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Excess Liquidity Game Is Coming To An End
In his daily notes, Rosie looks at what is sure to cause a few sleepless nights to all trend chasers who believe that the trillions in excess liquidity will be there to forever prop up artificially high stock prices. News flash - it won't, and it has already started to contract aggressively, yet computers seem to have problems with pulling down St. Louis Fed time series in their quest to constantly front-run one another.
Below are the three main charts of money aggregate levels over the past three months. As one can see, M1, M2 and MZM have commenced contracting at an alarming rate, implying that sooner rather than later, PMs will be forced to take out that rusty calculator and do some good old fashioned portfolio rebalancing and relative value digging, as the Fed can only prop the stratospheric equity prices so high before everything comes crashing down.
Here is Rosenberg's direct quote:
It is interesting that the equity market has begun to wobble (fade last Friday’s rally on such low volume) because we have noticed that some key liquidity indicators are not behaving very well, all of a sudden. M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.
So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.
As a reminder, by fundamental value we mean something a little more tangible than "sentiment" which was the reason for JPM's earlier upgrade of GE which seems to be the driving force for most of today's stock moves (aside from Bernanke's crusade to destroy the dollar at all costs of course).
To end, here is another quote from Rosie which may explain much of the recent ebulience in the equity market:
In case you are wondering how it is that the housing market has suddenly sprung back, it’s because the era of free money is back, courtesy of the benevolent U.S. government. The FHA’s share of the mortgage market has ballooned from a residual 3.0% in 2006 to 23.0% currently as the government moves in to replace the private subprime lending industry. So now we are back to the thought process that insuring mortgages with a 3.5% down payment is a good thing for the economy — little surprise that the FHA delinquency rate has soared to nearly 8.0% from 5.4% a year ago, and the taxpayer is on the hook. How is it that there is no public outrage for a government policy of giving another shot of scotch to the drunken sailor is totally beyond our comprehension.
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Don't fight the FED!
Seriously. This is what it comes down to. Regardless of how disconnected stocks are from anything remotely resembling reality, they continue to go up. The dollar continues to go down, despite being one of the most crowded trades ever. This reflation crap continues to dominate, and the only way to make money is to become part of it.
We all know it's horseshit, but what else can be done?
Yeah, just END IT.
Sorry, but I will. They've got an unstable balance sheet. I feel perfectly comforable betting against an insolvent bank.
www.RevokeTheFed.com March 2008WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";
WHEREAS, on December 13th, 1913 the US Congress enacted the Federal Reserve System;
WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;
WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;
WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;
WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;
WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;
WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;
WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);
WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;
WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;
WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;
WHEREAS, it is recognized that the current time is such a time of great difficulty;
WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;
WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;
WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;
WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;
IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;
WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.
NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.
IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;
FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;
WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.
SO HELP US GOD!
www.RevokeTheFed.com March 2008WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";
WHEREAS, on December 13th, 1913 the US Congress enacted the Federal Reserve System;
WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;
WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;
WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;
WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;
WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;
WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;
WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);
WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;
WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;
WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;
WHEREAS, it is recognized that the current time is such a time of great difficulty;
WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;
WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;
WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;
WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;
IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;
WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.
NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.
IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;
FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;
WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.
SO HELP US GOD!
I will not fight them but I am protecting myself from them. You should elaborate why you feel that one should not fight the Fed. I don't like their policies as they are in it for Wall St. I keep very little cash, no bonds and certainly the most important, no stocks. I am out of debt and I am waiting for the system to collapse. Even the Fed does not have unlimited power. Google Imperial over stretch. That will fill you in on what is truly going on. Why people would by treasuries for safety is beyond me. It is not value. Gold and silver are value. Please don't say one cannot eat gold. One certainly cannot eat dollar bills, either. Which one can be manufactured and which one can not? A clue, scarcity. That should answer your question. Good day.
You are wise. When I read "don't fight the Fed" I think as you do. Not fighting them means not shorting financial assets of any kind, but it doesn't mean going long financial assets. Go long physical assets. the steps the govt is taking to contain the prices of commodities is unprecedented, including market manipulation we probably can't even see, but sooner or later they WILL lose those battles, as people abandon fiat currencies in droves.
The end of this fiat currency game is coming.
With the money supply going down, you would
think the dollar would be going up.
What am I missing ?? Less is more , no ??
confidence in the dollar is fading?
Not when there is a crapload of debt, both consumer and government, to the tune of trillions.
The money supply data is fudged.
Never ask a sailor how much he's had to drink, 'cause it's none of your goddamn business how much he's had to drink anyway.
Man that was a great movie....
Why would there be public outrage at free money? It benefits many, and harms few at first.
Also, almost no one in the financial sector understands mortgage finance. How many money managers do you think really understand the roles of the FHLBs, for example?
So how does anyone expect the public at large to understand that the Fed is monetizing the entire US mortgage market, one MBS at a time, and how that monetization affects the price they pay at the pump? Do you really think J6P is going to connect those dots? Give me a break.
Exactly. Public corruption in its base form.
Like some others, I have said that the next implosion is FHA. Rosie's piece this morning certainly gives credence to this theory. Most of the scumball type mortgage brokers, mortgage bankers have been working FHA for the past year or so. This tells me that FHA's problems are going to be even worse than their own numbers indicate so far.
TD or anyone with an opinion.... let me say that I have always been confused my entire adult life on the money supply issue, M1, M2, MZM, etc. and perhaps laziness to bear down and learn it inside out is the true cause; shame on me. The question is how does the Fed's action on "slosh" tie in with the other money supply reductions? The slosh item is something Denninger talks about. Thanks to all for any thoughts.
ps...geithner is coming to my fair city tomorrow with Joe "the stimulus is blowing the world away" Biden for a fundraiser for my sycophantic Pelosi lover freshman congressperson. I'm trying to get a ticket for a freebie speech that Geithner will be at before the fundraiser.
The actual crowded trade underway is, as stated by Pimpco, 'hold hands with the Federales' .
Isn't it curious that after the G2 meeting, the take-away was that US and China would work in a coordinated fashion and it appeared as if criticism of our approach was turned down a bit. As it turns out both the FED and Big Red have been removing liquidity from the system. Clearly in the US it would be political suicide to launch another bailout ... especially within the context of the recession being over and the market never going back down. Months ago it was reported that the Obama adminstration thought they would get another crack at a stimulus program...looks like they are setting the stage for co-ordinated Stimulus 2.0 ...don't fight the FED!
The next implosion is the US Government itself, my friend.
yep they won't be pushing on a string they will be gang-bangin' it before this one ends..
In answer to your last rhetorical question, there's quite a bit of public outrage. It's what you see in the summer "Town Halls" and Tea Party movement. It doesn't fit an easy media narrative and therefore it's ignored. This makes it appear smaller than it is. At the same time, it comes from demographics unaccustomed to protest and therefore the visible tip represents a substantially larger swelling of anger.
It's like giving the drunk behind the wheel of his car another shot of tequila.
The issues at the FHA are beyond comprehension. As of now, using the first time buyer tax credit (haven't bought in 3 years) you can buy a house for a few hundred dollars down (.5% of the required 3.5% down payment), the other 3% down payment gets rolled into a 2nd mortgage (you know kind of like the piggy-back helocs that were so trendy) that doesn't require a payment until next summer.) You then ammend or file your taxes next year and when you get your tax credit refund check you payoff your 2nd (oh, yes you decide if it gets paid off, the gov't doesn't pay it off directly) and we know that everyone will of course pay off these seconds. Or, you could be buying a house getting your tax credit and walking away without making many, if any, payments -- but no one would be doing that, right?. It makes a lot of sense to me why the only houses that are selling are under $100,000 -- the max tax credit is 10% of the home price or $8,000....A sound system being built again. However, rally on.
My understanding of the program is that the 8k tax credit can only be used for closing costs or a down payment over and above the 3.5% (that the buyer must pay without assistance.) It also requires finding a lender who will finance in this manner. I'm trying to buy a house and haven't found a cooperative lender yet.
http://www.hud.gov/news/release.cfm?content=pr09-072.cfm
"How is it that there is no public outrage for a government policy of giving another shot of scotch to the drunken sailor is totally beyond our comprehension."
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"When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed."
It's like living int he twilight zone, Rand wasn't perfect but she nailed this to a T.
Who's quote is this? Did you make this one up yourself?
It's from Atlas Shrugged.
The Meaning of Money By Ayn Rand
Ayn Rand
Deleted
Well said!
Given that the statement is true, what should be done now?
My solutions, unfortunately, for the most part can't be implemented. Everything would be too draconian for political acceptance
It appears that the country is in for a period of suffering. There is not much be done short term. But as we are “Waiting for Godot” it will be pleasant to pass some time offering suggestions.
Mine: Short term:
1. Period of national suffering. Everybody “sucks it up” ; spends less into 2010.
2. "Too big to fail" legislation - yes! But will it actually happen?
3. One time increase in income tax on all who cannot show need of all income. Farmers and small business men who need operating capital (and the like) would be exempted. Percentage levels would be highest on highest incomes. (Won’t happen.) But some of the readers will be old enough to remember the measures taken during WWII.
Longer term:
Requires disciplining of the population; I fear we are never be able to go back. To start to be more competitive would require higher taxes and educational regulation in ways that would never be politically acceptable.
More wool gathering on this issue would be a waste of the readers time.
I weep when I read those words.
On top of falling monetary base figures we're seeing a flatline in the M1 Multiplier. In light of the monetary base AND multiplier contracting it is a real suprise that the stock market as just stalled instead of reversing course entirely.
http://research.stlouisfed.org/fred2/series/MULT
And on a semi-related note, i'd like to express some indignation at the beware-of-1937 crowd. They're all saying a withdrawal of stimulus would have disastrous consequences if we did it too early and bang the 1937 cudgel. Problem is that was 8 FRIGGIN YEARS after the 29 stock market crash. Are our policymakers really saying that they're going to hold this sword over our collective heads for a decade or more??? Do any of them really think we have that much time before the world gets pissed and closes out our tab?
Unlike the 30s, there is much more global trade, and currencies are backed by nothing, so trade wars are no longer fought via duties and quotas, but through devaluation.
The related question to how much longer will others back our debt is, how much longer can we fight the global trade war by devaluing our currency? There are a lot of countries out there who are screaming bloody murder over our default-through-devaluation, and it is unclear for how much longer they are going to take it.
'they're going to hold this sword over our collective heads for a decade or more?'
Its' the lead them by the nose, keep those inflation expectations well-anchored, hocus-pocus.
They sure are working on crashing through the DXY 77 level...little by little.
It looks like the intraday market isn't getting a huge boost from the low DXY right now. Break through 77 imminent?
just sold 1/3 of my FXE & FXF I bought last year. Momos having a field day. I expect there will be another FTQ when the market tanks again
None of this shit matters because NOTHING MATTERS
The markets are a total farce, thanks to total bankster/fed intervention
Investors participate, but do not impact the script
At this point I find no other explanations at all plausible
The markets have been up on b.s. sentiment for the last two years. There was never a case for $147 / barrel oil if it wasn't for spec. manipulation by G.S. and others.
What has changed? Nothing much. Just another attempt by government at "fixing" the economy. What do you guys think the reason for super low interest rates and crap mortgage contracts was? Lack of government oversight or deliberate manipulation?
Point is that there were warnings about a bubble in equities in 2007 and very few paid any attention to that. The same bubble is being inflated again and it will pop. What else?
I'm out since May and waiting patiently to go short. If I have to wait until Feb '10 so be it. Cash and some gold is good right now.
Not true tyler. The excess liquidity ends when the oligarchy wants it to. Most everything you say is correct, but you're failing to take into account manipulated markets. You've got all the MBS and soon commercial MBS purchases. You've also got all the money going out of treasuries that have gained since may. My indicators gave a huge buy signal two days ago, gold a few days before that. there is a huge pipeline of liquidity that is getting thrown into the market. the indicators say sell bonds, buy stocks. from a macro view it makes no sense, but the liquidity ain't going to end and I would have expected you would know that by now. Unlimited liquidity for ever, kill the dollar, cause inflation, get the liabilites owned by the tax payer. It is criminal, but the american sheep are too stupid to see what is going on
Well said, anyone could have seen this coming after Mar 18th when the Fed basically outlined they were going to print dollars like mad. I didn't anticipate the equities rally but easily anticipated the dollar decline versus commodities, that was a no-brainer in my mind, been long oil since March.
going forward, the Fed is going to print $500B to buy MBS and agency debt by the end of the year. where do you think that money is going to go? Into the financial asset bubble.
Beyond that, the Fed will have no choice but to continue buying MBS, probably well into 2011.
Beyond that, a hyperinflationary currency crisis.
It seems you blame the "too stupid" "american sheep". That is like blaming granny for getting mugged on her front porch. When you deflect blame away from the banksters, you're a de-facto apologist, though perhaps too stupid to see that.
bingo. +10K
As you say, dcb, unlimited liquidity for ever is criminal. I think TPTB are desperate.
I also think America can rebuild from scratch, without this banking system; perhaps, only without this banking system. I’m willing to give it a try, to start all over again – if it will put this once grand old republic back on her feet again.
James Madison warned of “The pestilent effects of paper money.”
George Mason of Virginia said that he had a “mortal hatred to paper money.”
Constitutional Convention delegate Oliver Ellsworth from Connecticut thought the convention “a favorable moment to shut and bar the door against paper money.”
The Constitution limited congressional authority to deal with the issue of money and mandated that only gold and silver could be legal tender. Madison argued the moral case for such. Paper money, he said, destroyed…”the necessary confidence between man and man, on necessary confidence in public councils, on the industry and morals of people and on the character of republican government.”
Rep. Ron Paul warns that ”debasing the currency as a deliberate policy is economically destructive beyond measure.” And, additionally, that “doing it without consideration for the rule of law undermines the entire fabric of our Constitutional Republic…
“When the government can replicate the monetary unit at will without regard to cost, whether it’s paper currency or a computer entry, it’s morally identical to the counterfeiter who illegally prints currency. Both ways, it’s fraud.”
America cannot restore her former glory saddled with a banking system based on… fraud.
can somebody explain why the money supply is decreasing despite all the liquidity pumped into the economy?
these charts seem to suggest the efforts by the fed are failing unless they are pulling money out of the economy via their treasury auctions(that is, if there are plently of domestic buyers, which im not sure about).
if the treasury auctions do not explain the decline in the money supply, it would seem to suggest we are in for a really tough winter. for deflation to overcome the liquidity pumped into the market by fed/treasury would suggest there is serious cause to worry.
The fed is assuming the role of a dust bowl farmer attempting to irrigate his fields with buckets of water @ 6:53+.
http://www.youtube.com/watch?v=sIEAJM-C3QE&feature=related
Can someone please decide if the economy is facing inflation or deflation?
On the one hand, arguing for deflation we have
. shrinking money supply aggregates
. negavite CPI and PPI
. high unemployment/large output gap
. falling import prices
On the other hand, arguing for infalation
. massive fed balance sheet growth
. every dollar denominated asset class known to man appreciating
It appears difficult for the FED to inflate away many years of far too easy money, so deflation SHOULD be the order of the day - but it does not appear to be happening yet.
When are those stimulus programs set to end?
It appears difficult for the FED to inflate away many years of far too easy money, so deflation SHOULD be the order of the day - but it does not appear to be happening yet.
When are those stimulus programs set to end?
It appears difficult for the FED to inflate away many years of far too easy money, so deflation SHOULD be the order of the day - but it does not appear to be happening yet.
When are those stimulus programs set to end?
note to Bernanke: Start your Journey now, my Lord
This just in:
"Consumer credit fell $21.1 billion in July, a record drop, with downwardly revised numbers for June. The decline was likely driven by outsized charge-offs at commercial banks.
Thank you for your interest in Wells Fargo's Economic Commentary by Email."
Hmm....green shoots. Yup.
HY already diverging from fund inflows
asset deflation, consumer price inflation. common guys lay off the fed, they have no other choice, prefer total colapse of basic services? your whole society was built and designed around 20 dollar oil, you have been poor for a long time you just didnt know it.
umm...is $40 Billion out of $9.5 Trillion really that big of a drop? You guys are a little too pessimistic.
We need a war or some catastrophe to take peoples awareness low.
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