Great chart, via Plexus Asset Management:

>


Fed_mechanism_3

Its so simple! How can this not work?

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Source:
Why the Fed’s rate cut did not come as a surprise
Ryk de Klerk
Plexus Asset Management, August 17, 2007
http://investmentpostcards.wordpress.com/2007/08/17/stock-markets-how-deep-is-the-rabbit-hole/

Category: Credit, Currency, Derivatives, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

62 Responses to “Major Central Bank Intervention in the Current Global Liquidity Crisis”

  1. KP says:

    Perverse liquidity –> Inflationary pressure –> Diminished returns –> Increase risk taking/leverage in order to keep up with / overtake inflation –> breeds MORE inflation –> too much leverage makes the wrong bet –> game over –> taxpayer bailout

    Rinse…10-20 years…Repeat.

  2. Peter B says:

    The problem that the Fed tried to cure (I’m guessing since they didn’t tell me) with their discount rate cut, easing liquidity in the asset backed commercial paper market, didn’t work today. The cost of borrowing in the ABCP market has actually gone UP today (look at SLIQ GO on bloomberg), evidence of continued reluctance to lend based on the collateral being posted. The 2nd problem the Fed wanted to address was to try to ease the constraints in the secondary mortgage market where the CFC’s of the world couldn’t securitize and sell the mortgage’s they were originating. It will take some time to see if that was successfully addressed. Other credit signals did improve today but just modestly as the 10 yr swap spread is down but is still above Wednesday’s close and the LCDX is higher but just back to where it was last Friday. The lack of response is what will get the Fed cutting the Fed Funds soon but will lower rates matter to an overly leveraged economy?

  3. Eclectic says:

    http://finance.yahoo.com/q/bc?s=%5EIRX&t=1d&l=on&z=m&q=l&c=

    I suppose it might just be a little like money laundering:

    Dickie Fred (“Discount Window” DF): – “Hey… you got any more of that goooood stufff for me?”

    Trickie Notie (TN): – “Yeaaaa boy!… Here, this is some choice stuff… just picked it up… what’ll you give me?”

    DF: “It’s good all right… Giveya 12… but not less!”

    TN: “You shittin’ me Dickie?… Why, I’d flush this shit for more than 5.25!”

    DF: “10?”

    TN: “Get lost!”

    DF: “9 but that’s it!”

    TN: “Bullshit… I’ve got you by the balls… I’ll fuck you over on Kudlow’s show… wanna try me?”

    DF: “*8* then…?”

    TN: “5.5″

    DF: “Sheei-ittt… can’t go 5.5!”

    TN: “5.75!… or I’m walkin’ and I’ll give the tellers your phone number!”

    DF: “AlRiGhT!!… done!… (mumbles)mooffooofoo..shfiittt.m.oooffoo.”

  4. Eclectic says:

    Breaking news:

    DF (text messaging TN): “Hey!!… call me… hurry… I need a call.”

    TN (return): “Oh, so… you need some more of the good stuff, huh?… a little more of that wicked stuff you like so weellllll… Zat it?…. Yeaaahhhh, I’m right, ain’t I?”

    DF (text): “No… it’s you… YOU need it… I’m beggin’ youuuuuu…. comee baccckkkk!!!… You need it (on knees, begging)… come on… back for some more!… bring anything you got… I’ll do toilet paper at five-seven-five!”

  5. SPECTRE of Deflation says:

    Barry I know of another chart that could be handy. It was used during the cold war. I think it went, bend over and kiss your ass goodbye towards the end. They have decided to monetize the debt of even the worst paper out there, and the borrowers can roll it over after 30 days if they like. The dollar is total toast. Junk silver sounding damn good right about now.

  6. F. Frederson says:

    They left out the boxes where every two bit middleman profits wildly for moving the debt on towards the lender of last resort – the taxpayer.

  7. Eclectic says:

    http://finance.yahoo.com/q/bc?s=%5EIRX&t=1d&l=on&z=m&q=l&c=

    Anybody that thinks that this is a bullish chart for equities is just not in touch with reality.

  8. Fred says:

    We had a RARE 90% UP day today, and it couldn’t have come at a better time. It is very rare (and bullish) to have a 90% up day so close to 90% down days. The historical stats are siding with the bulls at this point — despite the complacency of the bears (put call went out at 1.2).

    Remember — there is $2.68 TRILLION sitting in cash now. Weak hands were flushed out of the market this week.

  9. Winston Munn says:

    The FED 4-Step plan of Economic Management

    Step 1: Uncover problem
    Step 2: Throw money at problem
    Step 3: Problem solved
    Step 4: Uncover problem

    Ad infinitum…..

  10. Fred says:

    Well Eclectic…historically, there have been 22 similar drops in that short term yield…the average 12 mos equity returns have been ~ 22% from that point.

  11. Justin L Tindall says:

    Fooking, fooking, fooking bad. Where it ends is in the shitter. But one of your cohorts says buy, buy, buy! lol

  12. rj says:

    2007-08-17 11:51:21
    I was wondering about this story on the CFC emergency loans yesterday afternoon, and posted the following to the bits bucket, noting the disconnect between the writer’s opinion about the “tough times” for the banks involved, and the big pop to the banks’ share prices late in the day. Today it all makes sense, including the evidence that Da Boyz had advance notice a fix was in.
    —————————————————————————

    2007-08-16 16:26:25

    Can anyone explain what got the bulls so excited today about the CFC plunge protectors of Wall Street? Does the Fed offer unreported compensation to the IBs with which it contracts to carry out plunge protection services?

    Banks’ poorly timed loans to Countrywide
    J.P. Morgan, Bank of America, Citigroup committed to $11.5 billion in credit
    By Alistair Barr, MarketWatch
    Last Update: 5:33 PM ET Aug 16, 2007

    SAN FRANCISCO (MarketWatch) — Call it unfortunate timing for bankers.

    A group of 40 of the world’s largest banks lent Countrywide Financial Corp. (CFC:Last: 18.95-2.34 -10.99% 6:52pm 08/16/2007) $11.5 billion this week under credit agreements that they committed to as far back as 2006.

    The loans may help relieve a credit market squeeze on the nation’s largest provider of home mortgages. But they come at a tough time for the banks involved.

    Countrywide didn’t disclose which banks lent the money and a spokeswoman didn’t immediately respond to a request for a list of lenders.

    However, regulatory filings that Countrywide had provided the Securities and Exchange Commission show that J.P. Morgan Chase (JPM: Last: 45.47+2.47 +5.74% 6:49pm 08/16/2007) , Bank of America (BAC: Last: 49.85+1.62 +3.36% 6:53pm 08/16/2007) , Citigroup Inc. (C: Last: 47.55+1.94 +4.25%) , Lehman Brothers (LEH: Last: 54.75+3.18 +6.17% 6:50pm 08/16/2007) , Merrill Lynch (MER: Last: 71.13+2.19 +3.18% 6:52pm 08/16/2007) and Morgan Stanley (MS: Last: 58.97+2.34 +4.13% 6:52pm 08/16/2007) were among the banks that signed up to the loan commitments.

  13. Eclectic says:

    Billy Gross?

    …Are you gettin’ the notion that you got head faked out of your 3-5 year vision?

    Given current c-i-r-c-u-m-s-t-a-n-c-e-s can we expect the epistle to change?

    What was it you’d been saying about the 10-Y-T?… What wuzzit?… Wuzzit sumpin like… say?… down in the 3s?… Whuzzat what I’m ‘memberin’ wuzztha story?

    I ‘member thinkin’ you wuz jiss about riite!

    What say ye now, Billy?

  14. livefreeordieslow says:

    I just gotta relate this real-life anecdote.

    I went to my Wells Fargo branch in Silicon Valley b/c I upgraded my banking status to VIP (called it “PMA”) and that waives all banking fees.

    All I wanted was to remove $75/y fee from our untapped $75k emergency HELOC.

    But within <10 seconds of sitting down at the desk, the young banker – without so much as asking my name – offered to bump the limit from $75k to $250k. No charge, no strings.

    And…upon acceptance of his generous offer my HELOC entry interest rate would drop by .5%

    So who says credit done run dry? At my bank, it’s Friday and the taps are flowing.

    Afterward, I asked my fearless banker about the week’s credit turmoil. He looked at me blankly, and said, “What credit turmoil?”

    On principle, I then went to the teller, withdrew $1,500, bought 2 gold coins down the block.

  15. livefreeordieslow says:

    I just gotta relate this real-life anecdote.

    I went to my Wells Fargo branch in Silicon Valley b/c I upgraded my banking status to VIP (called it “PMA”) and that waives all banking fees.

    All I wanted was to remove $75/y fee from our untapped $75k emergency HELOC.

    But within <10 seconds of sitting down at the desk, the young banker – without so much as asking my name – offered to bump the limit from $75k to $250k. No charge, no strings.

    And…upon acceptance of his generous offer my HELOC entry interest rate would drop by .5%

    So who says credit done run dry? At my bank, it’s Friday and the taps are flowing.

    Afterward, I asked my fearless banker about the week’s credit turmoil. He looked at me blankly, and said, “What credit turmoil?”

    On principle, I then went to the teller, withdrew $1,500, bought 2 gold coins down the block.

  16. ac says:

    Nothing personally, but that means nothing. Nor will you actually get the credit.

    Nice selloff coming again. Until this fools figure it out, they will continued to get played.

  17. SPECTRE of Deflation says:

    We had a RARE 90% UP day today, and it couldn’t have come at a better time. It is very rare (and bullish) to have a 90% up day so close to 90% down days. The historical stats are siding with the bulls at this point — despite the complacency of the bears (put call went out at 1.2).

    Remember — there is $2.68 TRILLION sitting in cash now. Weak hands were flushed out of the market this week.

    Posted by: Fred | Aug 17, 2007 4:06:49 PM

    I will tell you what else you had. After pumping tens of Billions into the system including taking MBS paper and lowering the Discount Rate one half percent including now taking the toxic shit for a minimum of 30 days, the DOW managed to lose 160 points for the week. Congratulations.

  18. Winston Munn says:

    During all this turmoil, did anyone else happen to notice the economic data for the past couple of days?

    Housing starts: down
    Building permits: down
    Initial claims: up
    Philly Fed: down
    Michigan Sentiment: down

    There is still a real economy out there with real problems.

  19. Fullcarry says:

    This is a very amusing comment thread. My favorite though has to be a commentator named “SPECTRE of Deflation” telling us the Dollar is toast.

    :):)

  20. Eclectic says:

    SPECTRE,

    I must say… you are getting a re-mArKaBLE number of highly complimentary postings. It must be nice to have so many devoted fans.

  21. David says:

    The article made a good point, “the conclusion remains to rather err on the conservative side with whatever you do and not to frown upon holding cash.” or as Proverbs 21:5 said, “The plans of the diligent lead surely to plenty, But those of everyone who is hasty, surely to poverty.”

    Now for the big picture, for Bernanke and major brokerage firms, as Shakespeare said in ‘The Merchant of Venice’ “No. Take heed, honest Launcelot,”.

    It is now all about the Dollar, and as the dollar drops, inflation increase, reducing buying power and consumption, stalling the economy.

  22. VJ says:

    Fred,

    Remember — there is $2.68 TRILLION sitting in cash now. Weak hands were flushed out of the market this week.

    Remember – the market is still DOWN by more than 18% from where it was in 2000 in inflation-adjusted dollars.
    .

  23. Whammer says:

    I’m trying to understand why this crap keeps happening, under different disguises.

    Let’s see — in the late 70s/early 80s, there were lots of loans made to developing countries that didn’t perform, and were bailed out.

    In the late 80s/early 90s we had the whole S&L debacle.

    Now we have the subprime mess.

    Every time, people get filthy rich making bogus loans on ridiculous terms to people who have no way of paying them back. Then it turns into a gigantic crisis that requires governmental intervention.

    Why can’t we regulate these mofos to begin with???????

  24. jake says:

    i retired with $3 million in 1998…i put all of it in t bills…slept great at night….then the knuckleheads had the dotcom bubble and bust…..t bills went to 1%…barely scraped by for awhile…..ok t bill rates bounced back…..to 5%.. great i said….now these ding dongs produced a housing bubble or credit bubble..now its bursting again..t bills probably heading back down to 1% again..no wonder nobody saves anymore.

  25. dukeb says:

    So this has me wondering what will be the deal when all of these new private exchanges run into a situation like the public exchanges have now???

  26. Fullcarry says:

    Dear Jake,

    Why you were sleeping soundly while losing 50% of your net worth seems very intriguing to me. Lets see while you owned TBILLS earning something between one to five percent the price of most assets doubled. Whether it is Gold, Real Estate, Gasoline or Corn your purchasing power has been cut in half.

    Still its good to know that you seem concerned that your nominal returns might get cut from 5% to 1%. I hope that doesn’t keep you up all night.

    Wiki’s definition of Money Illusion: http://en.wikipedia.org/wiki/Money_illusion

  27. wunsacon says:

    Jake, unfortunately, fullcarry is right. Are you that leery of equity risk? There have to be some safer bets that you’re willing to take. Through inflation, you’re being taxed at higher than nominal rates.

  28. whipsaw says:

    hmmm, today’s exercise is a pretty good illustration of why you only bet against the so-called market sparingly and if you are nimble. All of those August SPY puts that looked like gold at lunchtime on Thursday wound up as crap today via legal manipulation. The only things I find remarkable about this are that 1) I did not have any puts and 2) I have March SPY calls and did not puke them yesterday, so they are only a bit under water now. Since things worked out fairly well for me, there must be some serious imbalances at work. :)

    Actually, I don’t know what to make of all this. I am not in the camp that believes that the Fed should just let things burn down- I could care less about the fate of some hedge fund cowboys who are upside down or what happens to flippers who overextended themselves. But I do care about the stability of the finance system and, within limits, about the little guys who are trapped in toxic mortgages on their homes because they were sold on The Dream by a system that was supposed to have been regulated, but was not. If things burn to the ground, then that has economic and social consequences that extend well beyond the people who deserve to be pounded.

    In other words, it ultimately affects everybody in an adverse way, including me, and that’s where I draw the line. While many have pointed out that Bernanke + Co. have now openly acknowledged that the substance of the last FOMC statement was nonsense, that probably doesn’t take into account the notion that double-talk is part of the Fed’s mission and is just one aspect of the Corporate State.

    So what happens next? I’m guessing a formal rate cut at the next FOMC meeting, along with some serious monkey business from Paulson on the Treasury side of things. In 6 weeks, this whole episode will have been written off as a scare by the MSM and the markets will be jammed higher thru the end of the year regardless of what “should” happen.

    Before the bonfire is lit and the flames begin, I should say that I am not suggesting that the economy is “robust,” that I think that any aspect of US fiscal or monetary policy makes any sense over the long term, or that there is any basis for equity markets to rise in the face of myriad problems. I am just saying that they will do so anyway because the house determines the odds and you won’t win if you stay at the tables long enough.

    ==whipsaw==

  29. jake says:

    for 40 years you could get 5% in a bank passbook savings and inflation was much lower….now they lie about inflation and give you next to nothing…the bond vigilantes are gone…..doesnt pay to save like it used to…bail out the speculator….bail out the speculator….makes me sick

  30. Winston Munn says:

    Monetary inflation is a requirement of a debt-based fiat currency system; it should come as no surprise that the Fed will do anything in its power to stop the mortal enemy of the system – deflation – including dropping money from helicopters if need be.

    The markets will move up with each infusion of cash, but unless there is real demand for debt the runups cannot sustain.

    The consumer is spent; housing is in recession; income growth is stagnant; capex has no reason to grow without the consumer leading; manufacturing is stalling even with a falling dollar.

    The only demand is from those in the money game, who try to create wealth with the alchemy of debt to gold. That kind of demand is unsustainable.

  31. The question that should be posed is, “Why would anyone invest in something they do not understand?” As complexity increases, so does risk. Unfortunately, complexity becomes a synonym for “exotic,” which has a positive context in the human mind, which brings about temptation. You can get the rest…

  32. jake says:

    heard tonight a hedge fund was leveraged 40-1…bail them out….in the next 5 years they’ll go up to 80-1..

  33. toady says:

    rj, you are right.

    The big players who made bad calls get liquidity to stay afloat while they save their asses; CNBC tells the small guy that the FED says its ok to get back into the pool and prop up market prices; and next week, the big players will cash in/out and leave the small guys holding the bag.

    And all of this wouldn’t have been possible without Uncle FED rushing to the aid of the big players and help sticking it to the little guy.

  34. slick says:

    “But I do care about the stability of the finance system ”

    Whipsaw – you mean the ILLUSION of stability. Go back to sleep, folks. Nothing to see here (until the next blowup).

    How long before people catch on? This isn’t like the old days. The public *IS* learning (thanks mainly to the Internet/tech. Slowly but surely, the faith erodes.

  35. whipsaw says:

    Winston Munn said:
    “The only demand is from those in the money game, who try to create wealth with the alchemy of debt to gold. That kind of demand is unsustainable.”

    I am not so sure that it is unsustainable- I learned a valuable lesson last year about confusing common sense with the alternate financial reality that we live in and came to the conclusion that you will not be well served by putting money on strong convictions.

    If you accept the idea that money is just a convention (or more accurately, an illusion), then it has potentially boundless supply. At least until the locals finally get tired of 200% inflation and stage a revolution that takes out all of the money game people to use your term. Until then, they can pretty much do whatever they want and we are nowhere near that point.

    Because global market correlation is fairly close to 1.0, no major nation can really afford to call any other’s bluff and they all just keep marching together creating more fictitious wealth. The only potential show stopper at the moment appears to be Iran via oil threats which is probably why there is such persistent interest in starting a war with them, it certainly has nothing to do with “democracy” or their nuclear ambitions.

    For investing purposes, I would say that a basic strategy would be to assume that equities will be substantially higher in five years than they are now because the power structure will make sure of that. For trading purposes, I would say that common sense is your worst enemy and the only thing worth following is price action.

    ==whipsaw==

  36. Jdog33 says:

    Whipsaw, that might be one of the best comments I have seen on the Big Picture ever.

    People on this board are very intellectually smart, but they are missing the “Big Picture”. It is in very few people’s interest to see the equity markets collapse in the US or around the world.

    As there are no longer any Pensions (unless you work for the govt.) to bail people out of a long-term stock market collapse, there is almost no alternative but for the govt./govt’s to help support the ONLY wealth creation mechanism almost everyone on the planet.

    A crash only helps the perma-bears (of which most in the world probably frequent this board). While 99.9% of the public is helped by equity prices gradually rising over time.

    That being said, I was told today that it is almost assured that this decade will show the least amount of stock market appreciation in the HISTORY of the markets.

    So, let’s not get all hot and bothered about our spectacular bull-run we have had over the last 4 years. It hasn’t been that great folks.

  37. P. K. says:

    Whammer is on to it.
    “I’m trying to understand why this crap keeps happening, under different disguises.

    Let’s see — in the late 70s/early 80s, there were lots of loans made to developing countries that didn’t perform, and were bailed out.

    In the late 80s/early 90s we had the whole S&L debacle.

    Now we have the subprime mess.

    Every time, people get filthy rich making bogus loans on ridiculous terms to people who have no way of paying them back. Then it turns into a gigantic crisis that requires governmental intervention.

    Why can’t we regulate these mofos to begin with???????”

    You could have added the moneycenter/investment banks involved in Mexico in the early 90′s, or the Asian crisis and Russia in the late 90′s.

    Why can’t WE regulate? “We” don’t control “our” government. Just look at the bipartisan pillaging of “our money” in the S.S. trust fund, racking up all those deficits over the last quarter century, before the money has to be paid back to US. Who has benefited from all this?

    And (please correct me if I’m wrong) isn’t it true that what’s going on now with the Fed’s moves lately is helping, not the “non-bank” banks (who need it most, whether rightly or wrongly), but once again the moneycenter/investment banks?

  38. Marcus Aurelius says:

    “In other words, it ultimately affects everybody in an adverse way, including me, and that’s where I draw the line.
    ==whipsaw==

    Posted by: whipsaw | Aug 17, 2007 8:13:21 PM”

    It’s good to know that you understand that you are not an island of independent wealth. Your very personal problem is that when it all comes crashing down (I do hope you understand, also, that nobody but nobody actually “rides” the bull – not even “the powers that be”), you will not be prepared to deal with those who have never had the luxury of surrendering to the illusion. Reality is a cruel thing, and those who have survived at the bottom (and in many cases, to survive at the bottom is to thrive) will literally eat your lunch. The fall will not affect these people “in an adverse way”.

    Many lessons in history – you should check what happened to those who treated the illusion of the never-ending wealth and power of Constantinople as a reality.

    Enjoy.

  39. whipsaw says:

    Jdog33 said:
    “Whipsaw, that might be one of the best comments I have seen on the Big Picture ever.”

    Thank you Sir or Madam, but I suspect that some will disagree and, in any case, the most useful comments I ever read here were from Alaskan Pete before he disappeared to Oregon or Washington. Anybody recall?

    My general view at this point in my life is simply that trying to apply reasonable capitalist theory to actual market transactions will lead to losses in both the short term and the long term. The Borg is running things, has nothing to do with capitalism, and will do whatever it takes to perpetuate itself which means that it will eat you up if you bet against it.

    ==whipsaw==

  40. VJ says:

    RUN ON LA COUNTRYWIDE BANK !

    “At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early ’90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names,” the Times added. “Bill Ashmore drove his Porsche Cayenne to Countrywide’s Laguna Niguel office and waited half an hour to cash out $500,000, which he then wired to an account at Bank of America.”

    The rush to withdraw money — by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company — came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown,” the paper continued.

    “It’s because of the fear of the bankruptcy,” Ashmore, president of Irvine’s Impac Mortgage Holdings, which escaped bankruptcy itself recently by shutting down virtually all its lending and laying off hundreds of employees told the paper. “It’s got my wife totally freaked out. I just don’t want to deal with it. I don’t care about losing 90 days’ interest, I don’t care if it’s FDIC-insured — I just want it out.

    “Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable,” wrote the LA Times Friday. “And federal regulators said they weren’t alarmed by the volume of withdrawals from the bank.”

    STORY

    .

  41. whipsaw says:

    Marcus Aurelius said:
    “It’s good to know that you understand that you are not an island of independent wealth. Your very personal problem is that when it all comes crashing down (I do hope you understand, also, that nobody but nobody actually “rides” the bull – not even “the powers that be”), you will not be prepared to deal with those who have never had the luxury of surrendering to the illusion.”

    Unfortunately, I am not an island of independent wealth and was not suggesting that the only time I cared about things was when it hit me, altho it probably came out that way. I was just saying that once a crisis impacts everyone, it requires special measures.

    I also understand the Constantinople reference, etc., but I have been hearing things like that for 40 years now. If you are familiar with Russian history, you will recall that it took around 200 years for the peasants to finally stage a successful revolt and I suspect that we are in pretty much the same mode now.

    The upshot is that an essentially corrupt system can live longer than you can, so fighting it is pretty futile.

    ==whipsaw==

  42. mdunn says:

    Anyone else notice that the official quoted primary and secondary discount rates were lowered in all FRB regions EXCEPT STL (http://www.frbdiscountwindow.org/CurrentDiscountRates.cfm?hdrID=20&dtlID=51)? Does Poole not voting have something to do with this? The released comment said they were unanimous.

  43. Eclectic says:

    I’ll begin by reproducing part of a quote provided by VJ above (source not provided)

    Quote:

    ["It's because of the fear of the bankruptcy," Ashmore, president of Irvine's Impac Mortgage Holdings, which escaped bankruptcy itself recently by shutting down virtually all its lending and laying off hundreds of employees told the paper. "It's got my wife totally freaked out. I just don't want to deal with it. I don't care about losing 90 days' interest, I don't care if it's FDIC-insured -- I just want it out."] end quote.

    Once more, currently evolving circumstances are providing a sort of real-time experimental observation of some of my theoretical work done over a period of more than 50 years. Read the above quote again and allow it to soak into your cognition for a moment and then read 3 excerpts below from my writing:

    (1) – Consider the following illustration. Assume an individual contemplates $20 in nominal fiat currency over two consecutive days. Given both that the time value of money is ignored and that the price and availability of goods and services are identical from one day to the next, then, if asked how he perceived the value of the $20 over the two days in question, how do you suppose he would answer? I suggest he must, by any reasonable application of logic, perceive the values on both days to be exactly the same.

    But, let us add another assumption without altering the prior assumptions. Assume that after the first day’s evaluation he learns that he has lost his job or that there has been some other economic tumult in his life or in his consciousness. Now, do you suppose he will still consider the perceived value to be the same over the two days? In my opinion it would be simply an absurdity to think he would. No, he will modify the nominal value of the $20 to some higher perceived value after learning the news. That increased modulation is one of the ways he arrives at an increased coefficient of perceived liquidity.

    The other way is that, on both days, he subconsciously perceives that he may substitute intellectual or physical labor in order to augment the transactional nominal liquidity demand of the $20. On both days this causes his perception of the value to be greater than $20, but on the second day he perceives it to be even higher than on the first. Because of that higher perception (due to an economic upset to his personal steady state), his level of perceived liquidity is raised progressively higher in amount than the unchanged nominal sum of $20 could ever indicate.

    Consequently, he will view marginal additions of nominal liquidity quite differently than if he had not experienced the phenomenon of an increase in perceived liquidity. The aggregated effect of this phenomenon is what disturbs the capacity of nominal monetary expansion to affect a return to equilibrium. In the enigma of macroeconomics this may be analogous to the singularity observed in theoretical physics.

    (2) – The change in perceived liquidity will obviate central bank actions to expand the money supply, because aggregate perceived liquidity, relative to aggregate nominal liquidity measured at the same time, will have already risen and begun to absorb the nominal money expansion by being substituted for its transactional demand. Its transactional demand thus reduced by substitution, nominal money expansion will produce no corresponding linear modulation of economic output. This is much more critical when the nominal money supply has declined as a consequence of the upset, because that is when the central bank will recognize it and have the greatest intentions for expanding it.

    (3) – Monetarists point to a collapse of the nominal money supply during one or more economic recessions after the market crash of 1929 as being the primary cause of the Great Depression, and they further argue that expanding the nominal money supply more rapidly and earlier during this time would have prevented it. It is simply not the case, for the reasons (in all of my writings) I have given.

    Too, Keynes, though he was absolutely correct in my opinion that a collapse of aggregate demand was the cause of the Great Depression, also focused on other elements he contended resulted from it. His arguments concerning those elements (for example, the relationship of interest rates to investments and monetary liquidity preference, and about velocity) have largely been challenged and determined not to be proved, or at best, archaic and in need of clarification or integration.

    Keynes was also right that it would require an increase in aggregate demand to bring about a recovery because the economy would not respond to monetary expansion. The rub is that Monetarists can defeat his assertions about liquidity preference, later categorized as a “liquidity trap,” by claiming to observe inconsistencies which refute the phenomenon. And rightly so, because now I have discovered that though there probably is a trap in a severe recession, it is not a high nominal liquidity preference resulting from some low interest rate and the teeter-tottering competition of cash against debt (bonds) that causes the trap, but something else.

    The elements of Keynes’ argument are of little consequence to market participants at such times. Rather, they are interested in satisfying a primal instinct for survival, economic and otherwise, even if only subconsciously and marginally expressed. ***Interest rates and investments and their competing merits are simply ignored***

    It is the supply of that coercive or compelling force (my definition of money is that it is a “force” rather than a tangible thing) that they trap and covet, and that trap is real and it sweeps up both nominal and perceived liquidity into an animal with no name recognizable by either Monetarists or Keynesians. In these cases depressed economies will certainly emerge from the doldrums eventually, given a sufficient association of higher aggregate demand and depleted aggregate perceived liquidity, but they ***will not do so just because they are made to float in a sea of nominal money***

  44. slick says:

    “Because global market correlation is fairly close to 1.0,”

    Not true. It appears that way, but is not true. More correlated than in the past, yes. But 1.0??? Nope. I believe over the past decade Japan is about .3 to USA.

    But your point is well-taken. Much better diversifying by asset class, sector, etc., than developed nation. FYI – Gold/oil to SPX is still practically 0 corelation. And so is cash. ;)

  45. wyler says:

    Istanbul was Constantinople
    Now it’s Istanbul, not Constantinople
    Been a long time gone, Constantinople
    Now it’s Turkish delight on a moonlit night

    Every gal in Constantinople
    Lives in Istanbul, not Constantinople
    So if you’ve a date in Constantinople
    She’ll be waiting in Istanbul

    Even old New York was once New Amsterdam
    Why they changed it I can’t say
    People just liked it better that way

    So take me back to Constantinople
    No, you can’t go back to Constantinople
    Been a long time gone, Constantinople
    Why did Constantinople get the works
    That’s nobody’s business but the Turks

    “Istanbul” 1953
    Words by Jimmy Kennedy
    Music by Nat Simon

  46. VJ says:

    Eclectic,

    I’ll begin by reproducing part of a quote provided by VJ above (source not provided)

    The source was posted as a hyperlink (STORY) immediately following the excerpt I posted. The original article was in the LA Times, but I didn’t link it from there because not everyone is subscribed.
    .

  47. pj says:

    “People on this board are very intellectually smart, but they are missing the “Big Picture”. It is in very few people’s interest to see the equity markets collapse in the US or around the world.”

    The only simple Q that I have is that why this concern for a collapse coming out now? Why not earlier when the seeds were being sown?

  48. DavidB says:

    How long before people catch on? This isn’t like the old days. The public *IS* learning (thanks mainly to the Internet/tech. Slowly but surely, the faith erodes.

    Until people get it through their heads that their debt is what is feeding the beast nothing will change.

    People need to stop being so greedy and selfish that all they care about is the money they make off their leverage. They need to start thinking about how that leverage is making ten times the dollars for the banksters than it is making for themselves. When they start to do simple math and realize that at a ten to one growth rate the banksters will own their children and grandchildren THEN maybe something can be done about the problem.

    The sheep need to stop borrowing money and feeding(themselves to) the beast. It is very simple. Debt-slavery is the enemy of the common man

    I would put much hope in that though. It appears the common man is too stupid and greedy to figure out the basics of the money system to the point of no longer borrowing a dime

  49. Zmetro.com says:

    The Quants Explain Disaster

    Joe Nocera (Subscription): Back in 1998, that now infamous quant fund really did melt down, not only liquidating, but shaking the entire global financial system. Long-Term used complex computer models that failed to anticipate some severe once-in-a-lif…

  50. Eclectic says:

    VJ – Sorry, didn’t recognize the hyperlink.

    Fred – You are correct, and I withdraw my comment only on the basis of having related that graph to any likely outcome for equities. I often fail to separate my own views regarding the economy from my views regarding the equity markets (they are at times different saddles to sit). I should have remarked that the graph I presented:

    http://finance.yahoo.com/q/bc?s=%5EIRX&t=1d&l=on&z=m&q=l&c=

    …does not appear to me to represent vigorous capital expenditure, but rather a generalized run for liquidity. Thus I do not anticipate it is net good news for the economy, although the stock market typically receives all forms of rate reductions favorably.

    Indeed, your point is well made. If the Dow was at 16,000 at the end of the year or at 9,000… neither of these outcomes would I find to be such outlying statistical observations as to make them extraordinary based on historical P/E multiples. I am inclined to believe that we will see further contraction of P/E multiples, but the wildcard is the level of earnings.

    To me the question then is: Will earnings grow at a rate faster than the rate of contraction of P/E multiples? If so the market will go higher… if not, lower. I have no idea which will occur.

  51. Aaron says:

    “A crash only helps the perma-bears (of which most in the world probably frequent this board). While 99.9% of the public is helped by equity prices gradually rising over time.”

    Well my personal opinion is crashes are as necessary to the ecosystem as forest fires. Its not that I look forward to the crash, but what comes next.

  52. Winston Munn says:

    Whipsaw:

    Not only are you correct but are actually only emphasizing my point. I left out a critical modifying phrase (apologies to all) and should have stated “that in the long run this is unsustainable.”

    There is a valid reason why the equities markets have a pronounced upward bias – it takes monetary expansion via debt to sustain the debt-based fiat, and monetary expansion first inflates asset classes before spilling over into general prices.

    This is the reason Bernanke in one of his earlier speeches/talks to Congress (I don’t remember which) stated a concern going forward for the availability of credit. It is also the reason FOMC minutes showed that some members were concerned that savings rates would grow more than anticipated. And it is the reason that a bias to rate cuts has now been introduced despite inflation being uncontained.

    The great fear is credit contraction.
    The markets respond to the expansion or contraction, whichever has the upper hand. Usually, expansion is winning.
    It may win again this time.

    Trading is about an educated estimation of which will have the upper hand over the next 6-18 month period, exapansion or contraction.

    Belief systems are the enemy of judgement. The only thing that matters to the market is the market’s reality.

  53. Winston Munn says:

    Eclectic:

    In your example it would seem that the perceived nominal value would also rise with a general decline in prices – deflation.

    Deflation should actually encourage consumption; however, as there is no real national savings, there are no held dollars to benefit from deflation and therefore nothing to spend; it is only by the mechanism of reduction of perceived nominal value (inflation) that consumption can be spurred.

    Or so it seems to me.

  54. SPECTRE of Deflation says:

    “People on this board are very intellectually smart, but they are missing the “Big Picture”. It is in very few people’s interest to see the equity markets collapse in the US or around the world.”

    The only simple Q that I have is that why this concern for a collapse coming out now? Why not earlier when the seeds were being sown?

    Posted by: pj | Aug 18, 2007 2:02:43 AM

    Because like Kudzoo they must sprout and then strangle everything in their path as they relentlessly grow further out from the tiny seed that was sown.

  55. Eclectic says:

    Winston, quoting you:

    “In your example it would seem that the perceived nominal value would also rise with a general decline in prices – deflation.”…end quote.

    Of course that is true, although it needs no separate stated case because anticipated deflation would simply be another component element of an increase in perceived liquidity. That should be obvious.

    But, when you say:

    “Deflation should actually encourage consumption; however, as there is no real national savings, there are no held dollars to benefit from deflation and therefore nothing to spend; it is only by the mechanism of reduction of perceived nominal value (inflation) that consumption can be spurred.” end quote.

    That’s an illogical assumption for these reasons:

    -Anticipated deflation actually constrains consumption, since participants desire to wait until prices decline further. It’s the opposite of Weimar, Winston, when workers took special bill-paying lunch breaks (they even initiated worker revolts for the rights to do so) to pay bills with payroll earnings because the same bills would only be higher just hours later.

    -It’s not realistic to attempt to extrapolate net negative national savings into a case of zero aggregate money in a given national society. That residual money that is possessed (somebody’s always got money) still participates in the deflation mechanism.

    -While hyperinflation does spur the immediate expenditure of all species held, because it is rapidly declining in value, it doesn’t really stimulate consumption itself, per se. Hyperinflation is an economic upset and still results in a higher perceived liquidity value that participants just install in all of the non-fiat elements of perceived liquidity. If you remember, nominal fiat is just one element, but there are others. I’ll define perceived liquidity again and then list its components:

    Perceived Liquidity is the sum total value of the entire capacity an individual has for executing transactions in order to obtain goods and services in real time present value. That entire capacity also includes the value of goods and services he may provide for himself or provide to others in exchange for nominal money, for bartered credits or directly for other goods and services.

    Perceived liquidity consists of:

    -the perceived value of nominal cash(*) either on hand or immediately receivable;

    -the perceived value of liquid nominal credit balances on deposit at banks or other financial institutions;

    -bartered credits immediately receivable;

    -commodities (including food, precious metals and gem stones) immediately exchangeable or consumable;

    -finished goods immediately exchangeable or useable; and…

    -the immediately exchangeable or consumable value of the intellectual or mechanical labor the individual may produce himself.

    There are no other components of perceived liquidity, since every monetary transaction ever completed either by primal or modern man has resulted from the exchange of one or more of these forms of perceived liquidity, and all economic exchanges occur in terms of perceived liquidity.

    (*) – even though hyperinflation may occur, it is still true that the individual p-e-r-c-e-i-v-e-s his nominal fiat to have a higher value after and during an economic upset than before it, but remember… it’s his perception of currency value relative to its nominal value, but **only when measured at the same time** Winston, that’s the reason no special case is needed to reorder my theories either in situations of deflation or inflation. The hypothesis holds for either case.

  56. Winston Munn says:

    Eclectic:

    Thank you for your time in responding.

    The point I was trying to make is that in our current economic system, debt availability (monetary inflation) is needed to spur consumption as there is no savings rate to back real economic expansion (that deflationary savings sponsors).

    We are as dependent on debt creation as a crack whore is to her connection.

  57. Eclectic says:

    Winston,

    I respect your opinion, but d-e-m-a-n-d is what drives consumption.

    Inflation is not theoretically requisite to an economy, and there are theoretical economies that would function very well without any inflation. For example, imagine an economy composed entirely of altruistic brothers:

    -There would be no profit.

    -Creativity and productivity would reduce the costs of goods and services marginally toward philosophical infinity (neg infinity – zero), because altruistic brothers could possess the capacity and incentive to c-o-n-c-e-p-t-u-a-l-i-z-e that this is mankind’s true economic objective.

    -Demand could be vibrant.

    -Consumption might therefore correspondingly be vibrant.

    -Inflation could n-o-t exist, because altruistic brothers would recognize it for what it is… a misconceptualization of profit, itself an erroneous concept.

    I realize this might be very difficult to conceptualize, and it may sound strikingly similar to communism, however communism fails because it can never ultimately maintain sufficient altruism to achieve mankind’s true economic objective. Since it lacks altruism, there’s no other motivation available for the creativity and productivity needed to obtain the objective.

    Both creativity and productivity are carrots held before the donkey in the form of assumed profits to be had in capitalism. Capitalism has the greater potential for achieving mankind’s true economic objective, but only because it substitutes the conscious objective of attainment of riches from profiting from economic exchanges, for the sub-conscious but real objective of attainment of zero costs for goods and services… this is the only true engine of wealth creation that mankind has ever experienced… p-r-o-d-u-c-t-i-v-i-t-y.

  58. Eclectic says:

    Let’s examine the word: altruistic.

    I’ve just used that word to illustrate a hypothetical economy of altruistic brothers. However, I find that the word doesn’t exactly work with my illustration, and for good reason; there’s no word I could use that would fit it… We’d have to invent a word that explains the brothers adequately.

    Altruistic was simply the closest meaning word I could use, but the concept I intended to have you imagine would best be described were you able to blend in your mind a number of words with different meanings: altruistic, cognitive, intuitive, aware, insightful and perceptive. Too, imagine selflessness as a philosophical concept of capital i-n-v-e-s-t-m-e-n-t (a sort of philosophical cap ex), rather than selflessness as a sacrifice, and you’ll get very close to my meaning.

    By using the term: altruistic brothers, I’d hoped you would be able to create in your mind the real meaning I sought, because the theoretical economy I attempted to depict wouldn’t actually require it to be composed of brothers. In fact, it might even be composed largely unchanged from the way our economy is composed now.

    Now, don’t accuse me of being a Pollyanna, because I am as aware as anyone else is that society is fully capable of producing individuals whose experiences in economic society will exist outside of some standard deviation from the mean. That is, we’ll have unfortunates among us, always, and they’ll require public assistance and understanding, and we’ll have those who are spectacularly fortunate and we shouldn’t ordinarily begrudge that success.

    You may say, “Eclectic, you’re dreaming about a utopia that can never exist.” But before you chuckle and dismiss what I’m saying as utopia, just think for a moment and you’ll understand that this economy that we exist in now… works to achieve the same objective as the one I’ve illustrated. It’s just that our functional economy is overlain with the lesser attributes and ill effects of unrestrained free-market capitalism, without which there would be less wasteful misallocation of economic resources and greater productivity to the benefit of all of society.

  59. Winston Munn says:

    Eclectic:

    According to Pete’s mom: “Pete, there is what’s real and then there’s what’s right. You have to deal with what’s real.”

    Agreed that demand always drives consumption; however, cannot adjustments to debt availability cause an artificial demand/supply imbalance. Isn’t this the exact nature of the housing bubbble?

    While I agree in principal with your theoretical models, I have trouble adjusting those models to actual events. That is probably simply my lack of brain power – I must work awfully hard to keep up with you.

    For example, you stated that inflation is not a theoretical requisite for an economy. While this is absolutely true, it does not seem to address the debt-based fiat system under which out current economy is based. It is also helpful to have a definition of inflation. If money is an exchangeable unit of lanor, then inflation must be a reduction in real value of present labor.

    The theory:
    Money = exchangeable unit of labor

    Howerer, we are operating under this:
    Money = exchangeable unit of labor plus some portion of future productivity.

    If money = labor, then the current system demands an expansion of labor (money) in order to satisfy the debt requirement of present money creation.

    Therefore, although I agree 100% with your theory, in my opinion the practical actuality is that under the present form of debt-based fiat, inflation is a requisite to service the debt. When there is no national savings, no passbook savings accounts, no money stuffed under mattresses, no jars of coin – all these are used to service present needs (paycheck-to-paycheck), then the only avenue left to spur demand is to increase real wages or expand the availability of credit.

    In my opinion, there are many very bright people who seemingly do not see the incongruence and necessary divergence between debt-based fiat and theoretical economic goals; if the very creation of currency mandates debt, then an absolute inflation rate of zero is an impossibility, and thus targeting an issue that is derived from supply/demand, i.e., price change, cannot facillitate the effective management of necessary reduction in present labor value that debt demands.

    Please understand that I have no formal economic training, so everything I surmise must be done by self-education and critical analyzation of presented facts. It took about every brain cell I have to write this reply.

    If it is rubbish, blame Pete’s mom.

  60. Eclectic says:

    Winston, you asked:

    “…cannot adjustments to debt availability cause an artificial demand/supply imbalance. Isn’t this the exact nature of the housing bubble?” end quote.

    Absolutely yes!… Key word is a-r-t-i-f-i-c-i-a-l, and thus the very word describes the misallocation of resources that often accompanies reckless unrestrained free-market capitalism. Too, the artificial demand has resulted in p-h-a-n-t-o-m profits (that this supposed financial liquidity crisis has uncovered)… this is the residue imperfectly attributed to i-n-f-l-a-t-i-o-n.

    Afterward, your comments regarding labor being the core basis of money is an absolute. When there is no exchange of mechanical or intellectual labor, there is NO exchange of money. Fiat money is then inert and has no value.

    For an economy to expand, the exchange of labor must expand… and fiat money is simply the surrogate that facilitates the exchange of labor without defaulting to absolute b-a-r-t-e-r.

    Also, zero inflation, although theoretically possible is in fact, as you say, an impossibility. Why?… Because you can never have a situation in which KNOWLEDGE is perfect or uniformly distributed. Thus, there are always market participants that can not recognize (or resist) that profit is an erroneous philosophical concept. Thus, inflation is unavoidable and it is the m-i-n-i-m-u-m price that a society must pay for the failure of the economic system to perfectly allocate economic resources… another thing that is also impossible in practice.

    Enjoyed the dialog, Winston. If you have a reply, I’ll read it… otherwise onward into Big Picsylvania.

  61. Winston Munn says:

    Eclectic:

    I only want you to know how much I appreciate your sharing of your time and knowledge.

    Thanks

  62. Eclectic says:

    Bingo Winston.