Graham Summers’ Free Weekly Market Forecast (the Fed is Terrified Edition)

Phoenix Capital Research's picture

This is the
most important chart related to the financial system today:



This is a
chart of the US monetary base. In simple terms, it charts how much money the
Fed has pumped into the system (at least that it admits). So it’s a kind of
visual of the Fed hitting the PANIC button: when the monetary base explodes
higher, the Fed is FREAKING out.

You'll note that during the Financial Crisis the Fed didn't do much until the
autumn of 2008 when it pumped nearly $1 trillion into the system. Think about
that, the Fed didn’t go nuts pumping money until the stuff REALLY hit the fan.

You'll also note that there's only one other time when the monetary base went
absolutely vertical: TODAY.

Indeed, the Fed has pumped nearly $500 billion into the system since the start
of 2011. Don't even try to tell me this is QE 2. If it was then the monetary
base should have spiked in late 2010, NOT in 2011.

No, this is the Fed FREAKING OUT about the financial system again. And it's a
freak out on par with 2008.

So if you think that all is well "behind the scenes" you're in for a
rude surprise. Something BIG is going down and I think it’s this:



This is the
31-year weekly chart of the 30-Year Treasury. As you can see, since 1988, the
30-Year has respected the above trendline. Every time we touched up against it,
the 30-Year bounced hard and continued its long-term bull market.


The last
time we nearly took out this line? The very beginning of 2011:



the interest-rate based derivatives market in the US is $196 TRILLION. If the
Fed lets interest rates get out of hand, then the entire system breaks down
even worse than it did in 2008: 2008’s crisis was triggered by the credit
defaults swap market which was just $50-60 trillion in size (less than 1/3 of
the interest rate based derivatives market).


Small wonder
the Fed is going nuts pumping $500 billion into the system in the last three
months alone. After all, once the Fed loses control of interest rates (and it
will) we’re going to see a market 4-5X bigger than the credit default swap
market implode.


Are you




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PulauHantu29's picture

Gold, oil, silver and food...these are skyrocketing in repsonse.



jsavage's picture

Couple of points....$USB has been in "near-breakdown" mode for the last 22 years! Secondly, isn't the Fed monetary pumping action inflationary which WOULD likely cause a breakdown?  So, if the Fed is FREAKED, wouldn't they be draining liquidity, or have I missed something?

eddiebe's picture

I assume I am correct in thinking that the bankers are way smarter than I am. They have the printing press and have all the money to manipulate markets and bought the gov and make the laws pretty much and are able to manipulate opinion.

 The bond market has been climbing for what 30 years?

 The bankers more than anything want to accumulate more wealth, right?

 Wouldn't it make sense to assume that at some point they will want to take profit on the bond and even start shorting it, so they can get more interest on the money they lend out?

 Any thoughts on this?

Imminent Crucible's picture

The problem with your thesis is that it assumes that banker profits consist primarily of interest on the money they lend out.  This is no longer the case.

Today, the money-center banks make the great majority of their profits by borrowing money from the Fed at 10bp to 18bp and loaning it to the Treasury for various durations.

In other words, the banksters are no longer in the business of lending to anyone but the government, and they are doing so with capital rented from the Fed at near zero rates. Their profits are mainly in the Treasury carry.

Even mortgage lending has been all but abandoned by the banks; the FDIC estimates that Fannie/Freddie/Ginnie/FHA/VA are 95% of the residential mortgage market today.

GFORCE's picture

Summers relies too heavily on a pencil-drawn line in the sand. A trendline break doesn't mean anything in this environment of excess dumb money, all following the same trade.

ElvisDog's picture

I agree that technical analysis is mostly meaningless in today's environment. However, it's mathematically impossible for the 30 year bond uptrend to go up forever. Eventually, it would hit the zero interest rate limit. At some point in the future, that uptrend line has to be violated on the downside.

Seer's picture

Summers is comparing two events that have/are behaved differently.  The 2010 event was proceeded by obvious problems in the market.  Now, however, he's saying that the 2011 event proceeds something.

I'm just thinking that we're looking at ink dots.  Yah, ugly ink dots, but ink dots nonetheless...  The macro is so encompassing that there's little way these dots can paint the big picture: yes, we know about reality, about history's telling of fiat dollars, but I don't think that these ink dots are providing any real big tip on all that: it's like pointing out at things while one is walking down a mountain and saying that they are clear signs that the valley is below- gravity TELLS us we're going down hill, we just don't know yet when it's going to introduce us to the valley!

falak pema's picture

Facts not belief systems...I believe Tyler Durden has posted on M2 or equivalent shadow banking money supply shrinkage velocity to corroborate...that FED printing shown above is basically fueling the inflationary cycle, the S&P bubble, not adding anything to the real economy of Small business or consumer sectors. Mis-appropriation of MS is also a concern when the printing press runs to no good effect except overheat! I hope this adds a small dent in the fixed belief system adage...

PPagan's picture

I admit to being an ignoramus as far as economic technicalities go, BUT...

although I appreciate access to insghts form those who know more than me, I am wary of fixed belief systems.

Every post from Summers reiterates alarmist themes. I believe there was a comment here a few days ago about the above Monetary Base chart, pointing out that the crucial chart is really the M2 money supply, which is not behaving unusually (I hope I have the terminology right). No response from Summers that i have seen to this point.

And as far as the $USB chart--since when is a "near breakdown" a technical indicator? Couldn't you call it a "non-breakdown", or even " a reassuring bounce off support"?


How much is a fixed belief system distorting Mr Summers' posts?


Just asking.

Imminent Crucible's picture

M2 money supply "is not behaving unusually"?

If doubling in size in a few years is behaving normally, then OK.

Otherwise, examine the chart.

More important yet is the chart of the growth of the Fed's balance sheet versus the chart for any commodity index: $CCI, Reuters-CRB, GSCI, your choice.

If you time-shift the lag between Fed expansion and its delayed effect on commodity prices, they are the same chart. 

SheepDog-One's picture

Unless ALL OUT balls to the wall printing continues, zero% interest rate remains in a gilded cage surrounded by concertina wire, and complete total market manipulation daily, the 'markets' completely implode. Thats what the FED is 'hiding', if you can call placing an elephant behind a blade of grass 'hiding it'.

sunkeye's picture

@sd-1  dude just want to compliment the post the zirp 'security perimeter' imagery is painted vividly and so too the 'dumbo' picture. kudos

re usd's value the money supply graph tells all, no?


eddiebe's picture

+ I totally agree. I just have to wonder if inflation hits the core ( not 'just' food and energy) won't that trigger a bond price slide, and once the slide happens how can they control that? I suppose then they will go to shorting the commodities and the stock market to drive the bond higher, but it would seem that game can only go on so long. Meanwhile the derivative pile just keeps growing and so does the fiat.. Any ideas?


falak pema's picture

The ongoing FED momentum is towards "print baby print" ad nauseam. Ie : Qe-3. But the current rumblings are that the levitated economy is showing encouraging signs of real recovery. Creating jobs and regenerating lost margins into 2011. Is this a silver lining or a clear sign of halcyon days ahead? The FED may want us to believe the second hypothesis, but it has no road map for telling us how the deficits will disappear and health be sustainably restored. The slightest monetary discipline involving base rate hikes from current abyssal lows will send US debt servicing through the clouds and consequently assets bubble comes tumbling down. As there is no fiscal impetus the deficits will increase on top of existing pile like it was no big deal, as, "we are reserve currency". USD goes further down the trash route in money market and foreign creditor eyes...Beggar thy neighbor in EU is no help for economic recovery, although it helps reduce monetary devaluation pressure as safe haven knee jerk comes into play.  But its just expediency...Some day FED/US govt. will have to say the buck stops here...and then it'll start the slide that every one fears as we don't know when/how it will stop...How many reactors on possible meltdown in WS...? Is 2008 any indication? ...We sometimes get the feeling that the US TBTF banks are as opaque as the TEPCO guys about their liabilities in shadow banking/derivatives potential unwind. And the FED knows it but looks the other way, like the Jap. govt. QE-2 is like feeding them salt water with a hose, and hoping cool-off (bad debt write-off through new, cheap money+ cap gains on S&P), will allow them to survive, then thrive. They thrive...but will they in their back-books, off official balance sheets.

Pray and hope...Benocide is no dope...alike Tepco...we're on a narrow steep slope..


homersimpson's picture

I offer a Duff beer if you can tell me when the Fed is going to lose control of interest rates.

Republican Lackey's picture

If the Fed wants to preseve itself, it will do the right thing. I wouldn't bet against the Fed not preserving itself.

tired1's picture

Hence the need for a right of return.

asteroids's picture

Will the FED have the guts to shrink its balance sheet once inflation kicks in? I doubt it. It would be the right thing to do but some excuse will come up.

Popo's picture

They will never shrink the balance sheet.

Because robot Keynesians cannot face the reality of *true* economic theory:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

-- Ludwig Von Mises, "Human Action"