Whenever we discuss some of the darker theories of a conspiracy or market manipulation, I seek to discover a market mechanism that can explain the actions. For example, I was quite doubtful of accusations of energy price manipulation — until Bill King identified the changes in the Goldman Sachs Commodities Index (GSCI). That change led to $6 billion of gasoline futures hitting markets in September and October — and the subsequent 30% drop in gas prices over a few weeks.
Might there be any similar mechanism around impacting equities?
One possible answer comes from John Crudele of the NY Post. Crudele has long been a skeptic of government data; its no surprise he looks askance at some of the actions of ther Fed and Treasury.
And indeed, it is the Treasury Department that comes under his watchful gaze. Yesterday, Crudele wrote:
"FOR the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation’s money supply seems to be confoundingly large.
It might also explain why Washington decided earlier this year to stop publishing M3 money supply figures, the broadest and most popular measure of money in circulation. Repurchase agreements – or repos – have long been used by the Federal Reserve to get money quickly into the hands of financial institutions, which in turn can put the money into circulation in the form of loans.
Last Thursday, for example, the Fed executed $2.5 billion in overnight repos and $8 billion in 14-day repurchase agreements. These were reported on the financial wires. The Treasury completed a $5.5 billion repo operation on the same day
under what it calls the Term Investment Option. There was no mention of
the Treasury operation on the wires. In the Fed’s repo deals, the banks
temporarily turn over securities to the central bank in exchange for
cash. The Treasury TIO program works in a similar way, except the
financial institutions pledge securities as collateral in exchange for
the cash."
What does this mean? Well, instead of the (theoretically) independent Federal Reserve controlling Money Supply, we see the Treasury department has had an "unseen" hand. MZM, M2 and credit growth has been soaring. This has the effect of providing the fuel for increasing the leverage and risk in the system.
"Is this like the repo operation at the Fed? "Kinda’," says a
spokeswoman for Treasury. "But not really." She said the TIO program
only replaced the old way of putting government cash in banks without
making the banks place bids, which gets the government a better deal."
This repo action is not reported by the Treasury Department, and Crudele that "financial institutions have been using it for three years to increase their liquidity." Surprisingly, it is not well known by the investment community.
What’s the problem with this? Crudele notes:
Experts worry whenever there is too much money – liquidity – in the financial system because it can lead to things like price spirals in the housing market and bubbles in stocks. But even more worrisome for the financial markets than too much liquidity would be an inability to track the amount of money being pumped into the financial system.
Unless I find out differently, it looks as if the Treasury has created a way to duplicate the Fed’s power. And that is a disturbing possibility unless it is somehow monitored.
Bill King adds:
"$20B was added to the system last Thursday and Friday. Where is it going with the economy ebbing? Of course it goes to the ‘new economy’, which is financial speculation and asset grabbling . . . The astute know that the repo world runs The Street. It is
the lifeblood of The Street, and ‘The Money Desk’ of each big firm is
the heart of the organization. Other traders garner the headlines and
TV spots but the ‘money desk’ reigns supreme on The Street. Just ask
the ex-principals of LTCM."
Indeed. The plot thickens . . .
>
Sources:
U.S. TREASURY IS QUIETLY DOING THE FED’S WORK
John Crudele
NY Post, November 7, 2006
http://tinyurl.com/yn5cfo
TREASURY TAX AND LOAN INVESTMENT PROGRAM
TERM INVESTMENT OPTION AUCTION RESULTS
Thompson Sawyer
Investment Management Division
http://www.fms.treas.gov/tip/auctions/tio-auction-results-274-11022006.pdf
Download tio-auction-results-274-11022006.pdf
Barry. Sounds like Crudele is on to something big. What I want to know is how to best incorporate that knowledge of money supply creation into making trading and investing decisions today and tomorrow. Any advice you can offer would be appreciated.
One other note: John Williams over at Shadow Govt Statistics ( http://www.shadowstats.com/ )has created a new metric that aims at being able to duplicate what M3 would have been telling us if it hadn’t been dropped.
Just one more constitutional level breach by the junta.
In the 1980’s (Cheney, Rumsfeld, Bush) the Reagan republicans created a building asset bubble by figuring out a way to circumvent the Fed. At that time, individual savings and loan corporations were given the right to approve federally guaranteed mortgage loans without oversite from the banking inspectors. The country underwent a building bubble that eventually went bust creating a financial bomb that resulted in the collapse of the savings and loan industry. A special agency, the RTC, was put together to dispose of the excess real estate and close down a huge swath of the bankrupt S&Ls. The American taxpayer was forced to cover a the debt caused by the goddamnest collection of of the republican underworld that had surfaced to loan themselves, with self-approval, 100’s of billions of dollars guaranteed by the taxpayers.
The experience of the last six years has been a replay of reaganitis, played out on an even grander scale with the same tired results-a-coming. A crash in the construction sector, massive loan defaults, criminal indictments for securities fraud, and the American taxpayer footing the bill.
Is the US government liabel for losses by short sellers ? How about the premium the speculator banks have been extracting from the public in the futures market ? How about the losses to come in the equity markets when this rippoff stops ?
Maybe I will find my tin foil hat. I know it’s around here somewhere.
danke
What we really need to find out is how this US government cabal has managed to push up broad money growth in the Eurozone, Japan, and UK to mulityear highs at the ame time.
Thanks Barry for posting this wonderful info. It definitely explains the liquidity spike.
The Treasury Department is pumping money into the financial system in an attempt to stimulate the economy and prevent a recession. So far, instead of economic growth the liquidity has been fueling ubiquitous speculative commodity and stock market bubbles.
What is surprising to me is that none of this is secret information—so there seems to be some complicity (apathy?) among mainstream financial journalists. Perhaps it is because one needs to be a Nobel Prize nominee to understand this stuff, but it seems that there are only a “few” of these nuggets that get uncovered. Barry, perhaps you can run a counter-junta/cabal organization that systematically seeks this stuff out (I guess you do that a bit now in your blog, but on a more focused basis!).
YOU NEED TO TALK MORE ABOUT THIS.
I’ve always felt the closing of M3 supply data signalled something corrupt/devious. Why does a “free” democratic society choose to hide data that was previously open?
Something stinks.
Hi Barry.
Thanks a lot for that post. It gets more and more clear, what happens in this crazy world…
Is there a comparison between Fed Liquidity input and treasury departments? Fed/Treasury ratio?
Could you have an update on PER in the 30s? Thank you so much, it is scary what you discover, the ugly face of reality comes clearer and clearer, however, we have taken measures and we will take measures.
Still, low income investors have a hard stand, Dow is too high, houses will further decline, and Bond yields are way too low (in comparison to the liquidity input, that will lead to strong inflation)
How are my boys goin’ to get their bonuses if we don’t pump a little? Gonna have to eke by on $36 bil this year.
Doesn’t Don Hays rely on this increase in money supply for part of his bullishness on the market. I think he has referred to it in the past as the “punch bowl.” Conversely, he advises investors to take money out of the market when the the punch bowl is taken away.
Wouldn’t the Fed offset this by doing less in the REPO market? The theory behind how the Fed controls interest rates is that liquidity injections lower rates. If the treasury injects liquidity, then it will also lower rates. Since the Fed determines how much money to inject based on interest rates, wouldn’t they just cut back by an equal amount? This seems like it would only change things if the treasury department can inject more liquidity then the Fed can remove. I suppose it might also screw up the Fed’s algorithms, since they probably look at how much the FOMC has to do as part of their determination of how close to a neutral rate they are.
I checked at Shadow Govt Statistics and John Williams has his “continuation” M3 chart available at:
http://www.shadowstats.com/cgi-bin/sgs/data
Looks to me like something pretty interesting is happening with both M3 and M1 over the past 18 months with M3 taking off (jumping from 5% YoY increase to 9% YoY and while M1 drops from about 2% YoY to -1% YoY.
I sincerely hope that there are still a lot of benign pieces missing to this puzzle, and that i am misunderstanding a bit of what I’ve just read. Either way a powerful light of scrutiny needs to be shown into this process.
I hope you will excuse my dumb question, but who funds this, at the end of the day, and how long can a scheme like this go on? Indefinitely?
I guess I’m trying to understand where the money “comes from” for these repo agreements by the Treasury.
Thanks in advance for any simple explanation one of you could give to a finance-challenged reader.
1980’s S&L..Remember Charles Keating and his 5 Senators…John McCain was one of them..
Sorry, I don’t get it…
You can peg the overnight rate, or the high-powered money supply, but not both. As long as the Fed can peg fed funds and set reserve requirements, it has all the control it needs, and could possibly have.
I watch MZM quite closely and it is readily available from the Fed. It is far from soaring. Credit growth is still robust but it is everywhere in the world. That doesn’t mean it is coming from printing money. So, conspiratorial reasons why it is growing must mean the long arm of the Fed extends to the EU, China, Australia and Russia.
I don’t like conspiracy theories. But, I am not totally discounting an attempt to levitate the markets given the housing scenario. But, then why isn’t the dollar cratering and gold blowing higher? Why are equity markets globally just as strong as the US?
I don’t like it. It makes our leaders out to be totally dishonest, corrupt and out to ultimately doom our nation. It’s hooey. And so is the reason for the drop in oil. I could give you a dozen reasons why it was weakening including weakness I can measure in the crude markets.
I hear printing too much money can lead to a disease in which the head is swiftly severed from the body. Perhaps we will find that this disease is not unique to monarchs of the House of Capet.
bdg123…uh..yea our leaders are totally dishonest,corrupt and to correct you ,they are out to get rich while they doom our nation.If I were a billionaire I would be making sure I had a lot of gold…
WHOA!
So now the treasury has found a way to short circuit the money market whether the fed wants it to happen or not.
Talk about a counter coup! The elite government insiders may have wrested control from the elite banking insiders. No wonder Paulson wanted into ‘the house’
So here is how they can short circuit the system using the current fractional reserve banking system:
The treasury takes what cash it has and buys a T-bill from the market. The banking system puts that money on reserve and multiplies it buy the 9 to 1 ratio. All the treasury has to do then is sell up T-bills in relation to the multiplied cash (9x worth)which gives them a wad of cash that they can then once again inject into the reserve system only to be multiplied once again.
Since the treasury is fully responsible to print up any dollars demanded of the system after the creation of those dollar through the money multiplier, they don’t even need the fed any more! They have completely closed the loop!
And they have effectively created a second printing press!
Are they now going to compete with each other or is one there for when the other starts feeling a little guilty?
BDG123,
>>But, then why isn’t the dollar cratering and gold blowing higher?
I think they have no other choice. Who blinks first…
I am no expert, but that question was why I started to read BigP already a while ago.
http://tinyurl.com/skzo6
seems to be a good explanation.
Maybe the tide starts to turn now:
http://tinyurl.com/ylvnem
WW
Richard Daughty (“The Mogambo Guru”) has been talking about stuff like this for months/years over at Kitco.com. I don’t fully understand it all myself, but it certainly makes sense.
BDG123, I appreciate your hesitation about engaging in conspiracy theories. But if our leadership isn’t corrupt on this issue, why stop publishing M3? Why the secrecy?
Also, as you admitted yourself, there are very good reasons for them to prop up the markets without appearing to prop up the markets. The Federal and consumer debt levels are huge.
You ask if the Fed can control China, the EU, et al. They don’t have to. The dollar is the reserve currency of the world, and we are the biggest economy in the world. China has been propping up our currency in order to keep their exports cheap. And the EU has been trying to compete with us and they’ve gotten on the debt train too. That part isn’t a conspiracy per se.
At the risk of being incredibly obvious, the U.S. Treasury is an American entity. America has racked up huge amounts on dollar-based debt. Why wouldn’t the Fed and the Treasury do everything in their power to reduce the value of their debt and fight deflation, if they can?
… uh, why isn’t gold soaring? huh? Let me know if u don’t know where to find a quote. It was up $18 FRNs today.
slosh…slosh…slosh….
And back into the stock market it goes, now that houses are a bum investment.
Someday, maybe we’ll have to have real money again, instead of this vast bunch of electrons running around everywhere.
To Semper fubar:
The answer to your question can be heard via audio an interview at
http://www.financialsense.com/Experts/2006/Griffin.html
The bottom line answer is that the FRB and US Treasury can create money out of thin air because they have given themselves the power to do it by authorizing its creation via signing a real or electronic document.
The government makes laws via the pen. They also create money the same way.
Personally, I would have it no other way because I trade stock indexes. Where do you think a large percentage of the newly created money goes? I think it goes into the stock index futures / ETF market. The stock index market is the first line of defense for “supporting the market”. The futures market is supposed to be a zero sum game, but I do not think it applies to stock index futures or treasury futures. There is probably a direct line from the money desk to the S&P 500 futures desk. Better yet, the money desk probably has there own Globex terminal sitting right there ready to shoot orders into the eMini S&P 500 futures with the push of a button.
I hope Barry is right and they decide to pull there bids and let the market do its thing on the downside.
By the way, the Nasdaq 100 (NDX) has made a double top today against the Jan. 11 high and the same is true for the SPX today against its Oct. 26 high. A close near or at the low today triggers a key reversal day sell signal double top pattern. The same pattern, but in reverse, that called the low of the year in the DJIA and the S&P500. (double bottom) The Nasdaq Composite Index could also be called a double top with a key reversal down bar today, but with a little more tolerance.
Bring on the volatility! Long Live Volatility!
Personally, I would have it no other way because I trade stock indexes.
*gasp*
20% will always say, “It works for meeeee!”
60% will slosh between the poles
20% will always say, “Off with their heads!”
Humanity is an amazing study
Big news headline today => The chinese are investing in OIL!
If they’re diversifying and the Saudi’s aren’t gettin as much as before… where’s the water gonna come from for the washin’ machine?
Thanks GS
Heard it all before. The Utah crowd. My apologies to the people of Utah as it is a joke. I don’t feel like writing a book but if you believe the Fed is doing something very nasty and ultimately extremely destructive to the long term American citizen, you will also need to implicate the EU, China, Japan, Australia, New Zealand, Canada, etc, etc, etc. That means you believe Ben Bernanke, Mike Moskow, every economist that works at the Fed and all central bankers are tied to some Omen type plot on par with the Anti-Christ. Maybe they all work for Damien.
If gold were Yuan denominated, it would likely be about $4,000 an ounce right now because of their monetary dynamics. Ditto with Australia. The forex markets moves for reasons that are difficult for most to understand including trade imbalances which are likely not solvable via the forex market. Doesn’t mean anything other than imbalances create instability. Given the dollar is the world’s reserve currency and commodities are dollar denominated, there is additional pressure on both sides of the dollar including dollar creation. Just as there would be if the Eurodollar were the world’s reserve currency and commodities were Eurodollar denominated. But, even if I typed it, you likely wouldn’t get it or give it fair witness because most conspirators are so focused on single variable analysis and clarity of vision.
I’ll leave all of you to your conspiracies. Be sure to invite me over to your bunker party. And more than anything, it’s time to buy guns for the coming of Revelations and the Four Horsemen soon after the nuclear war with China. The future is unknown but I can assure you $55 trillion in wealth versus the global alternatives still makes dollar very appealing. Imbalanaces could cause weakness in the dollar and gold would rise accordingly, regardless of whether it was a crisis or not.
BDG: simple question: why did they stop publishing one of the oldest monetary aggregate #s we have, unless they have something to hide? they clearly wanted to flood the markets prior to the election. they clearly no longer have a grip on money supply and asset inflation. now that the election’s over, and they lost (FRB and Republicans), they will punish the Democrats and the public for voting for them, also just time to drain the system, wring out the irrational exuberance before ramping up again for the ’08
…well at least we made it through an entire post w/out resorting to racial slurs.
Now if we could just remember to wipe our chin after foaming.
News today “China looking to diversify away from US currency reserves”
http://www.marketwatch.com/News/Story/Story.aspx?siteid
=mktw&dist=nwhfriend&rid=em_story_e_main&guid=%7B23
556CD8-DCCA-4870-BBF9-B36E41451F24%7D
I say learn how the fiat money system works and game it for all it is worth for the sake of your family and future generations of your family.
Stocks are paper assets and represent real wealth most of the time, depending on the company of course. Gold is real money and always will be.
Fiat money supply is the blood flowing through the veins of global markets that capitalize companies that supply the needs of 6 billion people and counting. The system is not perfect, but nothing is. Go back in history and note how often depressions occurred before 1913 across the globe. They happened every several years. But since 1913 there has only been one economic depression in the US. That is not a coincidence. Fiat money keeps the blood flowing after an economic heart attack.
I have read that the FRB created the stock market and economic depression from 1929-1932 to teach outsider banks a lesson and to clear the market place of banking competitors. The FRB restricted the money supply and let outsider banks go bankrupt and die. FDR’s executive order to confiscate all legal tender gold coins was also a way of consolidating real money wealth into the hands of the government to use as collateral for treasury debt. That was wrong to do in my opinion, if it is true. But, it is what it is. The question is what would you have done to protect yourself financially?
The answer is to trade long and short. Jesse Livermore made $100 million profit shorting stocks from 1929 – 1932. What would you rather do, complain about something you have no control over or make some money on the volatility?
I trade fiat money in the futures market in order to make more fiat money that I switch into real wealth (stocks) and real money (gold). In other words, I can click my way to potentially unlimited wealth by knowing how and when to trade fake stuff and then turn the fake stuff profits into real wealth and money. What a game! It does not get any better than this. Get busy making the fiat money system work for you. You have no other choice. Otherwise, you will get your clock cleaned through inflation in the value of fiat money and periodic deflation in the value of stocks.
Once you know how and when to trade you can write your own ticket. There are many examples of billionaire investors / traders who are making a real difference in the world after working the fiat system for all its worth and then giving real goods and services in the form of health care, housing, food, clothes and everything you can imagine to needy people all over the world.
Warren Buffett calls himself lucky for being a good asset allocator and living in the right country and at the right time in history. I recently read that $10,000 invested in Mr. Buffett’s original partnership in 1956 and then transferred into Berkshire stock in 1969 would be worth $450+ million today after all costs and taxes. Now that is growth! And believe it or not there are a few of those original partners still in Berkshire stock.
$10k turns into $450+ million in 40 years. That is a 30.71647% annual compounded rate of return.
Trading / investing is open to all who want to play. It is not easy, but I think it is worth the time and energy to learn how to do.
In the next 40 years I would not be surprised if hedge fund manager Edward S. Lampert of Sears Holdings fame has close to the same return. He is well on his way, but only time will tell.
Forbes 400 Bio
http://www.forbes.com/lists/2005/54/22YS.html
As for me, I am doing the best I can everyday to keep several steps ahead of fiat money inflation and grow my wealth through trading. In the end I will hopefully have plenty of real wealth to spread around like the best of them. Of course, only time will tell.
Good trading / investing to all.
I’m with curmudgeonly troll. I don’t get it.
The FED targets overnight interest rates.
So the Treasury Department does something to increase the money supply (which causes the overnight rate to decline). The New York Fed offsets Treasury’s action by selling securities in sufficient amounts until the desired overnight interest rate target is achieved.
What am I missing?
Sounds like BDG123 works for Goldman Sachs and is covering for Henry Paulson.
B –“I don’t like it. It makes our leaders out to be totally dishonest, corrupt and out to ultimately doom our nation.”
I don’t suppose parasites consider whether or not their sucking might “doom the host”…they’re simply “having lunch”.
Similarly, Republicans have simply been providing “Leadership”
as to conspiracies bdg, how can you or anyone NOT believe in them with regards to W’s crew?
Think about Right wing Pols/Businessmen who would so cavalierly use American soldiers lives like chess pieces in a giant corporate misadventure like Iraq. (see Iraq For Sale)
Over 600,000 iraquis have lost their lives since we went in there. 2,800 soldier patriots have been killed, thousands more wounded. Lied to-used-discarded. Why?
I enjoy your posts bdg but i’m beginning to wonder if you are a “trusting soul”, when our recent American experience shows that that trust is NOT warranted.
welcome to the black and white world of brion (nice spelling btw):
republicans bad, liberals good
The left-right partisan bickering on this website is getting tiresome. If you want to hurl invective, there are plenty of other places on the internet to do it.
Let’s stick to the markets, please.
Everything that has come to light and will come to light about this administration comes with a republican imprimatur. (white house-congress-senate)
I say these things as an ex-republican. My first campaign walk was for Barry Goldwater in ’64
(i was in a stroller true but my family political background is Goldwater, Buckely, Reagan Right)
I am now solidly Democrat and find i have been moved into the “Liberal” camp by the neo-con Republicans. (i consider myself a political moderate)
Do i believe ALL Republicans are evil? No. Do i believe Bushco is and has been evil? Absolutely.
Similarly, there are aspects of the Democrat party that make me uncomfortable.
Uncomfortable…..not nauseous.
But perhaps you are younger than me.
Perhaps you enjoy the “insights” of Hannity, Rush and O’Reilly over my early political influences & prefer demagoguery over cogent conservative argument.
I despise Black & White Mark and witless posts like yours.
So, that sucks. I missed the boat on currency today with the Chinese announcement on currency. I’ve been trying to diversify to other currencies or a bank with easy transitional banking….there doesn’t seem to be one even in this ‘global economy’. ICICI comes close, but no cigar.
Seems to me, there should be a world-wide bank that has accounts in an aggregate currency account with reasonable interest rates, like an Everbank that does savingins accounts instead of just bonds.
On Gold: I have to question the logic of gold for many reasons. It does not pay interest, it is subject to inflation at a faster rate than the dollar, and India has billions worth of the stuff held by all strata of the economy. So, I must ask the question, why would a fool buy gold in 1980 and hold it? Why would a fool buy gold now?
A quick google of the subject will reveal a lot of gold brokers with ‘reasons’ why, and many, assumed gold holders, touting its value in troubling currency times, but my bullshit detectors indicate otherwise.
Any comments on these quandries?
“Seems to me, there should be a world-wide bank that has accounts in an aggregate currency account with reasonable interest rates”
I think you just made your first Billion Rich….
Rich — if you bought gold in 2003 you wouldn’t be asking such silly questions.
Does any one think gold market is manipulated? and having gld ETF helps in artificially lowering physical gold prices? because what if the promoters of the ETF are not actually buying equivalent amount of physical gold. or selling from their stock on the spot market? manipulating the gold market this way prevents the gold market to keep check on Fed.
The “discussion” about the TIOs has been going on in “certain circles” for quite a while.
I’ve looked very closely at it, as I look at all the Fed and Treasury data daily, and in my opinion it’s much ado about nothing.
Here’s why. http://tinyurl.com/ybhk5q
An interesting thought – if the government can simply fabricate money at its discretion, then why do we have a need for taxes? Let the gov print all they want and let us keep our own! Why give it to the banks and then tax us. Print it, keep it, we keep ours. Works for me!