U.S. Commercial Paper Rates Decline to Lowest in Four Years

More evidence conditions are improving, but it has all been due to the Fed. Makes you wonder why we need an interbank market and CP market dependent on private institutions if it can stop functioning just like that and jeopardize the entire economy. True, the Fed's balance sheet would have to expand much more if it continues in this capacity, however, the financial sector's balance sheet would shrink by the same amount. The non-financial sector would keep on functioning as usual. I guess this also illustrates why the financial sector, in its current form, is redundant.

Obama on the dollar

But when asked about the dollar, Obama reveals just how inept he is when it comes to economics. His answer is ridiculous and displays a level of cluelessness that is mind boggling!

Obama victory may bring dollar spike

Don't be surprised to see a dollar spike if Obama wins the election. His team may quietly make their desires for a stronger buck known to Treasury and Fed officials. They could then point to that as a global vote of confidence in his new presidency. Watch Fed forex swap amounts for an indication.

What's wrong with this headline?

A CNNMoney.com article yesterday had the following headline:

"Bonds pressured by cost of bailout"

The article starts off by informing readers that the Treasury will need to "finance" $1 trillion in new programs by the end of the year, which we are told, "will bring a great deal more supply to the market."

First of all, the Treasury does not "finance" new programs. It simply credits bank accounts for whatever amount it needs to spend. The money is put into the economy first. That's why there's never any problem with selling any new "supply." In reality the "selling of that supply" is merely the Treasury swapping a reserve balance at banks for an interest bearing asset (a Treasury bill, note or bond), which in most cases returns a higher yield than the 0.65% interest rate the Fed currently pays on reserve balances.

The author of the article unwittingly points to the lack of difficulty in carrying out this operation when he states, "But demand for Treasurys remains, even with expanding supply."

Duh!

How hard could it be for the Treasury to get investors to fork over a reserve balance paying a paltry 0.65% interest rate for a higher rate Treasury? And particularly since the Fed has recently added over $400 billion in reserves?

But the author, like most people (and nearly all Wall Street economists) just don't understand monetary operations. (If only the Fed and the Treasury would just explain!)

Last week, despite the auction of this "huge supply" of $85 billion of new bills, notes and bonds, rates were unchanged. No surprise. Only a surprise to the media and Wall Street economists who will always be worrying about issues of "supply."

Total bank credit rebounding

Total bank credit fell sharply from April through September, but it is now growing at more normal rates. The nominal level of bank credit is at an all-time record high, however, it's good to see that the rate of growth is rising as well. This is good news for the economy; shows the Fed's actions are working and it should be good news for bank earnings going forward. Banks are incredibly cheap.

NYC Mulling Hedge Funds, Infrastructure Plays

"New York City’s Comptroller William Thompson is reportedly mulling investing some of the city’s $100 billion pension fund into U.S. infrastructure funds and hedge funds."

Expect other pension fund managers to do the same.

Infrastructure will be the next big theme over the coming years. Investment made here will be like getting into commodities in 2002. You'll make a fortune in the right vehicles and companies.

Track the amount of money the Fed has loaned to foreign central banks

If you desire, you can track the foreign currency position of the Fed (and these dollar loans to foreign central banks) on a weekly basis by going to the Fed's "Statement of Condition" website below.

http://www.federalreserve.gov/releases/h41/Current/

Historical releases are also available there.

When looking at this balance sheet pay attention to the item marked, "Other Federal Reserve assets." You'll notice that it's up to $522.9 billion. That's up $83 billion from the prior week and up $481 billion year over year.

Just so you know, next to the footnote for this entry it says: "Includes assets denominated in foreign currencies and any exchange-translation assets, which are revalued daily at market exchange rates."

Fascinating. Absolutely fascinating!

Fed has accumulated vast foreign currency holdings in a brief time. Bullish for dollar.

In the past four months the Fed has lent out $522 billion in U.S. dollar loans to foreign central banks, taking on an equivalent amount of foreign currency. This is an enormous increase in foreign reserves held by the Fed. Back in June the Fed only had $38 billion in foreign currency holdings and that’s about the amount it has held for years and years. This has huge implications. Loans between central banks such as this must be repaid. And they must be repaid to the Fed in dollars. Foreign central banks have doled this money out to banks in their respective nations and who knows what these loans are being used for. Furthermore, it is probably safe to assume that some percentage of these loans will not get paid back. (That even happens in good times.) But CBs will be on the hook to the Fed for the entire amount. Ultimately, the only way for foreign CBs to pay back any shortfall is to sell their own currency and buy the dollar. This could underpin the dollar for some time to come. Moreover, if the U.S. government’s attempts to shore up the financial markets and economy succeed, investors will want to own the dollar. A “perfect storm” of dollar bullish fundamentals may be coming together. I am short such currencies as the Hugarian forint, the Polish Zloty as well as the British Pound, Canadian dollar and most important, the euro.

SAC's Cohen, Einhorn Raise Money as Most Hedge Funds Shrink

Many hedge funds are imploding due to the current crisis and that's good: they were like children with loaded guns and too dangerous for the markets. However, some of practitioners of one form of speculation--naked short selling--are now arming themselves with more funds, ostensibly to continue doing what they love to do: destroy companies. SAC Capital's Steve Cohen and Greenlight Capital's David Einhorn have been raising a lot of fresh money. Both were instrumental in the demise of Lehman. Until we outlaw this activity you should expect to see other firms targeted.

Bloomberg: Korea Development Bank to Sell Short-Term Debt to Fed

But the Fed wouldn't give a loan to Lehman. Unreal!!!

Reserves, Monetary Base, M2 weekly update

Monetary base (billions $)














Monetary Base (y-o-y % change)














Reserve balances on deposit at the Fed (billions $)














Reserve balances at Fed (y-o-y % change)














M2 (year-over-year %change)













Notice money supply still not growing very rapidly, however, that is going to change very soon.

Size of upcoming Treasury auction not an issue

This morning I watched CNBC market commentator, Rick Santelli, talk about the upcoming supply of new Treasuries that are about to be auctioned off. His concern was the size of the supply and what impact it could have on prices and rates, as if to suggest that buying all these new bills, notes and bonds will put a strain on investors’ cash. What Santelli and many others fail to realize is that the Fed has already put more than $2 trillion into the banking system, meaning that the $100 billion or so of new supply will be readily absorbed with little trouble. Moreover, the interest rate on most of these securities is far higher than the interest rate the Fed pays on reserve balances (currently, about 1.15 percent), meaning that there is a good economic incentive to buy them. In essence, this is simply a swap that replaces a low yielding reserve balance for a higher yielding Treasury security.

***Remember: the funds that are used to buy Government securities (and pay taxes) come from Government spending. The money is put into the banking system first, ensuring that there is always an ample amount to buy the securities.

It is also why supply does not affect interest rates. Rates are set by the central bank.

Lending jumps $200 billion in last two weeks

Take a look at the huge jump in lending reported in the past two weeks. This is more than what had occurred over the prior 9 months!

John Kerry wants New Deal II

John Kerry wants New Deal II
Backs big fed stimulus By Jay Fitzgerald
Saturday, October 25, 2008 - Updated 1d 5h ago

“I am for a stimulus package. I am not for a stimulus package that just sends out checks,” said Kerry at a Boston Herald editorial meeting yesterday.

Instead, Kerry said the nation needs to spend more in areas that will both help the economy in the short run and long run - such as on roads and bridges, clean energy initiatives and life sciences.

Calling current financial woes the most “complicated economic time we’ve had since the Great Depression,” Kerry said new approaches are needed to reform the current financial system.

“We’re operating with old institutions that are incapable of responding fast enough, dealing with vast sums of money that cross boundaries in different financial centers,” said Kerry, who plans to provide more details of his economic agenda Tuesday at North Shore Community College in Lynn.

Democrats in Washington are pushing for more New Deal-like spending approaches for helping the economy, while the Republicans support boosting the economy via tax cuts.

Democrats definitely have the right idea on this

Bloomberg: U.S. 30-Year Yield Drops to Lowest Since Regular Sales Began

Yes, rates are collapsing even though the deficit is ballooning to a record. The debt/doomsday crowd just doesn't get it: there is no connection between the deficit and interest rates. Actually, one could even argue that a small deficit or worse, a surplus, actually can cause rates to rise.

More myths about deficits and gold-standard-thinking

Indeed, earlier in the day, Martin Neil Baily, an economist for the Brookings Institution, told the same congressional panel that a stimulus package would have to be anywhere between $150 billion to $300 billion to have any significant impact. He said that direct relief to ailing states with revenue shortfalls was necessary.

But Pelosi said she wasn't ready to scale the package that large because of concerns of what it would do to the escalating deficit.

Myths about deficits keep us from doing what we need
to do.

"One hundred and fifty billion would be closer to what the economy needs," she said. "I don't know if we can afford all that the economy needs."

Ditto: myths.

Pelosi has said that she would call the House into a lame-duck session following the elections if there are signs a package can be passed. House Republicans remain opposed to any stimulus legislation.

Hopefully they will be gone soon.

White House press secretary Dana Perino said the plan would have to be different than the one passed in September to merit the president's support.

"What we've seen put forward so far by the leaders in Congress, the Democrats, were elements of a package that we did not think would actually stimulate the economy," Perino said.

Oh, you mean like real spending in the economy??? It's textbook.

Congress also passed a $168 billion stimulus package in February that put money directly in the hands of millions of taxpayers, but critics said that did little to slow the economy's decline as nervous Americans saved rather than spent the money, or used it to pay down debt.

Congress this month passed a $750 billion rescue bill to bolster banks and improve the credit marks. Budget hawks warned Monday that a new stimulus package could send the federal budget deficit soaring toward $1 trillion.

And? So?? Would still only be about the size of the Reagan deficit, when looked at as a percentage of GDP.


"We're looking at easily a $750 billion deficit next year alone," said Rep. Paul Ryan (R-Wis.). "You throw a stimulus thing on this of 300 [billion], we're over a trillion-dollar budget deficit. Now, the question is … what does that do to the value of our dollar? What does that do to our borrowing costs?"

A bloated deficit could lead to inflation, but Kent Hughes, an economist with the Woodrow Wilson International Center for Scholars in Washington, said boosting the flailing economy was more important.

"That's the right risk to take," he said.

Kent Hughes is right.

Keynes gave the solution 72 years ago

John Maynard Keynes explicitly addressed all these arguments in 1936 in chapter 22 of his General Theory. He wrote at length about those who thought the Fed and other central banks should have nipped the late-1920s boom in the bud with tighter monetary policy, and concluded that they were all wet:

"The right remedy for the trade cycle is not be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."

Amazing that there is not a major fiscal response to this

It can all be stopped with a massive spending package. But myths about deficits and "gold-standard-thinking" keep us from saving ourselves. What a shame.

Fed rate cut expected, however, that won't do anything at this point. This is now classic, "pushing on a string." Would be much more effective for the Fed to buy stocks or better yet, stock index futures. Put a floor under this and stop the panic.

Bought some Petroleos Brazileiro (PBR)

Five months ago this was an 80 dollar stock. Bought it today at 20.90. What a bargain! Still major global oil player. Good time to get some cheap international diversification to Brazil market.

Sarkozy hints at need for change of the political structure of the EU

Geopolitical Diary: A Political Solution To An Economic Problem
October 22, 2008
(Source: Stratfor)

Speaking to the European Parliament on Tuesday, French President Nicolas Sarkozy said that an “economic government” partnering with the European Central Bank (ECB) was necessary for the continuation of the 15-nation eurozone — the collection of nations within the European Union that uses the euro as currency. The suggestion comes as the eurozone and the rest of Europe faces a financial and banking crisis. As a result, deficiencies have been unearthed within the EU economic structure that can only be overcome by greater integration of member states’ financial and economic authorities.

Or, eliminating the statute preventing the ECB to be the lender of last resort to institutions within the Eurozone. At the present time it is precluded from doing that by treaty.

The financial and banking imbroglio consuming Europe has emphasized how the EU and specifically the eurozone — although impressive and supranational — are nonetheless unprepared for, and incapable of handling, wide-ranging economic crises. The European Union is not a superstate, despite the accusations of its detractors or the wishful thinking of its supporters. It does not have a unified decision-making authority on most policy issues except for those concerning the functioning of its common market, and those are primarily non-political.

National governments of member states — across the ideological spectrum — have repeatedly shirked from giving up national sovereignty over vital political, military and economic issues. As the European Union expanded beyond the initial core of Western European states, the idea of policy convergence under a single decision-making authority died — although the Western Europeans themselves never managed to resolve issues of sovereignty either. The European Union essentially became a project of expanding the common market to virgin markets to the east. Until 2008, this endeavor was relatively successful and highly lucrative, opening new markets for European manufacturers and banks.

Yes, until 2008. That's when things started to get turbulent.

The establishment of the eurozone is an impressive feat in its own right. It binds together 15 economies within the 27-member union with a common currency and a common central bank. However, the ECB and the eurozone in general lack a number of competencies that, if ever implemented, would have impinged on national sovereignty but would have also made monetary and economic sense. These include taxation, currency “printing”, decision-making on where to funnel funds in times of crises and European-wide bank regulation.

But the question is, will they EVER allow those things to impinge on national sovereignty? Or will they opt out of the Eurozone instead?

In times of plenty — which the eurozone has experienced for the most part since its inception — it may seem sufficient that the authority of the ECB is strictly limited to keeping inflation under 2 percent (a role inherited from its direct ancestor the German Deutsche Bundesbank). However, the current crisis illustrates the deficiency of this system. Without supranational taxation, the eurozone does not have the ability to make liquidity infusions into the system directly — it simply does not have any real cash of its own. In fact, Europeans have had to depend on the U.S. Federal Reserve for capital through unlimited dollar funds made available Oct. 13. A credit-starved Europe had to draw $250 billion — with hundreds of billions more potentially outstanding — on the first day the Fed announced that swaps would be unlimited.

Even with a taxation system that would supply the ECB with its own pool of funds, someone would still have to make a political decision regarding receivership of those funds. The eurozone is therefore a monetary union with common monetary policy, but has no political oversight. This policy disjuncture becomes extremely relevant during times of economic crisis. And because the ECB does not have authority over the disparate banking systems, banking remains unregulated at the EU level, creating further problems once a crisis does hit.

Taxation not necessary to "provide" those funds. But author clearly doesn't understand this.

Sarkozy’s plan to create an “economic government” would in theory address all of the deficiencies listed above. The idea would be to imbue the current monetary union with political direction and authority. However, the idea would also necessitate surrendering national sovereignty to an extent — an action that Europeans have repeatedly proved unwilling to take.

Will they now be willing? Still questionable.

Sarkozy may have tried to allay these fears by using the word “economic” — highlighting that the authority would not extend beyond the policy realm currently being rocked by the financial crisis. This is a valiant marketing effort for sure, but in reality one cannot separate the political and the economic “government”, especially if the eurozone receives authority over taxation or the ECB becomes responsible for deciding which banks get bailed out or which industries receive loans. Were the Europeans willing to go this far in giving up national sovereignty, they would have done it already.

Agreed. That is absolutely the point and why it is not likely to happen. A dissolution of the EU, at least in part, is more likely.

Currency crisis developing

Countries that do not have access to Fed loans are seeing their currencies spiral into a freefall. The Hungarian central bank raised its benchmark interest rate by a full 3-percent overnight (now at 11.5 percent) to try to defend the Forint.

Although the ECB has access to the Fed and dollar loans, Eurozone banks may still be very short of dollars and this could cause a similar spiraling down of the euro. The ECB may actually be forced to raise interest rates to defend the euro, causing even more damage to the Eurozone economy.

This is the endgame for the euro and we could be witnessing its coming apart.

Global currency collapse against the US dollar continues

Overnight saw more violent selling of foreign currencies and buying of the U.S. dollar. Record lows for the Indian rupee, Mexican peso among others. New 3-year lows for the Canadian dollar. New 5-year lows for the British Pound and similar weakness for many others.

The euro is in a freefall that is likely to accelerate.

Gold is down and will fall much more as the euro deteriorates.

Use these ETF's to go long the dollar and short currencies

If you want to get on board this monstrous dollar rally, but are leery of opening a Forex account or just feel that you are not sophisticated enough, then try these two ETFs that are designed to profit from a rising dollar and falling euro.

PowerShares DB US Dollar Index Bullish (UUP)
Market Vectors Double Short Euro ETN (DRR)

Dollar is surging

Nations of the world and financial institutions are scrambling for dollars. In cases where the Fed is lending dollars directly, like to the ECB and the Eurozone, the dollar rally has been orderly, but relentless. In cases where the Fed is not supplying the dollars, there has been panic selling of the local currency for dollars (S. Korea, India, Mexico).

Euro is at a 19-month low against the dollar
Canadian dollar is at a 3-year low against the dollar
British Pound is at a 5-year low against the dollar
Brazilian real is at a 2-year low against the dollar
S. Korean won at a 10-year low against the dollar
Indian rupee at an all-time low against the dollar
Mexican peso at an all-time low against the dollar

You won't hear that in the media.

P.S. Gold set to fall, SHARPLY!

P.S.S. (Where's Jim Rogers? Peter Schiff? They're suddenly so quiet.)

Personal savings rate fell sharply under Clinton

Clinton's Treasury Secretary, Robert Rubin, pushed for a surplus and that led to the sharpest decline in the savings rate in the history of our country. One could argue that President Bush's policies have recently helped to stabilize that decline. If we try to balance the budget now the savings rate would plunge negative and stay there causing enormous harm to the economy and household balance sheets. The policies of both presidential candidates suggest this is a frighteningly real possibility.

Wayne Angell frets over deficit on Fox Business

Former Fed Governor Wayne Angell expressed concern over the deficit on Fox Business yesterday prompting FBN anchor Liz Claman to say, “Wayne, we’re so happy you are talking about the deficit because nobody else seems to be.”

That’s probably because the deficit is irrelevant.

This year’s deficit of $436 billion, while the largest in nominal terms, is smaller than the deficit of France, Germany and Japan and it is smaller than the deficit we ran in 2003 when viewed as a percent of GDP. However, the media doesn’t seem to want to put it in perspective.

The fact is, the deficit is too small.

History has shown that a deficit of at least 4 percent of GDP is necessary to pull us out of economic downturns. Reagan ran a deficit of 6.5 percent of GDP in order to get us out of the Volker recession in 1982. That was the largest deficit in the post WWII period. In 1991 the deficit ran up to 5 percent of GDP and that eventually turned the economy around. (Unfortunately not fast enough to help President George Bush 41.)

At $436 billion the deficit now is about 3.3 percent of GDP. Not until you see it reach somewhere around $700 billion can you say it is high enough to turn things around. And when it does hit that, don’t expect the misinformed media and fiscal conservative types to be cheering. But if you want a better economy, get out the pom poms.

Rising deficits in the Eurozone can make the member nations "insolvent."

The above headline comes from Warren Mosler's blog.

And he is absolutely right.

There is no "Federal Government of Europe." Budget deficits must be financed with OPM (other people's money). Member states in the Eurozone cannot simply credit bank accounts as the the Federal Government of the United States can. Only the ECB can and it is precluded by treaty from doing so.

The risk of a "payments crisis" among Eurozone member states is real.

Past payments crises--whether in Argentina, Mexico or elsewhere--have led to currency collapse and, sometimes, blood in the streets.

Member states of the Eurozone face potential insolvency if the Fed cuts off their funding. The euro faces potential collapse if European Central Banks cannot repay the loans the Fed has made to them.

Money measures

Monetary Base (y-o-y % change)














Reserve balances at the Fed















M2 (y-o-y % change)


Notice that while monetary base and reserves have shot up, money supply is still hardly growing at all. But this could change soon.

My choice for Treasury Secretary

My vote for Treasury Secretary

The next Secretary of the Treasury is likely to be another Wall Street banker. It is already rumored that JP Morgan CEO, Jamie Dimon, is Obama's favorite pick. But do we need another Wall Street banker at this critical time? True, Dimon navigated JP Morgan through the current subprime mess better than most of his peers, but the real question is, does he have the background in economics and public policy that will be needed to bring forth the major changes and investments needed to save our economy? I doubt it. If appointed he'll likely go about his job the same way many of his predecessors from private enterprise did--preaching fiscal discipline and extending bailouts to large firms deemed "too big to fail."

My choice for Treasury Secretary is James K. Galbraith, economist and son of the late, John Kenneth Galbraith, one of America's foremost economists during the last century.

Dr. Galbraith understands why the ideology of unregulated free market capitalism ended up bringing us the current disaster. His ideas and policy prescriptions are ideally suited to the challenges we face. He does not subscribe to the myths about deficits. He is not mired in "gold standard" type of thinking.

Professor Galbraith is also a member of Barack Obama's economic advisory team (I am assuming an Obama win). Not surprisingly, however, Obama will probably go with the safe, but altogether inappropriate choice of Jamie Dimon when a real diamond is standing right along beside him. (Obama talks a lot about change, but his actions belie his words.) That's unfortunate for us.

Below is a link to a list of articles by Professor Galbraith:

http://utip.gov.utexas.edu/JG/others.html

FOREX accounts

Some people have been asking me how they can open up FOREX accounts so they can short the euro. There are many online platforms. Here are a few:

Oanda
Forex.com
FXCM

I personally use Oanda. It is by far the most sophisticated.