Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps | ZeroHedge

Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps | ZeroHedge: "The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)"

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Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps | ZeroHedge

Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps | ZeroHedge: "The Federal Reserve's Covert Bailout of Europe

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing."

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Banks Set to Double Crisis Loans From ECB - Business News - CNBC

Banks Set to Double Crisis Loans From ECB - Business News - CNBC: "Goldman Sachs has told clients that banks could ask for twice as much in the February auction as in December when more than 500 lenders raised €489 billion. “They could do another €1tn easily in February,” said one senior banker. “It could be way more than that if things get worse in the markets.”"

Wow !!! Tyler Durden Is right again!
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Jim Rogers: I Would Not Buy Facebook - Business News - CNBC

Jim Rogers: I Would Not Buy Facebook - Business News - CNBC: "“There is an election in November 2012. Every time there is an election, the government pumps as much money as it can so it can to win the election. Of course things are going to look and feel better because Bernanke is printing money and Obama is spending money,” Rogers said.

He added that the US public are essentially “saps,” being fooled by a government eager to harness as many votes as possible in an election year.

“They want to fool all of us saps and get us through the elections, and then they’ll say we’ll worry about those saps next year,” he said."

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The great Indian head bobble | CNNGo.com

The great Indian head bobble | CNNGo.com: "The great Indian head bobble
Decoding the celebrated Indian head shake once and for all
By Mahesh Nair 23 January, 2012

"

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Excerpt from FRB Chicago page dated 6/15/2009-Nontraditional Monetary Policy* - Federal Reserve Bank of Chicago.

Nontraditional Monetary Policy* - Federal Reserve Bank of Chicago: "Because of these limitations, the Fed has turned to nontraditional policies. These can be broadly categorized in three groups. The first group expands on something that has always been a part of our policy toolkit, namely discount window lending through which the Federal Reserve Banks make short-term loans to depository institutions against adequate collateral. Since August 2007, the Fed has taken steps to encourage the use of the discount window as a source of liquidity, including reducing the discount rate and lengthening the terms of the loans. The second group of policies consists of opening new lending facilities to a wide array of participants in financial markets. One can think of it as a sort of discount window for financial actors who are not depository institutions. The third group of policies consists of large-scale purchases of GSE notes. This can be seen as an extension of traditional open-market operations: the Fed still exchanges reserves for bonds, but on a vastly different scale."

Bernanke announced today the relaunch of the above NT Policy moves.

QE3 is already here!

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President Obama Proposes Mortgage Refinances for 'Responsible Borrowers' - CNBC

President Obama Proposes Mortgage Refinances for 'Responsible Borrowers' - CNBC: ""I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks," the President announced in his State of the Union address."

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Fed Sees Slower Growth But Offers No Hint Of More Easing - US Business News - CNBC

Fed Sees Slower Growth But Offers No Hint Of More Easing - US Business News - CNBC: "In response to the deepest recession in generations, the Fed slashed the overnight federal funds rate to near zero in December 2008.

It has also more than tripled the size of its balance sheet to around $2.9 trillion through two separate bond purchase programs.

The policy is credited with having prevented an even more devastating downturn, but it has been insufficient to bring unemployment down to levels considered normal during good economic times."

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Brevan Howard Made Money In 2011 Betting On Market Stupidity, Sees "Substantial Dislocation" In 2012 | ZeroHedge

Brevan Howard Made Money In 2011 Betting On Market Stupidity, Sees "Substantial Dislocation" In 2012 | ZeroHedge: "Looking to 2012, investors appear to be expecting moderate growth, inflation and financial market returns. At Brevan Howard, we expect the continuation of enormous uncertainty. On the one hand, policymakers appear to have a much-improved grasp of the dangers posed by the banking and sovereign debt crisis in Europe. "

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The Fed buying the market indirectly....David Rosenberg article from September 2011 below. Boy, did he call it !!

The consensus view that the Fed is going to stop at 'Operation Twist' may be in for a surprise. It may end up doing much, muchmore. And this may be one of the reasons why the stock market is starting to rally (a classic 50%+ retracement, which always occur after the first 20% down-leg in a cyclical bear market would imply a test of 1,250 on the S&P 500 at the very least). Hedge funds do not want to be short ahead of next week's FOMC meeting, and who can blame them?

Here are 10 reasons why:

1. Just go back to August 9th. The Fed was supposed to make a more emphatic comment in the press statement about "extended period" as it pertained to the length of time the Fed would stay ultra-accommodative on the rates front. Bernanke went much further than anyone thought with his pledge to keep the funds rate at the floor at least to mid-2013.
2. Ben Bernanke has shown repeatedly that he is willing to take risks and be very aggressive.
3. Everyone knows that the Dow finished the August 9th session with a huge 430 point gain after the FOMC press statement was fully digested. Not only that, but when Bernanke held his two-day meeting in mid-December of 2008 and unveiled QE1, the Dow soared 360 points. And last November, the day after that two-day meeting when Bernanke made it clear in his Washington Post op-ed article how key it was to ignite the stock market, the Dow jumped 220 points. It may all be just for a near-term trade, but in an industry where every basis point counts, who wants to be short knowing all that?
4. At that August meeting, we know both from the statement and minutes that additional rounds of unconventional easing were discussed. And Mr. Bernanke made it very clear at Jackson Hole that they would be on the table again at the coming meeting
5. The Fed would like to be out of the picture during the election campaign (especially if Richard Perry ends up winning the GOP nomination).
6. The Fed has cut its GDP forecasts at each of the past three meetings.
7. The stock market is actually little changed from where it was at the last meeting and we know based on that Washington Post op-ed, that it is equity valuation (specifically the Russell 2000) that Ben wants to see rally. Sanctioning lower bond yields is just a means to that end.
8. There is no fiscal stimulus to bolster the economy, with the odds very high that the Obama jobs plan — some in his own party object to the package as per yesterday's New York Times — will be dead-on-arrival on the House floor. The Fed is the only game in town.
9. Financial conditions have tightened nearly 100 basis points since the spring and deserve a policy response.
10. Bernanke announced at Jackson Hole that this coming meeting was going to be a two-day affair, not one day. The last time he did this was back in December 2008 and that was when he invoked QE1. There has to be a reason why it is two days, and it must be because he wants to build the case for three dissenters. The Board is being sequestered for a reason!

Look, we are talking about the same man who, on October 2, 2003, delivered a speech titled Monetary Policy and the Stock Market: Some Empirical Results. I kid you not. This is someone who clearly sees the stock market as a transmission mechanism from Fed policy to the rest of the economy. Here is a key excerpt from that sermon:

Normally, the FOMC, the monetary policymaking arm of the Federal Reserve, announces its interest rate decisions at around 2:15 p.m. following each of its eight regularly scheduled meetings each year. An air of expectation reigns in financial markets in the few minutes before to the announcement. If you happen to have access to a monitor that tracks key market indexes, at 2:15 p.m. on an announcement day you can watch those indexes quiver as if trying to digest the information in the rate decision and the FOMC's accompanying statement of explanation. Then the black line representing each market index moves quickly up or down, and the markets have priced the FOMC action into the aggregate values of U.S. equities, bonds, and other assets.

Even the casual observer can have no doubt, then, that FOMC decisions move asset prices, including equity prices. Estimating the size and duration of these effects, however, is not so straightforward. Because traders in  equity markets, as in most other financial markets, are generally highly informed and sophisticated. any policy decision that is largely anticipated will already be factored into stock prices and will elicit little reaction when  announced. To measure the effects of monetary policy changes on the stock market, then, we need to have a measure of the portion of a given  change in monetary policy that the market had not already anticipated before the FOMC's formal announcement [emphasis added].

In other words, if Bernanke wants to juice the stock market, then he must do something to surprise the market. 'Operation Twist' is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires (this is exactly what he did on August 9th with the mid-2013 on- hold commitment). It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday. If he doesn't, then expect a big selloff.

What he is likely to do is another story, but here are some options:

1. Expand the balance sheet further and simply buy more bonds (at the longer end of the curve).
2. Eliminate the interest paid to commercial banks on excess reserves (to try to spur lending).
3. Announce an explicit ceiling on the 10-year note yield (say 1.5%), which the Fed has done in the distant past. Based on Bernanke's prior rhetoric, this would seem to be a preferred strategy (though the Fed relinquishes control of the balance sheet).
4. Buy foreign securities (bail out Europe and weaken the U.S. dollar — talk about killing two birds with one policy stone).
5. Announce an explicit higher inflation target or perhaps a lower unemployment rate target (i.e. reinforce the DUAL mandate).
6. As Mr. Bernanke stated for the record in November 2002, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. It could offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector.

Note that this is all for a trade. As we saw back on August 9th, we had a huge rally but the market is no higher today than it was then. All we have seen since is a huge amount of volatility.

Source: Gluskin Sheff

Ikea Shelves Indian Retail Market Move - CNBC

Ikea Shelves Indian Retail Market Move - CNBC:

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Stocks Are Cheaper Than They've Been in Two Decades - Fast Money - CNBC - CNBC

Stocks Are Cheaper Than They've Been in Two Decades - Fast Money - CNBC - CNBC:

Read this HORSESHIT!!

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How the US Lost Out on iPhone Work - US Business News - CNBC

How the US Lost Out on iPhone Work - US Business News - CNBC: "Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products."

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Jeb Bush Refrains From Endorsing Anyone - Bloomberg. JEB BUSH'S STANCE!

Jeb Bush Refrains From Endorsing Anyone - Bloomberg:


His non- endorsement could be indicative of his desire to compete....

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Mortgage Principal Cuts Don’t Help Homeowners, says Credit Suisse - Bloomberg

Mortgage Principal Cuts Don’t Help Homeowners, says Credit Suisse - Bloomberg:

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America’s Dirty War Against Manufacturing (Part 2): Carl Pope - Bloomberg

America’s Dirty War Against Manufacturing (Part 2): Carl Pope - Bloomberg:

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America’s Dirty War Against Manufacturing (Part 1): Carl Pope - Bloomberg

America’s Dirty War Against Manufacturing (Part 1): Carl Pope - Bloomberg:

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In Rural India, Crooks With Crocs Get the Votes: Pankaj Mishra - Bloomberg

In Rural India, Crooks With Crocs Get the Votes: Pankaj Mishra - Bloomberg:

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From the comment section of a popular site... interesting but not verified. Says Jeb Bush will be next US President!

« Kissinger vows to China: “Jeb Bush Will Be Next President”

A shocking report prepared by the Ministry of Foreign Affairs for Prime Minister Putin on the just completed meeting between China’s Vice Premier Li Keqiang and former US Secretary of State Henry Kissinger states that the Chinese were told that former Florida Governor John Ellis “Jeb” Bush, brother to the former US President and son of another, will be elected as the next American leader despite his currently not even being on the ballot.

According to this report, Kissinger told Keqiang that the Republican Party election process to select their nominee to run against President Obama was “completely manipulated” to ensure that their 2012 Convention would be “deadlocked” thus allowing for Jeb Bush to be nominated as a “consensus candidate” and thus his parties leader.

The path to a deadlocked convention, this report says Kissinger told the Chinese, lies in neither current Republican frontrunners Governor Mitt Romney or Congressman Ron Paul having enough delegates to ensure their nomination on the first ballot after which their supporters will be free to nominate anyone they so choose. ...

When queried by Chinese officials as to why Obama was allowed to be elected instead of Jeb Bush in the last US election, this report continues, Kissinger replied that the American public was not prepared for a continuation of the Bush-Clinton Dynasties that have, in fact, ruled the United States since the 1981 coup d'état staged against President Ronald Regan after he was nearly assassinated by the son of the then Vice President George H.W. Bush’s main business partner.

Kissinger further stated to the Chinese, this report says, that Obama was a “safe choice” to be an “interim leader” as besides his being a member of the Bush family (Obama is former President George W. Bush’s cousin by blood) his mother, Ann Dunham/Soetoro, was a “prized” CIA asset who was dispatched from Hawaii to Indonesia in 1967, along with seven year-old Barack Obama, to infiltrate villages in Java to carry out a CIA survey of political leanings among the Javanese population and whose “handler” was George H.W. Bush who a few years later became Director of the Central Intelligence Agency.

Kissinger added, this report says, that by putting Obama in office they were, also, able to secure the passing of draconian new laws in the United States that otherwise wouldn’t have been allowed to pass due to the overwhelming objections of American liberals and progressives, but who now are all but silent as the last vestiges of the US Constitution are being swept away. ... »

Brian Belski of Oppenheimer says S&P goes to 1400 in the short term...Below are 2 of his prior calls....Hmmm...short everything?

Feb. 28, 2010 (Bloomberg) -- “Rising oil prices simply do not have the shock value they once possessed” for U.S. consumers, according to Brian Belski, chief investment strategist at Oppenheimer & Co.

After all, BelskI has an impeccable oracular record.

Nov. 8, 2007 (Bloomberg) -- The decline in technology stocks today is an "overreaction'' and investors should buy shares of technology companies because they are undervalued, Merrill Lynch& Co.'s U.S. sector strategist Brian Belski said.

Who is pumping/rallying and causing this market melt up of 2012.

As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bn from US equity mutual funds in w/e January 4th - the largest since the meltdown in early August) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, 'who is pumping up stock prices?' His answer is noteworthy as a large number of indicators suggest institutional investors are more optimistic than at any time since the 'waterfall' decline in the summer of 2011. Citing short interest declines, options-based gauges, hedge fund and global asset allocator sentiment surveys, and the huge variation between intraday 'cash' and overnight 'futures market' gains (the latter responsible for far more of the gains), the bespectacled Bay-Area believer strongly suggests the institutional bias is based on huge expectations that the Fed will announce another round of money printing (to stave off the panic possibilities in an election year). The ability to maintain the rampfest that risk assets in general have been on (and the cash-for-trash short squeeze that has been so evident) must be questioned given his concluding remarks.

While we fully expect QE to come, we can't help but question the willingness to meet market expectations so head on (remember when the Fed used to like to surprise) but with ever blunter (and seemingly weaker) tools, what more can they do - leaving a market (and note here we did not say economy as that is clearly not benefiting) that needs exponentially more 'juice' (EUR10tn LTRO?) just to keep from the post-medicinal crash.

Dimon Joins Blankfein Predicting Market Rebound From Slump as Rivals Waver - Bloomberg

Dimon Joins Blankfein Predicting Market Rebound From Slump as Rivals Waver - Bloomberg: "JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and Goldman Sachs Group Inc. (GS) CEO Lloyd C. Blankfein predict Wall Street will rebound from 2011’s trading- revenue plunge. Rivals and analysts aren’t so sure."

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The market charade cycle...we are approaching "Summit"

Einhorn at his best:

The cycle looks like this: time passes and the crisis deepens. Markets, eternal creatures of habit, begin to reflect the ensuing fear. Then, just as things appear ready to unravel, there is a reprieve, as red headlines race across the screen: "Sarkozy and Merkel to Meet at Deauville", "Obama Phones Cameron", or "Christine Lagarde Waves from Bus". The market jumps. You'd think the media would quit falling for this charade, but having run out of clever headlines to describe the impending doom - "Eurogeddon" Really? - they herald every briefing, meeting, assembly, and conference call.

The market embraces these announcements as eagerly as the media, behaving as if any and all communication is equally constructive, and likely to yield a solution. The market continues to rise until the day of that summit, as all ears await a Grand Communique. Within minutes of any proclamation, the market may cheer with a final, celebratory spike. Upon evaluation of the actual statement, it becomes clear that either nothing has truly been agreed upon, or the plan is insufficient, impractical or just won't work. The market sells off and the crisis deepens some more. Lather. Rinse. Repeat.

Look at Jobs Before Leaping on Older Retirement: Peter Orszag - Bloomberg

Look at Jobs Before Leaping on Older Retirement: Peter Orszag - Bloomberg: "By the time the recent recession began, in 2008, Americans were already well into a reversal of the 20th-century trend toward earlier and earlier retirement. The employment rate for older women started rising in the mid-1980s, and for older men soon afterward. The effects were most pronounced among people 65 and older, but were noticeable for those in their early 60s as well. In 1994, 43 percent of people ages 60 to 64 were employed; by 2006, 51 percent were."

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JP Morgan analysts forecast for US Economy....Not good.

JPM's head economist Michael Feroli just joined the bandwagon of other Wall Streeters in cutting Q4 GDP, trimming his prior forecast of 3.5% to 3.0%. However, as this is backward looking, it is largely irrelevant if confirming what we already knew: that the economy was certainly not growing as fast as the market implied it was (yes, the manipulated market is not the economy, no matter how much the Fed would like that to be the case). A bigger question is what should one expect from the future. Yes - an in vitro future, isolated from the daily rumor mill of what may or may not happen to the French rating tomorrow or the day after. It is here that there is nothing good to expect: 'we think growth will downshift from 3.0% in 4Q11 to 2.0% in 1Q12. Looking beyond the first quarter, we expect a growing private domestic sector will contend with a fading drag from the external sector and a persistent drag from the public sector." Yet where JPM falls short, is its optimistic view on the private sector. As David Rosenberg showed yesterday, the ratio of negative to positive preannouncements just hit a multi-year high, with the primary culprit being the strong dollar. Unfortunately for Feroli's bullish angle, the private sector will not do all that well at all if the EURUSD remains in the mid 1.20s or falls further. In fact, corporate earnings will likely be trounced, which in combination with everything else that JPM lists out, correctly, could make the second half of 2012 a perfect storm for economic growth, an event which Obama's pre-electoral planners are all too aware of. What is the only possible recourse? Why more QE of course. The only unknown is "when."

From JP Morgan on the past:

The J.P. Morgan forecast now estimates that GDP growth last quarter was close to 3%. Although this is down a little from our earlier estimate of 3.5%, it would still be the first GDP number to have a “3” in front of the decimal since the second quarter of 2010. A substantial part of the growth seen last quarter owes to firms building inventories after being very cautious about stockbuilding in 3Q, and we anticipate inventory-building accounted for about 1.3%-pts of the 4Q growth. In part because that onetime lift to growth will likely fade in the current quarter, we  anticipate that growth will downshift to around 2.0% in the first quarter of the year.

... and the future:

The fading of the lift from inventory rebuilding is one of a few reasons to believe growth this quarter will be slower than last quarter.

• Retail gasoline prices were declining for much of the last few months of 2011. It does not appear that consumers will get a similar support from energy prices in early 2012.
• Unseasonably warm weather at the end of the fourth quarter likely supported construction activity. The return to what, so far, appears to be somewhat more normal weather will remove this temporary stimulus.
• Through November, exports have held in fairly well. This is not unusual: there is often a lag of a few months between when the fundamentals of  foreign trade change and when the trade flows themselves change. We expect the global slowdown to lead to slower export growth this quarter.

For all these reasons, we think growth will downshift from 3.0% in 4Q11 to 2.0% in 1Q12. Looking beyond the first quarter, we expect a growing private domestic sector will contend with a fading drag from the external sector and a persistent drag from the public sector.

Fading of external drags US nominal exports declined in both October and November; back-to-back declines in exports are relatively rare. Nonetheless, real export volumes have held up better, and through the three months ending in November real exports have increased at a 5.3% annual rate. Historically, global growth developments tend to be reflected in export performance with about a one-quarter lag. The J.P. Morgan global growth forecast (weighting countries by their trade shares with the US) bottoms in 4Q11 at 1.0%, and thus we see 1Q12 as the toughest quarter for US exporters. We anticipate that US growth will firm some as the year progresses, as the drag from net exports slowly dissipates. The J.P. Morgan forecast for US-trade weighted global growth projects an acceleration in growth among US trading partners from 1.0% in 4Q11 to 3.2% in 4Q12. Much of this acceleration is expected to occur in emerging markets, where stimulative policy actions are anticipated to boost growth. As this occurs, US exports should improve over the course of the year. [ZH: Best of luck of this happening with a soaring USD]

Persistence of internal drags

External developments should be a drag on the US economy in 2012, but a drag that fades over the course of the year. Another sector that should be a drag is government, though we expect that drag to persist throughout 2012. The fading of federal stimulus spending probably shaved off about 1/4%- to 1/2%-pt from growth last year, and we expect it will subtract about a similar amount in 2012.

Outside of stimulus-related spending, federal outlays should also be a drag. The winding down of operations in Iraq and Afghanistan should lead to an outright decline in defense spending. According to OMB estimates, after expanding by 0.3% of GDP in fiscal year 2011, defense outlays should decline by 0.4% of GDP in FY2012, the largest such contraction since the end of the Vietnam War in the early 1970s. Some of this contraction will not be manifest in the domestic economy: for example, reduced purchases from vendors in the theaters of operations have no  implication for US GDP. Even so, gauging from the NIPA data on foreign defense transactions, most—perhaps threefourths— of the decline in defense spending will be reflected in reduced purchases of US goods and services. Some of this drag may already be evident in 4Q11, as monthly data suggest a sizable pullback in defense spending.

While the federal fiscal thrust has gone from supporting the economy in 2009 to exerting a modest drag on it since 2009, state and local governments have been a steady drag on the economy since 2008. Given the large number of states and localities there is greater uncertainty gauging the future direction of fiscal thrust at this level of government. One data source, the Fiscal Survey of States conducted bythe National Association of State Budget Officers, points to spending growth in 2012 about in line with or a little slower than in 2011. This survey hasn’t always lined up with the spending patterns subsequently seen in the data, but it is at least indicative that the state and local government drag in 2012 may be in the same ballpark as in 2011.

Year to end with a bang

The expansion in domestic private activity against a backdrop of a fading external drag and a persistent public drag should produce a gradually accelerating pattern of growth. The end of the year, however, promises to deliver a serious wallop of policy uncertainty that could serve to slow growth. There are three major  fiscal policy issues set for the end of this year:

• The automatic federal budget cuts (sequestration) of around $100 billion per year that kick in at the beginning of 2012. These cuts stem from the failure of the Supercommittee to reach an agreement late last year.
• The expiration of the payroll tax holiday and extended unemployment benefits. We assume that these two measures, which are set to expire at the end of February, will be extended through the entire year. The fiscal hit here adds up to around $150 billion.
• Finally, the Bush-era tax cuts are set to expire at the end of this year. On an accrual basis these are worth about $250 billion per year.

All in, current law has about $500 billion of fiscal tightening that will occur in January 2013. Current law will undoubtedly be changed, as no party wants to see that much tightening in that short a period. However, how current law is changed is extremely uncertain, and that uncertainty could restrain activity toward the end of the year.

Federal Reserve Shell/Ponzi game may be coming to a sticky end, 2012 Article....Two years later

Last week, when we pointed out what was then a record $77 billion in Treasury sales from the Fed's custody account, in addition to noting the patently obvious, namely that contrary to what one hears in the media, foreigners are offloading US paper hand over first, there was this little tidbit: "The question is what they are converting the USD into, and how much longer will the go on for: the last thing the US can afford is a wholesale dumping of its Treasurys. Because as the chart below vividly demonstrates, the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world." Well as of today's H.4.1 update, the outflow has increased by yet another $8 billion to a new all time record of $85 billion, in 6 consecutive weeks, which is also tied for the longest consecutive period of outflows from the Fed's Custody account ever. This week's sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year. And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development. So while the elephant in the room could have been ignored 4, 3 and 2 weeks ago, it is getting increasingly more difficult to do so at this point, especially with US bond auctions mysteriously pricing at record low yields month after month. But at least the mass dump in Treasurys explains the $100 swing higher in gold in the past month.

Federal Reserve Shell/Ponzi game from 2010 article.

Submitted by Chris Martenson

The Shell Game Continues…

Monday, April 5, 2010

Executive Summary

• Record-breaking Treasury auctions continue to go off without a hitch, thanks to massive foreign participation.
• However, the amounts reported to be bought in the auction results do not match the Custody Account or TIC report amounts.
• The Fed is allegedly all done buying MBS and Treasury paper.  This cuts off an important source of liquidity for the Treasury, commodity, and stock markets.  
• How will these markets respond to a liquidity drought?

The end of March is upon us.  I need to take a moment to re-analyze the data to see what might happen now that the stimulus money has worn off, and, more importantly, now that the Federal Reserve's massive Mortgage Backed Security (MBS) purchase program is over.

This is important for a variety of reasons.  The first is that the enormous flood of liquidity that the Federal Reserve injected into the financial system has found its way into the Treasury market, supporting government borrowing and also lowering interest rates for the housing market.  How will the Treasury market respond once the liquidity spigot is turned off? 

The second is that this flood of liquidity has supported all sorts of other asset markets along the way, including the stock and commodity markets.  What will happen to these when the flood stops?  Will the base economy have recovered enough that the financial markets can operate on their own?  Will stocks falter after an amazing run?  Or will the whole thing shudder to a halt for a double-dip recession?

Back in August of 2009, I wrote that the Federal Reserve was basically just directly monetizing US government debt by buying recent Treasury issuances as well as Mortgage Backed Securities (MBS).

Here's the conclusion from that report: 

The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt.  This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.

This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency.  The difference is in the complexity of the game being played, not the substance of the actions themselves.

When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world, as they endeavor to meet the vast borrowing desires of the US government.

My surprise at all of this has been twofold.  The shell game has continued this long without the bond market calling the bluff, and I am baffled by the extent to which the other world central banks have both enabled and participated in this game.

Part of the explanation behind this unwavering support for the dollar and US deficit spending by other central banks lays in the fact that other Western and Eastern governments are equally insolvent.  It's possible that they feel they really have no choice but to play along, because the alternative would be to inflict a vicious and deeply unpopular austerity program on their own country, while everybody else is partying on thin-air money.  Who's going to be the first to do that?  Nobody, that's who. 

The Size of the Problem (or is it Predicament?)

Let's begin by noting the massive growth in the Treasury auctions over the past few years.  Where once we required a few hundred billion per year of new, incremental borrowing to fund the fiscal gaps, we are now borrowing more than a trillion each year.  Where the total size of all auctions (including roll-overs) was a couple of trillion each year, it is now approaching ten trillion.

The way I prefer to track this is at the source.  The media does an especially poor job of communicating accurate government deficit figures.  They simply relate the cash deficit, which is how the government reports it.  However, the true borrowing needs due to the deficit are best, and most easily, tracked by simply noting the increase in the "debt held by the public" portion of the federal debt.  Why the press misses out on this year after year is beyond me.

We know that in 2009, the incremental borrowing needs of the federal government (give or take a few billion, due to timing) must have been equal to the reported growth in the "debt held by the public" portion of the federal debt.

That figure for 2009 was $1,491 billion (or $1.49 trillion):

Recall that the total federal debt consists of the two components in the table above; 'debt held by the public' and'intragovernmental holdings.'  The former represents the size of all outstanding Treasury debt, and the latter represents money that the government has borrowed from itself but owes to various retirees and entitlement beneficiaries.

When the value of 'intragovernmental holdings' rises, it means that cash was borrowed from the entitlement programs and used to fund government operations.  If it rises, as we see above in 2009, then more money is coming in than going out.  If it is stagnant, then money coming into the programs is being equaled by money leaving.  If, heaven forbid, it falls, that means that the programs are now cash-flow negative to government coffers and more money is being paid out than is being taken in, which is our current situation here in 2010 (see next table below).

At any rate, for our purposes, we need to try and figure out where a record-shattering $1.49 trillion in fresh Treasury issuances went in 2009.  Who bought them?  How much went to foreign buyers, and can we expect them to buy more? 

And so far in 2010, we see that we are on track for another ~$1.5 trillion round of fresh borrowing:

 

Taken together, this means that in only two short years, 2009 and 2010, as much new Treasury debt will be auctioned off to the public as was outstanding in 1995.  Since government borrowing never gets paid down, at least in modern history, it means that the last two years have seen as much borrowing as happened over the period in which electricity was strung to every house, the highways were built, and our population tripled.  What can we point to that was created over the last two years to rival those accomplishments?  

Even more interestingly, we note something quite extraordinary in that table above:  Through the middle of March, the intragovernmental holdings have not increased, which indicates that expenditures are equal to revenues for the entitlement programs.  This has not happened for decades.  It means that from a cash-flow standpoint, the US government has lost an important source of liquid operating cash.  This is an enormous inflection point in the data series.  Instead of providing cash to government operations, the entitlement programs are now on the verge of draining cash.  The importance of this shift cannot be overstated.

Which brings us to the most important question of them all, which concerns the continued ability of the US and various other world governments to fund their deficits.  It is my contention that too few people are thinking about the possibility that the US government could face a funding crisis at some point, which means that it's a clear and present danger.

US Treasury Auction Results

Let's look at the Treasury auction data since 2009 to see what it can tell us.  To begin with, an auction may do a couple of things.  It may sell brand-new debt to raise new cash, it may "roll over" past debt that is maturing, or both.  So where 2009 saw $1.49 trillion in new debt sold, the total volume of the Treasury auctions was far larger, when we add up all the roll-over activity. 

Here's the data for the total activity 2009 and some of 2010: 

(Note:  This data excludes TIPS and cash management bills, so these numbers are actually smaller than the complete total.)

The table above tells us that while $1.49 trillion in new debt was issued in 2009, more than $8.5 trillion in total activity took place.  That's how much cash had to flow through the Treasury auction market for it to function. 

This illustrates why a failed Treasury auction will be avoided at all costs.  Any interruption to the trillions and trillions of dollars flowing through the Treasury market each year would cause an immediate and enormous train wreck that would ripple through the entire world's financial system (and trigger an avalanche comprised of hundreds of trillions of dollars of interest-rate derivatives).  A failed auction is simply not an option for the Fed or the Treasury Dept.

In 2010, more than $1.5 trillion in total activity had already occurred by March 10^th.  Once we mentally add in this year's likely borrowing, we might expect a grand total of some $10 trillion in total activity to take place by the end of the year.  In 2003, the total activity of this market was only some $3.4 trillion.  If you plot out the growth in activity, it looks like an exponential chart. 

With government deficits in the trillions stretching as far as the eye can see, and with an ever-increasing reliance on short-term debt, this trend is set to increase going forward.

Where It All Went

So now we know that nearly $1.5 trillion of new Treasury debt went out the door in 2009, along with another $371 billion in 2010.  But where did it all go?  Who bought it?  Can we count on them to keep buying?

Here the data is not as clean and clear as I would like.  There is quite a bit that is difficult to determine, based on the way that that data is collected and reported.  While it may not be the intent of the data gatherers to hide anything, that is the result.

In terms of the disposition of the $1,491 billion in Treasury bonds bought in 2009, here's what we do know:

• The Fed bought $300 billion of them, all long-dated securities.
• According to the TIC report, foreigners bought $617.6 billion.
• The rest, 'the plug factor,' was assigned to "households" by the Federal Reserve, accounting for more than $530 billion.

There are many who have questioned whether "households" were in any position to park more than 100% of their entire personal savings into Treasury instruments, but even the Fed tells us that this is a plug category, meaning anything not identified as going to itself or foreigners is assigned to this category.  The Fed has no idea how many Treasuries "households" bought in 2009; it only knows how many are not otherwise officially accounted for and that it should assign the difference to "households."

The truth is, we have no idea where that half-trillion in Treasuries went.  My best guess would be that they mainly went to large banks (probably even the primary dealers themselves) to a large degree, especially those that sold MBS to the Fed.  In keeping with the "shell game" concept, the only entities out there with a half-trillion lying around in 2009 probably got it from the Fed.

An asterisk in this story of where those Treasuries went concerns the difference between what the Treasury reports that foreigners bought (in the TIC report) and what the Fed says foreigners accumulated in the Custody Account.  Unfortunately, these two reports overlap to a large degree, but not completely.  This is a critical bit of investigation to perform, because it is so important that foreigners continue to buy US Treasury debt.  In 2009, the Custody Account holdings of Treasuries increased by $572 billion, while the TIC report said foreigners bought $617.6 billion, and we are unable to account for the whopping $45 billion difference between the two numbers. 

The Custody Account

I described the Custody Account in some detail back in August of 2009 in The Shell Game, so I won't rehash how it operates here, except to say that it is basically a gigantic brokerage account held by the Fed on behalf of foreign central banks.

In order to understand foreign buying habits when it comes to Treasuries, we need to peer into both the TIC and the Custody Account.  When we did this last August, here is what we found for the Custody Account:

The story in August of 2009 was one of rapid, uninterrupted growth in the Custody Account, seemingly without any concern or regard for the financial crisis happening then.

Today we find that during 2010, the Custody Account has not grown very robustly:

I am immediately drawn to the fact that the foreign Custody Account has been, well, a little flat lately (as marked at the end by the blue line at the top right).  However, it's also been a little flat at other times, which I have marked with dark horizontal lines, so perhaps this is a relatively normal occurrence.  Overall, perhaps we should be most impressed with the >250% growth over the past seven years(!).

Think of this $3 trillion debt as the portion of US government debt that is owed to a foreign credit-card firm.  Someday that's going to have to be paid back, and, no, it doesn't bode well for the future prosperity of the US.

Here's the Custody Account in table form, which reveals that 2010 is shaping up to be the weakest year in a long time:

I'm sorry, but a 5% growth in the Custody Account just isn't going to cut it for a country with a multi-trillion-dollar borrowing habit.  So far, the Custody Account has only increased by a paltry $26.5 billion in 2010.  That's a real cause for concern, and it makes me wonder about the recent upward volatility in Treasury yields.

Now, the Custody Account consists of both Treasuries and Agency debt.  Teasing this apart into its components, we find that total Treasury accumulation into the Custody Account has been a quite anemic $24.6 billion in 2010, which is more or less the same amount that was accumulated during a single week back in 2008 and 2009. 

Let's compare this $24.6 billion to the $371 billion of new Treasury debt sold in 2010 - it's only 7% of the total.   But we are told, week after week, that foreigners (via the "indirect bid") have bought on the order of 40% of each auction, or nearly $150 billion.  What gives?

Like here in this recent auction, where 39% of a single auction totaling $16.6 billion went to the indirect bidders:

What we are seeing here is a very large (and growing) disconnect, between the proportion of Treasuries that are said to be bought by foreigners in the Treasury auction result announcements, and what's showing up in their official TIC and Custody Accounts. 

I am increasingly concerned that this gap reflects a growing accumulation of Treasury issues by entities funded for this purpose by the Fed's magic thin-air checkbook.  If so, then the danger would be the response of the market and the reaction of various countries when that becomes common knowledge.

For now, it is clear that 40% of US Treasury auctions are not being bought by foreigners, at least if the TIC and Custody Account reports are to be believed.

Perhaps the growth in the Custody Account will resume and my concerns will amount to nothing, but the first quarter of 2010 is shaping up to be somewhat of a gigantic disappointment in that department.  Unfortunately, the TIC report is lagged by a couple of months, so we won't have the March numbers for comparison until the middle of June.  My guess is that the TIC report will also show weakness in the foreign accumulation of Treasury debt, but we'll also be taking a look then, just to be sure.

The concern here is that the Custody Account is reflecting early signs of waning foreign interest in US debt.  If (or when) we finally reach the point of saturation in this story, everything will change rather dramatically.

From Zero Hedge, we have this nice summary of the debt auctions coming up for next week:

The Treasury just announced the auction schedule for next week: a total of $165 Billion in gross issuance of which $74 Billion in coupons, and $8 billion in a 10 Year TIPS reopening. 

• $28 billion in 3 Month Bills, Auction date April 5
• $29 billion in 6 Month Bills, Auction date April 5
• $26 billion in 52 Week Bills, Auction date April 6
• $40 billion in 3 Year Bonds, Auction date April 6
• $21 billion in 9 Year 10 Month (reopening), Auction date April 7
• $13 billion in 29 Year 10 Month (reopening), Auction date April 8
• $8 billion in 9 Year 9 Month TIPS (Reopening), Auction date April 5

The fact of the matter is, the US government is now conducting weekly Treasury auctions that are as large as quarterly auctions were just a few years ago.  Exponential increase, anyone?  $165 billion in a single week is an enormous pile to unload.

What I Am Always Looking Out For

Long-time readers know that I am constantly on the lookout for a specific pair of market signals above all others, because its arrival will signal that a new game has begun.  That pair comprises a simultaneously falling US dollar index and rising Treasury interest rates (signaling falling Treasury bond prices).

In essence, this pair will signal to me that some major player, perhaps China, has decided to sell its Treasuries and take its money home, thereby driving down the dollar.  This is critical to me, because it will mean that the US will have begun its long date with funding difficulties.  Either interest rates will have to rise dramatically to attract new lenders (thereby killing the nascent recovery of the housing market and our entire credit-fueled economy), or the Fed will have to begin monetizing at an even faster rate than before.

In short, we'll be facing a period of profound austerity, raging inflation brought about by currency devaluation, or both.  In truth, I cannot imagine any possible way for the US to pay off its current official debts in current dollars, so I feel this outcome is merely a matter of time. However, it could be a long time, and we must also be prepared for that.

In the past week, there was a bit of excitement over in the Treasury market because there were two days of hard selling in a row.  This led to Treasury yields spiking and possibly breaking out over a two-year trend line:

The Treasury market immediately settled down right after these two days of selling, but something significant had clearly happened.  During this period, the dollar also rose quite handily, so my "signal pair" was not in play and I did not issue an alert, nor did I become overly concerned.  However, I did sit up and take notice and am following bond market signals with just a bit more focus these days.

A rapid rise in long-term interest rates here would be just about the last thing the Fed would want, as that would put pressure on stocks and commodities, and harm the housing recovery, such as it is.  So I doubt that the rate rise was planned or welcomed.

I am keeping a very close eye on the Treasury market right now and will alert you if anything breaks suddenly or crosses the threshold to actionable news.

One Possible Scenario

Although I am not convinced that I have access to good data, it would seem that China is in a serious bubble.  Or, rather, a series of bubbles, including real estate in several metropolitan locations and manufacturing overcapacity.  Several recent commentators have been adding up the facts as we know them, and it seems plausible to suspect that China is deep into bubble territory.

China also happens to hold $890 billion of US Treasuries (as of January 2010), as well as some amount of MBS stashed in the Fed's Custody Account (I don't have access to the necessary detail to say how much), so we'd be close if we estimated that China held $1 trillion of official US debt.

One scenario that I think has a chance of upsetting things would be for China to experience a bubble-bursting crisis, the mitigation of which would necessitate a need for liquid cash.  By this, I mean an event (or set of events) that would essentially force China to begin unloading their Treasury holdings. 

Under this scenario, we'd see immediate selling pressure in the Treasury market, leading to lower prices and higher yields.  I think this event would be sufficient to rip the cover off the Treasury market and expose the extent to which the market has been supported by central banks more than legitimate market players and expectations.

So another thing I am keeping an eye out for is any sign that China is experiencing a bubble-bursting event.  Here I track the Chinese stock market, the Baltic Dry Index (as a crude measure of export activity), and the news.

Conclusion

With a stagnant Custody Account reading and underwhelming TIC reports, it seems unlikely that that foreigners are going to be able to digest the volume of Treasury auctions that are coming up this year.  We've already seen a nice breakout on yields.  With everything I know about Fed policy at this point, I can assure you that a sudden jump in rates on the long end was not in the Fed's plans for last week.

My concern is that the mysterious indirect and direct buyers that have been showing up at Treasury auctions lately may be none other than the Fed itself or its proxies, hidden by some slight shell game or another.

There simply seems to be no other explanation, given the perilous state of the global economy.  Where is all this capital coming from, if not central banks?  From earnings?  From exports?  From legitimate economic savings?  From private individuals (during a major stock bull run)?  None of these explanations matches the volume of borrowing that we are seeing in the US Treasury market, let alone worldwide. 

The simplest explanation is that central banks are somehow providing the necessary liquidity to support the various governmental bond auctions that are happening around the world.  The US story does not add up and provides enough of a smoking gun to suggest that there are (at the very least) non-transparent buyers for the massive, record-breaking Treasury issuances we've been seeing lately.

If, or when, these deceptions are revealed, I predict that we will experience a pretty significant market dislocation that will take the form of a chaotic bond market, with yields that rapidly gyrate higher, currency perturbations that will shake markets, and an extended banking holiday, with capital controls imposed until a nightmarish derivative mess is unsorted.

Of course, these are just my hunches at this point.  Something is very much 'not right' in this story, but over the years I have learned that strange market conditions can last longer than you think possible and that things always seem to unfold more slowly than you might initially suspect.

So I am prepared for two possible scenarios:  1) a sudden change in the markets, and the alternative, 2) no change at all for ten years or more.  The first requires active financial and physical planning, while the second requires developing the right sort of mental patience.  It is a tricky psychological balancing act, to be ready for anything and nothing at the same time.  I imagine that being on patrol in Baghdad during hostilities was sort of like this, where nothing happened for 99% of the time, but then IEDs made the other 1% of the time very, very interesting.

What will happen next?  Nobody knows.  My advice remains the same as always:  Stay tuned to the world's markets and happenings for clues about what's unfolding, but make the necessary preparations to increase your resilience to whatever might happen next. 

The current market environment , where everyone is seemingly convinced that a recovery is now all but assured, is both encouraging and concerning.  Encouraging because that's most likely true.  Concerning because sharp breaks almost always happen during periods of complacency, when everybody seems to be looking the other way.  In short, when everyone is complacent, I get concerned, and when people get concerned, I try to remain calm. 

For now, there's a level of complacency about Treasury auctions that I find very disturbing.  There's really no way to make the story add up properly - I mean, how could it, with $1.5 trillion in new borrowing for two years in a row during economic weakness? - yet almost nobody seems to be concerned about the implications of that line of thinking. 

That is exactly the territory where great fortunes are made and lost.  At the very least, my wish is for you to preserve what you have and to be able to maintain an even keel and positive outlook, no matter what the future brings. 

For myself, this means putting in 25 fruit and nut trees on my property (accomplished this past weekend), followed by expanding the garden and installing solar and energy efficiency improvements.  We shall see if these turn out to be good uses for my capital and time.  For now, they provide me with the psychological sense of forward movement and improvement, both of which are very important to me right now and worth every penny to me all on their own.

Your faithful information scout,
Chris Martenson