Here's a little closer look at both FCB and Fed "accommodation" (Mr.Creosote's wafer thin mints). Personally, I think the "get long something" (including gold) cognoscenti playbook crowd is barking up the wrong tree, and is now way offside. I think there is only one trade left, short, via puts (that you can afford to lose), and/or in Treasury bills (*). SPY, XLF and others have implied vols of about 11-12, gifts. The fuel and wafer thin mints are being withdrawn, and that's why you saw and will continue to see pressure on rates. Now that the US needs to go to market to finance the Gulf recovery, right as an economic downturn (less tax receipts) unfolds, this will become even more critical.
FCB custodial holdings (last 13 weeks):
June 15: 1.436 trillion
Sept 14: 1.460 trillion
Added 24 billion, or 96 billion annualized, down from 200-300 billion in 2004- mid-2005. FCB's are on strike, or overstuffed.
Did the Fed monetize the difference? So far, only partially, not aggressively.
SOMA balance sheet (securities held):
June 15: 725,482
Sept 14: 732,393
That's up about 3.8% annualized, not especially out of line, and certainly not Mr.Creosote friendly.
In the three weeks post Katrina, they have monetized a bit more, but is this just what a "normal" CB might do under the circumstances? We will have to see going forward if this is new policy?
August 24: 728,393
Sept. 15: 732,553
federalreserve.gov
(*)
Not the same as a "government securities" money market. A bill is 3-6 months.
Charle MacKay attacks this from a going forward perspective. I think the jury is defintely still out however. If the FCBs are there, a ramp up of Fed moentizing may not matter much.
The heavy red rain of increasing federal budget deficits must be at least partly financed by the Fed, otherwise a capital squeeze will quickly ensue, causing interest rates to rise and badly crimping the stock market.
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