Interesting from AEP. Serious contraction in bank lending and M3 means its absurd for the Fed to consider withdrawing stimulus. Not surprisingly, one of his sources for the article is Rosie ... Note the paragraph about how this is shaping up similar to 2008 when the Fed was talking about tightening in the spring and summer of that year. http://www.telegraph.co.uk/finance/...lending-falls-at-fastest-rate-in-history.html US bank lending falls at fastest rate in history Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus. By Ambrose Evans-Pritchard, International Business Editor David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said. Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said. The M3 broad money supply â watched by monetarists as a leading indicator of trouble a year ahead â has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken. Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession â or worse â is growing by the day. "It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said. Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues to contract" in their latest statement. However, regional Fed "hawks" appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of "monetizing" its deficit in a stealth default on Treasury bonds. The bank has already wound up its main liquidity operations. Concerns that the Fed may soon reverse quantitative easing altogether have caused a sharp rise in credit spreads in recent weeks. Fed chair Ben Bernanke first made his name as an expert on the "credit channel" causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time. "The reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this," said Mr Ashworth.
Front end wacked even though the fed is saying that discount rate hike doesnt mean monetary policy will change, 'efficient markets' lol?
I was about to short ES right after the close, had to make a phone call, I came back and the bitch gapped down without me, perfect. It appears that IB doesnt have limit on close orders
One more thing(that public markets are usually not smart enough to realize), the discount rate is set by the board of governors(not the FOMC), so they had to make this hike in a 'emergency' out of nowhere situation, plus Bernanke hinted this a while ago, what markets were expecting, the next FOMC meeting?That wouldn't be right
Martinghoul, do you see any implication to a discount rate hike today as opposed to 1 or 2 months from now(or whatever the market was expecting)?
Are you buying? Wouldn't surprise me at all to see equities up a couple of percent tomorrow (after initial sell-off).
We will see what libor does(if it does anything at all) and how much GE goes down. However to take more risk I believe I will have to wait for the bernanke testimony, in particular the Q&A
Stocks are up about 5%+ in 3 1/2 trading sessions since the middle of last Friday. I was driving around today, mulling over conspiracy theories like the PPT, and thinking how bizarre/suspicious the move since Friday has been. I suppose a case can be made that the Fed wanted to do this, but not with the market below 10K and falling. So they engineered a little rally. Its not such a stretch given what we know has been done by the Fed and Treasury to forestall the crisis. Would buying equities at key points be much more of a stretch. This move obviously doesn't affect FF right now, but the gauntlet has been thrown down. Folks who need to hedge against higher rates on the short end will now have to do it. That means selling pressure on GE. Should GE retain a firm bid in the face of this move, that would be outstanding news to anybody who is long.
Well, I'd agree that the Fed timed the move according to market conditions It appears the the board meets every monday http://www.federalreserve.gov/boarddocs/meetings/ But if the market was still tanking hard I doubt they would hike. They caught a little rally and this might have tipped the decision, it appears though that the meeting and decision was made yesterday(feb 17)
I was re-reading that AEP article I posted this morning. This line seems prescient ... However, regional Fed "hawks" appear to have gained the upper hand. Yes, we all know the discount rate is almost a ceremonial rate, but a hike is a hike. I think AEP's statement is 1000% correct. The ball is in the equity markets' court. If stocks continue to rally or even hover around 10.5K -11K, expect a hike in the FF rate by summer. I'm not selling any stock nor am I selling any GE. If I had to make a guess right now, I'd say stocks continue to go up and the 2 year yield hits 1.25% by the end of March. Can't wait to hear what Rosie has to say. I'd expect that this move towards tightening will have him wildly bullish on the long end of the curve. One of the items at Grant's Spring Conference is going to be a debate about the strength of the economy between Rosie and Jim Grant. I'll be traveling that week and won't be able to make it, but I'm sure it'll be fun.