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Good article here from Gary North.

 

sorry Doc - dont have a link to it. Came as a free email so had to post the whole thing.

 

 

Gary North's REALITY CHECK

www.GaryNorth.com

www.snipurl.com/subscribenow

 

 

Issue 687 September 21, 2007

 

 

BERNANKE HAS SNOOKERED US ALL

 

Ben the Beard has put the shuck on all of us: hard-money

fanatics, Wall Street anal cysts, and full-time FED-watchers. He

has done it in plain site. He and his accomplices have left a

trail of digits, but nobody has followed the trail. Until now.

And even I may have wandered off the trail.

 

In the August 28 issue of "Reality Check," I wrote on "The

Fed's Next Moves." I wrote the following:

 

Forecasting what the FED will do is like reading tea

leaves. But let me give it a try.

 

The FED doesn't want to send a message of panic, so it

will not lower the FedFunds target rate until its next

scheduled meeting, which is September 18. At that

meeting, it will announce a rate cut. The FED will cut

it by at least .25 percentage point. But to be sure

that bankers know the FED means business, I think it

will be .50 percentage point, matching the cut in the

discount window's rate.

 

At the time, a forecast of a half-point cut was considered

improbable. Most FED-watchers thought .25 point was likely. As

you know, the FED cut the target rate by half a point. I also

wrote:

 

This will be heralded by the financial media as a sign

that it's time to buy stocks. The increase from 1% in

2003 to 5.25% in 2006 was also seen as a signal to buy

stocks. Everything is the media's signal to buy stocks.

 

Sure enough, when the announcement of the half-point cut was

issued late in the day, the Dow Jones rose by 335 points. It

rose almost 100 points the next day.

 

To make myself look like a genius, I should leave it at

that. But because of what has happened in the last month, I must

fess up. The following paragraph, as of today, was dead wrong:

 

While the FED is now pumping in new reserves at a

little under 6% per annum, and I expect it to continue

this policy for the foreseeable future, I don't think

this will be enough to reverse the sagging economy in

the next six months. But if I am wrong, then we can

expect a return of accelerating price inflation.

 

http://GaryNorth.com/snip/287.htm

 

Bernanke and the Federal Open Market Committee (FOMC) have

done something extraordinary. They have publicly lowered the

FedFunds target rate, and have forced down the actual FedFunds

rate to meet the target rate, while deflating the money supply.

 

You read it here first: "deflating."

 

The only monetary indicator that reveals directly what the

FOMC has done in recent weeks is the adjusted monetary base.

This is the one monetary aggregate that the FOMC controls

directly. It reveals what actions the FOMC has taken.

 

The adjusted monetary base serves as the monetary base of

the fractional reserve commercial banking system. Take a look at

what happened from the middle of August, when the FOMC lowered

the discount window's interest rate from 6.25% to 5.75%, until

mid-September. You probably have to see it to believe it.

 

http://GaryNorth.com/snip/288.htm

 

From early July, 2007, to mid-August, it climbed rapidly.

From mid-August to mid-September, it fell just as sharply.

 

This is deflation.

 

The table at the bottom of the chart provides the important

numbers: the rate of increase from various dates until now. From

mid-September, 2006, to mid-September, 2007, the increase was

1.8% per annum. This is what it has been ever since Bernanke

took over on February 1, 2006.

 

An increase of 1.8% is tight money policy by previous FED

standards. I have been hammering on this point for a year. The

FED has dramatically reduced the rate of monetary inflation.

 

I don't think my message has penetrated the thinking of most

hard-money contrarians. They keep citing M-3, which was canceled

by the FED a year ago, and which was always the most misleading

of all monetary statistics. Year after year, the M-3 statistic

was four times higher than the CPI. The M-3 statistic was

worthless from day one. Anyone who used it to make investments

lost most (or all) of his money. I have written a report on

this, which provides the evidence: "Monetary Statistics."

 

http://GaryNorth.com/snip/289.htm

 

This tight-money policy has been reflected in the various

consumer price indexes. This week, the Bureau of Labor

Statistics released the figure for August. The CPI fell by a

tenth of a point. That is, the economy experienced price

deflation.

 

Got that word? Deflation.

 

I prefer to use the Median CPI, which is published by the

Cleveland Federal Reserve Bank. In August, it rose by two-tenths

of a percent. This is what it rose every month since March.

This means a 2.4% increase, year to year, which is consistent

with the rise in the adjusted monetary base.

 

 

THE FED IS DEFLATING

 

The FED deflated from the day it announced the cut in the

discount rate to the posting of the latest issue of "U.S.

Financial Data."

 

Let me ask you a question. "From what you have read in the

hard-money camp, was it your perception that the FED has been

inflating?"

 

The answer is "yes," isn't it?

 

There is an ancient slogan in the newspaper profession: "If

your mother says she loves you, check it out."

 

I say: "If your favorite financial commentator says the FED

is inflating, check it out."

 

This brings me to an important point: you should monitor the

statistics carefully and regularly if you are investing actively.

You can do this here:

 

1. Federal Reserve charts

 

http://www.garynorth.com/public/department29.cfm

 

 

2. Yield curve

 

http://www.garynorth.com/public/department81.cfm

 

 

3. Price indexes (USA)

 

http://www.garynorth.com/public/department83.cfm

 

 

Year to year, the FED is inflating, but it may be inflating

far more slowly than what you have been told. Trust, but verify.

 

 

WHAT IS GOING ON HERE?

 

I must now begin a guessing game. The FOMC does not tell

the public exactly what it is doing. It is not very clear on

what it has done. But we can piece together a pattern from what

we have been told.

 

On September 18, the FOMC announced a half point reduction

in the targeted FedFunds rate.

 

Normally, the FOMC controls the actual FedFunds rate by

issuing newly created fiat money to banks in exchange for bank-

held assets. These are called "repurchase agreements." The FED

accepts these from banks that want to borrow money overnight in

order to meet legal reserve requirements. The banks need more

money to lend out. It gets this from the FED. Here is the

description of the arrangement that appears on Wikipedia.

 

Repurchase agreements when transacted by the Federal

Open Market Committee of the Federal Reserve in open

market operations adds reserves to the banking system

and then after a specified period of time withdraws

them; reverse repos initially drain reserves and later

add them back.

 

Under a repurchase agreement ("RP" or "repo"), the

Federal Reserve (Fed) buys US Treasury securities, U.S.

agency securities, or mortgage-backed securities from a

primary dealer who agrees to buy them back, typically

within one to seven days; a reverse repo is the

opposite. Thus the Fed describes these transactions

from the counterparty's viewpoint rather than from

their own viewpoint.

 

This means that the FED need not purchase T-bills to inject

new money into the economy. It can purchase other assets. I

believe this is mainly what the FED is buying today. I cannot

prove this, but it makes sense. It is trying to bail out banks

that are in trouble and which need very short-term money.

 

These assets are sold to the FED at face value, not market

value. The FOMC has issued a press release on August 17 which

clarified the new situation. Note the phrase, "a broad range of

collateral."

 

The Board is also announcing a change to the Reserve

Banks' usual practices to allow the provision of term

financing for as long as 30 days, renewable by the

borrower. These changes will remain in place until the

Federal Reserve determines that market liquidity has

improved materially. These changes are designed to

provide depositories with greater assurance about the

cost and availability of funding. The Federal Reserve

will continue to accept a broad range of collateral for

discount window loans, including home mortgages and

related assets.

 

http://GaryNorth.com/snip/291.htm

 

But does this include sub-prime mortgages? Indeed, it does.

In a FAQ on collateral, we read:

 

May a depository institution pledge sub-prime

mortgages?

 

The Reserve Banks accept performing mortgages. This

could include sub-prime mortgages.

 

http://GaryNorth.com/snip/292.htm

 

 

Second, we have already seen that the FED was reducing the

monetary base.

 

How could it reduce the AMB? There is only one way. It had

to sell assets. When the FED sells an asset, the money received

from the buyer disappears -- the monetary deflation side of

fractional reserve banking.

 

Third, we know from the record that the FedFunds rate for

over two months had been pushing against the targeted 5.25% rate.

Often, it would exceed 5.25%. Then the rate would decline,

inter-day. Look at the high-range figures:

 

http://GaryNorth.com/snip/290.htm

 

My presumption is that the FED was intervening to supply

reserves by buying repo's. This, in and of itself, would have

increased the monetary base.

 

Fourth, the monetary base declined. This requires an

explanation. I have one. The Federal Reserve was simultaneously

selling T-bills from its own account. It sold enough to more

than offset its purchases of repo's from commercial banks.

 

The buyers need not have been American commercial banks.

They could have been foreign central banks, individual investors,

and funds looking for safety/liquidity. The point is, the sale

by the FED extinguished the money that came in from outside the

FED.

 

This solved the immediate problem: supplying reserves to

banks. If the FOMC bought repo's of assets other than Treasury

debt, this provided liquidity for assets that would not have been

worth as much as the FED loaned had they been sold into the free

market.

 

Meanwhile, the sale of FED assets such a T-bills enabled the

FED not to increase the rate of money growth. It made the repo

purchases non-inflationary.

 

Can this continue? Yes. Will it continue? For a while,

maybe. Bernanke seems determined to avoid price inflation.

There is only one way to achieve this goal: reduce the rate of

monetary inflation. But a policy of monetary deflation or even

slow growth does not solve the problem of the business cycle.

The U.S. economy will slide relentlessly into recession.

 

The FED is caught between the rock and the hard place. I

believe it will inflate. But this recent decline in the AMB

indicates that the FED is determined to hold off for as long as

politically possible.

 

If the FED switches policy, this will be visible in the

chart and table of the adjusted monetary base. You should

monitor this weekly.

 

I may be incorrect in my analysis. But I can offer no other

explanation of how the FED was able to provide liquidity to the

FedFunds market and reduce the adjusted monetary base at the same

time. It had to sell assets.

 

 

WILL THE FED RE-INFLATE?

 

Eventually, yes. It has always inflated since about 1938.

That is what it does. That is why it exists.

 

The crucial question today is this: Can the FED avoid a

recession without re-inflating seriously? I think the answer is

no.

 

Next: Will it re-inflate fast enough to avoid a recession.

Again, I think the answer is no.

 

Next: Will it re-inflate, once the economy slides into

recession? I think the answer is yes.

 

In other words, between today and the next wave of monetary

inflation, we are likely to go through a recession.

 

You may have another scenario. You may have a wealth-

protection allocation strategy that is geared for inflation: up,

up, and away. If so, I wish you well, but I think you are wrong.

 

I think Bernanke is determined not to inflate. He is

willing even to sell T-bills to offset repurchase agreements.

 

Whatever the FED is doing to shrink the monetary base, that

is what it has been doing.

 

-

CONCLUSION

 

I am doing my best to stick with the available facts. These

facts are not consistent with what I thought the FED would do, as

recently as August 28. They are surely not consistent with what

the hard-money camp is telling you the FED has been doing.

 

If your mother says she loves you, check it out.

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Loonie getting to par makes the front page in almost every paper in Canada

 

LOL

609595[/snapback]

 

I had heard a couple months ago that well healed Canadians were buying USD hand over fist when it hit 1.05 in preparation for their annual southern migration. Suckers. How they gonna feel this winter when it's at .80. Nice little haircut that'll be.

609598[/snapback]

 

not so fast, there should be a good countermove. Somewhere between parity and....... ahem..... 80. :lol: :lol: :lol:

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No 5 day cycle buy signals on spx. 3 day are mixed. No real confirmation of the gap up open.

609596[/snapback]

 

If SOW crosses and holds 13,850 then I'm sticking with upward close of SPX, the line I have there is 1540 SPX close (near high of 9/19).

 

Right now SOW is just at that line...

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*DJ BOE: To Accept Prime UK Home Mortgage Loans As Collateral

 

 

  (MORE TO FOLLOW) Dow Jones Newswires

 

 

I bet you do not see that anywhere in the BOE charter......

 

 

RULES HAVE CHANGED!!!!!!!!!!!!!!!!!!!

609604[/snapback]

 

thats all since that wingohockingmoyamensinghead did fly to London last weekend!

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I guess foreign investors will lose confidence in agency debt now too

 

 

Accord Seen on Revising Mortgage Rules

By EDMUND L. ANDREWS

The Bush administration is softening its opposition to proposals that would expand government-backed mortgage companies ahead of an expected wave of foreclosures.

 

http://www.nytimes.com/pages/business/index.html

609574[/snapback]

 

Foreign investors have surely lost confidence. Foreign central banks are another story. They may or may not have any confidence but it doesn't matter. The issue with them is that they are playing defense, propping this market in order to keep feeding their own export driven economies. In the long run, it can't work, but they own so much of this crap already that they have no choice. Who they gonna sell to? And what happens to the 3/4 trillion that they already hold?

 

Seems like a no-way-out proposition to me. I look at the failure of the spreads on these to widen very much and I can only shake my head in wonderment. Unbelievable.

609579[/snapback]

 

 

We have Donald Trumped the world. :lol:

 

Donald-Trump-the-apprentice.jpg

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*DJ BOE: To Accept Prime UK Home Mortgage Loans As Collateral

 

 

  (MORE TO FOLLOW) Dow Jones Newswires

 

 

I bet you do not see that anywhere in the BOE charter......

 

 

RULES HAVE CHANGED!!!!!!!!!!!!!!!!!!!

609604[/snapback]

 

thats all since that wingohockingmoyamensinghead did fly to London last weekend!

609608[/snapback]

 

SO next time this guy leaves the country, cover your shorts before hand or

 

maybe next time he ain't coming back

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