Fed Pours More Debt on the Fire

Tuesday morning’s intervention by the Fed is more proof the capital market is on life support.

HB&B, which is in dire straits, used the added $200 billion Fed funding to buy selected stock sectors affected by the credit crunch, such as Banks and Retailers. The problem is that the Fed’s tools to solve the problem are the same ones that caused it. To wit: credit expansion.

Just as the market is trying to clean up its debts that are not supported by collateral so that properly recognized capital risk does not result in much higher interest rates in the future, along comes the Fed to pour more debt on the fire.

In effect the Fed was saying to the banks Tuesday, “We’ll exchange $200 billion of your garbage paper by printing more money.” The dilutive impact immediately shot the price of commodities higher. The People cannot afford these higher costs.

So who, other than HB&B, won Tuesday?

Traders merely closed their shorts, which added huge volume to the market, driving prices higher. But the important point is that value did not increase. So, after the impact of this Wall Street buying syndicate has played out, the liquidity will get worse because there are no fools among serious traders; they will not pay higher prices that are unsupported by higher value.

Traders know that the economy of Japan is on the rocks. They know that the economies of Russia and China are struggling to contain inflation that is out of control. They know that the economies of Canada and Mexico are being heavily impacted by the slowing US economy. They know that the UK housing market is collapsing, and German confidence in the economy is at a long-term low. They know that military conflict and terrorism in the Middle East is at the root of the problem and unlikely to be resolved any time soon. They know that as wealth is being destroyed at a pace unseen for perhaps the past four generations, the current interventionist action by central banks is no solution, and in fact is pouring more fuel on the fire.

Extreme volatility, as seen Tuesday, is being caused by the Fed and other central bankers who know that HB&B and the relatively few individuals who control corporate empires, all of whom are in financial difficulty, will answer the clarion call, sending their Talking Heads to Financial Entertainment Television to stir the People into a frenzy of greed.

But at the end of the day, the market knows that it is a value pricing mechanism, and value is not being increased by the action that central bankers are presently taking. So; up today, down tomorrow.

Smart traders closed their shorts and bought the dip. Soon they will extract even more capital from the market (i.e., liquidity) by shorting these higher price levels.

Yes, as surprising as this might seem, most of us are on a deathwatch.

Comments

[robert.bohrer]

Bill, you should post here more often - I enjoy your insight.

[phinsuntanning]

Bill, you are the man!

[Tony Soprano]

Tuesday morning’s intervention by the Fed is more proof the capital market is on life support.

WHO DOESN'T KNOW THIS? PLEASE DON'T TAKE COMMON KNOWLEDGE AND TRY TO MAKE SOMETHING NEW OUT IT JUST SO YOU CAN BLOG.

HB&B, which is in dire straits, used the added $200 billion Fed funding to buy selected stock sectors affected by the credit crunch, such as Banks and Retailers. The problem is that the Fed’s tools to solve the problem are the same ones that caused it. To wit: credit expansion.

FALSE, THIS IS NOT FUNDING, ITS A SWAP FOR TREASURES.

Just as the market is trying to clean up its debts that are not supported by collateral so that properly recognized capital risk does not result in much higher interest rates in the future, along comes the Fed to pour more debt on the fire.

SAME AS ABOVE, NOT TRUE, ITS A SWAP

In effect the Fed was saying to the banks Tuesday, “We’ll exchange $200 billion of your garbage paper by printing more money.” The dilutive impact immediately shot the price of commodities higher. The People cannot afford these higher costs.

AGAIN, NOT TRUE, THERE IS NO PRINTING OF MONEY.

So who, other than HB&B, won Tuesday?

Traders merely closed their shorts, which added huge volume to the market, driving prices higher. But the important point is that value did not increase. So, after the impact of this Wall Street buying syndicate has played out, the liquidity will get worse because there are no fools among serious traders; they will not pay higher prices that are unsupported by higher value.

THIS IS AN ASSUMPTION!!! THE TIMING OF THE FED WAS IMPECCABLE.

Traders know that the economy of Japan is on the rocks. They know that the economies of Russia and China are struggling to contain inflation that is out of control. They know that the economies of Canada and Mexico are being heavily impacted by the slowing US economy. They know that the UK housing market is collapsing, and German confidence in the economy is at a long-term low. They know that military conflict and terrorism in the Middle East is at the root of the problem and unlikely to be resolved any time soon. They know that as wealth is being destroyed at a pace unseen for perhaps the past four generations, the current interventionist action by central banks is no solution, and in fact is pouring more fuel on the fire.

THE SKY'S ARE TURNING VERY DARK. THE LOCUSTS ARE EATING EVERYTHING IN SITE. YOU ARE SO, SO, NEGATIVE THAT'S ITS TIME TO BE BULLISH.

Extreme volatility, as seen Tuesday, is being caused by the Fed and other central bankers who know that HB&B and the relatively few individuals who control corporate empires, all of whom are in financial difficulty, will answer the clarion call, sending their Talking Heads to Financial Entertainment Television to stir the People into a frenzy of greed.

ITS NICE TO BE AN INTELLECTUAL BUT YOUR ARGUMENT IS EITHER OUT OF HATE OR PERHAPS YOU WISH FOR ANARCHY.

But at the end of the day, the market knows that it is a value pricing mechanism, and value is not being increased by the action that central bankers are presently taking. So; up today, down tomorrow.

THIS IS A DUMB PARAGRAPH

Smart traders closed their shorts and bought the dip. Soon they will extract even more capital from the market (i.e., liquidity) by shorting these higher price levels.

Yes, as surprising as this might seem, most of us are on a deathwatch

LOL - I AM LAUGHING OUT LOUD. THIS BLOG IS A JOKE AND IT IS TRULY FUNNY. YOU ARE NOW QUALIFIED TO BE A COLLEGE PROFESSOR!

[CarlosSlim]

"Wealth is being destroyed at a pace unseen for perhaps the past four generations"

The Outsourcing of America is not a brilliant plan in the long term nor was the intentional destabilization of a secular Middle Eastern country so it's oil refinaries should be shut down to drive the price of oil up.

Now that Admiral Fallon has been booted out the door, there may be no sensible adults left to stop the drumbeat of war from threatening Iran. The actual attack upon Iran might actually DECREASE the price of oil, since the fear factor has been included in the price for some time now.

SSSSSH!!! BE VERY, VERY QUIET!!!!

These are "geniuses" at work. Everything they do will turn out just marvelous! Just have faith. Be optimistic!

Every day, things are getting better in every way!

[Solution]

Value is decided by confidence. Fed is taking over the extremely cheap issues at the right time. When market stablizes, those issues will rise in value. Fed will eventually make money. The difference will help paying off the huge national debt. This is a win-win situation.
I think Fed should do another thing, increase margin to 200% for speculative commodities. And probably short marnin as well. The low margin causes bubble and should be stopped now !!!

[miked15]

excellent points. Who is this Tony Saprana moron? Does he expect readers to take him seriously with such a foolish name? lol

[miked15]

In effect the Fed was saying to the banks Tuesday, “We’ll exchange $200 billion of your garbage paper by printing more money.” The dilutive impact immediately shot the price of commodities higher. The People cannot afford these higher costs.

AGAIN, NOT TRUE, THERE IS NO PRINTING OF MONEY.


Then where is the FEd getting the 200 billion? From the money fairy?

Run along now Tony Soprano (you spelled it wrong) before you get caught for being client number 8

[cheesecake]

i disagree with this article, the fed move yesterday was definitely a good move, however it will be not quite enough.

[bylo]

Cheesecake, the problem is that it will NEVER be enough! Like I said before, you can't fix too much debt with more debt!

[MeditateMeditate]

SOPRANO should disclose his positions, as he doth protest too much.

[Tony Soprano]

Here are two analogies about what the Fed has wrought.

Your teenager has maxed out their credit cards and is to a point they can no longer make payments. You step in as a co-signer and get the limits on the cards doubled.

Is this the right decision? This is what the Fed did for the banks yesterday. from NoFate

______________________...


The son does use a credit card but instead of spending it on himself he wants to lend out the money and become loan shark. His idea is to lend out as much money that he can. In the mean time people that he is lending out to all live on an island. The island depends on a dike system to keep the island from going underwater. The dikes take an enormous amount of power to run. The islanders are taxed a lot to keep the power going..

The loan business is slow starting and the son wants it to grow much faster. His rich daddy is still backing him up and thinks his son is remarkable. The son's new business plan offers loan owners interest in a new waterfront country club if they barrow more. They see it as a steal and it makes them feel rich so they barrow more. His new business plan is a success for many years. The new country club is well under construction. Most of the people on the island are happy and think they have it made. The son pockets a good deal of wealth but he always wants more and more.

As more time passes, the cost of the power to run the dikes starts to increase rapidly. Sadly some of the islanders become sick. The doctors on the island suspect the Avian virus. Some even die and others cannot work. Unemployment starts to rise dramatically and the power for the dikes continues to rise.

Not all of the islanders owe money to the son. Many are still wealthy and never liked what the son has done and they are very much concerned about the rising cost to power for the dikes. More time passes and construction cost for the country club increases as well. Construction on the project starts to slow down. Many on the island start to become angry.

Taxes receipts to pay for the power for the dikes starts to diminish. Some of the islanders want to raise taxes to pay for the power. The islanders that are sick are not paying taxes. A meeting is called. The meeting is a failure and the son goes into hiding. However, the islanders come up with another plan but still many on the island do not like the newer plan as well

The newer plan requires the islanders to barrow more money but from the mainland. The wealthy on the island do not like this plan because it will require them to pay more taxes in the future. However, some of the middle class people on the island become restless and crime increases.

The islanders are at a serious crossroad. Damned if they do and damned if they don’t. Many on the island say the island will sink completely underwater if new monies are not borrowed. Others do not agree and feel the island will be on okay without the additional debt.

I’m not going to finish this story. I will let your imagination do the rest.

But my point is we can let GM or Ford go under and we will still have cars. However, we cannot take this chance with the banks. Banks are the corner stone, hence the island metaphor, of our capitalism. If the banks sink we all sink. We cannot afford to take the slightest chance that this will spread further and SINK US ALL. At the same time it’s a shame that a lot of our mortgage companies, brokerages firms and money center banks let this happen. The dollar has crashed and confidence in ourselves has weakened. But it is the least venomous of two harmful poisons. from Tony Saprano

[CoolcatReport.com]

Bill,

I have to agree that markets are going to go where they want to go despite the Fed's desire to change that dynamic. Oil, metals and commodity plays should contrinue to benefit along with bear market ETFs.

Where is the bottom for financials? Hint: we're not there yet.

Cheers,

Kevin Kennedy
CoolcatReport.com

[Bingo 2]

Tony Soprano- You are wrong on one major point- The Fed IS printing money as fast as the presses will go. Why do you think our dollar is falling like a rock. Another problem simply stated, the Fed does not know what they are doing.they are acting like the textbook economists they are. Let's face it people- our government is BROKE ( thanks to the stupid war in Iraq (570 million per month) The fed has forgotten the little guy- He can not save money since the rate is below inflation.

[Tony Soprano]

MR. Bingo 2

You would rather have a DEPRESSION. The island will sink underwater. Then we would be absolutely broke. How would 10 or 15 or 20 percent unemployment help the little guy?

Its not up to the Fed to protect the little guy. The Democrats are supposed to do that and they can't seem to satisfy everyone in their party. Warren Buffett is supporting Hilliary and I like the Dems as well because the middle class needs a much better tax break and the rich are not taxed enough. The dollar has been dropping long before Bernake took over. I would rather have inflation than a very bad recession or depression that could last a decade or more. Also, there are many short sellers that are padding their book on this site, on TV, and print. They want chaos and a filling of helplessness. This is a very important point to remember in a bear market. In a wild bull market the opposite can become true as well. The bulls will promise you a rose garden. But back to what is going on now.

Members on this site are using words and phrases like: death of a thousand cuts, world wide despair, fear fueling more fear, the Fed does not know what they are doing and so on. THIS IS VERY BULLISH!

Foreign investors will show up at our doorstep with cash after the downturn becomes stable. This is not Armageddon and they know it. Later this year or early in 09 the dollar will rebound and investors around the world will be praising America. THIS IS VERY BULLISH!

The commodities bubble will burst. This will be Armageddon but not for the consumer. The frozen consumer will defrost. Coins will be jingling again. THIS IS VERY BULLISH!

Later in 08 housing starts will show faint signs of leveling off. By Mid 09 housing will be fully stable. Large plumes of dust from new home construction sites will appear on the horizon. THIS IS VERY BULLISH!

Keep the faith! I have been in the market for 50 years. However, all bets are off if something new comes into the equation. For example, a lot of folks say that we did not recover from the tech bubble until 03 but you must remember that several new factors came into the equation. After the tech bubble we had 9/11 late in 01, the airline industry nearly went under, and then later two mayor scandals -- Enron and Worldcom.

So if something new, and different, and very bad happens all bets are off. Keep the faith. We will get out of this mess.