Tag Archives: helicopter money

They’re Making It Easier To Buy Gold Cheap

To begin with, this statement by the Bank of Japan’s Kuroda validates my blog post yesterday about Japan’s monetary pivot to gold and to the east:  “no need and no possibility for helicopter money.”

My best guess is that the only productive activity for Bernanke on his last trip to Japan was eating blowfish sushi and hitting the teenage stripper establishments.

The manipulators are making it easier for us to accumulate gold at a cheap price.  I moved money from my fiat checking account into Bitgold every day this week and twice yesterday. I managed to catch what looks like the low of this latest manipulated pullback.  Every time they hit gold I buy.

I exchanged emails with Dr. Paul Craig Roberts yesterday about the  sell-off of the price of gold this week caused by the obvious “invisible” hand of the Fed.  Note this was a week in which Japan was supposedly going to drop $100 billion in helicopter money at Ben Bernanke’s behest – an announcement which should have sent gold soaring:

Me:   I agree this was a manipulated take-down of the price but,  you know as well anyone, markets never go straight up except the Dow/S&P 500 when the Fed wants to make those indices go straight up – like now.    Gold was overdue for a trading correction. I agree there’s some idiots out there who think the Fed is powerless now over gold – that’s ignorance or sensationalism.

Dr. Roberts:   Is there such a thing as a trading correction when the price is controlled and manipulated? Is it a trading correction when the bullion banks dump, as we have shown numerous times, massive paper shorts in the futures market?

Me:  I agree with your point there – but to be honest, I like to see any market pullback after it has the type of run that gold has had since early February. Should it be pulling back from a much higher price platform? Yes.  But gold was on the verge of going parabolic, which is never healthy in any market. The Fed is doing us a favor. I have been moving a lot of money from my checking account into my Bitgold account this week every morning. If gold was not being pushed down, I might not have added any.

The other interesting aspect of your point there is the amount of paper the Fed is needing to throw at gold to keep the price down. The open interest has been more or less at an all-time high on the Comex for a few weeks now. The last time the open interest was this high was when gold was pushing $1900.

In other words, it is requiring a much bigger relative effort for the Fed to prevent the price of gold from spinning out of its control now than it did when gold was about to launch over $2000.

They have not lost complete control yet, but they are much closer to that event now than they were in 2011.

On another note, the fact that the SPX spiked higher on the original Japan helicopter money announcement but has not sold off on the withdrawal of that threat underscores that fact that the Fed is pulling out all stops to push the market higher

But this is just the “marquee” indices – the Dow, SPX and Naz – as plenty of stocks have been and are heading lower because the core economy in the U.S. is falling apart.

 

Japan Is Signalling The End-Game For The U.S.

On a side-note, it’s important to know that late July/early August is seasonally the most quiet part of the year for the biggest eastern hemisphere gold accumulators. And we’re going into the “roll” period, when the bulk of the massive blob of August paper gold “rolls” into December, the next “front month” for Comex Paper gold. Having said that, China has actually slightly increased its gold imports this month. India has been in hibernation since March 1 but it’s biggest seasonal buying period starts in about four weeks. Unless smuggled gold into India is significantly greater in volume than anyone understands, India’s demand will be somewhat price inelastic and its elephantine appetite for gold will have a big impact on the price of gold.

This leads us to Japan. Curiously, Japan announced announced last week that its TOCOM Untitledcommodity exchange (Japan’s less corrupted CME-equivalent) would begin trading physical gold – like the Shanghai Gold Exchange – on July 25th – TOCOM Physical Gold.  It also announced that it would be introducing a delivery-at-settlement option for its current-month gold futures contract. That is, TOCOM gold futures buyers will now have the ability to take delivery of physical gold via TOCOM’s paper gold.

The news of this event was largely muted in the western financial media and even the alternative media blogosphere largely seems to have overlooked the news release. But this is a highly significant development because it signals a subtle shift in Japan’s economic and monetary focus from west to east.  It will also create an big upward price-readjustment in gold and silver.

The significance of Japan’s TOCOM exchange shifting from all fiat paper contracts to a physical gold trading and settlement operation is reinforced by the fact that two days ahead of the announcement it was reported that Tanaka Kikinzoku Group – Japan’s leading precious metals trader, refiner and manufacturer – acquired Swiss-based Metalor Group, one of the world’s largest refiners and supplier of precious metals-related products – Tanaka Buys Metalor.   Furthermore, in March 2015, Japan’s Asahi Holdings – a collector and refiner of precious metals – closed its acquisition of Johnson Matthey’s gold and silver refining business.  JM is one of the leading producers of refined precious metals products, including LBMA-quality 400 oz gold bars.

Now that Asia and Russia are no longer funding the U.S. Treasury debt printing press, the Fed will be forced to begin hyperinflating the money supply to keep the Government funded.  This fact is underscored by the Cleveland Fed President’s – Loretta Mester, a voting member of the FOMC –  recent comment about “helicopter money.”

While the Japanese continue to endorse the U.S. Government’s  use of the yen as a de facto printing press which enables the Fed to manipulate the U.S. stock market and to fund U.S. Treasury’s unrestricted  issuance of debt, they see the proverbial writing on the wall for the western monetary and financial system.  Japan has been quietly pivoting economically toward China for a couple years.

This abrupt transition into the physical precious metals market signals Japan’s move to integrate its financial markets and economic system into the developing eastern bloc monetary system, which appears as if it might eventually be seeded in gold.  It likely signals the end-game for the United States.

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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