The Biggest Cut of All - Technically Insolvent
In August credit markets seized up, forcing central banks in December to move in concert to inject cash into financial markets.
Since Jan 1st, more than $6.7 trillion has been wiped from world stock markets. From the G7 meeting...
Hanky Paulson issued the following understatement: "we should expect continued volatility in markets as risk is repriced."
Three weeks ago the biggest gain in 5 years, two weeks ago the market gave it all back. Why?
Even with printing presses running 24 x 7 to fund the insolvent global banking system you still couldn't print enough money to bailout the stock markets.
As the Fed cut, Japan held, forcing a global evacuation of leveraged carry trade positions. Don't believe me?
Since Sept 18th, Fed cuts 5.25% to 3%; 225 bps, giving the carry trade a 2.25% haircut, multiply by an average of 10X leverage on positions, you get 22.5%.
From Oct 11 to Jan 23 low, SP500 -19.4%; RUT -23.7%; NDX -24.3%, we rest our case.
FYI, look at the carry trade effect on the Yen since the Sept 18th cut: the Dollar Index -5.2%; vs the dollar; the RMB +4.5%; the Euro +6.6%; the Yen +7.6%.
Oh, and I suppose you don't think the banking system is insolvent either? Guess again my little baby ducks...
Technically Insolvent...
The Fed announced the creation of a Term Auction Facility on Dec. 12, enabling banks to borrow for 28 days versus a wide range of collateral.
The minimum bid the Fed accepts is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market.
As a result, banks began borrowing reserves from the TAF en masse. Looking at the Fed's H.3 statistical release
"Aggregate Reserves of Depository Institutions and the Monetary Base." ...
This drove non- borrowed bank reserves down from $44 billion in early December to minus $8.8 billion at the end of January.
So effectively all the bank reserves have been borrowed from the Fed, meaning technically the banking system is insolvent.
Putting this in perspective, it doesn't matter whether the banks borrow from the TAF or through Fed Funds. Its like a monopoly game where you can use anything as money...
although the central bank runs out of officially printed Monopoly money, the bank can substitute and therefore never runs out of money.
So, as the Fed and Treasury can print and credit money at will, there can and never will be any lack of reserves.
Since Jan 1st, more than $6.7 trillion has been wiped from world stock markets. From the G7 meeting...
Hanky Paulson issued the following understatement: "we should expect continued volatility in markets as risk is repriced."
Three weeks ago the biggest gain in 5 years, two weeks ago the market gave it all back. Why?
Even with printing presses running 24 x 7 to fund the insolvent global banking system you still couldn't print enough money to bailout the stock markets.
As the Fed cut, Japan held, forcing a global evacuation of leveraged carry trade positions. Don't believe me?
Since Sept 18th, Fed cuts 5.25% to 3%; 225 bps, giving the carry trade a 2.25% haircut, multiply by an average of 10X leverage on positions, you get 22.5%.
From Oct 11 to Jan 23 low, SP500 -19.4%; RUT -23.7%; NDX -24.3%, we rest our case.
FYI, look at the carry trade effect on the Yen since the Sept 18th cut: the Dollar Index -5.2%; vs the dollar; the RMB +4.5%; the Euro +6.6%; the Yen +7.6%.
Oh, and I suppose you don't think the banking system is insolvent either? Guess again my little baby ducks...
Technically Insolvent...
The Fed announced the creation of a Term Auction Facility on Dec. 12, enabling banks to borrow for 28 days versus a wide range of collateral.
The minimum bid the Fed accepts is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market.
As a result, banks began borrowing reserves from the TAF en masse. Looking at the Fed's H.3 statistical release
"Aggregate Reserves of Depository Institutions and the Monetary Base." ...
This drove non- borrowed bank reserves down from $44 billion in early December to minus $8.8 billion at the end of January.
So effectively all the bank reserves have been borrowed from the Fed, meaning technically the banking system is insolvent.
Putting this in perspective, it doesn't matter whether the banks borrow from the TAF or through Fed Funds. Its like a monopoly game where you can use anything as money...
although the central bank runs out of officially printed Monopoly money, the bank can substitute and therefore never runs out of money.
So, as the Fed and Treasury can print and credit money at will, there can and never will be any lack of reserves.
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