Author: Lee Adler

On October 13th & 14th I attended the Chicago Natural Resources Conference. If you have not been to a mining/minerals or natural resources conference you…

This bombshell really caught my eye last night. The US Wizards (Fed) actually conducted a $2.32 billion drain (sold securities from it’s holdings, pulling money out of the economy) from it’s SOMA or permanent account last week. Further, they conducted the drain in the T-Notes, not Bills. The timing didn’t strike me as technical, as the huge TIO operations conducted by the Treasury are abating. On top of it, the Treasury is going to market to raise $21.5 billion (plus or minus, the to be announced four week bill ) in new money next week. Therefore, for a SOMA drain to make sense from a timing point of view, it should have occurred a month ago, not now. The Fed hasn’t really been friendly with liquidity at all of late, and to me this suggests they are stepping aside of any operation to keep longer rates down. Their cronies, the foreign central banks (FCB), have not been friendly either.  In the last six weeks they have sold $8 billion in US Old Maid Cards from their custodial accounts.

The rationale for this approach is long overdue. The Wizard’s clients, the Pig Men, especially the banking wing of the enterprise, is now being badly squeezed by the inverted yield curve. Banks have already milked all the time deposits they captured in 2004-2005. Nearly all of those have now rolled off, and with little, if any deposit growth, banks must compete for funds, and cost for new time deposits are solidly over 5%. Therefore it doesn’t make sense for banks to borrow new money at 5.5%, and purchase what to my mind are longer term, high risk, low yield securities like agencies, or mortgages, mortgage back securities (MBS) or asset backed securities (ABS; car loans, etc). 

Indeed, one big player, Bankamerica, said as much in their conference call yesterday, announcing that they are going to gradually unload $100 billion in securities (MBS represent 80% of what BAC has for sale), presumably to Riskloves and FCBs. I say presumably, because this ASSumes that hedge funds are willing to be the last ones standing when the music stops. The Riskloves in turn are ASSuming the FCBs will take these Old Maid Cards as well, but in reality the FCBs have actually sold $1.6 billion in agencies in the last four weeks. Gee, ya think these rocket scientists have finally connected the dots about rising foreclosures, and ghost neighborhoods in the US?  On the later score, this story out of Las Vegas even blew my cynical mind, especially this part. Do vacant houses with big mortgages, really make sense for a central bank reserve holding?

Right now there are about 22,000 existing homes on the market across the valley and 9,800 of them are vacant.

Apparently, some foreign entities philosophically just don’t buy into this scam? Russia, seems to be one, they are just reluctant to play the game. They announced this week that they would shift $35 billion in USD out of their holdings, and into Yen. The Yen carry trade Riskloves dismissed this one too, but one by one the Ponzi daisy chain is breaking up. Adding insult to injury, China conducted the largest IPO in history. That’s $19.1 billion in capital flows coming from “somewhere” back into Asia, to support Chinese, rather than American plutocrats.

When one adds all this up, the Fed is trying to impact the longer end of the curve higher for several reasons: 1. keep the waning capital flows coming  to support this (see Chart) 2. get a normal “profitable” yield curve in place for their banking cronies, who incidentially are also short a slew of note futures, how convenient, umh. 3. slow down runaway credit demand into nonsensical speculative ventures, such as Ponzi finance to support more vacant properties. 4. actually slow imported consumption some (see chart again), and put up a further token inflation fight.  Perhaps, though this ASSumes, the Wizards are even capable of promoting this kind of sound policy? Stay tuned.