chart courtesy of Meir Atazur


I love when graphics can depict a lot of information elegantly. The above chart (via Meir Atazur) concisely conveys three data points: The average monthly return for each year over the past 23 or so, the average September return, and the SPX.

Now, any good statistician will tell you that 2 dozen instances is likely to be an insufficient number to draw a significant conclusion from. However, I find the chart interesting nonetheless, as it reveals somewhat of the quandry both Traders and the Fed finds themselves in.

Traders know this can be a volatile month. And with the Punch Bowl Caucus pleading for rate cuts, stocks have surged — on the belief that rate cuts are about to arrive.

As the market rallies up towards its old highs — the S&P500 (SPX) is now about ~4% of its ALLTIME peak — it becomes harder and harder for the FOMC to give the market what it wants — another hit of that sweet, sweet junk. (YEAH, that’s the spot . . .  Ummmm, good stuff).

The last thing Chairman Ben wants to do is cut rates, as he fears of reinflating the various Greenspan-created asset bubbles.

And before you start screaming Fed Fund Futures, note that since January 2006, there have been half a dozen instances of where the futures were forecasting a cut that never came to pass.

As Bill King notes:

"Bernanke’s really big problem is the busted system, which means previous flows of credit have been altered. Certain entities can no longer get credit no matter how much credit that the Fed creates.

Stocks and commodities are rallying smartly because much of the credit that the Fed is creating now flows to fewer players and those players have fewer vehicles to play.  This is how STAGFLATION turns  into an inflationary recession and income distribution concentrates even further."

Today’s Ahead of the Tape column adds that we remain as "data dependent" as ever:

"When he spoke at the Federal Reserve’s symposium in Jackson Hole, Wyo., Friday, Chairman Ben Bernanke cautioned that recent financial-market turmoil has made charting the economy’s course more difficult than usual.

"Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country," he said. That puts extra weight on today’s "beige book" report — the collection of on-the-ground business anecdotes that the Federal Reserve’s 12 regional banks put together eight times a year.

If the beige book in any way mirrors what some car dealers, trash haulers and diamond dealers have to say, then the economy — while by no means booming — has so far absorbed the hit from financial-market woes. That’s good news for Main Street. But it might not be great for Wall Street, where hopes for a Fed rate cut depend in part on a dimming outlook for growth."

Thus, a cut is far from the done deal its been described as. I give it a 55/45 chance — barely better than even money.


‘Beige Book’ Spoiler Alert: Don’t Bet on Cut
WSJ, September 5, 2007; Page C1

Category: Credit, Derivatives, Federal Reserve, Inflation, Investing, Markets, Psychology

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.

37 Responses to “Recursion, Reflexivity, Feedback Loops & the Fed”

  1. SPECTRE of Deflation says:

    Talking about data, the 3 month LIBOR is up another 2 ticks to 5.72%. While we all breathlessly await the FED decision, the LIBOR rate is on a march up, and many forms of financing are tied to this rate.

  2. SPECTRE of Deflation says:

    Conduit Risks Are Hovering Over Citigroup

    If the Vehicles Go Sour, Rescues Could Be Costly;
    Bank Has ‘No Concerns’
    [It's All Contained...S.D!]

    September 5, 2007; Page C1

    Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper.

    The investment vehicles, known as “conduits” and SIVs, are designed to operate separately from the banks and off their balance sheets.

    [Is this starting to sound like Enron?...S.D.]

    Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission.

    Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses.

    [CITI is one of the banks that was granted an exemption on how much money could flow from the banking unit to the securities unit...30% instead of 10%...think this could turn out bad?...S.D.]

    Citigroup has told investors in its SIVs (which stands for Structured Investment Vehicles) that they are sound and pose no problems.

    [Once again folks, it's all contained so go back to sleep...S.D.]

    “Quite simply, portfolio quality is extremely high and we have no credit concerns about any of the constituent assets,” said a recent letter from Paul Stephens and Richard Burrows, directors in Citigroup’s London-based group that oversees the bank’s SIVs. “Citi’s SIVs remain robust and their asset portfolios are performing well.”

    [Quite simply, they are full of shit...S.D.]

    A Citigroup spokesman declined to comment on the bank’s SIV disclosures or potential exposure that it might face from them.

    So far, there hasn’t been any suggestion of problems with Citigroup’s SIV or conduit vehicles. Yet recent turmoil in the commercial-paper market, in which some issuers were unable to find buyers for new paper, raised concerns that SIVs and conduits could face problems that would force the banks affiliated with them to step in.

    This has left bank investors grasping at straws as they try to piece together the risks facing individual banks. Accounting rules don’t require banks to separately record anything related to the risk that they will have to loan the entities money to keep them functioning during a markets crisis.

    [Don't grasp...RUN...S.D.]

    “Any off-balance-sheet issues are traditionally poorly disclosed, so to some extent, you’re dependent on the insight that management is willing to provide you and that, frankly, is very limited,” says Mark Fitzgibbon, director of research at Sandler O’Neill & Partners, which focuses on the financial-services industry.


  3. SPECTRE of Deflation says:

    Barry, when all that shit gets moved to the balance sheet…the sheet will hit the fan. It’s all debt folks. Liquidity is debt!

  4. D. says:

    Markets seem to think that the liquidity issue has been resolved. Here is an article that explains how the decision makers are now stuck with a hot potato. The swap market could be next if the commercial paper is rescued… why would you use default protection derivatives if the government doesn’t let the stuff default? Expect class action lawsuits!


  5. kharris says:

    Lacker sounded like he was folding his tent yesterday. When hawks start moving out of the way of an ease, odds of an ease are pretty good. By the way, ADP shows a further slowing in private hiring. Hudson and Challenger offer similar views. Bernanke says that the most recent data are what Fed policy will rely on, and the most recent labor market data are not good.

  6. D. says:

    And here is an article on the effects of Libor…


    Don’t how much lower fed funds rates could improve this environment!

    It’s funny how in 2007, we more than ever beofre, still look at the economy in a one variable, linear way. As if a government controled variable such as the interest rate will save our capitalsit free market world! LOL.

  7. Ban the Spectre says:

    About as off topic as the ‘Spectre’:

    “If you find yourself publishing way too many comments, consider this: This humble blog is my forum for expressing my ideas. Get your own damned blog.”
    –Big Picture Disclosures and Terms of Use

  8. SPECTRE of Deflation says:

    About as off topic as the ‘Spectre’:

    “If you find yourself publishing way too many comments, consider this: This humble blog is my forum for expressing my ideas. Get your own damned blog.”
    –Big Picture Disclosures and Terms of Use

    Posted by: Ban the Spectre | Sep 5, 2007 8:52:47 AM

    Barry has my e-mail address. This is his blog, and I’m not trying to take over anything. The thread discussed interest rates and the possibility of cuts by the FED. If your simple mind can’t tie together LIBOR and the FFR, I can’t help ya.

    Now do you have anything usefull to add Cramer?

  9. Eclectic says:

    Quoting King in your piece:

    “This is how STAGFLATION turns into an inflationary recession and income distribution concentrates even further.” end quote.

    That is exactly correct. Stagflation of the 1970s resulted from a Keynesian application of monetary policy by the Carter administration, attempting to offset the structural failures of U.S. industries, such as mostly the auto and steel industries but other industries as well, to compete, and an attempt to reflate the money supply that had been sucked away by OPEC. Today subprime and conflicts in the capital markets associated with hocus pocus derivatives are threatening to suck it away.

    That all resulted in union wage and benefit contracts being ratcheted to the moon. There were a few years when increases of 10-12% or more were simply assumed. That’s what ran interest rates to the point of money market mutual funds yielding (for a short time) greater than 20%; it’s what drove housing to the boom bust of that time, and it sowed the seeds of the thrift bust 10 years later.

    For any who desire, or in fact hunger for a FF cut… I might have just shown you a picture of what the ultimate results of that action (and repeated actions) might be.

    And from ‘Ahead of the Tape:’

    “If the beige book in any way mirrors what some car dealers, trash haulers and diamond dealers have to say, then the economy — while by no means booming — has so far absorbed the hit from financial-market woes.” end quote.

    That is the “walking around economy” that is the Fed’s greatest responsibility, not the asset markets. Even still, responsibility for the W-A-E is frought with conflict regarding the Fed’s primary mission, stability and integrity of the currency and financial systems that support the W-A-E.

    Time will tell, but without any significant signs of a worsening W-A-E, I’ll spot you a few %, Barringo; I’ll venture 75/25 for staying at Five-Two-Five. As I’ve said 9/18 will be an exciting day.

    To that end I’ve added it as a 4th choice for a means of receiving a potential total Governor pardon for our death row inmate.

    1)- So far he’s cooked if the 10-Y-T closes at or above 5.250 (and not 5.248!). Otherwise he can keep shaving.

    He can elect to switch into:

    2)- His money market mutual fund ever breaking the buck, even for o-n-e day… If it does, he fries… otherwise, keeps shaving.

    3)- 90-day T-Bills stay above 2.500 he’s saved – if they close at or under 2.500, he fries… and now we’re adding number:

    4)- If the Fed cuts FF on or before 9/18, he’s forever pardoned… and if they hold, he fries.

    Which one would you pick?… All you Big Picsylvanians, what about all of you? I’ve heard a lot of mouth, but so far not much prediction.

    You gotta think number 4 is lookin’ good for the inmate, huh?… That the one to go with?… Just think… in just a few days you could walk, and give Mishkin a little knowing wink.

    Come on. We don’t have all day. Take your pick.

    You want to thumb your nose at Dr. Benber N. Anke?… Take 4. You’ll experience the most exciting few days any inmate could ever experience. One thing for sure… your fate would be decided before you have to look at any more spooks.

    Here’s the next Fed meeting:


  10. mhm says:

    The Cut still depends on the BOE and ECB reports Thursday morning. If they hold theirs (like BOJ did) there is a change the Fed will cut.

    If you plan to travel abroad in the next few months, you better hedge your travel funds…

  11. SPECTRE of Deflation says:

    “Stocks and commodities are rallying smartly because much of the credit that the Fed is creating now flows to fewer players and those players have fewer vehicles to play. This is how STAGFLATION turns into an inflationary recession and income distribution concentrates even further.”

    We already have too much income inequality in this country. In fact, we haven’t seen this much inequality since the Great Depression. Add up a negative savings rate, even though they got creative with the numbers recently, and you have a recipe for disaster.

    On the other hand, for players in the market, it is helpful to know where the juice is flowing and go with the flow until it stops working. The big question right now is where will the next bubble be if the FED is successful in reinflating?

  12. steve says:

    you do a good job on the blog. hats off to you. you are giving only 55/45 chances for a cut from the Fed. curious IF most recent data (Challenger LayOffs, ADP and now Pending Home Sales) might change your view at all? best I can tell, Mishkin over this past weekend gave a speech that seemed to be read by the ‘pros’ as suggesting weak housing to provide necessary cover and from what i can tell, Pending Home Sales are Existing (or Used) Home Sales that will show up within next couple of months … point being things in housing getting worse, NOT better … seems to UP the odds of an ease, wouldn’t you say? therefore it seems front end of the Tsy curve (2s) a good place to hide out, sit and wait, until the dust settles (sometime into the Sep 18th meeting?) … and yes I’m a bond guy, sorry. so today the sell-stocks buy-bonds trade fits. who knows what it’ll do into the close or into the fed meeting?

  13. Stuart says:

    Pending home sales down 12% in July and that is BEFORE all this credit/liquidity turmoil. With resets still only 1/4 complete…
    FOMC cut is all but a certainty. The bigger question is what percent. Housing is accelerating to the downside and again, we’re only just begun to get into the major reset months. Anyone who thinks the current credit turmoil with a rapidly declining housing market will not pull down the economy further below trend, when the FOMC already acknowledge it was performing below trend, and will force the FOMC’s hand is delusional.

  14. TexasHippie says:

    I predict a rate cute with very strong language indicating it’s not likely to happen again later this year. Benber doesn’t want to be caught “asleep at the switch” if the market tanks in September, but he also doesn’t want to get folks too excited. Their view of inflation seems contained and the market is softening, so a rate cut will be an attempt to mitigate recessionary trends.

  15. Joe Klein's conscience says:

    Steve & Stuart:
    What will a rate cut do? Will it help stop foreclosures? The credit crunch is due to more than higher interest rates. Do you know what rate cuts will do to the dollar?

  16. TexasHippie says:

    Mr. Conscience – what if consumer expenditures and capex dry up, what will that do to the dollar? Dr. Bernanke is more concerned about deflation than inflation, so I’d presume he’s not so concerned about the dollar’s declining value relative to foreign markets or commodities?

  17. Stuart says:

    Joe Klein’s conscience, agreed that rate cuts will not stop foreclosures as those are now controlled by other factors but that’;s not why I suggest rate cuts are now a certainty. My primary thesis is we’re already feeling considerable pain now entering the general economy from already incurred foreclosures and we’re still only really in the 3rd inning. As a preemptive move considering rate cuts have a lagged benefit of several months at least, it is reasonable to conclude the economy is going to slow down further. As a result the rate cuts are not to stem foreclosures but to buffer or minimize the resultant negative effects on the broader economy. Peter Schiff might be right on this call.

  18. Stuart says:

    This afternoon beige book release is absolutely critical. It’ll add another 150 to the downside or erase all losses depending on whether it shows the Feds’ heads are on planet earth or planet mars.

  19. wunsacon says:

    Which scenario do people prefer: stagflation or depression?

    I’ll take stagflation for $2000 gold, Alex.

  20. Ernst Stavro Blofeld says:

    Don’t ban SPECTRE.

  21. fenner says:

    Barry, Sorry about these irrelevant posts, but back onto the subject of credit card debt. Note: Costo does not take credit cards.

  22. Ross says:

    Blofeld, refresh my memory. What does SPECTRE stand for?

    Ross AKA ‘Psychic with Alzheimer’s…I can predict what I will forget.’

  23. Stuart says:


    I’ll second that.

  24. Pool Shark says:


    “Costo does not take credit cards.”

    That’s funny; Costco ISSUED my American Express card. For the last 5 years, I’ve never purchased anything at Costco without my credit card.

  25. SPECTRE of Deflation says:

    Which scenario do people prefer: stagflation or depression?

    I’ll take stagflation for $2000 gold, Alex.

    Posted by: wunsacon | Sep 5, 2007 11:24:59 AM

    I’m hedged either way. You are right that our choices are limited. We can have Depression where cash will be king, or we can have Stagflation/high inflation where the PM’s will do well. Preservation of capital is key right now. I to will take $1600 – $2000 Gold Alex!

  26. Greg0658 says:


    besides jawbone’g

    what activities could a lobby or organized lobbies do to force the hand in their financial favor?

  27. Great point Barry! I’ll stick to quality stocks.

  28. SPECTRE of Deflation says:

    Blofeld, refresh my memory. What does SPECTRE stand for?

    Ross AKA ‘Psychic with Alzheimer’s…I can predict what I will forget.’

    Posted by: Ross | Sep 5, 2007 11:42:35 AM

    SPECTRE is an old James Bond nemesis. I liked the moniker because I think the elites are every bit as evil as anything Ian Fleming could ever dream up.

    For you younsters, it was before your time, and your very limited life experiences.

  29. Bond....James Bond says:

    Special Executor for Counter-Intelligence, Terrorism, Revenge and Extortion.

  30. Whammer says:

    Pretty much gotta agree with Wunsacon, et al. Seems like Au and Ag gotta win.

  31. Ernst Stavro Blofeld says:

    SPECTRE = “SPecial Executive for Counter-intelligence, Terrorism, Revenge and Extortion”


  32. fenner says:

    Pool Shark,

    Our Costco does not allow Visa or MC, which I believe would be the bulk of credit card purchases in most stores. Maybe yours does? I’m curious.

  33. Eclectic says:

    That was a pretty pastel beige in my opinion.

    For those with high expectations for a FF cut coming out of that beige, I think you’ve possibly got a dog that won’t hunt.

    BTW, Larry Kudlow… Don’t think you’re a-foolin’ anybody wit’cho earnins’ pore-mouthin’ self. You ain’t a-sneakin’ in’nat FOMC thoo no backdoor, nosiree you ain’t!

    I knows-ye!…They cut’tat FF and you’ll be back a-sangin’ G.S.N.T. louder’n Mario Lanza:


    If the Fed met tomorrow and we could assume that NFP wouldn’t blow up this Friday, I’d be tempted to move it to 80/20 for holding.

    ps, Spectre is putting up some interesting stuff. All you that don’t like it have to do is skip it if you don’t want to read it.

    I read it Spec, but you’re severely abusing my f’ing eyeballs.

  34. Pool Shark says:


    I don’t know about Visa or MC, but I use my Costco Platinum Amex card for virtually every purchase I make. I’ve been averaging around 2% cash back the last year or so.

    Here’s a similar offering from Costco/Amex:


  35. tt says:

    don’t ban SPECTRE !!!!!

    I for one would read him all day long

  36. David says:

    The beige book is now showing that the stock market is unpredictable and can indeed lose value. I think preserving principal and lowering risk is important, that’s why I like US bonds, they do pay less, over time, than stocks, however, they can play a valuable role in these time.

    “Be just and fear not:
    Let all the ends thou aim’st at be thy country’s” Shakespeare

  37. Dk says:

    “Talking about data, the 3 month LIBOR is up another 2 ticks to 5.72%.”

    LIBOR moves in ticks? thats news to me. maybe theyre notational ticks?