Tuesday, October 7, 2008

Bottomless FED Toolkit

Another day another drama. Daytime soaps cannot match the gut wrenching activity of our economic system. A bit short on time tonight, so just a few quick hits.

Must Read Articles; No Really You MUST Read Them!
While I take in tons of stories and information on most days sometimes you come across a piece that captures something fundamental and important. Today's "Five Things You Need to Know" over at Minyanville is one such work of art. This article is required reading for any serious mind, and should be required reading for Mr. Bernanke and pals. Take a look:

http://www.minyanville.com/articles/sox-bks-spx-hgx-indices-fed/index/a/19378

Key excerpt:
"Think about it this way; it is not "normal" to be able to walk into virtually any retail store in the country and within 10 minutes be able to access $2,000 in credit by simply showing a drivers' license. It is not "normal" to buy a home with zero money down. This is not "normal" behavior. Adjusting to the new reality of normalcy will be a painful process.

On the one hand, Federal Reserve officials, Federal Government officials, many Wall Street executives and salespeople, believe it is "necessary for our economic security" to return to that place of easy credit. I disagree with that. I believe the American people disagree with that. And so the disagreement over the Bailout Bill, though pegged in the Mainstream Media as a war between battling economic classes, might really be a much deeper and more significant faceoff; a battle for the economic soul of this country."

As always, very strong stuff.

If you are of the persuasion that Gold is money, and will always be that way then Shedlock has an excellent article about Gold in the current environment. Mish also shows that Gold is decoupling from silver and what that means for silver:

http://globaleconomicanalysis.blogspot.com/2008/10/real-price-of-gold-soars.html

Key point:
"Fundamentally, silver is more of an industrial commodity than it is a currency. It is not holding up as well as gold in recent selloffs. There is a very real possibility that silver falls back to the 2004 high around $8. Those who pay attention to moving averages will note that $8 happens to be the 200 EMA as well.

In contrast, gold has almost no industrial use worth mentioning. The demand for gold is the same as it has been throughout history, as money."

Great charts as well.

Bottomless FED Toolkit
This morning the FED decided to step into the world of commercial paper. I have to admit that my grasp of this section of finance is limited, so I cannot offer too deep a commentary. What I will state is the the FED is no becoming an unsecured lender. The FED is supposed to loan money only to member banks, but now will dive right into the messy world of loaning to more general companies as well. As this is all new, we of course can have no way of knowing how this will work out.

The FED seems bent on trying something new every day until they see some kind of response. I never recommend doing the same things over and over again and expecting different results. What else will the FED pull out of its toolkit? We will probably see something else by weeks end.

The problem is still the same problem as it relates to lending: There are no credit worthy borrowers that want to borrow, and the banks cannot lend like the good old days of subprime mania any more. With the FED supplying endless cash, no bank is going to lend to another in this environment if the FED will do it instead. Why Bernanke and pals cannot see any of this is lost on me.

With daily intervention from all sides of the government is makes sense to me that the markets are struggling. Why take on a position or try an investment idea if the rules are going to change overnight? If you have a solid macro view and would like to put some money to work you cannot because the very fabric of your thinking may be voided by an activist FED and/or Treasury.

Things are a mess and instead of thinking and coming up with a coping mechanism for the debt unwind, the FED and Treasury are heel bent on using old tricks for a new problem. Good luck with that.

Have a good night.

54 comments:

watchtower said...

Fractional reserve banking systems require constantly expanding debt.

I know you don't want the peak oil arguments here but from what I've read it looks like we peaked globally around May 05.

How can this system be maintained without cheap and unlimited energy?

"Economic predictions were just as grim. With oil consumption growth directly correlated to gross domestic product growth, a permanent oil decline may mean a permanent recession, according to Gail Tverberg, commentator on the Oil Drum website. Jim Puplava of Financial Sense imagined a time when each American family would get a ration of 20 gallons of gasoline per week. But Simmons said he thinks it’s too late to print the ration books."

http://energybulletin.net/node/46765

Matt Simmons thinks that it is too late to print the ration books, maybe he is the real deal and maybe he's not, but time will tell.

Will "demand destruction" be enough to set this back for awhile?
I don't know.

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