Open Market Operations

The Fed has been reduced to promoting politically expedient "solutions" in the face of a moribund global economy suffering from persistent and intractable unemployment.

The ECB's new bond purchases are not being sterilized like last year.  In fact, just the opposite.

The Fed just announced that going forward it will proceed with reverse repo series every two months. The reason? "The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates." With liquidity already being very scarce courtesy of the FDIC assessment, of Europe wreaking havoc with money markets, of repos pulling out of the market at a record pace, of O/N General Collateral trading with the same volatility as the S&P, this will surely have no impact at all on anything, just like all other centrally planned, and carefully thought through actions.

One of the key catalysts for Wednesday's market rout which originated in Europe came following news that Chinese banks had cut down on their credit lines to Europe, which highlighted the key threat to the European banking system: access to liquidity. The Chinese reaction is merely a symptom of a much deeper underlying ailment: the increasing lack of counterparty confidence across various funding markets, both traditional and shadow, which has continued to accelerate over the past week, a development summarized effectively by the latest report in the International Financing Review which uses some powerful words (of the type that European bureaucrats hate) to explain where Europe stands right now: "credit taps run dry for European lenders, setting scene for liquidity crisis." For those strapped for time the take home message is that: "with bond markets shut and investors unwilling to buy asset-backed securities, the repo market – for some banks the sole remaining source of private funding – has become the most recent tap to run dry, with some investment banks pulling credit lines worth tens of billions of euros in recent weeks." This is very disturbing as with liquidity windows shut, Europe's bank have no recourse on how to roll the €4.8 trillion in wholesale and interbank funding which expires in the next two years. End result: the only recourse is the ECB, which unlike the Fed, is not suited to be a lender of last resort and has been morphing into that role over the past year kicking and screaming. And when that fails, there are the Fed's liquidity swap lines. Too bad that the liabilities in the European banking system are orders of magnitude bigger than in the US, and should this liquidity crisis transform into its next and more virulent phase, even the Fed will find it does not have enough capital to prevent a worldwide short squeeze on the world's carry trade funding currency (once known as the reserve currency).

Markets witnessed forex intervention from Japan overnight to curb the strength in JPY, which together with further monetary easing by the BoJ weighed upon the currency across the board, and observed USD/JPY to gain around 300 pips since the initial intervention. In other forex news, strength in the USD-Index weighed upon EUR/USD and GBP/USD as well as commodity-linked currencies, whereas the NZD came under further pressure after New Zealand's finance minister said that strength in NZD is a headwind for the economy. Elsewhere, European equities traded lower in early trade, however did come off their earlier lows after some analysts pointed out that the ECB may reactivate its Securities Market Programme (SMP), which also helped the Eurozone peripheral 10-year government bond yield spreads to narrow. In other news, the BoE kept its benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 200bln respectively as expected, whereas the ECB left its key interest rate unchanged at 1.50% as expected. Moving into the North American open, markets look ahead to the ECB's press-conference following its rate decision to gaze into future policy-direction of the central bank. US jobless claims data is also scheduled for later in the session, whereas in fixed income there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Feb'17-Jul'18, with a purchase target of USD 2.75-3.5bln.

Where is the money coming from to buy stocks? 

Markets remained apprehensive as the impasse over the issue of raising US's debt ceiling prevailed, and further risk-aversion materialised after German finance minister expressed his reluctance in the use of EFSF/ESM to purchase government bonds in the secondary market. This resulted in weakness in European equities, led by financials, which provided support to Bunds, and also weighed upon the EUR across the board. In other news, AUD received strength following higher than expected inflation data from Australia overnight, whereas a downtick was observed in GBP/USD after a sharp decline in CBI trends total orders figures from the UK.  Moving into the North American open, markets look ahead to key economic data from the US in the form of durable goods report, DOE inventories figures, as well as the release of Fed's Beige Book. In terms of fixed income, USD 35bln 5-year Note auction is scheduled for later in the session. Markets will also watch keenly US corporate earnings from the likes of Boeing, ConocoPhillips, and Visa.

Only now, after three years of roller coaster markets, epic debates, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway. Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’)....Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Still confused about why nobody is calling the EFSF expansion Europe's TARP, aside from the fact that this latest European bailout is exactly Europe's TARP? Need a one page summary tearsheet on the European Council Decision as pertains to Greece now and all the other European countries later? Have no fear, because Goldman's Francesco Garzarelli is here again, explaining all you need to know about the ongoing taxpayer-to-insolvent nation-to-bank capital transfer.

Hey, it helps the big banks ... so shut up, already!

A month ago we reported about Bob Ivry's discovery that the Fed had been conducting a secretive bailout operation between March and December 2008, under which banks borrowed as much as $855 billion over the time frame for a rate as low as 0.01%. As the Fed itself explains following a just disclosed launch of a page dedicated to this Saint OMO, "The Federal Reserve System conducted a series of single-tranche term repurchase agreements from March 2008 to December 2008 with the intention of mitigating heightened stress in funding markets. These operations were conducted by the Federal Reserve Bank of New York with primary dealers as counterparties through an auction process under the standard legal authority for conducting temporary open market operations. In these transactions, primary dealers could deliver any of the types of securities--Treasuries, agency debt, or agency MBS--that are accepted in regular open market operations. By providing term funding to primary dealers, this program helped to address liquidity pressures evident across a number of financing markets and supported the flow of credit to U.S. households and business." Well, not really. As the chart below shows the banks, pardon primary dealers, that benefited the most from this secret iteration of Fed generosity were once again foreign banks, with the Top 5 borrowers being Credit Suisse, Deutsche Bank, BNP Paribas, RBS and Barclays. Together these five accounted for $593 billion of total borrowings, or 70% of the total. So perhaps the Fed should rephrase the last sentence to "supported the flow of credit to U.S. European households and business" which is to be expected. After all, as we have demonstrated before, the European banking system's liabilities are orders of magnitude greater than the US. So in order to preserve the global Ponzi (a main reason why Greece must never be allowed to fail), the biggest weakness that has to be addressed constantly is and will be in Europe.

A few weeks ago Barclays compiled a useful chart representing the largest holders of Greek debt. Today, the bank's Laurent Fransolet has issued an update "of the table “Top 40 holders of Greek government bonds and Greek debt” (Figure 1), in which we show updated holdings for Q4 10 for AXA and add KA Finanz from Austria to the list. We also clarify that the holder EFG in previous versions is Eurobank EFG." Not surprisingly, despite the refining drill down of secondary exposed parties, the top holders remain central bank and affiliated institutions, explaining the ongoing prerogative to not impair central banks' Greek holdings as a result of a rating agency event of, even selective, default.

Lee: Think like a criminal. Look, it’s a matter of knowing what the Fed’s next move is going to be, and knowing the investment implications.

In the end they cannot fulfill their purpose because the banking system is dead. This is Frankenstein’s monster.

Merely minutes after reporting the third daily surge in the SHIBOR we see a Dow Jones update which confirms that this liquidity escalation is far more serious than a merely transitory jump in short-term lending rates. Per DJ: "China's central bank said Wednesday it will suspend its regular open market operation Thursday, in an apparent response to the tight liquidity conditions in the banking system." As a result of the just reported 7 Day SHIBOR hitting 8.81%, the highest since October 2007, the PBoC will not conduct regularly scheduled open market operations tomorrow when it offers three-month paper, to mop up excess liquidity in the country. "The PBOC sold CNY1 billion ($154.6 million) worth of one-year bills at 3.4019% in its operation Tuesday, after leaving the rate unchanged at 3.3058% for the past 11 weeks. On Thursday last week, the PBOC lifted the rate on its three-month bills by eight basis points to 2.9985%, the first increase on the three-month central bank bill yield since early April. "It is difficult for the central bank to find enough demand for its short-term bill offering amid the severe liquidity squeeze in the money market. If it persisted with the three-month bill offering tomorrow, the yield would jump again, adding pressure to the central bank's operating costs," said a Shanghai-based trader with a local bank."