Sunday, September 23, 2007

Show Me The Money! / Hussman

On top of Hussman´s post i think it is good advice to read Turning a BB Gun Into a Machine Gun? from Russ Winter on the latest Fed and central bank action around the world. While i agree with Hussman on the data and facts i think Bernanke and the Fed have given the wrong message to the market. Too bad that the $index and the long end of the yield cirve didn´t play out like they have hoped .....

Zusätzlich zu den Ausfühtungen von Hussman ist es ratsam sich Turning a BB Gun Into a Machine Gun? von Russ Winter hinsichtlich der Notenbankaktionen in letzter Zeit durchzulesen. So sehr ich auch mit Hussman was die Faktenlage angeht übereinstimme so sehr muß man jedoch auch sagen das Bernanke und die Fed dem Markt praktisch eine Einladung gegeben haben die zwar kurzfristig gute Laune verspricht mittel bis langfristig aber kontraproduktiv sein wird. Dumm nur das sowohl der $Index als auch das lange Ende der Zinskurve die Partystimmung nicht teilen kann .....

These quotes sums it up ........Diese Zitate treffen es ziemlich gut

Scott Reamer / Minyanville
Bravo to Ron Paul for giving voice to the hundreds of millions or pensioners,savers, working stiffs, poor, fixed income beneficiaries, laborers, gasoline-, bread-, milk-, and egg-buyers who weren’t able to ask Mr. Bernanke why he – like every Fed chairman before him since 1913 – screwed them for the benefit of the top 5% of the population of this country.

Bernanke: The anti-Robin Hood / Fleckenstein

The Federal Bank of Guardian Angels roared down Wall Street last Tuesday. Its mission -- to bail out the stock market -- was a success (for now).

But the rate cut was no gift to Main Street, which lies outside the
loop of crony capitalism.

Bobble-head Fed Long ago, the Fed abdicated its responsibility under then-Chairman Alan Greenspan. But now chief Ben Bernanke and the boys at the Fed have taken irresponsibility to a new level, where they have clearly demonstrated that they work for Wall Street -- and when Wall Street says jump, the Fed asks, how high?

I don't quite have the database to research this, but I seriously doubt that we've ever experienced a 10% fed funds rate cut, or discount rate cuts of better than 15%, with the stock market a few percentage points off an all-time high.


Show Me The Money!
Investors were cheered last week when the Federal Reserve lowered its target for the Federal Funds Rate by 50 basis points, and lowered the Discount Rate (the interest rate it charges on loans to the banking system) by 50 basis points as well. It's important to emphasize that the impact of these changes is mainly psychological, and outside of a pool of a few billion dollars, won't have any effective bearing on the “liquidity” of the banking system, nor on the solvency of $3.4 trillion in real estate loans, and $6.3 trillion in total bank lending. ...

Much ado about nothing
....If you examine the data you'll find that the total level of “liquidity” that the FOMC deals with is minuscule in relation to a $13.8 trillion economy, and the variation is even smaller. The total reserves of the U.S. banking system are about $40-$45 billion, and are very stable. The Fed simply does not “inject” meaningful amounts of “liquidity” to the banking system.

Indeed, the latest cuts in Fed controlled interest rates were effected without any injection of “liquidity” into the banking system at all. Total borrowings by depository institutions from the Federal Reserve (i.e. borrowings at the Discount Rate) actually fell last week to $2.421 billion, from $3.158 billion the preceding week. That couple of billion dollars is the sum total of all outstanding borrowings at the Discount Rate. Though these figures are still higher than the typical level of discount window borrowing (a few hundred million), they are minuscule. Yet these are the figures that investors are revved up about as if this “liquidity” will save the mortgage market.

Meanwhile, there has been no material change in the “liquidity” provided by the Federal Reserve in the federal funds market either. It's kind of funny (and just a little pathetic) how the press and investors get all excited every time the FOMC does an open market operation, as if they represent fresh “injections” of liquidity into the banking system. They are generally nothing but rollovers of existing repurchase agreements.

Open market operations come in two flavors: permanent and temporary. As I've frequently noted, about 99% of the monetary base created by the Federal Reserve represents gradual and predictable increases in the amount of currency in circulation. Year-to-date, the Federal Reserve engaged in what it classifies as “permanent” open market purchases amounting to $1.9 billion in February, $6.1 billion in April, and $2.7 billion in May, for a year-to-date “permanent” increase of $10.7 billion in the monetary base. Not surprisingly, most of this has been drawn off as currency in circulation, which has increased by $9.1 billion since January. Simply put, “permanent” open market operations are simply the way the Fed increases currency in circulation. It is simply incorrect to believe that these open market operations add meaningfully to the “liquidity” from which banks are able to make loans.

Temporary open market operations generally take the form of “repurchase agreements” whereby the Fed takes collateral in the form of Treasury securities or U.S. government backed agency securities, and provides funds to banks for periods typically ranging from 1 day to 2 weeks. At the end of that period, the banks are obligated to repurchase the securities from the Fed at the sale price, plus interest.

Since reserves are only required on checking deposits, the total amount of reserves in the U.S. banking system is only about $40 to $45 billion. Banks don't hold stack a pile of idle cash in a corner of the vault to maintain these reserves. Instead, they hold securities like Treasury bills and U.S. government-backed agency notes, and if they find themselves in need of reserves, they just pledge these securities to the Federal Reserve as collateral.

Look at the last month of data. We know that total bank reserves during this period have ranged between about $40 to $45 billion. Using data on the last 25 FOMC operations reported by the New York Fed, we can tie out the amount of outstanding repurchase agreements on any given day. Recall that total reserves include those obtained through discount rate borrowing and Fed repos (though “nonborrowed reserves” exclude discount borrowings). Evidently, the majority of the reserves in the U.S. banking system are represented by a continuous rollover of outstanding “temporary” repurchase agreements. If one set of repurchase agreements for $10 billion matures 3 days from now, you can pretty well predict that the Fed will enter new repurchase agreements of nearly this amount when the existing agreements expire. As a result, the total amount of repos outstanding is fairly stable. On balance, the Fed injected nothing – repeat nothing – this week.
Importantly, investors are misled when they interpret each new repurchase agreement as if it is a “new injection of liquidity” into the banking system. The bulk of these repos do nothing more than to replace the ones that are due. .....

Simon Says
The simple fact is that while the Federal Reserve lowered the Fed Funds Rate and the Discount Rate last week, it did not do so by “injecting” any new funds at all into the banking system. Rather, the Fed lowered these rates strictly by announcing they were now lower.

It's easy to understand this in the context of the Discount Rate, because the Fed is the only entity that charges that rate. With Fed Funds, you can understand how the announcement alone can change the rate by understanding a) that the entire variation in bank reserves that determines the Fed Funds rate amounts to only a few billion dollars, and b) banks are generally willing to follow the rate “called out” by the Fed so long as it doesn't affect the spread they earn.

Outside of the banking system, you'll notice that while Fed-controlled interest rates dropped last week, market-controlled interest rates rose. Treasury yields increased at nearly all maturities, as did mortgage rates, including those on 30-year conventional mortgages. Indeed, the only “relief” to borrowers was on rates tied to LIBOR, which fell. But even this is not “new purchasing power” for the economy, because the drop was matched by a reduction in deposit rates, so any relief to borrowers with rates tied to LIBOR came entirely at the expense of savers.

Again, the argument is not that interest rates are irrelevant, or that there is no relationship between total government liabilities and inflation (though the tightest relationship is between government spending growth, regardless of how it is financed, and inflation – particularly over horizons of 4-5 years). The argument is that there is no credible mechanism by which Fed actions control the economy.

The bottom line – the much celebrated move by the Fed last week created no new liquidity, no new reserves, and no new purchasing power. Given all that, it's unlikely that all of this will result in any material improvement in the solvency of the mortgage market

Market Climate
..... Presently, the trailing net P/E on the S&P 500 is 17.9, with a dividend yield of just 1.84 and a price/revenue multiple of 1.55.

Indeed, only two of those “second Discount Rate cuts” occurred with the S&P 500 P/E above 15 and advisory bullishness running over 50%. Those instances were December 1971 and January 2001. The average subsequent performance of the S&P 500 following those cuts was -1.22 over 3 months, 0.92% over 6 months, and 3.17% over the following year. Knowing What Ain't True / Hussman
A year-over-year CPI figure of about 4% or more, as I've mentioned before, is statistically baked-in-the-cake by November.

.....In precious metals, the Strategic Total Return Fund continues to have about 10% of assets in these shares. While this market appears overbought in the near term, we've already clipped our exposure enough to allow for some retrenchment, and given the continued favorable Market Climate overall, there is no reason to lighten our position so much that we would have to hope for weakness in order to reestablish a base position. As our position stands, we'll be inclined to increase our exposure on any substantial weakness, but we also don't have any need to “chase” the market in order to obtain exposure, should precious metals move higher from here.
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4 Comments:

Blogger jmf said...

Some excellent quotes from
Tony Jackson / FT "Emotional finance and the bubble factor"


First, you might argue the credit crunch was priced into equities in advance. In that case, we might expect it to have been priced into the credit markets as well, which it plainly was not. Indeed, people in the credit world – a senior figure told me last week – have been eyeing the equity markets in recent weeks with disbelief.

Next, you might say, investors are working on the reasoned assumption that the credit debacle will not affect the real economy. Well, test that on the UK market. Since August 8 – the day before the credit markets finally seized up – the FTSE 100 has risen slightly. But within that, the worst performers – the banks, of course, excepted – have been those exposed to a downturn in consumer spending. Persimmon, the nation’s biggest housebuilder, is down by nearly a quarter. The pub group Mitchells and Butler is down around 12 per cent.

Which have risen most? Copper miners Kazakhmys and Antofagasta are up 16 per cent and 14 per cent respectively. The copper price, meanwhile, has gone nowhere. There could be some rationale behind that, but it is probably not worth inspecting.

This rather assumes today’s markets are amenable to central bank control. In credit especially, that looks an antiquated notion. Nor should we forget that the markets fought the Fed perfectly successfully on the way up

The crisis is not over yet, and there is no saying how long its implications will take to sink in. But when they do, investors will have more to think about than chasing the next bubble.

2:06 AM  
Anonymous Anonymous said...

Aber...

Even after the rumors about Deutsche Bank, the market says 'So what?' -- Asia up, Europe mostly flat, US futures up (if the US opens up, then Europe will most likely finish up).

I think the people who suggest this sort of bad news is already 'baked in' may be right: we saw the lows for the year on 16 Aug, and stocks will climb to new highs during the rest of 2007.

Just watching the action, at this point it is hard to disagree.

eh

3:06 AM  
Blogger jmf said...

Moin Eh,

i agree. It´s always important to watch the action and not the news.

I suspect that the latest move was probably some kind of short squeeze with the usual spin that the Fed will safe the markets.

The tripple witching on Friday probably didn´t hurt either.....

We have probably seen the lows for this year but i doubt that we will climb much further.

But with the next spin "year end rally" already in the making i´m probably wrong... :-)

But as long gold and the miners are performing this will be ok for me....



Bus as long gold and the miners are moving upwards this will be o

3:46 AM  
Blogger jmf said...

from Barry
Inflation is Dead? Part II


Just last week, CNBC ran a segment titled, “Is Inflation Dead?” (It should have been titled "Is Journalism Dead?")

The BLS has transportation costs down 1.2%.Look at the above BLS table under the ‘compound annual rate 3-mos ended Aug ‘07’ column. Transportation costs are down 6.6%; energy prices are down 17.5%.

The benign CPI is due to lower energy costs over the past three months. Of course, the record surge in energy prices this month negates this. The September energy prices should be up more than the above 3-month declines. What do you want to bet that somehow this will be dismissed?

Yet every delivery comes with a fuel surcharge, and we are told ‘motor fuel’ costs are decreasing.

It appears that some of the public is no longer buying this nonsense. Here's the results of today's WSJ survey. When asked the question "Which is most likely to become a problem with the economy?," well over half -- 63% -- said either inflation or stagflation:

4:51 AM  

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