Federal Reserve

Rather than trying to achieve some illusory political game by moving forward with another pretend scheme for the disposal of the stake in AIG, a scheme dreamed up in a hasty and ill-considered fashion, Secretary Geithner and the White House should start with a small but very important step, namely to reorganize the public stakes in AIG and other firms now held by the Fed.

Key releases on jobless claims and industrial activity give way to Chairman Bernanke and other financial regulators at mid-morning…

Mark Pittman's last valiant effort to bring some transparency to the most destructive organization in the history of mankind has succeeded. According to testimony to be delivered to the House tomorrow, "under a framework established by
the act, the Federal Reserve will, by December 1, provide detailed
information regarding individual transactions conducted across a range
of credit and liquidity programs over the period from December 1, 2007,
to July 20, 2010. This information will include the names of
counterparties, the date and dollar value of individual transactions,
the terms of repayment, and other relevant information. On an ongoing
basis, subject to lags specified by the Congress to protect the efficacy
of the programs, the Federal Reserve also will routinely provide
information regarding the identities of counterparties, amounts financed
or purchased and collateral pledged for transactions under the discount
window, open market operations, and emergency lending facilities." Luckily this action by Bernanke will prevent the rioting that would have followed an appeal to the Supreme court, which would have certainly sided with the secretive group of Keynesian priests. If nothing else, the plethora of data will keep the blogosphere preoccupied for days upon days, rummaging through millions of pages of explicit corruption.

Everything is proceeding exactly as I have foreseen - Emperor Palpatine

In a market where the Fed has assured that up is always and forever, or at least until such time as Primary Dealers can take down 99.9% of any given bond auction, down, it is no surprise that even monthly and seasonal patterns are completely inverted. The traditionally weak September market performance, has been flipped on its head in an attempt by all those involved to rescue the vast majority of underperforming hedge funds which would otherwise see an influx of redemption notices and terminations (ref: DE Shaw). So now that September is in the books, what does conventional knowledge tell us about October, so that in this Fed-induced bizarro world traders can come in and do the opposite. We look to Art Cashin for the answer.

A week ago we wondered how it was that Pimco's Bill Gross, who is now rumored to be Larry Summers replacement as the QE infinity whisperer on the right side of President Obama, had an advance look into how the Fed will adjust its GDP forecast ahead of the general public. Today, we got the first half of the response: in a speech to the European Economics and Financial Centre in London, Minneapolis Fed president Narayana Kocherlakota has just lowered his GDP forecast from 3% to 2.5%. And most importantly, the Fed President's speech in decidedly QE-negative: our favorite quote on QE from a Fed president so far: "The Fed cannot literally eliminate the exposure of the economy to the risk of fluctuations in the real interest rate. It can only shift that risk among people in the economy. So, where did that risk go when the Fed bought the long-term bond? The answer is to taxpayers." Thank you Fed.

We have no chance. The regulators are stacked up against us.

Has it maybe ever occurred to any of our glorious regulators that the reason why nobody has any faith left in the stock market, which has become just a teetering house of cards, supported constantly by the Federal Reserve Bank of New York, is due to precisely the kinds of totally nonsensical ramps in the market just as the one we are witnessing right now? Consdering that the economic data could hardly be any worse, how is anyone supposed to trade this complete binary gibberish? We realize there are another ten minutes in trading, which means the S&P will likely make another valiant attempt at 1,150 just to get nothing but more algos to do the buying once limits are triggered. Whether it will succeed is irrelevant, as nobody trades any more, precisely for this reason. And the end result will be merely another flash crash, that will drive absolutely everyone out, up to and including the last few vacuum tubes remaining.

Some very troubling observations from Bill Gross. In summary: "What the U.S. economy needs to do in order to return to the “old” normal is to recreate nominal GDP growth of 5%, the majority of which likely comes from inflation. Inflation is the classic “coin shaving” technique of government since the Roman Empire. In modern parlance, you print money faster than required, pray that the private sector will spend it to generate investment and consumption, and then worry about the consequences in a later decade. Ditto for deficits and fiscal policy. It’s that prayer, however, which the financial markets are now doubting, resembling circumstances which in part are reminiscent of the lost decades in Japan since the early 1990s. If the private sector – through undue caution and braking demographic influences –refuses to take the bait, the reflationary trap will never snap shut. Investors will likely not know whether the mouse has grabbed for the cheese for several years forward...The most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead."

Key events dominating today are Case Shiller, Confidence (both Conference Board and ABC) and Richmond Fed.

The following is Part I to David DeGraw’s new book, “The Road Through 2012: Revolution or World War III.” This is the second installment to a new seven-part series that we will be posting throughout the next few weeks. You can read the introduction to the book here. To be notified via email of new postings from this series, subscribe here.

• Last week's key story , conveniently buried late on Friday: "Three Wholesale Credit Unions Nationalized As US Securitizes $50 Billion In Legacy Toxic Assets; Failure "Sweep Under The Rug" Friday Just Got Real" - (Zero Hedge)
• From media shy to publicity whore, book-talker extraordinaire, David Tepper is now everywhere (New York Mag Profile)
• China Imposes a Steep Tariff on U.S. Poultry (NYT)
• Gold is the final refuge against universal currency debasement (Ambrose Evans-Pritchard)
• Japan Looks At $55bn Stimulus Package (FT)
• Fed Relative Value Model for Treasuries Showing Diminishing Market Returns (Bloomberg)
• Wolfgang Munchau on why the European Rescue Facility (EFSF) is one
  bid CDO, and would collapse immediately if France is downgraded  (FT)
• Eurozone banks face test as loans expire (FT)
• Interview: Marc Faber on the Federal Reserve and Hyperinflation (Seeking Alpha)

With FRBNY Brian Sack's Permanent Open Market Operations (POMO) now firmly back on the scene, and by all appearances about to grow orders of magnitude larger than the prevailing $10 billion a week levels following implementation of QE2, we have been bombarded by requests to explain the methodology behind what the 10:15 am - 11:00 am liquidity intervention by the Fed means in terms of asset prices. We recently presented Nic Lenoir's observations on how POMO impacts rates on an intraday basis. However, the most comprehensive report on the issue comes courtesy of Bob English as the Precision Report. His analysis titled A Grand Unified Theory on Market Manipulation is a must read for everyone who dares to trade ahead of the Fed on POMO days (which, incidentally, this week will be on Tuesday and Thursday). While the report is as of August 2009, the logic behind it is as relevant and applicable today as it was when first written.

Easy Al Greenspan created the Mother of All Bubbles by keeping interest rates at 1% for a prolonged period of time while encouraging everyone to take out adjustable rate mortgages. His unshakeable faith in the free market policing itself allowed Wall Street criminals, knaves and dirtbags to create fraudulent mortgage products which were then marketed to willing dupes and “retired” internet day traders. Al’s easy money policies and disinterest in enforcing existing banking regulations also birthed the ugly stepsister of the Mother of All Bubbles. Her name is the Consumer Debt Bubble. The chart below is hauntingly similar to the home price chart above. The consumer will be deleveraging for the next ten years. The numbskulls on CNBC and the other mainstream media have been falsely reporting for months that consumers were deleveraging when it was really just debt being written off by banks. Baby Boomers are not prepared for retirement and will be shifting dramatically from consuming to saving. As consumer expenditures decline from 70% of GDP back to 65% of GDP, consumer debt will resemble the home price chart to the downside.

Last night the New York Federal Reserve reported its custody account holdings of agencies (red line, bottom panel) dropped $45.972 billion, or -5.8%, in the week ending Wednesday, September 22. Both measures are a weekly record decline. At the same time, custody holdings of Treasuries (blue line, top panel) increased by $49.657 billion, or 2.06%. This is a nominal record and the largest percentage increase in two years (since Oct 8, 2008). We have heard/read no explanation or color about this decline. So we cannot say whether this massive shift out of agencies and into Treasuries means foreigners are “running scared” from agencies or if this is simply some kind of technical adjustment.