Ben Benanke's Incompetent

[Aman A.K.A. Ahamburger]

Jun 6, 2011 18:23:56 GMT -5 bimetalaupt said:

Jun 1, 2011 12:30:52 GMT -5 @maui1 said:

i am not sure it is the men (greenspand/volker as well) as fed chairman, that makes them seem stupid, but the position itself that is stupid.

as i see it.........the baseless need for the fed, is the only need i see for the fed.

It was designed by Paul Warburg.. You know Warburg was part of the Rothschild family and he gave up a huge banking salary to take the job.. We just need to have the Fed Pay more for the office of Chairperson.. Just think what Dimon would lose if he took the job? Just think what Wm Dudley would lose ( 200,000- 100,000) to take the chairman's jobs..

It is all about money,
Bi Metal Au Pt

=

This is an interesting way of looking at those last notes flow5, basically taking a lot of the authors bias opinions out of the write up.

On May 25, 2011, CASH ASSETS on the books of foreign-related financial institutions was just under $950 BILLION, up about $200 billion from April 27, 2011. On May 4 cash asset at foreign-related financial institutions were 50 percent of all the cash assets held by commercial banks in the United States.

Please note, that on December 29, 2010, before QE2 really swung into action, these foreign-related institutions held only about one-third of all the cash assets on the balance sheets of commercial banks in the United States.

The increase from December 29 to the present has been roughly $590 billion.

And, what have these foreign-related financial institutions done with the funds?

There is an account called “Net (Deposits) Due to Related Foreign Offices.” On December 29, 2010 this account, on the reported statistics was a negative $420 billion. That is, this was not money due to “related foreign offices” it was the money that “related foreign offices” had allocated to the United States office. That is, it was an asset of the bank and not a deposit liability.
On May 25, 2011, this negative number had turned into a positive number, it became a liability of the United States branches to “related foreign offices”, and this number was slightly over $86 billion. This represented a swing of $506 billion!

In essence, cash assets at these foreign-related institutions rose by about $590 billion since December 29 and $506 billion of this increase went to “related foreign offices.”

More from your notes flow5..

An additional market buffer notes JPMorgan (after the FED ends POMO purchases), is that Central banks have been accumulating foreign exchange reserves at a rapid pace (with emerging markets accumulating 80% of 2010’s $885b total). Consequently, conservative Central bankers are likely to increase their purchases and support of U.S. Treasury’s.

And hopefully, as bankers are confronted with a remuneration rate that is less attractive vis a’ vis other competitive instruments and yields, bank lending will expand (pushing the economy along).

Put into perspective:

QE2 greased the wheels (velocity). It accelerated decision making (financial transactions). It redistributed financial investment (not real investment). It supported the Treasury Market (the FED's informal mandate). Once you change the risk value (swap or convert assets), you make the markets rebalance. Rebalancing alters the asset mix. It makes the market re-examine, and revalue, the linkages between financial and real assets. It changes support & resistance lines. It increases the demand for speculative loan-funds.

Time to hit it out of the park Ben! What would Paul W, say, eh ? Show me the numbers?

[Driftr]

Nice speech Ben...

[texasredneck]

As always big ben speaks and the market tanks.

[Aman A.K.A. Ahamburger]

That's not what we were talking about here guys. However, at least he was honest. If he would have said "YAY everythings okay!" The market would have contiuned onward and up ward. Then it would have been Ben manipulating the market

[flow5]

Lee Adler:

"The Fed has pledged to replace any maturing paper on its balance sheet with additional Treasury purchases. Including MBS paydowns and GSE maturities. This should translate to the Fed BUYING $10-15 billion A MONTH in Treasuries for the remainder of this year. That’s essentially a starvation diet for the PRIMARY DEALERS, given that they face the responsibility for absorbing much of the expected $100 billion a month or more of NEW TREASURY PAPER"

wallstreetexaminer.com/category/money-and-the-fed/

seekingalpha.com/article/273794-as-pomo-power-loses-punch-primary-dealers-will-notice

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

QE2 ends June 30th & the supply of loan-funds will decline drastically.

[Small Biz Owner]

Just keep printing more and more money until it becomes worthless.

We are almost there already.

[flow5]

zerohedge:

"just a week after the last 7 year targeting POMO, Dealers sold another $3.168 billion to Brian Sack. Total tally: $8.561 billion monetized by the New York Fed in less than two weeks following the auction. Simply stated: the Dealers' unprecedented interest in the auction... was transitory. Just TWO WEEKS LATER, the Dealers have FLIPPED BACK 75% of their ENTIRE POSITION in the latest 7 Year On The Run bond. And this is the kind of sleight of hand that allows the Treasury to represent success after success in bond auctions"

[flow5]

www.ritholtz.com/blog/2011/06/the-great-qe2-flush-out/

"In Q1 2011, the Fed’s QE2 purchases of Treasuries totaled $1.3 TN on a seasonally adjusted annual basis. This number far exceeds the QE2 total program"

"the Fed will continue buying Treasuries with the proceeds from maturing securities — which we estimate to be around $230.4 BN from July1, 2011 to December 2012"

"Unless credit markets begin to recover in a significant way, the source of new liquidity to drive major markets is in question, in our opinion. Flows into one market — whether it be equities, bonds, commodities, or foreign assets — will likely be at the expense at another and follow a zero-sum game"

House-holds" reduced their Treasury holdings by $1.1T & repositioned their funds by investing $903B in Mutual Funds.

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

This is not a zero-sum game. The U.S. must reverse (increase), the flow of funds thru the financial interemediaries (non-banks), or 82% of the lending market just prior to the downturn. The BOG's new policy tool, IORs, are not just a contractionary open market device for conducting monetary policy within the CB banking system.

IOeRs exert a profoundly deflationary force (a cessation of the circuit income & transactions velocity of funds), in our highly interdependent economy. Unlike raising reserve ratios during 1936 & 1937, IOeRs induce dis-intermediation (an outflow of funds) from the non-banks (e.g., MMMFs, commercial paper market, etc.). IOeRs reduce the supply of loan-funds, increase the cost of loan-funds, and absorb existing savings (stopping a vast stock of savings in the private sector from being matched with real investment).

I.e., the source of all time/savings deposits to the CB system is demand deposits, either via the currency route, the bank’s undivided profit’s account, or since Oct 3, 2008, IOeRs as well. The CB’s (sanctioned by professional economists), have decided to pay for what they already own (i.e. the elimination of REG Q ceilings).

But the non-banks do not compete with the CBs. The non-banks are the customer’s of the CBs. Money flowing to the non-banks never leaves the CB system (as anyone who has ever applied double-entry booking on a national scale would know). The growth of the intermediaries/non-banks cannot be at the expense of the commercial banks. And why should the commercial banks pay for something they already have? I.e., interest on time deposits.

[flow5]

QE2 re-positioning (before the end of its $600b bond buying program), has "U.S.-domiciled equity funds (Lipper's MSCI index), suffering net redemptions in 5 out of the last 6 weeks, while money market funds recorded inflows.

(Reuters) - Investors are shifting into bonds and money markets and away from equities and emerging markets. Inflation expectations are muted & an economic slowdown is of concern. Looking for a flatter yield curve as FED sells assets in the exit process.

Stocks to fall?

[decoy409]

flow5, and what did I ring the bell on about 9 months back? Herding recall. And I also stated where they would flock to.
Now how is the bond/treasury cake holding up in real time??? Nobody really knows as it's all in the 'other' books.

[flow5]

The FED’s policy problem is with the payment of interest on inter-bank demand deposits. IOeRs are not the equivalent of short-term t-bills. IOeRs are the functional equivalent of required reserves (because the remuneration rate is the Central Bank's policy rate - & it floats (it’s adjusted for economic growth).

The BOG's new policy tool, IORs, are not just a contractionary open market device for conducting monetary policy within the CB banking system; IOeRs exert a profoundly deflationary force (a cessation of the circuit income & transactions velocity of funds), in both the highly interdependent, domestic, and global economies.

Unlike raising reserve ratios during 1936 & 1937, IOeRs induce dis-intermediation (an outflow of funds) from the non-bank financial institutions (e.g., MMMFs, commercial paper market, etc.).

IOeRs compete with money market “paper” (the highly liquid, short-term, dealer funding market). The financial instruments traded in the money market include Treasury bills, commercial paper, banker’s acceptances, certificates of deposit, repurchase agreements (repos), municipal notes, federal funds, short-lived mortgage, and asset-backed securities & Euro-Dollar CDs (liabilities of a non-U.S. banks operating on narrower regulatory margins).

The money market is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities from one year or less). The domestic money market is benchmarked internationally (by the London interbank market LIBOR indexes & foreign exchange swaps).

The money market collects & channels private savings thru the financial intermediaries (& rolls-over & refinances existing operations). The financial intermediaries include the Shadow Banks (“Paul McCulley of PIMCO’s non-bank investment conduits, vehicles, and structures”). In turn, the financial intermediaries invest their borrowings in longer-term, less liquid, earning assets (e.g., to the capital market - where money is provided for periods longer than a year).

IOeRs flatten out the yield curve. They reduce the spread, or net interest rate margin between borrowing short & lending long (between the weighted-average interest earned on loans, securities, and other interest-earning assets, & the weighted-average interest paid on deposits and other interest-bearing liabilities). A flatter yield curve and/or lower rates shrinks bank profit margins.

IOeRs remunerated @.25% encompass the short-end of the yield curve, & QE2's LSAP's effect is distributed on the other portion of the yield curve. The FED's flattening yield curve policy reduces profit opportunities & discourages the extension of new loans or the purchase of new investments.

In summary, IOeRs stop the flow of existing funds originating in the money market, reducing the supply of loan-funds, increasing the cost of loan-funds, and absorbing existing savings (stopping a vast stock of savings in the private sector from being matched with real investment). I.e., the IOR policy results in stagflation.

I.e., the Daily Treasury Yield Curve Rates show the 1 year rate is now @.19% Thus we (or Bernanke), shoot ourselves in the foot again.



libertystreeteconomics.newyorkfed.org/2011/05/will-the-federal-reserves-asset-purchases-lead-to-higher-inflation.html


Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
06/01/11 0.04 0.05 0.11 0.18 0.44 0.74 1.60 2.28 2.96 3.83 4.15
06/02/11 0.04 0.04 0.11 0.19 0.45 0.78 1.65 2.34 3.04 3.92 4.25
06/03/11 0.04 0.04 0.10 0.18 0.42 0.75 1.60 2.28 2.99 3.90 4.22
06/06/11 0.03 0.05 0.10 0.18 0.43 0.74 1.60 2.29 3.01 3.92 4.25
06/07/11 0.01 0.05 0.11 0.18 0.39 0.74 1.59 2.29 3.01 3.94 4.27
06/08/11 0.01 0.04 0.11 0.18 0.39 0.68 1.52 2.24 2.98 3.88 4.20
06/09/11 0.02 0.05 0.10 0.19 0.43 0.73 1.60 2.30 3.01 3.91 4.22
06/10/11 0.02 0.05 0.10 0.19 0.41 0.71 1.58 2.28 2.99 3.87 4.18

[flow5]

Across all operations in the schedule listed below, the Desk plans to purchase approximately $62 billion. This represents $50 billion in purchases of the announced $600 billion purchase program, which will be completed by the end of June, and $12 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-June and mid-July. As always, this schedule is subject to change should the FOMC choose to alter its directive to the Desk during the monthly period.

Operation Date1 Settlement Date Operation Type2 Maturity
Range Expected Purchase Size
June 13, 2011 June 14, Outright Treasury Coupon Purchase 08/15/2018 - 05/15/2021 $4 - $5 billion
June 14, 2011 June 15, Outright Treasury Coupon Purchase 12/15/2012 - 11/30/2013 $2.5 - $3.5 billion
June 15, 2011 June 16, Outright Treasury Coupon Purchase 12/31/2016 - 05/31/2018 $4 - $5 billion
June 16, 2011 June 17, Outright Treasury Coupon Purchase 06/30/2015 - 11/30/2016 $4 - $5 billion
June 17, 2011 June 20, Outright TIPS Purchase 04/15/2013 - 02/15/2041 $1.5 - $2.0 billion
June 20, 2011 June 21, Outright Treasury Coupon Purchase 08/15/2018 - 05/15/2021 $4 - $5 billion
June 20, 2011 June 21, Outright Treasury Coupon Purchase 12/31/2013 - 05/31/2015 $4 - $5 billion
June 21, 2011 June 22, Outright Treasury Coupon Purchase 12/31/2016 - 05/31/2018 $4 - $5 billion
June 23, 2011 June 24, Outright Treasury Coupon Purchase 08/15/2021 - 11/15/2027 $1 - $1.5 billion
June 24, 2011 June 27, Outright Treasury Coupon Purchase 12/31/2013 - 05/31/2015 $4 - $5 billion
June 27, 2011 June28, Outright Treasury Coupon Purchase 06/30/2015 - 11/30/2016 $4 - $5 billion
June 28, 2011 June 29, Outright Treasury Coupon Purchase 08/15/2018 - 05/15/2021 $4 - $5 billion
June 29, 2011 June 30, Outright Treasury Coupon Purchase 08/15/2028 - 05/15/2041 $2 - $3 billion
June 30, 2011 July 1, Outright Treasury Coupon Purchase 12/31/2016 - 06/30/2018 $4 - $5 billion

Completion of $600 Billion Purchase Program
July 6, 2011 July 7, Outright Treasury Coupon Purchase 01/15/2014 - 06/30/2015 $2.5 - $3.5 billion
July 11, 2011 July 12, Outright Treasury Coupon Purchase 07/31/2015 - 12/31/2016 $2.5 - $3.5 billion

[flow5]

"Laurence Fink, CEO of BlackRock Inc (NYSE:BLK), said on Friday that he expects strong demand for U.S. Treasury issues as the Federal Reserve exits its bond-buying program."

""Investors are de-risking," Fink told CNBC in an interview. "They are frightened of the world and all these issues we have in front of us." As a consequence, he said, "Banks are going to be forced to invest in Treasuries.""

[flow5]

Commodities, stocks (& money center bank stocks in particular), to fall?

[flow5]

WSJ flow of funds z.1 release: "$26,172: Amount of debt the average U.S. household would need to cut to bring balance sheets back to 1990s levels.

Americans have made progress in paring back their debt, partly by cutting their credit-card use and mostly by walking away from mortgages and other loans. But they still have a long way to go.

In the first quarter, households owed $13.3 trillion, an amount equal to 18.4% of total household assets, including stock portfolios, savings and homes, according to the Federal Reserve‘s flow of funds report. That was DOWN FROM 21.7% two years earlier but still well above the 14.4% level that prevailed in the 1990s. That suggests household BALANCE SHEETS don’t have nearly enough cushioning against financial shocks, like job loss and illness, as they should.

To get back to 14.4%, households would have to shed a combined $2.9 trillion of debt. In other words, either people cut their credit cards up like crazy, or they keep putting their keys in the mailbox and walking away.

Another way: Increase household assets by $20.4 trillion — a 30% gain that would all but wipe out real estate losses and take the stock market to a new all-time high. History suggests that day will eventually come, but given the current state of the financial and housing markets, it seems unlikely to come quickly"
===============
still deleveraging

[flow5]

"In summary, TOTAL HOUSEHOLD NET WORTH INCREASED by $1 trillion from $57.1 trillion to $58.1 trillion in the 3 months ended March 31, 2011. This the highest level of household net worth since Q2 2008 when it stood at $60 trillion, and STILL DOWN substantially from the ALL TIME HIGH of $65.7 trillion in the summary of 2007, or the peak of the credit bubble."

[flow5]

NEW YORK -(Dow Jones)- U.S. MONEY-MARKET FUNDS' significant exposure to European banks underscores the threat that the risk of a Greek sovereign default poses to global financial markets.

As of February, U.S. money-market funds' HOLDINGS OF SHORT-TERM SECURITIES sold by European banks--including commercial paper, asset-backed securities and certificates of deposit--stood at 44.3% OF THEIR TOTAL ASSETS, according to a recent research report from Fitch. The ratings agency said it will release updated data in several weeks.

If those funds were to sell some of their holdings, they could pull the plug on an important channel of short-term funding for European banks and pre-empt a crisis across the euro zone--even without Greece having an actual default, the event most feared by European banks.

Alternatively, the funds COULD SUFFER BIG LOSSES from their investments if the Greek debt crisis worsened--either with an actual default, or a restructuring that undermines banks' balance sheets. The deterioration in the banks' financial position would worsen again if CONTAGION were to spread to other countries within the euro zone and if their bonds were also to come under selling pressure.

"It is easy to see therefore that the risk of a Greek default has SYSTEMIC IMPLICATIONS that go way beyond the euro area," wrote Pater Tenebrarum, an independent analyst who runs the Acting Man financial website. He put the figure for U.S. money-market exposure to European Bank assets at 42%.

The European Central Bank also is exposed to this tight relationship between U.S. funds and European banks. The ECB has accepted some 480 billion euros ($689 billion) in asset-backed securities, and it has an additional EUR360 billion in "non-marketable financial instruments" on its books--similar assets to those held by the U.S. money-market funds.

That's up sharply from EUR36 billion in 2005, according to calculations by German news magazine Der Spiegel based on data from the European Central Bank.

It is one reason why many ECB officials are opposed to proposals by the German government that private investors share the bailout cost via a voluntary restructuring on Greek government debt.

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

Its now a highly interdependent world. Little wonder IOeRs have been allowed to explode.

[flow5]

FXstreet.com (Barcelona) - John Taylor, Chairman and Founder of the world's largest currency hedge fund, FX Concepts, which has more than $8 billion under management:

"Taylor says that after shorting the dollar, he has currently reversed that to be now long just a week ago and expects a big upside USD catalyst in the NEXT "3 OR 4 DAYS"

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

Dollar to reverse NOW?

[flow5]

"Excluding distressed sales, the bottom map shows that there are 20 states that have POSITIVE RATES OF APPRECIATION through April"

"CoreLogic releases home price data a month earlier (now available for April) than Case-Shiller (now available for March), and b) CoreLogic reports two price indexes - one that includes all single-family homes (like Case-Shiller) and another home price index that excludes distressed sales (short sales and REO transactions). In that way, we can track home prices in the "healthy" sector of the real estate market independently of the distressed part of the market."

"The CoreLogic HPI is a "repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality" view of pricing trends than basing analysis on all homes" "


seekingalpha.com/article/274348-excluding-distressed-home-sales-corelogic-index-shows-that-home-prices-are-increasing-in-20-states

[flow5]

Daniel K. Tarullo, a governor of the Federal Reserve.

"In a speech on June 3, Mr. Tarullo implied capital requirements for systemically important financial institutions — a category specified in the sweeping overhaul of financial regulation last year — could be as high as 14 percent, or roughly DOUBLE what is required for all banks under the Basel III agreement.

Whether the Federal Reserve will go that far is not certain; a capital requirement of an additional 3 percent of equity (on top of BASEL's 7 percent) may be more likely, but that is still 3 percent MORE than big banks were hoping for. (These percentages are relative to risk-weighted assets.)

The big banks are likely to mount four main arguments as they press their case against the additional capital requirements, Reuters has reported:

1. “Holding capital hostage” will hurt the struggling economy because it will mean fewer loans at a time when lending is already depressed.

2. Establishing “huge” capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk.

3. If banks hold onto more capital and make fewer loans, borrowers will turn to the “shadow banking sector” – the so-called special purpose vehicles, for example — which has little or no oversight.

4. Tough standards in the United States would create a competitive disadvantage vis à vis other countries.

Each of the bankers’ arguments is wrong in interesting and informative ways.

First, capital requirements do not hold anyone or anything hostage — they merely require financial institutions to fund themselves more with equity relative to debt. Capital requirements are a restriction on the liability side of the balance sheet — they have nothing to do with the asset side (in what you invest or to whom you lend).

....This is not about holding anything; it is about funding relatively less with debt and more with loss-absorbing equity. More equity means the banks can absorb more losses before they turn to the taxpayer for help. This is a good thing.

The idea that higher capital requirements will increase costs for banks or cause their balance sheets to shrink or otherwise contract credit IS A HOAX — and one that has been thoroughly debunked by Anat Admati

In a recent public letter to the board of JPMorgan Chase, whose chief executive, Jamie Dimon, is an opponent of higher capital requirements, Professor Admati points out that these requirements would — on top of all the social benefits — be in the interests of his shareholders. The bankers cannot win this argument on its intellectual merits.

The second argument, that establishing “huge” capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk, is an attempt to rewrite history.

During the Dodd-Frank debates last year, the Treasury Department and leading voices on Capitol Hill — including bank lobbyists — said it would be a bad idea for Congress to legislate capital requirements and should leave them to be set by regulators after the Basel III negotiations were complete.

Now the time has come to do so, and Mr. Tarullo is the relevant official — he is in charge of this issue within the Federal Reserve and is one of the world’s leading experts on capital requirements.

But the banks now want to say that this is not his job as authorized by Dodd-Frank. This argument will impress only lawmakers looking for any excuse to help the big banks.

The third bankers’ argument, that borrowers will turn to the “shadow banking sector,” contains an important point — but not what the bankers want you to focus on.

The “shadow banking sector” — special purpose vehicles, for example — grew rapidly in large part because it was a popular way for very big banks to evade existing capital requirements before 2008, even though those standards were very low.

They created various kinds of off-balance-sheet entities financed with little equity and a great deal of debt, and they convinced rating agencies and regulators that these were safe structures. Many such funds collapsed in the face of losses on their housing-related assets, which turned out to be very risky — and there was not enough equity to absorb losses.

....Sebastian Mallaby, who has carefully studied hedge funds and related entities, asserted correctly last week in The Financial Times that it would be straightforward to extend higher capital requirements to cover shadow banking.

The fourth bankers’ argument, that higher equity requirements in the United States would create a competitive disadvantage vis à vis other countries, is like arguing in favor of the status quo in an industry that emits a great deal of pollution, a point made by Andrew Haldane of the Bank of England"

economix.blogs.nytimes.com/2011/06/15/the-big-banks-fight-on/

[flow5]

Month to date federal withholding taxes as of June 15 were down 5.5% from last year, negating the monthly gain in May. That gain was primarily due to the calendar anomaly of a payment date for a biweekly and semimonthly pay period for many employees coming on June 1 last year. That resulted in an understatement in May’s 2010 receipts and an overstatement for June last year. Therefore the 5.5% decline so far this month vs. last June makes things look worse than they are. The truth is that tax receipts over the last rolling monthly period are about even with last year, suggesting that the economy has stalled, but has not collapsed to the degree implied by a 5.5% decline.

The one month moving average of daily withholding tax collections is at about the same level as last year. May’s gains have dissipated. The 13 week moving average is sinking fast and should be hitting bottom now. It is at roughly the same level as last year. Normal seasonality has a flat period through Q3, with a drop into the low in September/October. If this graph drops below last year’s level from here, then the economy probably is in free fall. That would be very bad news in terms of the levels of debt the Treasury must float in the months ahead.

(From 5/19/11) There’s no sign of upward momentum in this chart. Things should turn more negative as stimulus spending recedes and other government spending is cut. This will coincide with the ending of Fed money printing. That should all result in a continued economic slowdown, and lower revenue collections leading to bigger deficits and greater than forecast Treasury supply.

Looking at other taxes as of June 15, excise taxes were down 8% vs. last year. Corporate taxes were down 9.3%. Quarterly income taxes are due on June 15. The April 15 quarterly tax take was only down 6% y/y. The drop in excise and corporate taxes are bad signs for the economy, and again suggest that the government will need to borrow far more in the months ahead than the Treasury had expected based on its rosy economic assumptions. The Treasury market could be in for a shock when the size of new auctions start coming in much larger than anticipated.

June is the peak month for corporate taxes. It’s clear that the trend of corporate tax receipts remains negative. The old joke is that businesses keep two sets of books. My bet would be that corporations inflate the earnings that they report to Wall Street and show the real story to Uncle Sam. The downtrend there is not a pretty picture.

However, I do recognize that U.S. corporations are earning and keeping profits offshore. That’s good for their executives and bad for the American people. Is that good for the stock market? Is it good for stock prices? Does it justify higher PE ratios? That’s bulls' argument of the bulls. Needless to say, I don’t agree.

Reviewing other items tax refunds show a $4.6 billion drop this year for the first half of June vs. last year. Outlays net of debt redemptions show a $6.5 billion drop as of mid month. These items represent a sharp reduction in economic stimulus, and that will only get worse in the months ahead as government budget cutters wield their axes. Here we could have the worst of both worlds. Falling outlays will reduce economic activity, but revenues could fall faster, increasing the rate of government borrowing. The result could be a vicious cycle burdening the markets with unexpectedly greater levels of Treasury supply that will suck up any available capital and probably force stocks to be liquidated.

The one bright spot in the Daily Treasury Statement, which is inconsequential in terms of total revenues but has some significance as an economic indicator, is in individual non-withheld taxes. They were up by $900 million to $2.4 billion in mid June vs. the same period last year. Again, June 15 is a quarterly estimated tax due date, so clearly some small business people were doing well this year.

Treasury cash was $126.4 billion on June 15vs. $85 billion last year this point. The government has built up a huge war chest in anticipation of the debt ceiling problem. With weak tax receipts in June, that money will be gone quickly.

Back in January I wrote that the Fed’s pumping was causing rapidly increasing input costs that are squeezing both corporate profits and consumers' ability to maintain discretionary spending. I said that these forces should eventually result in diminishing economic activity. To that extent, the apparent beneficial economic effects of QE2 would be self limiting. These forces have played out as expected over the ensuing five months.

(from 4/29/11) Deficit spending and tax refund cash has been distorting the economic data, making it look better than it would in the absence of these oceans of cash. As stimulus is withdrawn and the government delays other spending, and as tax refunds fall from $111 billion in February to zero over the next couple of months, the economic data should weaken dramatically. That should lead to lower revenues, bigger deficits, and more Treasury supply later this year.

As of mid June we are now seeing these forces play out in real time. With the Fed now set to end its program of quantitative easing for the time being and government spending set to decline, the squeeze should worsen in coming months. A scramble for the liquidity needed to absorb huge waves of Treasury supply is likely to cause massive dislocations in both the economy and the markets.

This seems like a good time to reiterate my April call to sell everything, now with increased urgency, especially when the market provides a gift reaction rally as it should soon.
===========

LEE ADLER: This article is an abridged excerpt from the June 16 Wall Street Examiner Professional Edition Treasury update.

seekingalpha.com/article/275499-federal-tax-receipts-show-economy-grinding-to-a-halt?source=email_macro_view

[flow5]

Ed Dolan:

…PRICE-LEVEL TARGETING is the view that central banks should focus their policy on holding the average price level to a PRESET GROWTH PATH over an extended period. It resembles the more widely known policy of INFLATION TARGETING in assuming that monetary policy should target nominal variables, which it can affect directly, not real variables, which it can affect only indirectly.

It differs from inflation targeting in how it deals with situations where inflation falls short of the target. Inflation targeting aims to get inflation BACK TO A TARGET RATE, and then ease off. Price-level targeting more aggressively aims for ABOVE-TARGET INFLATION until the price level has fully caught up to its previous path.

Chairman Ben Bernanke has indicated that the Fed considers inflation of about 2 percent per year to be consistent with its mandate, but neither he nor his predecessors have explicitly endorsed any specific form of targeting. As a result, there was a GOOD DEAL OF AMBIGUITY about what the Fed was trying to do when it undertook its second round of quantitative easing in November 2010. Did it intend to bring the price level back to the original path of 2 percent inflation that it had begun to fall below in early 2009? Or did it intend to rebase the target, and aim for 2 percent inflation going forward from the start of QE2?

The chart starts in January 2009, just at the point when inflation began to drop below 2 percent. Over the next year and a half, the actual price level fell farther and farther BELOW the original 2 percent path. If QE2 had been intended as classic inflation targeting, its objective would have been get onto and stay on a 2 percent path REBASED in November 2010. As the price level rose above the rebased target, as it began to do already in January 2011, the Fed would have had to EASE OFF its expansionary policy in order to prevent excess inflation.

Instead, the Fed continued with the full planned program of QE2, EVEN AS INFLATION ROSE to 3 percent and above during the late winter and spring of 2011. That outcome was exactly what had been advocated by proponents of price-level targeting, including Charles Evans, head of the Federal Reserve Bank of Chicago, who had become a voting member of the policy-setting Federal Open Market Committee in January.

What now? Judging from the just-released May data, it looks like things are developing as price-level targeters would want them to, but the job is not finished. As the dashed extrapolation of the actual price-level series shows, it would TAKE ANOTHER 3 QUARTERS of 4 percent inflation to BRING THE PRICE LEVEL BACK TO THE PATH it dropped below in the depths of the recession.

WILL THE PRICE LEVEL CONTINUE TO CATCH UP with its earlier trend? At this point, the odds look better than even that it will. Barring some very bad economic numbers over the next few months, the Fed is unlikely to undertake a new round of quantitative easing, but it probably will not have to do so.

There ought to be enough of a LAG IN POLICY EFFECTIVENESS to allow inflation to continue above 2 percent for some time yet. To slow inflation more quickly, the Fed would need not just to stop additional asset purchases, but to begin aggressively to reduce its accumulated holdings. It has given no indication that it will do so.

www.businessinsider.com/if-qe2-was-price-level-targeting-it-is-starting-to-work-2011

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Let's be clear on the terms of "inflation". Some questions:

(1) Where was the CRB index in Aug 2008?
(2) How far did it fall.
(3) Has reflation or rebasing brought it back to Aug 2008 levels?
(4) Like the CPI, is the CRB's composition "representative" of overall consumer prices?

Then, what proportion of these price increases are due to:

(1) monetary inflation
(2) a declining exchange rate
(3) the growth of emerging economies
(4) the carry trade
(5) an overpopulated world & the scarcity of resources
(6) the unregulated Euro-dollar market

How many of these factors are under Central Bank's control & how many are controllable?

So considering these factors, is the FED's inflation mandate (core CPI) on the right trajectory? I.e., are monetary inflation, & the core CPI, equivalent metrics?

The CRB peaked at April's month-end. Shouldn't the FED be more aggressive in its open market purchases and attempt to boost real-money stock growth? Isn't a falling stock market telling us something?

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

My take is that monetary inflation is currently too weak. Commodities are signaling this weakness.

[flow5]

Summer ends Labor day week-end. Monetary policy NOW projects that both ROCs in money flows will contract in the 3rd qtr (stocks to follow).

However, any decline is just a receipe for another rally - given that downswings are corrected by the growth of real-money (the rate-of-change in the money stock in excess of the rate-of-change in inflation).

[flow5]

In the latest week 6/6/2011, the ratio of currency to demand deposits continues to decline. I interpret this to mean that the transactions velocity is declining.

Whereas the FED's research staff:

(in the 80's): "Board staff developed the so-called P* (P-star) model, based on M2, which used the quantity theory of money and estimates of long-run potential output and velocity (THE RATIO OF NOMINAL INCOME TO MONEY) to predict long-run inflation trends"

New excuse:

"As I have already suggested, the rapid pace of FINANCIAL INNOVATION in the United States has been an important reason for the instability of the relationships between monetary aggregates and other macroeconomic variables.14 In response to REGULATORY CHANGES and TECHNOLOGICAL PROGRESS, U.S. banks have created new kinds of accounts and added features to existing accounts.

More broadly, PAYMENTS TECHNOLOGIES & PRACTICES have changed substantially over the past few decades, and innovations (such as INTERNET BANKING) continue. As a result, PATTERNS OF USAGE of DIFFERENT TYPES OF TRANSACTIONS ACCOUNTS have at times SHIFTED RAPIDLY and UNPREDICTABLY"

=====

total b.s. The FED's research staff has never had a clue.

[flow5]

JOHN MASON:

How is this growth happening if bank loans are decreasing?

Well, economic units are still getting out of assets that are EARNING VERY LITTLE INTEREST & ARE NOT COUNTED IN THE TWO MEASURES OF THE MONEY STOCK and placing the assets in accounts or cash that can be spent when needed which are included in these measures of the money stock.

In several previous posts I have taken this as a negative sign, a sign that people want to keep their ASSETS READY FOR SPENDING because they are without jobs or without sufficient income or see other assets being underwater. They are keeping assets in transaction accounts so that they can spend the money when needed.

This movement to assets the economic units can transact with is seen in the increase in the HOLDINGS OF CURRENCY, which has gone from a year-over-year rate of expansion of 6.3 percent in December 2010 to 7.7 percent increase in March 2011 and an 8.2 percent rise in April.

The year-over-year rate of GROWTH OF DEMAND DEPOSITS has risen from 15.7 percent in December 2010 to 20.9 percent in March to 21.8 percent in April.
N
NON-M1 portions of the M2 MONEY STOCK have hardly increased within this time frame.

So, the Federal Reserve continues to PUSH ON A STRING. The commercial banks aren’t lending. Economic units aren’t borrowing. And these latter economic units continue to move their assets from LONGER-TERM, LESS LIQUID ASSETS TO SHORTER-TERM, TRANSACTIONS-TYPE ASSETS.

The evidence here still indicates that the banking system is not fully engaged in economic recovery and the efforts of the Federal Reserve system have accomplished little more than spur on the “carry” trade in international financial and commodity markets. And, it also indicates that consumers and small businesses, in aggregate, continue to keep their assets where they can spend them through a period when they CANNOT MEET CURRENT SPENDING NEEDS WITH THEIR INCOMES and cash flows being weak.

[flow5]

IOeRs are as counterproductive as raising the maximum interest rates commercial banks (REG Q CEILINGs), could pay on time and savings deposits in 1966.

Back then, Regulation Q policy allowed the commercial banks (during the first seven months of 1966), to pay higher interest rates on certificates of deposit than savings and loan associations and the mutual savings banks could pay on share certificates and savings deposits. Such an interest rate differential existed in no other period. It was this factor, unique to 1966, that triggered the residential mortgage credit crisis of that year (at that point in time the thrifts didn't even have interest rate ceilings - their first ceilings were established in Sept).

IOeRs (like REG Q CEILINGs in 66), induce dis-intermediation in the money market (which is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities within a one year period). I.e., IOeRs dry up lendable funds.

Depending upon the source, IOeRs reduce the supply of loan-funds, increase the cost of loan-funds, & absorb existing savings. I.e., the IOR policy exerts a depressive effect upon gDp.

[flow5]

JANET YELLEN:

"Before the crisis, market participants grew comfortable with borrowing collateralized by a variety of less-liquid assets, sometimes using structured investment vehicles (SIVs), conduits, and other off-balance-sheet structures. Directly or indirectly, market participants used SHORT-TERM FUNDING that needed to be RENEWED ALMOST CONTINUALLY but lacked a formal LIQUIDITY BACKSTOP (although, in some cases, such support was seen by market participants as implicit). Further, much of the financing--through repurchase agreements (repos), over-the-counter (OTC) derivatives, and other mechanisms--was collateralized by securities that already embedded significant structural leverage."

"This layering of leverage had profound consequences when sentiment changed. Lenders who had financed securities, either directly in the repo market or through structured vehicles, were suddenly no longer comfortable with the collateral and were UNSURE OF THEIR POTENTIAL EXPOSURE TO LOSSES. Given the uncertainties, the rational response went beyond RAISING HAIRCUTS or other means of TIGHTENING CREDIT TERSM: Banks simply stopped lending, typically by not "ROLLING OVER," or RENEWING, SHORT-TERM FINANCING when trades matured. In addition, collateralized borrowing had taken on many transactional forms, including OTC derivatives or securities financings, which were not always recognized as economically equivalent. Given the extent of layering, and sometimes opacity of leverage, the result was a rapid and DISORDERLY UNWINDING, over just weeks or months, of a very complicated system that had taken years to evolve."

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

The debt market (Shadow Banks), collapsed & have not been allowed to recover because of IOeRs.

[flow5]

JANET YELLEN:

"First, important classes of generally unlevered investors (for example, pension funds) are reportedly finding it DIFFICULT in the present low interest rate environment to meet NOMINAL RETURN TARGETS and may be reaching for yield by assuming greater interest-rate and credit risk in their portfolios"

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

But rumors persist that some version of the old "OPERATION TWIST" (1961-1965), will continue to FLATTEN the yield curve.

BERNANKE - 2002: "An episode apparently less favorable to the view that the Fed can manipulate Treasury yields was the so-called Operation Twist of the 1960s, during which an attempt was made to RAISE SHORT-TERM YIELDS & LOWER LONG-TERM YIELDS SIMULTANEOUSLY by selling at the short end and buying at the long end. Academic opinion on the effectiveness of Operation Twist is divided. In any case, this episode was RATHER SMALL IN SCALE, did not involve explicit announcement of TARGET RATES, and occurred when interest rates were not close to zero."

=========

This operation changed the "trading desk's" March 1953 "bills only" policy that restricted open market operations to the short end of the debt market, esp. Treasury bills.

[flow5]

JANET YELLEN:

"I mentioned earlier that strong demand has been pushing prices higher in the syndicated loan market and figure 7 shows recent developments: Inflows into this asset class have indeed been robust and prices have been rising quite rapidly. An important characteristic of SYNDICATED LOANS is that they are FLOATING RATE INSTRUMENTS, priced at a FIXED SPREAD TO LIBOR (the London interbank offered rate). In an environment where interest rates may be expected to rise, this characteristic may partly explain such strong investor interest."

==========

Borrowers beware

[flow5]

"The Billion Prices Project @ MIT has just been updated with daily price data through June 1, and is reflecting moderating inflationary pressures that have fallen to a new 5-month low (see chart above of monthly inflation rates since 12/25/2010). From a high of about 0.85% for the monthly inflation rate through late February, inflation has fallen to about 0.32% for the month ending June 1, and has been trending steadily downward for the last three months to the lowest level since late January."


"From a statement issued by the BPP @ MIT group: "We had been anticipating a slowdown in the all-items CPI, which was reflected in the BLS announcement a few days ago. The annual inflation rate appears to be stabilizing around 3.5%.""

seekingalpha.com/article/275810-indications-of-falling-inflation

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

Economy (nominal gDp), sliding.