-->

Fed's Bluff and Bluster: Where's Sgt. Friday?

By Russ Winter

July 26, 2004




Over the last few fortnights, market observers have witnessed a parade of Fed officials strutting their inflation fighting prowess. They talk about the"history" of the Fed and their"credibility" on this front. Amazingly, the market cognoscenti seem to hang on their every word. The Dollar spikes, metals plunge, bonds and stocks churn based on these utterances. One is reminded of the scene in the Wizard of Oz, when Dorothy was asked to bow down before the almighty Wizard. Of course we all know the rest of that great scene, you know when Toto pulled back the curtain.

Where is Toto? Or perhaps a more accurate analogy would be where is Sgt. Friday in all this? What are the facts, m’am? This observer finds the disconnect between the Fed's utterances and their ACTIONS to be quite profound. So much so, that I am inclined (as difficult as that can be) now to just ignore the talk and propaganda and focus on the facts, m’am. Joseph Goebbels would have been proud to see his Orwellian"big lie" approach practiced so blatantly. Perhaps the time has come to get aggressive on the Toto trade?

There are several arenas that any market player can track on the Toto/Sgt. Friday trade. One glaring one that is getting scant attention is Fed debt monetization. Monetization is when the Fed prints money out of thin air, and enters the market as a"customer" to participate in treasury auctions or make open purchases. The Wizards are having quite a party right now on this front. They are showing about as much sobriety as college kids on spring break in FACT.

Prior to May 5th, and for the previous 52 weeks, the Fed"bought outright" (monetized treasuries typically) about $577 million a week. This is a number that is easy enough for even arm chair market players to follow. After all why wait for the Ministry of Propaganda to tell you all this before a flock of"group-think" Congressmen? It's in Barron's market lab section, or in the Fed's web site here: www.federalreserve.gov

But starting May 5th, the spring break smoke and mirrors drunk and orgy began. Here are the weekly figures for debt monetization by the Fed:

5-12: $2,199,000,000 (that's roughly $2.2 billion)
5-19: $1,748,000,000
5-26: $453,000,000
6-2: $1,441,000,000
6-9: $1,598,000,000
6-16: $1,914,000,000
6-23: $63,000,000 (a break in the action to clean Mr. Porcelain from the night before?)
6-30: $2,056,000,000
7-7: $569,000,000
7-14: $2,106,000,000
7-21 $2,507,000,000

The 12 week average is $1,395,000,000 per week. The last 8 week average purchases were $1,532,000,000 - 266% more than the pre-May 5th level.

And for good measure the Fed has elected to be"diligent" about fighting inflation by adding $13,345,000,000 in permanent injections into the system over the last two months.
http://www.ny.frb.org/markets/permanent.html. Permanent injections are another mechanism that the Fed uses to inject high powered money into the system. This is effectively a very low interest loan of medium duration (90 days to over a year) to selected financial institutions. Those"friends of Al" then invest and/or speculate in the debt markets. You will often see these"loans" materialize just before a big Treasury auction, when they are then are used to absorb this paper.

Here are the weekly numbers since early May:

5-12: $1,692,000,000
5-24: $783,000,000
5-26: $796,000,000
6-2: $1,400,000,000
6-8: $1,000,000,000
6-9: $1,035,000,000
6-23: $1,390,000,000
7-7: $1,557,000,000
7-13: $398,000,000
7-14: $1,898,000,000
7-22: $1,396,000,000

Then there's the obvious one, a Fed funds rate that is at least several percentage points lower (if not more) than the real rate of inflation. Are the Wizards inflation fighters? I submit in the Land of Oz only, just the facts, m’am.

-->Hi,

>Monetization is when the Fed prints money out of thin air, and enters the market as a"customer" to participate in treasury auctions or make open purchases.

Das wär's natürlich. Die Fed kauft von der Treasury direkt als Kunde (customer), d.h. als Käufer? Warum dann"or"? Bezieht sich das"or" auf OM-Käufe oder was sind"open purchases".

Ich habe noch nichts dazu finden können. Falls es stimmt, wäre dies ein doppelter Bruch des Fed Acts: Erstens darf nicht"outright" gekauft werden (von den einzelnen Feds), und zweitens darf"die" Fed selbst, also governor in Washington usw., überhaupt nichts kaufen. Die gibt ja auch weder Noten aus (das tun die 12 Feds) noch nimmt sie entsprechend andere Passiva.

>Prior to May 5th, and for the previous 52 weeks, the Fed"bought outright" (monetized treasuries typically) about $577 million a week.

Das"buying outright" ist also wie gelaufen? Vielleicht könnte es der Sergeant auf der Web-Page der Fed mal zeigen? www.federalreserve.gov müsste einen Hinweis geben, den ich nicht finden kann.

>The 12 week average is $1,395,000,000 per week. The last 8 week average purchases were $1,532,000,000 - 266% more than the pre-May 5th level.

Kurzum: Sind das Direktkäufe der Feds bei der Treasury? Dann hätte Gov endlich den Direktzugang zur Notenpresse gefunden, ohne vorher über den Markt gehen zu müssen.

>And for good measure the Fed has elected to be"diligent" about fighting inflation by adding $13,345,000,000 in permanent injections into the system over the last two months.

Nun dazu:

>http://www.ny.frb.org/markets/permanent.html. Permanent injections are another mechanism that the Fed uses to inject high powered money into the system.

Dabei handelt es sich um das klassische Verfahren: Käufe von Titeln am Markt.

>This is effectively a very low interest loan of medium duration (90 days to over a year) to selected financial institutions. Those"friends of Al" then invest and/or speculate in the debt markets.

Klar, sie nehmen Titel auf, die noch nicht fällig sind.

>You will often see these"loans" materialize just before a big Treasury auction, when they are then are used to absorb this paper.

Auch klar, aber das ist altbekannter Usus. Natürlich muss der Markt flüssig sein, um die Treasuries aufzunehmen. Damit kaufen aber noch laufende Titel neue, was zunächst nur auf eine Umschichtung hinausläuft, da die ablaufenden Titel ja erst bezahlt werden müssen, wozu Treasury Geld braucht (sofortige Fälligkeit).

>Then there's the obvious one, a Fed funds rate that is at least several percentage points lower (if not more) than the real rate of inflation. Are the Wizards inflation fighters? I submit in the Land of Oz only, just the facts, m’am.

Der Sergeant meint vermutlich nicht die reale (die's nicht gibt), sondern die wirkliche Infla-Rate. Die wirklich Infla-Rate müsste sich dann allerdings im Diskont (Kursverfall) der noch laufenden Titel bemerkbar machen, da es deren Inhaber nicht schätzen, wenn sie über die Infla enteignet werden.

Also kann der zweite Komplex beruhigt dem Markt, wo keine Idioten versammelt sind, sondern Profis, überlassen werden. Gehen dort die Kurse nicht in die Knie, ist nichts weiter zu sagen.

Der erste Komplex allerdings (Direktkäufe) wäre etwas ganz anderes. Kann das hart gemacht werden, ist völlig neue Lage und die Hyperinflation (via Staatstitel direkt an die Feds und damit die Notenpresse) nur noch eine Frage der Zeit.

Mal sehen, ob der Sergeant richtig reportiert hat oder ob er wegen Verbreitung groben Unfugs demnächst seine Streifen verliert.

Gruß!