New Year Looks Like Old One – 1/2/08

Lee Adler and Aaron Krowne review the latest real estate spin from the NAR, more cuts at major banks, and exactly what the Fed is up to, as opposed to what it wants people to think it’s doing.

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4 comments for “New Year Looks Like Old One – 1/2/08

  1. don
    January 3, 2008 at 11:04 am

    Excellent, very informative discussion on housing.

    Question, which Aaron was driving at near the very end of program: Is it not true that should Fed aggressively expand monetary base, then unneeded reserves would pile up in banking system, causing Fed Fund Rate to dive, thus putting pressure on Fed to drain to raise Rate? Does this not present a dilemma for Fed?

    Also, any comment on ABCP growth as reported today (Thursday)?

  2. admin
    January 3, 2008 at 11:12 am

    Thanks Don. I believe that the Fed would only aggressively expand the base when there’s upward pressure on rates. Right now they are aggressively contracting the base. They wiped out that two day add and then some today. Crazy. I don’t want speculate beyond that because it doesn’t seem like something the Fed would do in the absence of upward pressure on rates. While I expect to see that at some point, we’re not there yet.

    As for the ABCP, it’s puzzling, but just a very small blip for now. Is it because paper is being forced to roll over with accrued interest and no more cash is flowing out of the market? Because there is no more cash? No conclusion to be drawn yet. Let’s see what next week brings.

  3. JO
    January 3, 2008 at 7:50 pm

    Hi Lee, I have been reading your blog for a while now an dthink it is great. I have seen several of your columns on how the Fed is draining money out. I have not read the WSE pro articles but I guess I am wondering: Is the Fed increasing the money supply in the last 3-4 months s most people indicate ? Some have even re-created M3 formulas and say this has gone up well into double digits…Is the Fed trying to create conditions for more inflation or do you indicate they are actually creating potentially deflationary conditions?..With so much staglfation talk/signs and inflation indicators (ie.gold/oil prices) screaming higher, it is hard to reconcile with plumetting T yields. Any comment?

  4. admin
    January 3, 2008 at 10:04 pm

    This is a subject that I have covered in great depth in the Wall Street Examiner Professional Edition Fed Report, as well as in our podcasts. The Fed’s System Open Market Account, in essence the monetary base not including currency, is a very different matter from the broadest measures of money such as MZM.

    Broader money measures are grossly overstated, in my opinion, due to the problem of fictitious capital backing the liabilities being counted. In essence that money doesn’t exist, and that’s been proven by the several bailouts of mmf’s that we have seen already. There will be more to come, and eventually, my guess is that there will be a number of funds that do break the buck.

    God forbid if there are runs on retail money market funds.

    I honestly don’t know why the Fed has been restraining the growth of the SOMA to such a degree, unlike the BOE and the ECB. My guess is that the Fed is worried about the bulge in MZM. But again, I suspect that a big chunk of the reported money supply doesn’t exist. I would assume the Fed knows that, but then, they admitted to being surprised by the depth of the housing collapse. How sane observer paying attention to the housing market could have been surprised is beyond me, so maybe the Fed really is dumb enough to miss the obvious when it comes to these ridiculously misleading money supply growth figures.

    More important than the why is the what. We can determine the what by watching the Fed’s daily open market operations, and lately their machinations vis a vis the TAFs.

    For purposes of intermediate trading, I want to react to what the Fed is doing, and how that fits with what the stock charts are showing. I leave the “whys” to other people to debate. For trading purposes, when the Fed keeps the monetary base growing at a very slow rate, if at all, that’s bearish. But the Fed can turn on a dime tomorrow. That’s why I update and report on the data daily.

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