Bill Cara: The Thin edge of the wedge, Sun., Nov. 13, 2005, 11:27 PM

« Reader mail on Stelco, Sun., Nov. 13, 2005, 9:32 PM | Main | What is reflation?, Mon., Nov. 14, 2005, 7:40 AM »

November 13, 2005

The Thin edge of the wedge, Sun., Nov. 13, 2005, 11:27 PM

The Fed has announced they are going to stop publishing the important M3 monetary aggregates number. That folks tells me the rest of what I suspected was going down in mid-September when Greenspan summoned the top 15 banks to the NYC Fed offices. I believe Refco was discussed, and I believe Greenspan floated Ben Bernanke's name by those bankers as a smell test, which he took back to the President, giving two thumbs up. But the big deal was the two changes in policy that the Fed has never disclosed to the public: (i) reflate, and (ii) drop the M3 because it is too obvious an indicator of reflation.

Let's go back over the time the rocket was lit under money supply and when the XLF took off.

I had mentioned once in the blog that it looked to me like the meeting at the Fed office in mid-Sept was the precursor to Refco, and the reflation (which would head off a liquidity crisis).

Remember Y2K. Same b.s. And the Fed blew up the market then just like it looks like they'll do again.

And, if I'm right, here's how they are doing it.

Fed open market operations increase the money supply by the Fed buying treasury paper back from the banks, which puts the cash back into the commercial bank reserves, which can then be used by the banks as they choose -- personal/corporate loans or prop trading.

If it's the latter (prop trading) -- which is likely because the Fed didn't want more debt in the system, especially housing-related debt -- guess which stocks the banks are going to buy first? Their own.

And I think Sandy Weill visited the Saudi Kingdom this week to put the bug in the Prince's ear. I didn't have a fly on the wall, but I think I could hear the words, It's ok to buy more Citigroup today. The Fed and the President have approved the reflation plans. The President will be going to Beijing next week to tell PBC's Mr Joe that all is well, and now China can start to revalue Renminbi."

You know, this stuff is awfully important to Mom & Pop. We need transparency. Not the joke played on us by government regulators, but true transparency.

A couple weeks ago I wrote in my blog re Refco that the VIP's in Washington -- if they really wanted to do a public service -- would be to ask Greenspan everything that happened in that mid-Sept meeting with the 15 biggest bankers in America, and now I think they should bring the bankers (not the oil men) to Congress, and get them to talk as well.

Being treated like mushrooms is a bloody disgrace.

The last time these jokers at the Fed pulled their reflation stunt was to put how many hundred billion dollars into the system to head off a problem that never happened. There was no problem, but the banks were flush, and the extra money in 2H99 went straight into Internet stocks that these bankers on Wall Street were taking public and hyping to the moon.

Some moon shot!

What followed was one of the worst bear markets in U.S. history. And the majority of those Internet stocks went right off the board, or down "95 pct because they were smellier than used toilet paper. And Goldman Sachs was the worst culprit.

And now we have to listen to crap from CBS 60-Minutes tell us how many millions Jim Cramer made trading stocks on Wall Street. No he made his money building TheStreet.com, which was a flash in the pan Internet stock. Then he lost it, and came back to front-run stocks on his CNBC appearances (according to his staff) until they fired his you know what right out of the studio. Kernan and crew would just spit when they heard his name.

Then one day, he returned, told to keep up some good appearances with Larry Kudlow, and finally given his current show " the one that Business Week profiled on a recent cover, and 60-Minutes did tonight.

Now people want to forget the old Cramer problems because it's not good for business.

But back to the Fed, because if you haven't seen the U.S. Money supply numbers that came out on Thursday, then you didn't understand why gold was popping.

And here are the Weekly and Daily price charts for the XLF (Financial Services, which is to say Wall Street). They reflect what happens to bank stocks when the Fed decides to turn on the jets:

Here's what happened to gold. Right from the start of September, when word went out about the mid-month meeting between Greenspan and the NYC bankers, the gold stocks started to fly. Then there was a pullback as friends of Washington (Kudlow and friends) went on the warpath against gold. Then another rally as the money supply numbers started to show what was really going down.

Now do you see how much of a joke that guy Luskin was on the Kudlow & Company CNBC show? And you were maybe wondering why I took such offence, even to the point of putting up a scorecard on my website. I was going to take it down (why rub dirt in his face), but I'm so mad now I'm going to leave it there for other bloggers to point to.

So, yes, I do think gold and diamonds (did you catch that on 60-Minutes/Cramer) will pop, and so too will the equity market (for a while).

I now see Dow=11,000 in the cards, or maybe higher. But whatever the high water mark, I believe it will be followed by a crash. And now I think even the 9200 level will be hard for the Bulls to hold once the floodgates are opened. They can only dam this torrent of water from the Fed so high, and then something will burst.

Real estate maybe? After all, every bank in America has created and sold to the Moms & Pops of America every possible piece of over-priced MBS paper they could possibly sell. And now that the Fed will have to really move interest rates much higher to counter the effects of reflation, where do you owners of that MBS paper think the price is going?

I'd sell now and put your money into T-Bills. That tells you where I think the mortgage market and the long-bond market is headed.

I am really disappointed tonight because until this point I have been arguing that Alan Greenspan has had a terrific career. Now I think politics has flushed it down the toilet. And brought in Bernanke to make it worse.

Posted by Posted by Bill Cara on November 13, 2005 11:27:33 PM | Category: Economics

Discourse

This is a fantastic piece, but I cannot fully grasp its significance because I do not understand how we can have "reflation" when the Federal Reserve is raising the short term interest rates and by definition reducing the money supply, right?

How can they simultaneously conduct open market operations to raise interest rates, but then also conduct open market operations to "reflate"?

Or does this article imply that the Fed Hikes are coming to an end soon.

Any help/explanation is appreciated

-Ben Green

PS I also found this article very informative re: the announcement to stop publishing M3 statistics:

http://www.dailykos.com/story/2005/11/11/16272/574

Posted by: Soulek1 at November 14, 2005 1:03 AM [link]

Soulek1, you beat me to it - this was an ecxellent piece Bill - I would have to say that your depth of scope on putting the pieces together were intriguing to say the least and in full flow. I can't say I understand it's full implication - but that gives me something to do for the next hour! Do you have a copy of those transcripts :) .sz.

Posted by: sergio at November 14, 2005 1:14 AM [link]

and another one:
http://members.aol.com/gparrishjr/m3_inflation.html

Posted by: sergio at November 14, 2005 1:46 AM [link]

Okay now, the implications of this are far greater than one thinks. After jiggering the CPI numbers beginning in the 1980s and continuing through Democrat and Republican administrations, we are now hiding the "independent" Federal Reserve monetary supply numbers (Econ 101) from the public. No longer will the government numbers tell us what true inflation is and we won't be able to figure it out by following the numbers. Okay....

The only people who will know what the repurchases are is the Feds and of course the people they are buying securities from-- the banks. Think they will have a clearinghouse to compare notes? I bet it is already set up.
Also, the European bankers will have a good idea of the amount of reflation as well. Only John Q Public will be left in the dark as the good times of the 80s and 90s come to an end and his life savings is wiped out.

Bill, I think the endgame is to get this economy past the 2008 elections and into the hands of another Republican who will then try to engineeer a quick crash and recovery. Politics trumps economics. The demographics largely favor the Republicans going forward. Look at the voting block the South now provides. If conservative Ohio is the swing state the Democrats must win every 4 years they are in trouble and they know it. Only the economy can derail the Republicans. Iraq can't. Katrina can't. Almost all the big social issues favor them, barring immigration reform and the Dems are on too shaky ground to capitalize there.If the Republicans can engineer another 4 years they can permanently change the judiciary and hence America for the next 30 years. Hence they are going for it. Why do I think this? Because I used to help run their campaigns, am in tune to the thinking, and I can see what's going on. They see the Supreme Court vacancies coming up (Stevens, Ginsburg)and have convinced themselves that, economy be damned, this is the greater good.

So I think we have to be careful here. I wouldn''t assume anything. All bets are off if prices and data can be managed like this. Yes gold SHOULD pop. But the equity markets SHOULD have been in decline too. But politics comes first. With the reflation certain bubbles must appear and the most politically acceptable bubbles are in the stock and real estate markets. Not gold. Too many questions will get asked as the "link" between gold prices and inflation is seared into the memories of too many Americans, even, that's right, John Q Public. Man I am becoming paranoid.

Posted by: MarkM at November 14, 2005 6:05 AM [link]

Mark -- I don't see you as being paranoid -- just starting to think about a bigger picture.

Wouldn't it be nice to send politicos to Washington with your agenda -- and those of the majority of voters -- rather than the interests of the very few people who paid for their campaigns and directed their backroom agendas?

The Blogosphere is going to crack this nut. Pretty soon the "little people" will be the ones carrying the big stick.

Pretty soon you will be seeing a chain gang of miscreants from Corporate America, Wall Street, Big Media and government sitting in prison for their self-serving actions against society.

It all starts at the top, politics, as you called it. "We the people" has become "We a few of the people" and as time goes on you are seeing that more clearly.

Thank goodness for the Blogosphere.

/Bill

Posted by: Bill Cara at November 14, 2005 8:05 AM [link]

And that is why there is an attempt now to regulate the Internet and the blogosphere here in the name of (hee hee) "campaign reform". Regulations were drafted this year and floated and got shot down.

Well, Bill, I would reconsider your proposed re-short of XLF, eh? Now it becomes a game of finding which part of the tarp they will allow to balloon next and which they will sit on. Brings "managing the economy" to a whole new level of meaning.

I believe our good friend Mr. Faber will have more than a few words to say about this.

Posted by: MarkM at November 14, 2005 8:22 AM [link]

Discontinuance of M3
by movermike
From the Federal Reserve Statistical Release, On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate.

The Free Market News Network explains why:

If an increase in the money supply is the cause of a rise in the general price level than M3 is an important measure of price inflation simply because it is considered to be the broadest measure of money and, hence, the best measure of price inflation. With M3 crossing the 10 trillion dollar level the Fed has decided to stop publication of this important data. The Fed by nature is an inflation machine built to support limitless spending by the government. Yet the Fed also enjoys the reputation of being an inflation fighter. In order to protect its image the Fed has found it necessary to cease publication of M3 data. The information provided by M3, coupled with the 1-Year Treasury Constant Maturity Rate, can allow anyone with a spreadsheet to track the rate of inflation and real interest rates.

Government "transparency" at its finest!

M3 federal reserve mover mike

Update: Check out Bill Cara's rant on the M3 discontinuance and reflation and gold. He doesn't get much better than this!

Here's the chart we built when Don Luskin came out with his idiotic prediction about gold's uptrend being over:
It's been 42 days since
Don Luskin, on Kudlow's TV show,
said that gold's up trend is over
and the price of gold will drop
$30-40 from $464.20!

This free script provided by
JavaScript Kit

BTW, that was an idiotic piece about Jim Cramer on 60-Minutes. Who actually listens to that screamer. He is an embarassment!
Posted on Monday November 14, 2005 at 11:37am. 2 Comments 0 Trackbacks

Posted by: Mover Mike at November 14, 2005 3:25 PM [link]

What's amazing is that even though M3 has double so quickly, so much of it vented abroad and came back in the form of cheap goods. But that also created tremendous competition abroad for scarce resources like oil, etc., and now consumers will start feeling the more obvious effects of this. In the meantime, though, don't forget that this is a political operation first and foremost... Elections of 2006 and 2008 must be shored up with cheap money... That's plenty of time to establish straw-men to blame for the inevitable inflationary hangover that has been forestalled time and again.... The Oil industry is being flogged right now for just such a purpose.

Posted by: J.C. Ernharth at November 16, 2005 11:35 AM [link]