovered money substitutes: the creation of on-demand bank deposit liabilities by private banks unbacked by any reserve cover, created through their issuance of loans and purchase of securities when they pyramid up those loans, securities purchases and deposit liabilities on top of their reserves.

•The Federal Reserve, via the largely passive issuance of currency: the issuance of Federal Reserve notes, created when the public chooses to redeem their on-demand bank-issued deposit liabilities for currency. In contrast to covered and uncovered money substitutes, the issuance of Federal Reserve notes is by and large neutral with respect to the total money supply, as it simply substitutes one form of money, namely covered and/or uncovered money substitutes for another, namely currency.
The combined total of covered money substitutes plus currency is what economists call the monetary base. And the issuance of covered money substitutes is more popularly known as quantitative easing or QE.

Now, while the Federal Reserve can create money via the issuance of covered money substitutes at will and without limit, it can only do so on a one to one basis; i.e., one dollar of asset purchases or QE can only bring forth one dollar of money supply. So, even though the Federal Reserve’s money printing powers are unlimited, there is not much bang for the buck. In the case of private banks it works the other way around. Under the law of the land, the private banking system can create money – uncovered money substitutes – at a multiple of their reserves at current reserve requirements, at a multiple of at least ten to one. Bang for the buck. Problem is, the buck stops when those private banks max out their reserves. The trick then, to get the money supply firing on all cylinders, is to get everyone involved, everyone working together as a team – the Federal Reserve supplying the QE fuel, and the private banking system taking that fuel and pyramiding up the money supply.

Where are we today? Well, for the first time in quite a while, the Federal Reserve and the private banking system are finally teaming up.

Have a look at these charts, depicting the relative contribution of the Federal Reserve and private banks in the money creation process, the former as measured by covered money substitutes and currency; i.e., the monetary base, and the latter as measured by uncovered money substitutes:

It doesn’t take a rocket scientist to see that the Federal Reserve has done most of the heavy lifting these past several years, first with its $1.5 trillion QE I asset purchase program – September 2008 through March 2010 – and more recently with it’s $600 billion QE II. Indeed, since the inception of the Federal Reserve’s first QE asset purchase program, the monetary base, infused as it has been with that barrage of QE asset purchases, has accounted for some 80% of the increase in TMS2. Private banks, the issuer’s of those uncovered substitutes, have been relatively quite, accounting for a mere 20%.

But things seem to be changing. Note the recent change in the composition of TMS2 in favor of private bank-issued uncovered money substitutes. Without doubt, private banks have shown a marked willingness to lever up, over the last clutch of months accounting for the entire increase in TMS2. Indeed, our most recent rate of change metrics on those uncovered money substitutes say it all. Over the last twelve months they’re up an annualized 14.3%; over the last three an annualized 20.5%; and in December an annualized 21.8%. Double digit growth rates and accelerating too.

So what’s this all mean? It means that for the first time in some time the money supply is starting to fire on all cylinders. The Federal Reserve’s QE II asset purchase program which began in November means $600 billion in covered money substitutes – a net $75 billion per month through at least June 2011 – and, holding all other things constant, the same in bank reserves. Private banks who are already sitting on $1 trillion in reserves owing to the Federal Reserves QE I asset purchase program are now levering up, creating uncovered money substitutes at double digit rates. That’s what we would call a money supply that is starting to fire on all cylinders.

What’s Next on the Monetary Inflation Front

So, where to from here? Is this a sustainable trend? Are the Federal Reserve and their private bank partners truly teaming up? In particular, are private banking institutions now joining the Federal Reserve in the money printing festivities, looking to pyramid up their now growing pile of excess reserves as we move into 2011? If the answer to this last question is yes, then that fact, combined with the Federal Reserve’s QE asset purchase program, will not only mean that the money supply is ready to fire on all cylinders, but, as we posited in last month’s Monetary Watch, could very well be set to explode.

Of course, no one really knows what’s next, especially as regards the future money printing activities of private banks. Yes they’re buying securities, but as we have discussed in previous Monetary Watch posts they’re still not loaning at rates that one would call normal. And while private banks do not have to make loans to pyramid up the money supply, only having to buy existing securities, it certainly helps.

Then too, we must ask, are private banks still risk averse. No doubt, the financial markets remain dicey, as does the real estate market. And quite frankly the U.S. economy, distorted by years of monetary largesse, isn’t exactly on solid footing, weighed down by a huge debt load, currently some 370% of GDP, and an underemployment rate of close to 17%. So, even private banking institutions backstopped by the unlimited money printing capabilities of the Federal Reserve could run tail at the first signs of trouble, preferring instead to simply sit with their excess reserves.

Having said this, there is no doubt in our minds that at the first signs of trouble the Federal Reserve would step in and goose the money supply with another QE barrage. And even risk averse private banks might still prefer to buy at least some “safe” U.S. government securities at several hundred bps more than the measly 25 bps the Federal Reserve is currently paying them on their excess reserves. God knows there are plenty of government securities around. But that’s a far cry from a money supply firing on all cylinders.

blogs.forbes.com/michaelpollaro/2011/01/19/monetary-watch-january-2011-money-supply-firing-on-all-cylinders/

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Carry trade is a very interesting and a preferred trading strategy in the foreign market. It's popularity stems from the fact that it guarantees traders returns on its medium and long-term investments. The Carry Trade can also make profit even if prices in the market stays the same for a long period or time.

Exactly how do they do this? Well, it basically involves buying high interest currencies and selling these currencies with low interest rates. So while you are paying a low rate for the currency you sold, you're collecting a higher interest on the ones that you bought. The difference in rates then makes profit.

Very basic concepts that traders do is to buy from countries with high interest rates and short those currencies that offer low interest rates.

This strategy of carry trade works best at certain market conditions, and hinges a great deal on the selection of a currency pair. This is truly important as this could spell the difference between losing and making a profit. In choosing the best currency pair, two things are considered:

The difference of two currencies' interest rates should be substantial for profit to be assured. Latest interest rates for the most liquid currencies worldwide should be the basis for this. For example: Australia (AUD) - 4.35% vs. Japanese Yen (JPY) - 0.15%.

The economy of both currencies should be viewed. Favorably, the economy of the currency that you will be buying should be strong, and the currency with that you would be selling would have a weaker economy (usually the Japanese Yen, as it has a low borrowing cost)

As an example, here are some currency pairs usually selected using the Carry Trade strategy: GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY.

If you do the math, you might think that money generated would be meager. But if we look into the international market and its endless possibilities, you'd be surprised at how offshore carry trading system has been bringing in the bucks for a lot of business traders.

ezinearticles.com/?Basic-Information-on-Carry-Trades&id=5758760

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Stocks Fall Lower As US Sovereign Debt Interest Rates Rise And As China Plans Credit Tightening
By theyenguy
Financial market report for January 20, 2011

Introduction
Matthew Craft, of the Associated Press reports Stocks Edge Lower On Fears Of Chinese Rate Hike, stocks, commodities fall as surging in Chinese economic growth leads to fears of a rate hike. “Worries that China may raise its interest rates sent copper, oil and the companies that produce them lower. Commodities fell sharply after China reported that its economy expanded 10.3 percent in 2010, renewing concerns that the country’s central bank will increase borrowing rates to slow growth. China’s inflation surged 4.6 percent in December. Demand from China has been a big factor in sending commodities prices surging over the past year. Companies that produce commodities, such as aluminum maker Alcoa Inc., AA, have been counting on that demand to continue. “All investors and companies these days are clinging to this Chinese demand story,” said Jack Ablin, chief investment officer at Harris Private Bank. “And anything that could cause that to falter could have ugly implications.” Oil, USO, and copper, JJC, fell more than 2 percent. Silver, SLV, fell 4 percent. Freeport-McMoRan Copper & Gold Inc., FCX, dropped 5 percent even after the mining giant reported 60 percent higher income in the fourth quarter as a result of higher copper and gold prices.”

I … Stocks fell lower on falling US sovereign debt and on falling currencies.

A … The 30 10 US sovereign debt yield curve flattened more today taking bonds overall lower.
Bond vigilantes called the interest rates on US Sovereign debt higher.
The interest rate on the 30 Year US Government Bond, $TYX, rose to 4.62%
The interest rate on the 10 Year US Government Note, $TNX, rose to 3.46%.

The 30 10 US sovereign debt yield curve, $TYX:$TNX, flattened more today. It has commenced an Elliott Wave 3 down this week. The 30 10 US Sovereign has now entered into the most aggressive phase of its deterioration, with the result that there will be a severe deleveraging of stocks and bonds globally. The 30 10 US Sovereign Debt yield curve, along with yen carry trade, and Swiss Franc carry trade investing and the recent dollar liquidity coming from QE 1 and QE 2 have been the great investment levers of a prior age of prosperity. The world is now passing into an age of delveraging and austerity.

The 30 Year US Government Bond, EDV, -1.6%
The 10 Year US Government Note, TLT, -1.4%

Total Bonds, BND, -0.4% continuing their fall lower in a bull flag pattern.

Longer duration corporate bonds, BLV, -1.0%
Shorter duration corporate bonds, LQD, -0.4%

Sovereign debt interest rates rose globally turning world government bonds, emerging market bonds, and international corporate bonds lower.
World Government Bonds, BWX, -0.5%
Emerging Market Bonds, EMB, -0.4%
International Corporate Bonds, PICB, -0.6%

Junk bonds, JNK, are perceived to be a “money good” safe haven investment for now as they have remained their moneyness steady, at their market top, which came in early January.

B … The major world currencies and emerging market currencies turned lower on rising sovereign debt interest rates globally, turning world shares, VT, 0.6% lower.
Major world currencies, DBV, -0.4%
Emerging market currencies, CEW, -0.7%

World shares, VT, fell 0.6% lower.

The emerging markets, EEM, fell 1.1 lower, as emerging market currencies, CEW, fell 0.7%.

South African Rand, SZR, -1.9% turned South Africa, EZA, -1.6%
New Zealand Dollar, BNZ, -1.5% turned New Zealand, ENZL, -1,1%
Australian Dollar, FXA, -1.3% turned Australia, EWA, -1.7%, Small Caps, KROO, -1.5%
Swiss Franc, FXF, -1.2% turned Switzerland, EWL, -1.3%
Japanese Yen, FXY, -1.1% turned Japan, EWJ, -0.9, Japan Small Caps, JSC, -0.9%
Swedish Krona, FXS, -0.6% turned Sweden, EWD, -1.7%
British Pound, FXB, -0.6% turned United Kingdom, EWU, -1.9%.

Euro, FXE, traded unchanged yet the European shares, VGK, -0.6% .

The US Dollar, $USD, traded unchanged at 78.79.

Austria, EWO, -1.8% following Switzerland and Sweden lower.

Turkey, TUR, -2.6%, following currencies lower; Turkey is a poster country for carry trade investing; its fall lower suggests that carry trade investments are unwinding globally.

Debt deleveraging is producing a global deleveraging shock. The chart of the optimized carry trade ETN, ICI, shows that carry trade investing proved unsuccessful on December 29, 2010 as this metric of carry trade investing entered an Elliott Wave 3 of 3 Down after Ben Bernanke formally announced QE 2 and the European Leaders failed to come to a comprehensive solution to the European sovereign debt crisis.

The chart of world shares relative to the yen, ACWI:FXY, communicates that peak wealth was achieved on Friday, January 14, 2011.

C … Base metals and precious metals fell lower.
Base Metals, DBB, fell 2.9% with Lead, LD, -3.4%, and Copper, JJC, -2.6%. Yi Tian and Maria Kolesnikova of Bloomberg report Copper Drops Most in Two Months on Speculation China to Restrain Economy. Copper fell the most in two months on concern that China, the world’s biggest metal consumer, will take more steps to restrain the economy. Copper futures for March delivery fell 11.1 cents, or 2.5 percent, to $4.259 a pound at 10:25 a.m. on the Comex in New York. (Hat Tip to Gary of Between The Hedges)

Silver, SLV, -4.4%
Gold, GLD, -1.9%

D … Basic material stocks shares fell lower taking the Russell 2000 small cap growth, textile manufacturers, disk drive manufacturers, transportation, global small caps, world stocks, and the Morgan Stanley Cyclical Index stocks lower on deleveraging US sovereign debt.

A deleveraging crisis has commence. The world has passed from the age of leveraging and economic growth … and into the age of deleveraging and economic contraction.
Silver mining, SIL, -4.3%
Exploratory silver mining, SSRI, -4.1%
Gold mining, GDX, -1.5%; the gold mining shares were the first to sell off with sovereign debt and the flattening yield curve. Their correction is likely reaching or has likely reached the point whee they are ready for somewhat of a bounce higher when gold moves higher as stocks sell off.
Junior gold mining, GDXJ, -3.3%
Copper mining stocks, COPX, -3.9%
Uranium stocks, URA, -2.5%
Coal stocks, KOL, -1.2%
Basic Materials, IYM, -1.5%
International Basic Materials, DBN, -1.5%

Chemical stocks fell lower,
Balchem, BCPC, -1.7
Dupont, DD, -1.5
LSB Industries, LXU, -2.7
New Market, NEU, -2.4

Refinery stocks fell lower, Western Refining, WNR, -4.2%

Global industrial mining stocks fell lower,
General Moly, GMO, -4.6%
Horsehead Holding, ZINC, -1.8%
BHP Billiton, BHP, -2.8%
Cliff Resources, CLF, -3.5%
Tech Resources, TCK, -3.4%

Textile manufacturer, Unify, UFI, -2.0%

Transportation: Railroad, GWR, -2.0%

Disk Drive manufacturers,
Quantum, QTM, -1.8%
Western Digital, WDC, -3.6%

Russell 2000 Growth, IWO, -1.4
Russell 2000, IWM, -1.0%
Global Small Caps, VSS, -1.1%
World Stocks, VT, -0.5%

Chart of the Morgan Stanley Cyclical Index, $CYC, -0.7%, shows that the cyclical trade has broken down.

Morgan Stanley Cyclical Index Components falling lower included:
Basic Materials Component, Freeport McMoRan, FCX, -3.7%
Automotive Component, Johnson Controls, JCI, -3.3%
Paper Component, International Paper, IP, -2.4%
Transportation Component, Ryder, R, -1.6%.

II … Networking, software and semiconductors fell lower taking the Nasdaq 100 lower.
Nasdaq 100, QTEC, -1.5%

Networking, IGN, -3.4%
Software, IGV, -1.6%
Semiconductors, XSD, -1.3%

EMC Corp, EMC, -1.5%

Cypress Semiconductors, CY, -1.5%
STM Electronics, STM, -2.3%

III … Internet stocks weighed on the Dow.
Google, GOOG, -0.8% and Amazon, AMZN, -2.6% are part of a the larger group of Dow Internet Stocks, FDN, -1.8%, that sold off today.. Its wise for traders to take gain on these at this time.

IV … Credit tightening and inflation destruction turned Indonesia, China Materials, China, China Small Caps, China Financials lower, the BRICS lower, Indonesia, agriculture production, global shipping, MRO services, technology leaders, and industrial leaders.

Inflation sensitive Indonesia, IDX, -3.5%, continued its dive lower.

The Shanghai shares, CAF, -1.4%, are leading stocks lower globally.

China Materials, CHIM, -2.0%
China, YAO, -1.6%
China Small Caps, HAO, -1.5%
China Financials, CHIX, -1.7%

The BRICS, EEB, -1.1% and Thailand, THD, -1.2%

Inflation sensitive agriculture production, shares, MOO, -2.1 falling lower on falling fertilizer manufacturers POT and MOS.

MRO Services
DXPE, DXP, -1.7%
UTI Worldwide, UTIW, -2.3%

Industrial leaders
Belden, BDC, -2.0%
Cummins, CMI,
Eaton, ETN, -3.8%
Parker Hannifen, PH, -6.1%

Machine tool manufacturers
Flow International, FLOW, -5.5%
International Tool Works, ITW, -1.4%
Timken, TKR, -3.7%
Mettler Toledo, MTD, -2.5%

Small Cap Industrial Shares, XLIS, -0.6%
Polypore, PPO, -4.1%
Watts Water Technology, WTS, -1.3%

Small Cap Technology Shares, XLKS, -1.6%
Avid Technology, AVID, -3.6%
Universal Display, PANL, -5.6%
Measurement Specialties, MEAS, -4.1%
OYO Geospace, OYOG, -2.1%

Global shipping, Ship Finance Intl, SFL, -1.8%

Shani Raja of Bloomberg reports: Asian Stocks Drop as China Economic Reports Prompt Tightening Speculation. Asian stocks fell, with the regional benchmark index sliding the most in almost two months, as Chinese economic reports prompted speculation the country will do more to fight inflation and U.S. earnings disappointed. The MSCI Asia Pacific Index fell 1.3 percent to 138.66 as of 7:34 p.m. in Tokyo, with about seven stocks declining for every that rose. “It’s fair to say that this data will add to pressure on China to tighten,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Ltd., which manages about $93 billion. Hong Kong’s Hang Seng Index dropped 1.7 percent, its biggest intraday decline in a month, and the Shanghai Composite Index fell 2.9 percent. Japan’s Nikkei 225 Stock Average retreated 1.1 percent. South Korea’s Kospi Index slipped 0.4 percent, while Australia’s S&P/ASX 200 Index dropped 1.1 percent. “If the economy keeps growing at the current pace, inflation (Hat tip to Gary of Between The Hedges)

V … Mining intensive countries fell lower.
Canada Small Caps, CNDA, -2.1%
Australia, EWA, -1.7%
Australia Small Caps, KROO, -1.5%
South Africa, EZA, -1.7%
Peru, EPU, -1.2%.

VI … Frontier markets turned lower.
Frontier markets, FRN, -1.5%.

VII … Japan shares turned down.
The Nikkei 225, ^N225, has turned down from its January 13, 2011 high of 10,589 to close at 10,437.31.
EWJ, -0.9%
JSC, -0.9%.

VIII … Home building shares bounce up making for an excellent short selling opportunity.
Lowes, LOW, +3.7%
Home Depot, HD, +2.4

IX … Utility Shares rise to rally high
Utilities, XLU, +0.7%
International Utilities, DBU, 1.6%
Southern Company, SO, is consistently listed among the top U.S. electric service providers in customer satisfaction by the American Customer Satisfaction Index; it pays a 4.7%

X … Conclusion and investment application.
A flattening 30 10 US sovereign debt yield curve, inflation destruction, China credit tightening, and currency deflation have commenced the mother of all bear markets.

A flattening 30 10 US sovereign debt yield curve, $TYX:$TNX, communicates that moneyness that has come from sovereign debt seigniorage is passed away.

Jack McHugh in Big Picture article 2011 in Preview: A Year of Transition (or Worse) relates: “Fed Chairman Bernanke calls these asset purchases “monetary policy” and others call them “Quantitative Easing”. What they should rightly be called is debt monetization and money-printing. The world is awash in fiat currency paper. If, as I believe, the policies we’ve seen since 2009 eventually lead to some sort of funding problem in the U.S.”

US Treasury auctions and other central bank Treasury auctions will fail, the sovereign crisis seen in Europe will manifest globally. Then out of chaos a Sovereign and a Seignior will rise to power to provide new moneyness and a new seigniorage system.

Gold is the sovereign currency and storehouse of investment value. The chart of gold relative to the Australian Dollar, GLD:FXA, communicates that gold, even though falling notationally in value, has maintained its worth relative to the Australian Dollar.

In European News
Spain’s Central Bank Plans To Print Euros To Bailout Cajas In Operation Similar To Ireland’s Central Bank Bailout Of Its Banks.
A … Spain’s central bank to print Euros to save regional home loan banks.
Sara Schaefer Munoz and Jonathan House of the Wall Street Journal report Spain to Ramp Up Bailout of Banks. Spain plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices, people familiar with the matter said, an acknowledgment that previous efforts to fix the banks have fallen flat as the country seeks to ward off an international bailout. In a first step, Spain is preparing to issue €3 billion ($4 billion) in debt in coming days, the people familiar with the matter said. Government officials are putting plans in place to eventually raise as much as €30 billion, according to these people, though some say the final tally will be less. The hope is that a series of capital injections will quell investor jitters about the savings banks, known as cajas (literally, “boxes”), which have been a thorn in Spain’s side as it seeks to convince investors that the country’s finances are stable. The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can’t raise funds on their own and will need a government bailout was one reason ratings agency Moody’s put Spain’s rating on review for a downgrade last month. (Hat Tip to Gary of Between The Hedges)

B … The Spanish bailout is similar to that of the Irish Central Bank as Daily Bell staff report End Of Euro? …Ireland Prints Own Notes.

C … Jeffrey Donovan of Bloomberg reports Euro Bonds at Risk as Moody’s, S&P Poised to Lower Credit Ratings.
Europe’s most-indebted countries are vulnerable to additional rating cuts driving up their borrowing costs, which may pressure policy makers to muster a more aggressive response to the region’s debt crisis. “To say that we are at the bottom of credit ratings cycle, by implication one will have to believe that the deleveraging process has come to an end,” said Peter Geikie-Cobb, who helps manage about $6.5 billion at Thames River Capital U.K. Ltd. in London. “I don’t think that’s the case.” Fitch Ratings cut Greece to BB+ on Jan. 14, joining Standard & Poor’s and Moody’s Investors Service in bestowing junk status on the country’s debt. Moody’s began reviewing Portugal and Spain in December after S&P started its three-month clock on whether to downgrade Spanish debt. The European Union’s so-called peripheral countries have seen their creditworthiness evaporate as surging budget deficits and slumping economic growth boosted debt. The bailouts of Greece and Ireland have focused investor scrutiny on other high- deficit countries such as Portugal, Spain and Belgium. “The risks of ratings changes in the next few months are high, and the rather more Pavlovian reaction of short-term trading books will indeed be sensitive to such changes,” said Marc Ostwald, a strategist with Monument Securities in London. A wave of ratings downgrades could begin within weeks. (Hat Tip to Gary of Between The Hedges)

theyenguy.wordpress.com/2011/01/21/stocks-fall-lower-as-us-sovereign-debt-interest-rates-rise-and-as-china-plans-credit-tightening/

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Barron's Randall Forsyth:

The great virtue of recessions is that they purge the excesses of the booms that preceded them. Or at least are supposed to.

Malinvestments, to use the lingo of the Austrian school of economics, result from an excess of easy credit and, in to use a euphemism endemic to our age, irrational exuberance.

That would include building houses unprecedented in scale, both in terms of their size as well as their numbers. Even as McMansions and more modest houses sprawl across the land, many of which are unoccupied and foreclosed upon, hope springs eternal of a new wave of homes being built.

Reflecting that, home builders' stocks are have risen substantially, with the SPDR Homebuilders exchange-traded fund (ticker: XHB) up nearly 30% through Tuesday from last Aug. 26. If the latter date seems familiar, it is the day before Federal Reserve Chairman Ben Bernanke began his campaign for QE2, which ultimately resulted in the central bank's plan to purchase $600 billion of Treasury securities by June 2011.

But the recovery in the home builders' shares suffered a sharp reversal Wednesday as the XHB ETF fell 2.4% following news that housing starts fell 4.3% in December, to an annualized rate of just 529,000. The Panglosses parsing the numbers suggested last month's bad weather somehow depressed the seasonally adjusted numbers, which they implicitly assume don't take into account snow in December.

John Williams, the perspicacious proprietor of Shadow Government Statistics, suggests that while December's reported drop in housing starts is statistically insignificant, it shows that far from recovering, housing activity is "rolling over" again. Last month's 529,000 annual pace of starts is well below the historically low average pace of 569,900 since December 2008.

Even worse, notes David Rosenberg of Gluskin-Sheff, was the 9% plunge in starts of new single-family homes, to a "mere" 417,000 annual rate. The persistent weakness in single-family starts means that fewer homes are under construction -- down 1.1% in December and down seven out of the last eight months. Along with Williams, he reckons residential construction will be a drag on fourth-quarter gross domestic product.

The optimists pointed to a 17% surge in building permits, but Rosenberg says that's apt to be a "one-month wonder because of a builder rush to get applications in ahead of some building code changes that were going into effect on Jan. 1 in New York, Pennsylvania and California. This is why permits soared 81% in the northeast and 44% in west. In the rest of the country, building permits sagged 5%."

What's different this time is that instead of fulfilling its role as the classic leading indicator for recovery, housing has become a drag. "While its direct share of GDP has always been small, the multiplier impact through the rest of the economy is huge," Rosenberg points out.

In past cycles, real-estate agents and mortgage lenders could reliably count on jump in incomes, which they'd surely spend, while contractors might buy a new truck when they saw a steady stream of work. None of that is counted in the GDP as housing-related, although it surely is.

Housing thus could be reliably counted upon to lead the economy from recession to recovery. All it would take would be a reduction of interest rates -- which invariably had been pushed higher, eventually precipitating the downturn -- and you'd be off to the races.

No need to belabor why mortgage rates still near all-time lows aren't sparking recovery, as more stringent lending standards and high unemployment are acting as headwinds. Yet, as Rosenberg points out, housing starts are down 9.3% since the recession officially ended in June 2009 -- an unprecedented decline 18 months into a recovery.

There are some positive signs, notably a 12.3% pop in sales of previously occupied homes reported by the National Association of Realtors Thursday. That cut the inventory of unsold homes to an 8.1-month supply from 9.5 months in November.

Investors accounted for 20% of December's sales, up from 15% a year earlier, as distressed sales comprised 36% of the market in December, up from 32% a year earlier. That indicates the market is doing its job of clearing away some of the past excesses. But a new flood of foreclosed homes are likely to come to market as the robo-signer scandals abate.

"Policymakers have done an admirable job of creating the illusion of recovery, and it has worked because it would seem based on asset pricing that the vast majority of investors have bought into this illusion hook, line and sinker," Rosenberg writes.

That's as good an explanation of the rally in home builders' stocks in the absence of any sign of recovery in home building

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By Pedro Nicolaci da Costa

WASHINGTON | Fri Jan 21, 2011 3:47pm EST


Reuters) - Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on January 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

"The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.

STALE RISK

In response to the worst financial crisis and recession since the Great Depression, the U.S. central bank pulled out all the stops on monetary policy. It not only slashed interest rates effectively to zero, but also committed to buy some $2.3 trillion in Treasury and mortgage securities in order to keep long-term borrowing costs down.

For weeks now, worries had been percolating among investors about the possibility that the central bank might run into trouble when it eventually decides to unwind some of those extraordinary measures. For more, see: [ID:nN1080075]

In particular, analysts feared the Fed might be forced to sell either its Treasury or mortgage-backed securities at a steep loss in a rising interest rate environment, or end up having to pay a higher interest rate on bank reserves than it receives on the securities it holds.

Fed Chairman Ben Bernanke, asked about the possibility in congressional testimony earlier this month, said even the most extreme circumstances would not have very large implications.

"Under a scenario in which short-term interest rates rise very significantly, it's possible that there might come a period where we don't remit anything to the Treasury for a couple of years. That would be I think a worst-case scenario," Bernanke said.

However, the Fed has tended to assume that interest rates would be rising sharply only if the economy were recovering very rapidly. Fed policymakers seem to be ignoring the possibility that the country could face a bout of so-called stagflation -- a period of high inflation with depressed economic activity like that seen during the 1970s.

That would be truly damaging to the Fed's holdings because it would almost certainly have to sell assets at a loss.

Lou Crandall, chief economist at research firm Wrightson ICAP, points out that the nearly $1 trillion in dollars circulating through the global financial system represent a form of interest-free borrowing for the Fed, giving it a large cushion against possible losses.

Still, if the crisis has taught economists anything, it is that, in highly leveraged financial markets, risks seen as extreme can often materialize more quickly than forecasters can adjust their models.

The Fed's accounting change does help it dodge a scenario that could be highly damaging to its reputation and credibility, even if a "paper insolvency" would have few immediate implications for the central bank's operations.

Compared with the prospect of going broke, being accused of accounting shenanigans is a luxury. In that sense, the Fed's decision to alter its own accounting rules appears prudent.

If only businesses and households had the same privilege

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Volcker Rule May Work, Even if VagueBy FLOYD NORRIS
Published: January 20, 2011

Paul A. Volcker is a giant of financial history. He played a behind-the-scenes role when the United States abandoned the gold standard in 1971. He restored credibility to the Federal Reserve and slew inflation a decade later.

Paul A. Volcker, here testifying before the House Banking Committee in 1980, restored credibility to the Federal Reserve as its chairman.
In what would have been retirement years for anyone else, he became chairman of the group overseeing the International Accounting Standards Board and guided it to a level of independence that outraged French banks.

Now, at 83, he finally has something named for him. The question is whether it can be effective.

The Volcker Rule was part of the Dodd-Frank Act that Congress passed last year, barring banks from engaging in “proprietary trading.”

When Mr. Volcker proposed it, the big banks at first wanted to kill it. But it became clear that the combination of his prestige and the bank’s own bad reputations meant that something was going to pass.

So the banks settled for trying to hobble the rule with exceptions and qualifications.

Now it is up to regulators to adopt rules.

This week the Financial Stability Oversight Council, which was also created by Dodd-Frank and is led by the Treasury secretary and includes other financial regulators, put out a study and recommendations on the issue, providing at least a road map toward the rules that will come out within a few months.

The hurdle they face is simple: there is no easy way to tell a proprietary trade from another kind of trade, particularly given the exemptions worked into the law.

As the study noted on its first page, “These permitted activities — in particular, market making, hedging, underwriting and other transactions on behalf of customers — often evidence outwardly similar characteristics to proprietary trading.”

To some extent, regulators have made it easier for banks to continue trading. The biggest potential loophole is market making, and the study took a broad view of that. It made clear that market makers may acquire securities because they expect customers to want them, not just because they already have orders.

That means, wrote Jaret Seiberg, an analyst with MF Global, that they “need not worry that miscalculating customer demand would result in large penalties.” He added that “this seems even more positive than industry was expecting. The biggest banks would benefit the most from adoption of this type of proposal.”

But that goody may be more than balanced by the overall tenor of the report, which repeatedly cautions that regulators must be on the outlook for efforts to evade the rules.

“I think it is a good-faith effort to enforce what the law asks for,” Mr. Volcker told me this week, after reading the report. “It makes clear you cannot hide proprietary trading in other activities. It strikes me as very straightforward.”

Straightforward may not be the word that some bankers will choose. They had hoped for clear rules that could be complied with — or evaded, if you want to be cynical. Instead, they got a lot of advice for regulators on how to monitor bank trading to see if it complies, using statistics invented for other purposes, like risk measurement.

Do banks tend to make the most money from a trade on the first day, rather than over time? Does the inventory of securities turn over quickly? Are daily profits relatively consistent? Negative answers could indicate proprietary trading and provide a reason for bank examiners to descend on a trading desk.

I have another metric that they might consider. What are the traders paid? If a trader is collecting millions in salary and bonus, you have to wonder whether he or she is merely trying to satisfy customer demand, as opposed to time markets.

The use of all those metrics, along with requirements for banks to monitor them and have clear policies, sounds scary to some. Winthrop N. Brown, a partner at Milbank, Tweed, Hadley & McCloy who represents banks, said the council had done a good job in general, but “I would be troubled if I were a chief compliance officer. It seems to be very burdensome.”

The Sarbanes-Oxley Act in 2002 accomplished something with a provision that I thought superfluous, and the council picks up on that by suggesting that chief executives be required to certify that their banks are in compliance with the Volcker Rule, just as the earlier law forces them to certify the accuracy of financial statements. It turned out that certification concentrates attention, even if it does not change the underlying legal requirements.

Some think the concentration on proprietary trading is a little ridiculous. It was not, after all, such trading that produced the financial crisis. That came from bad loans and botched securitizations of such loans. Nothing in the Volcker Rule affects lending, and the law specifically says it is not to be used to hamper securitizations.

When I put that to Mr. Volcker, he pointed both to the problems at Société Générale, the French bank that lost billions of euros because of a rogue trader, and to Bear Stearns, the first casualty of the financial crisis. Bear’s problems first emerged in a hedge fund it ran, which it bailed out in an effort to preserve its reputation. Eventually, a liquidity crisis brought the bank down.

The new law tries to limit that by restricting bank investments in hedge funds. They can start them, but within a year are supposed to have a stake of no more than 3 percent.

There would be a case for the Volcker Rule even if such trading had not caused problems in the past. Banks are special, simply because they have deposit insurance, and there are limits that need to be imposed on the risks that such government-guaranteed banks take.

Of course banks can take plenty of risks without engaging in proprietary trading. Bad loans have brought down many a bank. But bank lending is something that society wants to encourage. Other forms of speculation may be perfectly reasonable, and even highly profitable much of the time, but their societal benefit is far less clear. Those who wish to gamble in that way ought to do so without such insurance.

In the end, the Volcker Rule may work, even if there are ways around it. Is it really worth the effort to dodge rules to do things that would be perfectly legal if someone else did them? If the regulators do put in the effort, the answer may be that few banks will bother.

Mr. Volcker himself professes optimism.

“I may not understand modern financial attitudes,” he said, “but I don’t think a bank wants to be conducting financial activities that will be revealed as simply skirting the law.”

That optimism is, however, based on the assumption that regulators will put in the effort. For now, that is probably a good assumption. But it is worth noting that regulators are being asked to do a lot without a commensurate increase in resources. That may not hurt the Fed, which sets its own budget, but the Securities and Exchange Commission is getting stretched very thin and the new Republican House leadership shows no interest in fixing that.

The S.E.C. this week put out a report on inspections of financial advisers, as required by Dodd-Frank. The staff concluded that the commission would not have the resources to do enough inspections, and asked Congress to either allow it to impose fees on advisers to pay for the inspections or assign the task to self-regulatory organizations, which could impose similar fees.

One commissioner, Elisse Walter, voted to release the study but argued that it did not go far enough.

“We need to address this issue now,” she concluded. “For far too long, in the investment advisory area, the commission has been unable to perform its responsibilities adequately to fulfill its mission as the investor’s advocate, and investment advisory clients have not been adequately protected. This must change.”

Regulatory priorities come and go. For now the Volcker Rule seems important, but then we are only a couple of years removed from the Madoff scandal. Yet it seems unlikely Congress will provide the needed resources to assure there are adequate inspections of money managers.

It may not be that many years before some banker concludes the possible profits from speculative trading are attractive enough to justify trying to get around a rule whose enforcement no longer seems to be a priority.

www.nytimes.com/2011/01/21/business/21norris.html?_r=1&pagewanted=2&src=busln

[flow5]

China May Be Masking Its Purchase of U.S. SecuritiesBy FLOYD NORRIS
Published: January 21, 2011
Recommend

For eight years after the United States resumed running large budget deficits in 2002, China was the largest lender, buying a fifth of the new Treasury securities sold during that span — an expenditure of more than $900 billion. During 2006, China financed more than half the American deficit. When the financial crisis struck hardest, China spent more than $100 billion on Treasuries over the two-month period of September and October 2008.

Graphic Who Buys U.S. Debt?.But over the last year, China has been a net seller of Treasury securities, according to figures released this week by the American government. If that is true, it would be extraordinary, considering the size of the bilateral trade deficit, and there has been speculation that China has been purchasing Treasuries through accounts in other countries.

The Treasury Department estimated that China reduced its holdings of Treasuries by nearly $11 billion in November alone. For the 12 months through November, as the accompanying charts indicate, China reduced its holdings of Treasuries by more than $36 billion.

The Treasury issues separate estimates for China and Hong Kong, but they are combined for purposes of the charts and this article.

The Treasury figures indicate that over the eight years from the beginning of 2002 through the end of 2009, the total amount of United States government debt outstanding — not counting securities owned by other agencies of the American government, like the Federal Reserve and the Social Security Administration — rose by $4.4 trillion to $9.3 trillion.

Of that, China provided about a fifth and other foreign countries provided two-fifths. The remaining 40 percent was purchased by Americans, although for a time in the middle of the decade, Americans were selling Treasuries even though the government was stepping up its borrowing.

For the first 11 months of 2010, American banks, institutions and individuals bought about three-fifths of the $1.5 trillion of additional Treasury debt, while China sold some and other foreign jurisdictions bought the rest.

The figures are estimates, and include both private and government transactions.

The charts show the cumulative 12-month changes in holdings of Treasuries for three classes of investors — China, the rest of the world and Americans. The American figures exclude purchases by the Fed and other government agencies.

It is not easy to see how the Chinese government managed to keep its currency from rising more rapidly against the dollar if it did not continue buying Treasuries in 2010, and there has been speculation that it shifted purchases to accounts managed by British money managers.

If so, such purchases would show up as British purchases. As it turns out, Britain is estimated to have been the largest purchaser of Treasuries over the 12-month period, adding $356 billion to its holdings. That made it by far the largest buyer, followed by Japan. The only other major seller during the period was Russia, according to the government estimates.

If China has been buying through money managers, it may be easier at some point for it to begin selling Treasuries through the British channel without others understanding where the selling pressure is coming from

www.nytimes.com/2011/01/22/business/economy/22charts.html?adxnnl=1&ref=floydnorris&adxnnlx=1295654487-R2x1HygSXRwGshjPb0Q3qw

[flow5]

I don't think you'll see this reported anywhere else. The monetary base, total, excess, non-borrowed, & required reserves figures have been revised back for 27 months (& some other months - in prior years). The largest revision was for $429b in Jan 2009.

My question is why were they revised? Why wasn't there a notice & an explanation? Did that many bankers make that many mistakes on their account maintenance FR 2900 biweekly reports? Did the FED revise reserve requirements?

I smell a cover-up - just like the one Richard Anderson & Robert Rache did when they "reconstructed" reserves & the monetary base at the Federal Reserve Bank of St. Louis. Anderson's new figures showed that there was no increase in bank legal reserves in 1980 even though the money stock grew at a 20% annual rate of increase from April to Dec. And at that point in time legal reserves were "binding". Thus it made Paul Volcker "look good".

See this is the second revision. The first one occurred in 2007-2008 & went unreported as well. Prior to this revision, the rate-of-change in long-term money flows declined for a consecutive 29 months. Afterwards it was revised this changed to 23 months. What does this do? If you use the first set of figures it shows Bernanke driving the economy into a full scale depression. After the revision it shows that Bernanke started to "ease" monetary policy before the economy started its big fall in Aug 2008. That's politically significant.

You see, no one follows reserves (per Richard Anderson @st. Louis), prudential/contractual or otherwise. And the FED will eventually eliminate all reserve requirements (see "The Financial Services Regulatory Relief Act of 2006" giving the Board of Governors authority to lower reserve requirements on all transaction deposits (applied to deposits above a certain threshold level) TO AS LOW AS ZERO PERCENT, from their previous minimum top marginal requirement ratio of eight percent. These changes are effective October 2011).

The FED doesn't follow the "Blue Book's" governmental accounting, auditing, and financial reporting standards, & it would obviously not pass any normal corporate audit of its books (I worked at 3 Fortune 500 companies (timesharing, data, & voice), in accounting for 17 years).

Its on-line Federal Reserve Bulletin has now effectively eliminated the "paper trail" & thus any accounting trail. I.e., all statistical revisions are overlaid & iterations are seldom kept (unlike all corporate accounting records). I.e., I am accusing the FED's executive staff of deliberately covering up their mistakes.

[flow5]

2000 jan ……. -0.08 ……. 0.01 top
feb ……. -0.06 ……. -0.04
mar ……. -0.13 ……. -0.12
apr ……. -0.13 ……. -0.04
may ……. -0.07 ……. 0
jun ……. -0.12 ……. -0.06
jul ……. -0.1 ……. -0.05
aug ……. -0.11 ……. -0.03
sep ……. -0.11 ……. -0.04
oct ……. -0.12 ……. -0.07
nov ……. -0.12 ……. -0.11
dec ……. -0.14 ……. -0.09
2001 jan ……. -0.14 ……. 0
feb ……. -0.14 ……. -0.04
mar ……. -0.13 ……. -0.11
apr ……. -0.12 ……. -0.02
may ……. -0.12 ……. -0.01
jun ……. -0.1 ……. -0.04
jul ……. -0.07 ……. 0
aug ……. -0.06 ……. 0.02
sep ……. -0.05 ……. 0.03
oct ……. 0.11 ……. 0.18
nov ……. -0.02 ……. 0.01
dec ……. -0.02 ……. 0.04
2002 jan ……. -0.01 ……. 0.16
feb ……. 0 ……. 0.1
mar ……. 0.01 ……. 0.01
apr ……. 0.01 ……. 0.07
may ……. -0.04 ……. 0.03
jun ……. -0.03 ……. -0.03
jul ……. -0.02 ……. -0.02
aug ……. -0.01 ……. -0.13
sep ……. -0.02 ……. -0.04
oct ……. -0.02 ……. -0.06 bottom
nov ……. -0.01 ……. -0.11
dec ……. 0.02 ……. -0.07
2003 jan ……. 0.07 ……. 0.06
feb ……. 0.05 ……. 0.01
mar ……. 0.07 ……. 0
apr ……. 0.06 ……. 0.06
may ……. 0.05 ……. 0.06
jun ……. 0.08 ……. 0.05
jul ……. 0.1 ……. 0.12
aug ……. 0.1 ……. 0.14
sep ……. 0.11 ……. 0.15
oct ……. -0.05 ……. 0.09
nov ……. 0.06 ……. 0
dec ……. 0.05 ……. 0.03
2004 jan ……. 0.04 ……. 0.13
feb ……. 0.04 ……. 0.08
mar ……. 0.09 ……. 0.05
apr ……. 0.11 ……. 0.1
may ……. 0.14 ……. 0.07
jun ……. 0.17 ……. 0.03
jul ……. 0.18 ……. 0.04
aug ……. 0.15 ……. 0.06
sep ……. 0.19 ……. 0.08
oct ……. 0.18 ……. 0.06
nov ……. 0.16 ……. -0.01
dec ……. 0.17 ……. 0.04
2005 jan ……. 0.18 ……. 0.15
feb ……. 0.13 ……. 0.03
mar ……. 0.13 ……. -0.01
apr ……. 0.13 ……. 0.03
may ……. 0.12 ……. 0
jun ……. 0.11 ……. 0.01
jul ……. 0.07 ……. 0
aug ……. 0.02 ……. -0.01
sep ……. 0.01 ……. 0
oct ……. 0.01 ……. -0.05
nov ……. 0.02 ……. -0.14
dec ……. 0.04 ……. -0.05
2006 jan ……. 0.04 ……. 0.03
feb ……. 0.01 ……. -0.04
mar ……. -0.02 ……. -0.08 top
apr ……. -0.03 ……. -0.03
may ……. -0.02 ……. -0.02
jun ……. -0.01 ……. 0
jul ……. -0.03 ……. 0
aug ……. -0.06 ……. -0.02
sep ……. -0.08 ……. -0.03
oct ……. -0.08 ……. -0.06
nov ……. -0.06 ……. -0.11
dec ……. -0.07 ……. -0.04
2007 jan ……. -0.11 ……. 0.05
feb ……. -0.09 ……. -0.04
mar ……. -0.11 ……. -0.1 bottom
apr ……. -0.09 ……. -0.05
may ……. -0.05 ……. -0.01
jun ……. -0.05 ……. 0.02
jul ……. -0.08 ……. 0.01
aug ……. -0.07 ……. 0
sep ……. -0.07 ……. 0 top
oct ……. -0.04 ……. -0.03
nov ……. -0.04 ……. -0.06
dec ……. -0.04 ……. 0
2008 jan ……. -0.07 ……. 0.08
feb ……. -0.05 ……. 0
mar ……. -0.04 ……. -0.07
apr ……. -0.03 ……. -0.01
may ……. -0.01 ……. 0.05
jun ……. -0.04 ……. 0.04
jul ……. -0.03 ……. 0.04
aug ……. 0.02 ……. 0.05
sep ……. 0.04 ……. 0.05
oct ……. 0.17 ……. 0.14
nov ……. 0.24 ……. 0.19
dec ……. 0.3 ……. 0.31
2009 jan ……. 0.45 ……. 0.57
feb ……. 0.4 ……. 0.39
mar ……. 0.38 ……. 0.25 bottom
apr ……. 0.4 ……. 0.38
may ……. 0.47 ……. 0.49
=============

Bernanke first tightened monetary policy as soon as he was inducted. The rate-of-change in monetary flows (our means-of-payment money X's its transactions rate-of-turnover) fell for 29 consecutive months driving the economy into a depression. I.e., Bernanke didn't initiate an easier monetary policy when Bear Sterns 2 hedge funds collapsed, but waited until Lehman Brothers filed for bankruptcy.

[flow5]

Credit Suisse

The sharp criticism from various quarters notwithstanding, the [Federal Reserve's] Federal Open Market Committee (FOMC) recommitted itself on Dec. 14 to the $600 billion large-scale asset purchase program ("LSAP" or "QE2") it launched in November.

Also, the by-now-familiar language about the path of the FOMC's fed-funds rate target was left intact: "The Committee…continues to anticipate that economic conditions…are likely to warrant exceptionally low levels for the federal-funds rate for an extended period."

Not all meeting participants in December were in favor of the Committee's decision. This is obvious from Kansas City Fed President [Thomas] Hoenig's eighth consecutive dissent. Also, the minutes of the Dec. 14 FOMC meeting, press reports, and policy makers' public comments have suggested a fundamental divergence of opinions and perspectives among Committee members.

The make-up of FOMC voters in this new year includes several vocal commentators on the Fed's unusually accommodative policy stance -- particularly of the central bank's ongoing LSAP program. In our view, at least one dissent per FOMC meeting in 2011 is likely; two dissents are possible, especially later in the year; three are highly unlikely.

Still, we expect the major characteristics of the LSAP program -- including its initial $600 billion size and eight-month duration -- will be left unchanged at the Jan. 25-26 FOMC meeting. The Committee's reference to a purchase pace of $75 billion per month may be deleted or changed to $80 billion, however, bringing it in line with the most recent operation schedule, reported by the New York Fed on Jan. 12.

We anticipate the Jan. 26 FOMC statement will acknowledge those economic sectors that have shown improvement in recent months, including consumer spending.

But we also look for some comment to the effect that the Fed still views the economy as far from achieving the central bank's dual mandate of maximum employment and price stability. That would be consistent with retaining the "extended period" language regarding the low fed-funds rate

[flow5]

As I previously repeated stated:


WASHINGTON, Jan. 22 (UPI) -- The U.S. Federal Reserve said U.S. consumers have begun dipping into their savings and investment accounts for the first time in nearly 60 years.

In the two years ending in September 2010, U.S. consumers have withdrawn $311 billion from savings and investments, representing a net draw from their disposable income of about 1.4 percent for the first net retreat in 57 years, The Wall Street Journal reported Saturday.

For the previous 57 years, on average consumers' financial assets grew by 12 percent of their disposable income per year.

The spending helps the economy, but a draw down in savings could haunt consumers if they are hit with hard times in the future, the Journal said.

In a recent poll, only 35 percent of U.S. consumers said they had enough funding saved to last three months.

Read more: www.upi.com/Business_News/2011/01/22/Consumers-draw-on-their-disposable-funds/UPI-12221295723134/#ixzz1BoRrwz8f

==============

I.e., income velocity is a CONTRIVED (make believe) figure.

[bimetalaupt]

Flow5,
I think this agrees with your posting that the excessive reserves are posted on H.6 as M2.. The only way we could have gotten a positive M2 number with no savings.. The year over year post for m2 is up 3.6%
Bruce

[bimetalaupt]

Jan 22, 2011 19:14:02 GMT -5 flow5 said:

As I previously repeated stated:


WASHINGTON, Jan. 22 (UPI) -- The U.S. Federal Reserve said U.S. consumers have begun dipping into their savings and investment accounts for the first time in nearly 60 years.

In the two years ending in September 2010, U.S. consumers have withdrawn $311 billion from savings and investments, representing a net draw from their disposable income of about 1.4 percent for the first net retreat in 57 years, The Wall Street Journal reported Saturday.
Flow5,
On the other hand M3 has just made the turn from very negative to short term positive.. Not year over year yet.. still down 1.2% for YOY numbers but M3 is not 13,674. Trillion USD or off 1.2% for the yoy math model.

Just a thought,
Bruce

[/img]
For the previous 57 years, on average consumers' financial assets grew by 12 percent of their disposable income per year.

The spending helps the economy, but a draw down in savings could haunt consumers if they are hit with hard times in the future, the Journal said.

In a recent poll, only 35 percent of U.S. consumers said they had enough funding saved to last three months.

Read more: www.upi.com/Business_News/2011/01/22/Consumers-draw-on-their-disposable-funds/UPI-12221295723134/#ixzz1BoRrwz8f

==============

I.e., income velocity is a CONTRIVED (make believe) figure. [/quote] The thinking is Ben B. has the idea the we are not out of the woods :YET!!! In 1930 President Hoover was told by this advisors the Depression was over.. The Federal Reserve had not replaced the lost Money from the M3.. This was an effect of the banks lack of capital due to losses from bad Real Estate and stock loans.

On the other hand M3 has just made the turn from very negative to short term positive... still down 1.2% for YOY numbers but M3 is now 13,674. Trillion USD or off 1.2% for the yoy math model. Is this the sign of Recovery Mellon Was looking for

Attachments:

[flow5]

Money supply growth is too fast. 4th qtr real gDp is estimated to be 3.5% - high enough to tank bonds...but not indicative of job growth - construction is still in the dumps.

ZeroHedge is going to check into my claim about Bernanke tanking the economy. But they can't without the data.

[bimetalaupt]

Jan 22, 2011 22:38:21 GMT -5 flow5 said:

Money supply growth is too fast. 4th qtr real gDp is estimated to be 3.5% - high enough to tank bonds...but not indicative of job growth - construction is still in the dumps.

ZeroHedge is going to check into my claim about Bernanke tanking the economy. But they can't without the data.

Flow5,
You are talking about the 2006-2007 negative M1 growth we talked about on the old Fed-Watch ?

I recall you had a very clear picture of things to come during those post.. From Fred.. M1 Multiplier.. Sure took a hit in 2009!!!

You did a great job,
Bruce

Attachments:

[bimetalaupt]

Jan 22, 2011 22:38:21 GMT -5 flow5 said:

Money supply growth is too fast. 4th qtr real gDp is estimated to be 3.5% - high enough to tank bonds...but not indicative of job growth - construction is still in the dumps.

ZeroHedge is going to check into my claim about Bernanke tanking the economy. But they can't without the data.

Flow5,
On the other hand you would think excessive reserves would be a sign of something is wrong like it was in 1932? Did you see anything unusual with the excessive reserve chart from FRED. Why are banks not lending money if they have all these excessive reserves.. ZeroHedge wants to know ME TOO I will not tell!!!
Just a thought,
Bruce

Attachments:

[Aman A.K.A. Ahamburger]

My thoughts Bruce, that banks are looking at billions in mortgage buy backs. They have to keep the reserves so that there isn't a fall out. The chart tells me something though. It might be time to keep a little more excess reserves around...