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October 07, 2008

Peak US Dollar And Peak US Treasuries Likely Occurred Today
by Richard in Bellingham

In a cultural, political, and economic sea change, the US Central Bank announced sovietization of lending

Today the US abandoned Milton Friedman's neoliberal laissez faire economic policies, that is free marketplaces, where privatization is the operative principle, to embrace sovietization of lending.

In as much as banks are no longer lending in the commerical paper lending marketplace, due to a lack of trust between lender and debtor, the Federal Reserve has announced a framework agreement and facility to become the sole lender in the commercial lending marketplace.

The Federal Reserve has stepped up to the plate to provide liquidity so companies can meet payroll, cut checks, and continue to issue purchase orders of consumables, services and raw materials.

Thus unfreezing a condition of lending gridlock, that is credit gridlock, that has existed since September 11, 2008, when banks found they could not sell stock to raise capital, due to the questionable value of their assets, that is the debt, they hold on their books.

The Federal Reserve today has become provider of liquidity and capital to facilitate ongoing economic activity.

The Federal Reserve's role has expanded to become the Bank of Banks, that is, the nation's bank.

The Federal Reserve will become the United States' monetary authority and capital provider.

US Federal Reserve announces Commercial Paper Funding Facility, CPFF, to purchase U.S. commercial paper

Craig Torres of Bloomberg relates in article Fed to Purchase U.S. Commercial Paper to Ease Crunch that the Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today's action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

The Fed's action is seen to provide liquidity to end the liquidity run in the commercial paper lending marketplace

The Fed's efforts are aimed at "stemming the bank-run-like panic," said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. "The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market."

Fed officials in a conference call with reporters didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase. The officials also declined to specify when the purchases would begin.

The central bank's special purpose vehicle will be big enough to backstop the entire market, one official said on condition of anonymity.

Issuers will be able to sell commercial paper to the Fed up to the average amount they had outstanding in August, an official said.

Policy makers began considering buying commercial paper several weeks ago as the market began to seize up, with borrowers increasingly only able to raise funds on a short timeframe, even just overnight, officials said.

The Fed's unit will buy three-month commercial paper, which should help issuers extend the maturity of their borrowing, an official said.

"While we have continued to fund without disruption, the Fed announcement today is an important development that will help restore confidence in the market and facilitate more lending," General Electric Co. spokesman Russell Wilkerson said. "This is a positive move and we applaud the Fed's decisive action." The company is the biggest U.S. commercial paper issuer through its GE Capital finance unit.

Yields to fall

Fed officials anticipate that yields will come down significantly as a result of their initiative.

Yields on top-rated overnight U.S. commercial paper dropped 0.74 percentage point today to 2.94 percent, according to data compiled by Bloomberg. Borrowing for seven days increased 1.25 percentage points to 4 percent.

The Treasury's deposit with the Fed's special purpose vehicle will be substantial, officials said. The funds won't come from the $700 billion rescue plan authorized by Congress last week.

Stocks initially climbed and Treasuries sank after the Fed's announcement, while shares later turned lower. The Standard & Poor's 500 Stock Index was down 0.13 percent at 1,055.50 at 11:49 a.m. in New York. Yields on benchmark 10-year notes climbed to 3.51 percent from 3.45 percent late yesterday.

Today's announcement comes only hours before Bernanke gives his Economic Outlook today,

Today's announcement came hours before Fed Chairman Bernanke speaks on the economic outlook at 1:15 p.m. in Washington. He and Treasury Secretary Henry Paulson held discussions yesterday as stock markets slid and money market rates climbed as the crisis deepened.

The Fed's new unit will buy three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate, which is a measure of traders' expectations for the Fed's benchmark rate.

Fed officials on the conference call indicated that they would like the facility to be a backstop, which would suggest the special vehicle's rate would be set at a slight penalty to normal market rates. They declined to answer a specific question as to whether the rate would be set above current rates, or below, which would constitute a subsidy for borrowers.

The initiative is seen as a funding backstop

"The Federal Reserve will consult with market participants regarding appropriate spreads that are consistent with the facility serving as a funding backstop under more normal market conditions," the Fed said.

The commercial paper facility is heralded as only temporary

Commercial paper purchased by the vehicle must be rated at least A1/P1/F1, the Fed said. Issuers will pay the unit an upfront fee based on the commercial paper initially sold to the vehicle. The vehicle will cease buying commercial paper on April 30, 2009, unless the Board of Governors agrees to extend it.

The Fed will cap the amount of commercial paper each company may sell to the central bank.

The Fed announced yesterday that it will double previous facilities of TAF, TSLF, PDCF and emergency actions to as much as $900 Billion; and is considering announcing other initiatives as well.

The Fed yesterday said it will double its cash auctions to banks to as much as $900 billion, and telegraphed today's announcement by saying it was looking for other ways to alleviate liquidity strains.

The Fed's move is "very unusual, very aggressive and a very bold step," said Chris Varvares, president of St. Louis- based Macroeconomic Advisers LLC, a forecasting firm. Assuring that corporations can fund their short-term cash needs "is absolutely essential."

Emerging Market Bonds Fell

There was not a central bank rescue facility announced for the emerging bond market; EMB fell 2%.

Municipal Bonds Fell

The Federal Reserve did not respond with a facility to Governor Arnold Schwarzenegger's plea for assistance. Nor was there a Federal Reserve facility announced to address the closed municipal bond market for other states such as Massachusetts.

The iShares S&P National Municipal Bond ETF, MUB, fell 2%.

Jeremy R. Cooke of Bloomberg in September 30, 2008 article reports: "U.S. state and local government bonds are headed for their worst quarterly performance in as much as 14 years as a wave of Wall Street consolidation undermines support for the municipal market. Tax-exempt bonds have fallen 3.15 percent since the end of June, according to Merrill Lynch & Co.'s total-return Municipal Master Index. The quarter's decline may exceed the 3.18% drop in the second period of 2004, which was the steepest since the 5.75% decline in the first three months of 1994."

Jeremy R. Cooke of Bloomberg in October 3, 2008 article reports: "U.S. states and municipalities were all but shut out of the tax-exempt bond market for a third week, as borrowers managed to sell less than 15% of a typical week's new fixed-rate issues, data compiled by Bloomberg show ... 'This market has run into trouble again,' T.J. Marta, a fixed-income strategist at RBC Capital Markets ... said ... 'The most recent dislocation will exacerbate the negative developments already taking place for state and local government finances.'"

Michael McDonald in October 2, 2008 Bloomberg article repots: "Massachusetts Governor Deval Patrick said he is seeking budget cuts amid financial market turmoil that forced the state this week to cancel plans to borrow money to fund operations. The governor, citing a $223 million shortfall in tax collections, ordered a spending reduction of 7%. The state this week canceled the sale of commercial paper as investors boycotted the markets."

These reports tell me that the municipal bond market has utterly broken down. This is a silent neutron bomb that is going to cause massive layoffs in state and local governments; these governmental units will basically have to go into shut down mode; except for some low level of law enforcement there will be a swift shut off of services.

US Stocks fell

Stockcharts.com reports that the overall US stock market, VTI, fell 6%.

Kate Gibson of MarketWatch reports that "investors offered only a tepid cheer for the Federal Reserve's latest move to ease frozen credit markets."

Peter Bookvar, equity strategist at Miller Tabak said: "How aggressive are you going to be ahead of earnings season?" .... "We have such frayed nerves; people are afraid to jump in no matter what." Bookvar related of the US and other central banks: "It's going to be raining money for the next couple of months."

After those midday remarks, the yen carry traders, who have been the principal investors in the financial sector since July 14, when they sold oil, USO, commodities, RJI, and gold, GLD, have been looking for a reason or several reasons to sell their investment in the financial sector; and today they found three:

1) a realization that the Fed is the sole provider of credit at least to the corporations; and that the banks are now simply walking dead men.

2) a fear of D-Day, that is this Thursday, when the first batch of credit default swaps are to be settled on the bankruptcy of Lehman Brothers

3) the announcement that Bank of America, BAC, fell 26% after reporting a 68% profit fall, slashing its dividend and saying it will attempt to raise up to $10 billion in common stock.

The yen carry traders sold their investments in the financial sector, which produced these loses: XLF -10; which induced homebuilding ITB -10, and real estate ICF -10, IYR -9, KBE -9, IAI -9, IAT -9.

The BRICS, EEB, sold off, producing these loses as well EWZ -10, EEB -10, OIH -10, SLX -10,

Among the financial-sector stocks weighing most heavily on the S&P, General Growth Properties, GGP, which fell 41%. The Chicago-based owner of 200 malls nationwide on Monday suspended its common stock dividend and announced the departure of its chief financial officer.

Also weighing on the S&P, Apartment Investment and Management, AIV, fell 27%. The Denver-based company is among the nation's largest owners of apartment complexes, and recently said it expects to take a $3 million to $6 million hit in the third quarter due to hurricane damage to its properties.

The yield curve has exploded higher

The yield curve had been steeping it exploded higher as is seen in interest rates, $TNX:$UST2Y, and in ETFs, TLT:BIL

Peak US Treasuries may be in, as the US Treasuries fell, they should have risen on today's lower stock values.

Today may be the end of the "so called" flight to safety in US Treasuries even if the Fed announces a surprise rate cut or announces even further facilities to provide liquidity.

Stockcharts.com reports SHY at 83.95 ... SHY

Stockcharts.com reports TLT at 99.28 ... TLT

The interest rate on the 30 Year US Government Bond ... $TYX

The interest rate on the 2 Year Treasury bill ... $UST2Y

The interest rate on the 10 Year US Government Note ... $TNX

Those invested in DXKSX found they were invested the wrong way.

We have the 'mother of all lending spreads'.

Unfortunately the US is going to a zero US central bank rate; now stealthily, soon overtly.

Scott Lanman of Bloomberg in article Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut reports that the Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.

The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.

"Absolutely, it's a stealth easing," said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher".

As the US Government official rate is moving to zero, the world's interest rate as defined by the Ted Spread remained high today at 3.4; and not only that, there was no lending again today, that is, the markets remain frozen until the Fed's CPFF facility kicks in, so thus the market place interest rate is infinitely high, that is beyond measure.

A Ted Spread's above 2.0 for any extended period of time relates to me that economic heart of society, that is lending, has suffered a cardiac arrest. The failure of the Ted Spread to fall below 2.0 tells me that capitalism and investing is dead and cannot be revived. With a Ted Spread above 2.0, trust between lender and debtor has been destroyed.

The only thing that remains is for authoritarian government to arise, and to enforce framework agreements that have already been declared such as the Security and Prosperity Partnership of North America, the SPP. And to engage in greater collectivization as we see today, with the announcement of CRFF, where through working groups and councils, such as the NACC, and stakeholders appointed by government and industry, the factors of production are overseen, and capital and natural resources expropriated, for the benefit of what might be termed "the homeland."

I find the following suggestion for a lower central bank interest rate "terrifying", as I believe interest rates should be going higher not lower; yes I abhor low interest rates.

John Fraher in Bloomberg reports: "In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.

The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.4 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S. The rate represents the pace of inflation investors expect over the life of the securities.

All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.

"If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate," he says. "What's the point of holding back?"

My observation is that the spread between the US government central bank interest rate, and the world market interest rate is 'the mother of all lending and interest rate spreads'.

The Fed's action must succeed to prevent a catastrophic 'financial system black out' that is a 'complete financial system shut down'.

Factors why banks are unwilling to lend include:

an awareness of rising unemployment raises the risk the debtor will not repay.

an awareness of the explosive danger that derivative counterparty risk provides to debtors.

an awareness of the risk of their own exposure to default events on credit default swaps.

an awareness of that their own stock value is going to fall rapidly, threatening their capital position, whereby they will have to close.

The hope is that the Fed's actions of being the insurer and provider of commercial paper will be broad enough and implemented quickly enough to prevent an economic shutdown from occurring at a rate faster than it did in the 1929 to 1932 Depression.

Today, the Fed is boldly going where no Fed has gone before. I do have to question, does the Federal Reserve have the legal and constitutional authority to do what it is doing?

I do not favor the US government being the lender of only and last resort. The provision of CPFF is a cultural shift of epic proportion to state corporatism, that is state corporate rule, and it is the nail in the coffin for the AAA rating of US Treasuries as well as the US Dollar.

The government printing presses will simply be printing money, which means that when unemployment increases beyond a certain future level, hyperinflation for food and clothes and shelter will result.

And a catastrophic 'financial system black out' that is a 'complete financial system shut down' may occur anyway, as panic unfolds over today's significant stock market sell off and a growing realization of the failure of the municipal bond lending market.

Gold rose to strong resistance

The chart of the gold ETF, GLD, shows a dragonfly candlestick, after a 3.5% rise to $87.25 ... GLD

Gold rose to close at $884 ... $gold

Peak US Dollar may be in given the nationalization of the commercial paper market

The dollar bullish ETF, UUP, is manifesting bearish at 24.95 ... UUP

The US Dollar, $USD, closed down at $81 ... $USD

Investment Application

Because of financial system instability and lack of liquidity, I recommend diversification of investment in gold in four locations immediately: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.

Richard in Bellingham
The Resourceful Bear Blog

I blog to communicate an observable and ongoing investment demand for gold, the 'Liquidation Thesis', and the fulfillment of Bible prophecy.

My investment maxim is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength.

Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

I'm the Resourceful Bear, and I say: "Interest rate inflation, producer price inflation, and consumer product price inflation is on the way and that is a gold thriller, and a stock and bond killer".

I am a blogger who writes on the investment demand for gold; I suggest that before anyone make an investment decision, that one consult with a licensed investment professional.

Copyright © 2008 Richard in Bellingham

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