Tag Archives: Fed funds rate

Is The Fed Beginning To Lose Control?

I enjoyed Stockman’s piece on Dec. 30th – LINK – concerning the impact of the meltdown in the commodity industries. I think people are seriously underestimating the impact.  –  New Year’s Day email from John Embry

I would like to point out that John and I always discuss a few pleasant topics as well as plot the demise of the global economy.   On that note:  Happy New Year everyone (Buon Anno a tutti).

I pointed out to John that Stockman’s analysis did not include any consideration of the amplification caused by derivatives on the destruction to the world/U.S. economy that is going to be felt from the price collapse of oil and basic industrial commodities.   In fact, I would argue, though it’s next to impossible to prove, that the Fed spends a significant amount of time working to prevent any evidence of the brewing derivatives nightmare from reaching overt public view,  in conjunction with the ECB, BoE and U.S. Treasury (the exchange stabilization fund).

An interesting event first brought at least to my attention by Zerohedge occurred on December 31.  The Fed funds (FF) rate plunged significantly below the lower bound of the Fed’s .25-.50% FF rate to the rate set that day at .12% (source:  Zerohedge, with my edits in black) click to enlarge:

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The question is, why did this happen?  To begin with, although it went largely unnoticed, the Fed also jacked up the interest it pays on bank excess reserves (IOER) from .25% to .50% at the same time it nudged up the FF rate.   Let’s first review what Fed funds are and how they work mechanically.

The Fed funds is the mechanism by which banks who have cash in excess of what they need to meet reserve requirements lend these “excess” reserves to banks who might need a temporary loan in order meet reserve requirements.  It is thus a system by which banks with extra liquidity make short term loans to banks who need liquidity.  The Fed funds rate is the rate at which excess funds are loaned out. The FF rate is set in a competitive bidding process each day based on the supply of funds made available to lend and the demand to borrow these funds.

In theory the Fed is supposed to be able to “control” the FF rate by regulating the amount of ready-liquidity in the banking system.  The Fed “adjusts” systemic liquidity using the reverse repo and repo “tools” (it can also adjust the minimum reserve ratio but this is rare). If the FF rate is headed above its target range, the Fed repos cash liquidity into the banking system.  Conversely, it uses the reverse repo if the FF rate is headed below the lower bound of its target range in order to remove systemic liquidity.

The IOER “mechanism” was put in place when the Fed began using its “helicopter” to dump printed money into the banking system.  Note:  half of the printed money either remained inside the banking system, which is a closed system, or went to the U.S. Treasury via transmission through the banking system;  the other half of the printed money was injected into the mortgage banking system through Fannie Mae, Freddie Mac and the FHA via the banking system.  The latter form of helicopter money ignited the mini-housing bubble and has led to mortgage and derivative products similar to the same products presented in “The Big Short.”

Prior to the Fed’s paying interest on excess reserves, banks were not earning any interest on their excess reserves at the Fed unless they lent out that money to other banks via the Fed funds mechanism.

The justification used by the FOMC in implementing the IOER was that it would enable the Fed to control the lower bound of the FF rate despite the flood of bank excess liquidity sitting at the Fed.  This is because if the FF rate were to slip too far below the IOER rate, banks would keep their excess liquidity sitting in the excess reserve account rather than make those funds available for interbank lending.   In the current framework for this interest rate management model, the FF target range is .25-.50% and the IOER is .50%.  A further elaboration of this idea can be found here:  LINK.

Without getting too theoretical, in theory the FF rate should be slightly below the IOER rate.  This is because Fed funds are collateralized by Treasuries and triple-A mortgage paper.  The IOER is “collateralized” by the Fed’s balance sheet, which has a tiny book value in relation to the size of the balance.  In other words, on a “risk-adjusted” basis, a Fed funds loan is slightly less risky than a deposit sitting in a Federal Reserve account. Therefore, the Fed funds rate, everything else being equal, should be slightly lower than the IOER rate.

This brings us to the Friday event, when the Fed funds rate crashed below the .25% lower bound of the current FF rate policy, indicating that the amount of liquidity made available for Fed funds borrowing was well in excess the amount demanded to be borrowed and well in excess of the Fed’s ability to keep the FF rate at the .25% lower bound.

Why did this occur?  The simplest explanation is that the Federal Reserve is losing control of the amount of liquidity sloshing around the banking system and therefore is losing control of interest rates.  Yet, on Friday, the FF rate was set not only significantly  below the IOER rate but it also plummeted below the Fed’s “lower bound” rate.  This means that some banks chose to lend to other banks at a rate that was significantly below the IOER rate.  Bernanke’s Fed told us this would not happen.

It’s possible that this will be attributed to an end of year technical glitch.  As Zerohedge points out in the article linked above, the FF rate dropped at month end every month in 2015.  But it remained within the Fed’s lower bound of 0%.

The Fed could have prevented this from occurring if it had removed significantly more than $105 billion in liquidity from the banking system when it nudged up the FF rate (using the reverse repo tool).  In fact, some estimates were that the Fed would need to remove up to $1 trillion in reserves in order to maintain the lower bound of the FF rate target range.

There must be some reason that the Fed did not remove more liquidity from the system.   This line of reasoning further points to the probability something might collapse if the Fed were to remove the amount of liquidity from the system necessary to keep the FF rate from dropping below the lower bound.  It also suggests that the Fed is losing control of its ability to manage the massive liquidity monster it has created.

I want to close out this post with a quote from someone (I’ll refer to him as “MC”) with whom I was discussing this subject yesterday afternoon.  We both agreed that the Zerohedge post, while informative, was missing some key ingredients in its description of what had occurred.   It was MC’s comment below that led me to meditate further on this ordeal and the more I ponder the “ingredients” which went into Wednesday’s events, the  more I believe MC is on the right track here:

If I had to choose between excess liquidity or a bank that can’t afford a rate in the channel [i.e. the Fed fed funds target range] it would be the latter.  But really?  [The Fed] must be going to extreme measures to avoid any appearance of stress somewhere in the system.

Flexing my conspiracy theory brain cells, it must be something big like JPM where it is big enough to have a real demand for funds where these small differentials [i.e. the difference between the .25% lower bound for the FF rate and the lower rate of .12 at which the FF rate was set on Wednesday Dec 31] could matter and is systemically important and they don’t want attention drawn, yet… Like going to the discount window, etc

Stick A Fork In The United States

The tragedy of our day is the climate of fear in which we live and fear breeds repression. Too often sinister threats to the Bill of Rights, to freedom of the mind, are concealed under the cloak of anti-Communism.  – Adlai Stevinson, Speech to the American Legion Convention, 1952

Today the climate of fear being fomented is concealed under the cloak of terrorism/ISIS. Severe repression is coming.  The policies and laws implemented since the inauguration of Bush 2 in 2000 have been slowly strangling the middle class, financially and legally.  The affects of the latter are about to become more apparent and more painful for everyone.

The American public has stood by passively in complete acceptance of the horrendous acts of brutality, savagery and wealth confiscation thrown at it since the passage of the Patriot Act.  We stood by and watched as our Government implemented an illegal attack into Iraq predicated on blatant lies, conducted unimaginable acts of torture on illegally detained prisoners of “war,” bombed weddings and funerals (Hillary Clinton:  “oops, my bad”) – the list seems endless.  The U.S. Government shamelessly throws propaganda in our face which turns the truth inside-out.  Everyone else is the bad guy.  The U.S. is exceptional and therefore entitled to trample over the rest of the world.

Perhaps the most egregious crimes have been right under our own noses, where the elitists have been openly wiping the last crumbs of middle class wealth off the table and into their own pockets.  You really think your retirement fund or pension money will be there when you retire?  That’s laughable.

I’m still trying to sort out and understand the exact reason why the Fed decided to push up the Fed funds rate from zero to not-much-more-than-zero.  What you might of missed is that the Fed raised the interest it is paying to the Too Big To Fail banks who have $2.4 trillion in cash given to them from QE that is earning interest in the Fed’s “Excess Reserve Account.”  The rate was raised from .25% to .50%, effectively doubling the amount of free cash flowing into the banks from their Excess Reserve largesse.   On the other side of this, consumer borrowing rates were immediately raised.

The only conclusion that can be reasonably drawn by the Fed’s move is that the noose described above – put in place quietly over and with no resistance over the last 15 years – is now being tightened.

The S&P 500 Is Set Up To Crash

Let me preface this commentary with the proviso that none of us has any idea the extent to which the Fed and the Working Group On Financial Markets, which has its offices in the same building as the NY Fed, has the ability to prevent a stock market accident.

Having said that, a large portion of the stock market has been in a tail-spin. The Dow Jones Transports Index is down over 18% from its peak last November; the SPDR retail ETF, XRT, is down 15% from mid-July this year; the iShares Biotech ETF, IBB, is down 18% since its high close in mid-July – perhaps ironically one day after XRT closed at its high; AAPL is down 20.3% from its February 23, 2015 all-time high – technically AAPL is now in a bear market; Dow Jones homebuilder/construction index, DJUSHB, is down over 10% from its high close (not even close to all-time high) in August – notwithstanding all the other fundamental headwinds starting blow at housing with full force, hiking interest rates will act like a roadside bomb on the housing market.

The point here is that many sub-sectors of the NYSE, sectors which had been extraordinarily hot as Untitled1stock trades, are now reflecting the truth about the deteriorating condition of the U.S. economy. (click on image to enlarge).

We can dissect the debate over the reasons why the Fed has decided to start “normalizing” – whatever that means – interest rates now. The fact of the matter is that it is impossible to know for sure why the Fed decided to nudge the Fed funds rate up by one-quarter of one percent. What we know based on reams of empirical evidence is that the U.S. economy is now collapsing at the rate it was collapsing in 2008/2009. Unless the FOMC is completely brain-dead – a consideration I would not fully dismiss – the Fed must have had some ulterior for setting a posture of tighter monetary policy.

With the high yield, and now investment grade, bond sectors imploding (I suggested over 2 weeks ago that the virus infecting the junk bond market would spread to investment grade), the next part of the capital structure that will be attacked is the equity “layer.” Many of you might have missed this news release yesterday:  Fed Votes To Limit Bailouts. The Fed is now restricted legally in the scope of its ability to prop up crashing banks.  There has to be a reason this legal restraint was allowed to be executed, because certainly the big banks and the Fed had the ability to derail it.  Perhaps it’s just putting window dressing on impending market developments that the Fed is now powerless to prevent anyway.

I have suggested for quite some time that eventually the natural forces of the market could not be prevented from seizing the S&P 500 and pulling it down to a level that reflects the true underlying economic and fundamental conditions from which markets derive their intrinsic over long periods of time.  History has already shown us many times that market interventions never work indefinitely.  Just ask OPEC.

Again, it’s impossible to time the markets perfectly, but the probability of a big downside event in the stock market is now highly skewed in the favor of those who set up their market bets to take advantage of the coming downside action.  My SHORT SELLER’S JOURNAL is a weekly subscription service, delivered to your email on Sunday night or Monday morning, is a market briefing with two ideas for shorting the market.  I also include some market comments not covered in this blog.

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The Fed’s Rate Hike Was Largely Meaningless

Last week I suggested that if the Fed nudged up the Fed funds rate, it would likely trigger a pop in stocks and precious metals.    The reason is twofold.  First,  the markets would be relieved that lunacy surrounding the event was over – a “relief” rally, if you will.   Second, it’s obvious to everyone, the Fed inclusive, that the economy is tanking.  The stock/precious metals rally after the hike reflects the view that the next policy move by the Fed would be a reversal of today’s decision plus more money printing.

Paul Craig Roberts and I spent a few moments discussing the mechanics of Wednesday’s decision by the FOMC to raise rates.   The product of our discussion was his insightful commentary about the ramifications of the FOMC’s decision to hike:

What Does Today’s “Rate Hike” Mean?

Paul Craig Roberts – The link to his article here:  What Does Today’s “Rate Hike” Mean?

The Federal Reserve raised the interbank borrowing rate today by one quarter of one percent or 25 basis points. Readers are asking, “what does that mean?”

It means that the Fed has had time to figure out that the effect of the small “rate hike” would essentially be zero. In other words, the small increase in the target rate from a range of 0 to 0.25% to 0.25 to 0.50% is insufficient to set off problems in the interest-rate derivatives market or to send stock and bond prices into decline.

Prior to today’s Fed announcement, the interbank borrowing rate was averaging 0.13% over the period since the beginning of Quantitative Easing. In other words, there has not been enough demand from banks for the available liquidity to push the rate up to the 0.25% limit. Similarly, after today’s announced “rate hike,” the rate might settle at 0.25%, the max of the previous rate and the bottom range of the new rate.

However, the fact of the matter is that the available liquidity exceeded demand in the old rate range. The purpose of raising interest rates is to choke off credit demand, but there was no need to choke off credit demand when the demand for credit was only sufficient to keep the average rate in the midpoint of the old range. This “rate hike” is a fraud. It is only for the idiots in the financial media who have been going on about a rate hike forever and the need for the Fed to protect its credibility by raising interest rates.

Look at it this way. The banking system as a whole does not need to borrow as it is sitting on $2.42 trillion in excess reserves. The negative impact of the “rate hike” affects only smaller banks that are lending to businesses and consumers. If these banks find themselves fully loaned up and in need of overnight reserves to meet their reserve requirements, they will need to borrow from a bank with excess reserves. Thus, the rate hike has the effect of making smaller banks pay higher interest expense to the mega-banks favored by the Federal Reserve.

A different way of putting it is that the “rate hike” favors banks sitting on excess reserves over banks who are lending to businesses and consumers in their community.

In other words, the rate hike just facilitates more looting by the One Percent.

The FOMC Meeting: Theatre Of The Absurd

Well, the “big” day has finally arrived.  Since Bernanke’s infamous “taper” speech, there’s been an absurd amount of time, energy and resources spent by analysts, financial news television mannequins and bloggers discussing when and if the FOMC would take the unimaginably bold step of raising the Fed funds rate by 25 basis points.   Into how much money does this translate?  25 basis points on $1 million is $2500.  Laughable.

After the Fed deferred the life-shattering decision to nudge rates up slightly at the November meeting, the threats issued by various Fed officials became a daily occurrence. Given that the “bar” that was set to trigger the massive nudge up in rates was a 5% unemployment rate, the non-farm payroll report for November seemingly calcified the decision.  The die is cast, the Rubicon has been crossed.

Meanwhile, every possible economic report, index and indicator originating from private sector sources show that U.S. economic activity is plunging at a rate last experienced in 2008-2009.  Notwithstanding the fact that monetary policy implemented by the Fed since 2008 will be looked upon by history as Bernanke’s Waterloo, certainly any move to redirect this disaster by raising rates even a small fraction right now will only serve to throw the economy into the abyss.

The entire episode between the November and December meetings has been nothing short of one big Hollywood production.  Theatre of the Absurd in its purest form.  Like it really matters whether or notUntitled the Fed raises the Fed funds target rate by 25 basis points. Since 2009, the effective Fed funds rate has averaged around .13 percent.  In reality, even if the Fed does hike the Fed funds target range by 25 basis points to .25-.50 from 0-.25, and removes enough banking system liquidity to enforce minimally the lower bound, the effective funds rate might go up less than 12 basis points.   All this “hoopla” over what will likely amount to raising the big bank borrowing rate from the Fed by 12 basis points.  That would be $1200 on $1 million.

There is, of course, an insidious Orwellian aspect to this entire charade.  By focusing the entire market’s attention on what amounts to a completely meaningless hike in the Fed funds rate, the Federal Reserve/Government hand-puppet operators have effectively deflected the debate and focus away from the real issues plaguing our system.

Lost in the discussion has been the fact that the Government-reported employment, inflation and GDP statistics are entirely fraudulent.  The true unemployment is closer to 25% than 5%; the cost of everything that matters has been escalating at 5-10% per year for several years; the upper .1% of the wealth strata in this country has sucked an enormous amount of wealth away from a middle class that is shrinking into oblivion; and the entire political system has become dysfunctional to the point at which a confirmed criminal is one of the leading candidates to become the next President.

Other than that, Mrs. Lincoln, did you enjoy the production of “Our American Cousin?”

Is The Fed Trying To Arrange A Bailout Of Junk Bond Funds?

Warning #3:   If you are hesitant to sell your bond funds, use any bounce in the junk bond market to get out of all fixed income funds.  Someone asked me the other day about Treasury funds.   Go read the fine print in the prospectus.  You can find it online.  If the fund permits the use of derivatives, get out of it.  100’s of thousands of investment advisors and retail investors loaded up on Pimco’s Total Rate of Return fund having no idea that it is riddled with derivatives.   If you own Black Rock funds, don’t wait for a bounce.  Just get out.  Black Rock is the financial market version of Fukushima.

I heard a rumor today that the Fed is trying to solicit “fire sale” liquidity bids from private equity funds for big chunks of the bonds held by high yield mutual funds and ETFs.  I want to emphasize that this is an unsubstantiated rumor but it comes from a good source.

At this stage in the game, I believe the Fed will do anything possible to keep the system from collapsing.  On the assumption that the rumor is valid – which I would suggest has a 95% level of probability – I would also expect to see the Fed, in conjunction with the Treasury, offer private equity firms zero-percent credit lines in order incentivize and facilitate an attempted bailout of the junk market by private equity funds.  After all, this would be a no-risk opportunity for the managers of these funds to throw their growing cash piles at something besides Silicon Valley unicorns in order to put the cash to work and skim fees off the invested capital.

Of course at the end of the day, if this scenario plays out, it will be just another attempt to kick the proverbial can down the road and forestall the inevitable collapse of the financial system.  Unfortunately the fundamentals which support the idea that there’s any intrinsic value in the majority of the junk paper that has been issued over the past five years continue to deteriorate.

The primary reason for the Fed to prop up the junk bond market is to prevent the stock market fromUntitled collapsing.  The graph on the right shows what’s at stake (click to enlarge).   At some point the performance of the S&P 500 and the high yield bond market will be forced by the market to re-correlate.  I highly doubt that high yield bonds will converge up to the stock market.

The graph below on the left shows that leveraged loans, which sit on top of junk bonds in the capital structure, are chasing junk bonds in a race to the bottom now.  Theoretically, to the extent the the top of the Untitled1capital structure – leveraged loans – are valued at less than 100 cents on the dollar, everything below them is worth zero.  In a strict application of bankruptcy law, liquidation payouts go from top to bottom.  However, for practical purposes, bankruptcy workouts typically sprinkle some of the agreed restructuring value to the debt tranches below the senior secured level.  If for nothing else than to prevent lawyers from cannibalizing any remaining value with fees.

As you can probably guess, if senior secured debt and junk bonds are worth substantially below par, the equity is worth zero.   THAT is why the stock market eventually follows the junk bond market lower.  THAT is the dynamic that the Fed will attempt to prevent using any possible means at its disposal – legal and illegal.

History tells us this will eventually fail.   The degree to which the end result is catastrophic is always directly proportional to the amount of effort that went in to the attempt to prevent the inevitable.

You can make money off of this inevitability by shorting the stock market.  As this unfolds, there is a lot of money to be made shorting all of the hideously overvalued stocks.   My new subscription service will be rolling out two ideas per week that will help you find ways to exploit the gross price distortions and sector bubbles that have developed after 6 years of extremely reckless monetary policy by the Federal Reserve and U.S. Treasury.    You can subscribe by clicking here:   SHORT SELLER’S JOURNAL.

The Markets Edge Closer To Collapse – What About The Derivatives?

The massive, unprecedented level of Central Bank intervention in the markets has terminated the purpose for having capital markets.  Currently the only goal of the Fed is to do what needs to be done in order to prevent the markets from collapsing.  This has been the mission since 2008 – and, really, since 1987.

Currently there’s a gargantuan tug of war going on between the hedge funds and the Fed. The hedge funds are leveraged up on extremely overvalued stocks and bonds.  Most of them are about to become impaled on their OTC derivatives, which have zero liquidity and function to “turbo-charge” the margin debt extended to hedge funds by Wall Street.  On the other side of the tug-of-war rope is the Fed/ECB/BoE, which are working furiously to prevent forced hedge fund selling from collapsing the markets.

The ongoing effort to push down the price of gold and silver is essential to prevent a big move higher in the metals from signalling to the world that global financial system is collapsing.  If you don’t want everyone rushing out of the coal mine, remove the canary before it dies. Imposing downward pressure on the metals using their derivatives form is the Fed’s act of removing the canary.  At some point the canary will escape and fly back into the coal mine…

Zerohedge published this graph earlier this morning (click to enlarge).  It shows the extreme Untitledvolatility of the S&P 500 right after the NYSE open.  It’s a 5-second graph of the March S&P 500 future.  The obvious trade right now is to short the stock markets.  This is probably the last alternative  available for hedge funds to hedge out their illiquid fixed income positions, especially the junk-rated stuff.  The pension funds are dead meat.  They have no hedging alternatives.  Their only “hedge” is if the Fed/Government decides to shut down the markets to in order to prevent selling.

I suggested several months ago that this was coming eventually.  The gating of junk bond funds is the Untitledstart of this process.  Gating is the same thing as shutting down a market, as it prevents anyone from selling their positions. Please notice that discussions about OTC derivatives seem to have slipped out of the public forum.   For most, this simply means the problem has gone away.   But OTC derivatives lie at the heart of the problem for the Fed.  Fuses have been lit and are moving closer to the detonators.

No one knows when the big explosions will become uncontainable.  But that reality grows closer by the day.   I don’t know what meaningless policy decision will be regurgitated by the FOMC on Wednesday. I’m sure a lot of midnight oil was burned over the weekend working on the draft. But the stock market has at least 1000 points of downside risk and little to no upside, unless the Fed goes  “Weimar” with the printing press.

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The Fed Has To Hike Rates Now – Here’s Why Stocks/Gold Spiked Up

The unemployment rate is soaring month by month, and, even worse, it appears to understate the true extent of the deterioration, given the unusually high incidence of permanent, as opposed to temporary, layoffs, and the unprecedented increase in involuntary part­time work.  – Janet Yellen from the June 2009 FOMC meeting transcripts (note:  My friend/colleague John Titus – Best Evidence videos – sourced this quote)

Reading between the lines of the above quote from  the then FOMC co-chairman is an admission that the non-farm payroll report is defective.  At the time, in order to support the FOMC’s decision to print trillions and take short term interest rates to zero, Yellen admits that the non-farm payroll was underestimating the true level of unemployment in the U.S. economy.

The Fed funds rate “target” has been 0 – .25% for the last 84 months (since December 2008).   Since Bernanke’s infamous “taper” speech in May 2013, the Fed has been threatening to raise the benchmark Fed funds rate in an effort to “normalize” interest rates, whatever the heck that means.   Clearly the Fed, deep inside its dark heart, knows that it has committed a horrendous policy disaster by leaving rates at zero for over six years.

Since the 2013 Taper Speech, the Fed has kept the market on edge by threatening to raise Fed funds at each next meeting only to defer the decision in classic “moonwalk” fashion. But this time around, since the October FOMC meeting, the dull roar from the regional Fed monkeys transitioned into daily hyena shrieks.  The Fed painted itself into a corner, as it would likely no longer be able to move the “do not cross this line” threat without completely destroying the last shred of any remaining credibility.

Last Friday’s non-farm payroll report sealed that fate.  Barring some unforeseen staged false flag terror event that causes the stock market to go over Niagra Falls, the Fed has no choice but to move the needle on the Fed funds rate by one-quarter of one percent (.25%).

The reason the markets soared, over and above the standard daily dose of monetary nitroglycerin the Fed injects into the stock market just keep it from crashing, is that the markets are pricing the next policy move after the December hike, which will entail a rate cut plus more QE. The market knows the NFP is phony and the market knows the Fed knows that the NFP is phony. But the Fed is boxed in – it has cried “wolf” too many times. If the Fed found an excuse to defer again, the signal would be an affirmation that the payroll report is a sham and the economy is indeed tanking.  The dollar and the stock market would plunge toward Dante’s Inferno.

Gold affirmed this view, as it managed to break free for the day from the heavy restraints placed on its price movement by the Fed/Treasury and soared over $24. It was one of the biggest one-day moves in the price of gold in the last 12 months.

There are two reasons the Fed will have to restart its digital printing press: 1) by early 2016 it will become apparent to all but maybe a few of the blind regional Fed monkeys that the economy is collapsing; 2) with the economy collapsing, Federal tax revenues will head south quickly while defense, healthcare and general entitlement spending will soar. The Fed will have to print more money if for no other reason than to help fund the coming massive increase in Treasury debt issuance.

The markets are going to become very bumpy – both to the upside and the downside.  But mostly to the ROFLMAOdownside.   The stock market has become overvalued by any real historical measurement, ex-the phony accounting standards phased in over the last 10 years designed to help hide the degree of overvaluation.   It is likely that more QE will only cause very temporary upward spasms in the stock market and most of the action will be to the downside.  With regard to the latter, stay tuned…

Yellen’s Bluff – The Economy Is Getting Sucked Into A Black Hole

Dave, why is your Federal Reserve/Government so insistent on the idea of raising rates and coming up with truly insulting economic numbers to allegedly justify it? What is really going on behind the curtain?  – John Embry

Apparently, Janet Yellen is asserting that “gains” in the labor market show the economy is on a healthy track of expansion and this necessitates a need to raise interest rates.  First of all, this coming from a troll-like figure who stated in an FOMC meeting – per the 2009 FOMC meeting transcripts – that the employment report was bogus.  And second, it stretches any realm of credibility to assert that a one-quarter of one percent hike in the Fed Funds rate constitutes a rate hike.

But contrary to Yellen’s disingenuous rationalization supporting her threat to raise the Fed funds a smidgen, here’s what the markets are saying about the economy:

Untitled

Oil and copper are two of the best “barometers” of the relative level of economic activity.  The conspiracies about why oil is tanking are just ludicrous .  The price of oil is in collapse because the demand for oil is collapsing.  It’s that simple.   Copper confirms this.   Both commodities are being sucked into the same black hole into which they were getting sucked in 2008/2009, before Bernanke’s finger got stuck on the “GO” button of his electronic printing press.

On Monday the Dallas and Chicago Fed manufacturing indexes were released. Both plummeted below 50 (the Dallas index has been below 50 for awhile).   A reading below 50 from these Fed indices indicates economic contraction – i.e. economic output is declining. The “new orders” sub-component of all the regional Fed indices is dropping so low that it’s starting to dig a hole for China

To make matters worse, the holiday retail sales spending season is morphing – predictably – into a disaster.  Bank of America released its aggregate credit card spending data which tracks the first three weeks ending on Black Friday and found that early holiday sales were down 1.2% from last year (link from Zerohedge).   Keep in mind that “Black Friday” sales promotions began at the beginning of November, which – if anything – should have pulled sales forward.  In other words, there should have been a healthy gain in year over year sales for the measured period.

It’s become obvious to most that the housing market is rolling over.  I’m seeing the indications all around Denver and have received emails from people from all over the country confirming the same.  I’m no longer hearing ads for “house flipping” seminars on the local radio broadcasts, which had flooded the airwaves for most of the summer.  Sure there’s still going to be some tiny pockets where there’s embers still glowing from the trillions of dollars the Fed/Govt injected into the mortgage market.  But anyone who buys a house now will be significantly underwater on their mortgage a year from now.

I’m looking forward to watching the Fed navigate the next meeting.  I don’t see how they can slide by another meeting without raising rates.  Unless an “unexpected” exogenous event occurs that enables them to justify another round of deferral after running around  like idiots with their heads cut off on a daily basis since the last FOMC meeting issuing rate hike threats.

In the context of the Paris false flag event,  the recent escalation of anti-ISIS propaganda and the rising level of confrontation with Russia, there’s a lot of material available to the Central Planners of the U.S. which can be used to generate an “exogenous event” that would enable to Fed to moonwalk away from a rate hike and deflect the hoi polloi’s attention away from the reality of the U.S. economic system swirling into a black hole.

The Fed’s “Expedited, Closed” Meeting Is Pure Kabuki Theatre

More like Theatre of the Absurd, will all due respect and apologies to Albert Camu and Samuel Beckett.

The Fed announced a “meeting under Expedited Procedures” that will take place on Monday, November 23.  The “matter(s) considered” is a “review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks (regional).   You can see the notice as posted on the Fed website.

This meeting appears to be much ado about nothing – with all due respect to Shakespeare. Why?  The matter to be considered is the rates charged to banks under the Fed’s “Primary Credit” program – LINK.   This is commonly, generically referred to as the “discount window.”

Historically the discount window was the mechanism used by the Fed to enable member banks to borrow on a short term basis to meet temporary liquidity issues.  With the development of financial market technologies and the liberal use of the printing press since 1980, the discount window – i.e. the Primary Credit program – is rarely used.  The current rate charged to discount window borrowers is 50 basis points above the Fed Funds rate.

Let’s take a look under the hood (click on image to enlarge):

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The table above is from the Fed’s latest update on its balance sheet. I’ve shaded in yellow the assets (loans to banks) that would be subject to the Fed’s “advance” and “discount” rates, which are the topic of the “emergency” meeting. If you take a magnifying glass to the numbers, you’ll see that there’s only $105 million that’s been borrowed from the Fed’s “discount window.” It’s next to meaningless in the context of the Fed’s $4.4 trillion balance sheet.

If you are interested, you can read the press releases from the last two monthly meetings which dealt with the discount rate policy:  LINK

It is highly likely that the Fed will raise the discount rate at Monday’s meeting.  It will have absolutely no affect on the Fed’s overall monetary policy and no affect on the economy. However, it will definitely reinforce the Fed’s poker face with regard to the outcome of its December FOMC monetary policy zoo-fest.

In fact, the Fed has in the past raised the discount rate to signal a tighter stance in monetary policy only to whiff on raising Fed Funds rates.  It’s pure Kabuki Theatre.

I really don’t know if the Fed will call its own bluff and raise the Fed funds rate.  It doesn’t really matter.  If the Fed raises rates it will trigger another move straight up in the dollar, which will further crush U.S. manufacturing exports.    I also have a feeling, although I can’t prove it, that even a small increase in bank funding rates (repo rates) would possibly trigger an “uncoiling” of some big derivatives trades in which the TBTF’s are stuck.

One last comment.  The KC Fed manufacturing survey was released today.  It nudged into positive territory after registering negative to highly negative readings for the previous 8 months in  a row.  It turns out, if scan through the details of the report – KC Fed manufacturing survey – you’ll see that the reading of 1 (“one”) in the composite index was achieved using “seasonal adjustments.”

It appears that the composite index was “juiced” both with seasonal adjustments and with expectations six months out – aka the “hope index.”  A further, deeper reading of the report shows that on a not seasonally adjusted year over year comparison basis  the “composite index” was -5 (negative five) for November.  In addition, the production index was negative to deeply negative on this basis for 10 of the last 11 months.  Ditto for average employee workweek, shipments and new orders for exports.  In other words, the economy is in bad shape and getting worse.

The Fed may well raise in December.  But if it does, it will throw the U.S. economy into a depression that will make the 1930’s depression look fun.  Having said that, I believe that the sudden and covert meeting called for Monday is nothing more than an opportunity to use a hike in the meaningless discount rate to jawbone/frighten the market into believing in December’s Santa Clause appearance just after the FOMC meeting.