The Federal Reserve’s ABS Braking System

imageWith all due respect to “Jammin Janet” the Federal Reserves modus operandi seems to have been to slam on the brakes at the free money window a month or two back, and then sort of pump the brakes, hoping for a smooth stop of deflationary pressures, so rates can be raised slightly this fall.

As you can see in the short-term H.6 Fed Money Stocks data, the rate of M1 increase has come back up to 2.5% while broader M2 is running 4.6.  And Trader Bart’s estimate of M3b (reconstructed) shows, the M3b is running around 2% which is still slightly below Fed prayer levels.

If you look closely, though, you can see how people are trying to arb things up.  That last hour press on gold Friday, for example.  It doesn’t take away from the 10 year being just over 2% and it doesn’t mean we are out of the financial woods yet.

The reason the ABS analogy is useful is this: 

If you slam on the brakes on ice too hard, you lose control.  By the same token, when the Fed slammed on the brakes, they have done so in a measured way.  They don’t want to lose control.

Ideally, rates will bottom out over what’s left of summer, we will see a tiny increase in rates in September.

This will drive people by the thousands to lock-in real estate deals because yes, rates will revert to historical norms and they are far below those levels now.

When the herd starts to move into real estate (big jump in Housing data) then the Fed can pump the brakes just so.  Enough to get the economy going again, but not so much as to send things into hyperinflation.

Gold prices, even with the Friday bump are telling us the Fed is still in control, but the reality of the Long Wave in Economics is the terrible bottom is not in yet.

In order for the meaningful bottom to arrive, we need to see a massive destruction of both debt and savings – none of which has happened yet.  Check with the Greeks and Cypriots on how much fun this is.

But the amazing part is that the doomsters are saying “World Ends this Fall!!!

No.  Go look at the data.  Go look at Trader Bart’s M3b.  Go continue the growth rate of money from the 2009 point where print to save became the regimen.  The Fed as I read it has yet another Trillion of QE they could make up, if they really wanted to.  And, if things get bad, they will.

So for now, we continue with a very skeptical off-planet perspective.  The Fed is pumping the brakes, trying to arb up rates.  When rates go up, people will revert to the “Buy now before prices go up” mentality and the economic recover sees our one more massive upside.

On the other hand, an accident at a major player could spin the world into the financial abyss. 

We’ve been telling you to keep an eye on Deutsche Bank, for example.  New CEO is sounding less than upbeat about legal problems and just Friday key counsel stepped aside.

imageThe reason for concern here is evident when you look at the Comptroller of the Currency’s most recent quarterly report:  Banks are back to increasing their Net Current Credit Exposure (NCCE).

We seem to be building towards another 2007-2008-like spike and you know what happened at that spike high in 2009 – the world was ending as real estate imploded.

Deutsche Bank is huge.  In one story back in June when the co CEO’s were “shown the door” DB’s derivatives book was placed at $54-trillion.  To put that into perspective, the US Gross Domestic Product is less than $18 trillion.  Thankfully, this is all supposed to be hedged.

All of which sets up a fascinating question the markets may be answering as we head into the fall.

“Are the problems in Deutsche Bank big enough that they might need to be helped or (God forbid) bailed out? “  And the follow-on question is “Who’s big enough to do that?”

I’ve got a crazy pet theory about how to bail out a “Too Big to Bail” problem – should ever one come along.  And Deutsche Bank – should things blow up – might be an interesting test case.

Obviously US taxpayers would scream bloody murder if there was a move to bail out a foreign bank.

But there’s another way to have an  international bailout of a super player.  And that’s what I’d describe as the “Distributed Screwing” approach. 

Let’s say an International Monster like Deutsche (though I don’t think they will) ran into trouble.  What would happen if there was a “structured failure.”

Under such a scheme, the Monster Bank would “stiff” US banking counterparties in a proportional kind of way.  Laying off their cost of a bailout on US and other country’s banks who did business (as counterparties) to the Monster Bank.  It’s be like a deliberately inverted Herstatt effect…

The slick thing about this is it spreads the pain around, no one in the US could object to saving the “poor victim” US banks, and should a little “extra” be distributed to the rest of the derivatives poker players at the table, then the Monster player could be saved without the host country having to put up a dime.

It’s all theory, mind you…and a nutty one at that.  But crazier things have happened.

Still, this is not an immediate problem.  Big problems – like elephant pregnancies – take a while to gestate.  Between 617 and 645 days, depending on if you are talking Asia Elephants or African Elephants.

I’m guessing the gestation period will be about that long for the Teutonic species of elephant, too.  Then we shall see if a crisis is delivered.  But if it is, Ure’s Distributed Screwing Theory might just show up.  That’s how Depressions work…destruction of debt and savings.  A global Elephant’s death could do it all.

Ferguson’s Social Suicide

To mark the one year anniversary of violent death in Ferguson, there’s a quote in a Reuters’ story over here that’s worth reading:

These were criminals, they weren’t protesters,” he said of the shooters. “There is a small group of people out there that are intent on making sure that we don’t have peace that prevails.”

Unfortunately, it is a case of social suicide.  A community that looked like it was beginning to get back together has, once again, been shoved in the direction of social suicide by what I am just speculating are the same people who support anarchy and don’t believe in the rule of law – unless it’s theirs.

It’s Called Payback

The story this morning out of Turkey about deadly violence in Sirnak and Istanbul may not seem like a big deal.

But it begins to fall into place when you remember the US just sent half a dozen F-16s to Turkey in order to launch faster attacks in the region.  And now we are going after Syria directly along with ISIS…and from where?  Why, Turkey, of course.

So look for Turkey to be blown sky-high with some frequency.  The thinking of the opposition (Syria/ISIS) is that even though asking the US to leave Turkey won’t work, if the country is blow up from under moderate leadership, they will have to flip.

Summer Rally Arriving?

Dennis Lockhart of the Atlanta Fed speaks today.  We’ll see if he hints toward a hike in September, or not.

Not much else going on except some bond rates and then productivity which comes out tomorrow.  To my reckoning, celebrating high productivity is dead wrong.  At 100% won’t we all have been replaced with robots?

Dow futures were up about 110 when I looked.  Which might be the start of the run toward the average annual high date:  August 26 plus or minus a couple of weeks.

Do you regret not buying bushel baskets of cheap call strikes for the August option expiration last Friday when they were cheap? You might get better odds on the Strip.  At least there you can get free drinks.

Matter Goes Shapeshifting

A new NOvA experiment gets into morphing neutrinos with interesting results.  Not sure how that turns into a free lunch or steak and lobster, though. OK, interesting if you’re a neutrino, then.

ChiComs Back Room

The  Communist Party of China is meeting at a what-passes-for-posh resort this week to decide on their country’s future.  What happens is this is where the real deals are made and then get rubber stamped by the Central Committee.

China watchers are keeping an eye on two things:  The bouncing on “corruption” charges of a former retired military fellow with some big horsepower, which means China may be thinking in terms of a tri-stable world power structure.

And China seems intend on naming the successor to the Dalai Lama.  Just saying, when a political party gets to pronouncing approved reincarnations, it is a bit much.

3 thoughts on “The Federal Reserve’s ABS Braking System”

  1. always seems like George and American gurus have 1 solution to fix anything . the problem they created by the way AND terminal for the American empire 4th reich.. and that is .. !!!!!!!!!!! smash gold with gold you haven’t got .. wake up the world aint buyin ussa or fed problems , bad luck..

  2. ” no one in the US could object to saving the “poor victim” US banks,”

    What ! ? ? What ! ? ? What ! ? ?

    There is at least one, that one being me! If capitalism is to be an honest economic system then too big to fails need to fail and let the chips fall where they fall. Saving the weak weakens the whole. Letting the weak die strengthens the whole. “Victim” hazards are a given and one should be prepared for that circumstance. Be he man or corporation.

  3. “I am just speculating are the same people who support anarchy and don’t believe in the rule of law – unless it’s theirs.”…Are you saying that these were police/paid provocateurs?

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