Really Scary Fed Charts: Fun With Reserves

Non-Borrowed Reserves of Depository Institutions (BOGNONBR) first went negative in January 2008. Negative Non-Borrowed Reserves for the first time in history was both surprising and nerve wracking. In October 2008 Non-Borrowed Reserves hit -$332.797 billion and looked set to plunge further. However, by January 2009 Non-Borrowed Reserves were back in positive territory at $167.388 billion. The two month swing of $500.185 billion both rather large and rather sudden to put it mildly.

Non-Borrowed Reserves are a measure of banking system reserves, consisting of Total Reserves (member bank deposits in Federal Reserve Banks, plus vault cash), less funds borrowed (Borrowed Reserves) at the Federal Reserve Discount Window. With the creation of the Term Auction Facility (TAF) borrowed reserves did a moon shot and non-borrowed reserves went cliff diving because TAF loans are categorized as borrowed reserves.

For Non-Borrowed Reserves to pull out of their steep dive either Total Reserves would have to increase significantly or Borrowed Reserves would have to decrease.

Note: The Federal Reserve created a series of Non-Borrowed Reserves that adjusted for the effects of the Term Auction Facility called Non-Borrowed Reserves of Depository Institutions Plus Term Auction Credit (NONBORTAF) which now stands at $605.715 billion.

BORROWED RESERVES:

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) seem to have peeked (for now) at $698.786 billion in December 2008. As of right now, January 2009 they stand at $653.565 billion, a reduction of $45.225 billion or 6.47%. This is the first reduction in demand for loans by banks from the Federal Reserve since the crisis started.

Since these are funds borrowed by member banks from a Federal Reserve Bank for the purpose of maintaining the required reserve ratios a reduction could be a good thing. This could be the very first glimmer of hope…

Depository Institutions with insufficient reserves will borrow from the Federal Reserve to meet their legal Reserve Requirements. Normally, an increase in borrowed reserves signals tighter Federal Reserve credit policy and potentially higher interest rates for bank borrowers. When the Federal Reserve provides less credit to the banking system, banks must borrow to maintain the required reserves. These loans, in the form of an Advance or Discount by a Federal Reserve Bank, are normally collateralized by Treasury securities.

However, this time around it was NOT the Federal Reserve that “tightened credit policy” but rather Mr. Market. This is the ultimate fate of each and every credit bubble. It cannot be prevented and it can only be delayed for so long. The course adopted even now by the Federal Reserve is of course the same desperate delaying action it has always employed…

Most of the Borrowed Reserves came from the Federal Reserve Discount Window. Discount Window Borrowings of Depository Institutions (DISCBORR) have exploded from a long run average of just one or two hundred million to a peak of $403.541 billion reached in October 2008. Since then Discount Window Borrowings have dropped to $215.239 billion, a decline of 46.67%.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."–Ludwig von Mises

Clearly, Borrowed Reserves did not decrease nearly enough to allow Non-Borrowed Reserves to scream into positive territory.

TOTAL RESERVES:

Bank of Governors Total Reserves (TOTRESNS) started going exponential in August 2008 after spending years in the $40 billion dollar range. From August 2008 through to January 2009, Total Reserves increased from $44.134 billion to $821.238 billion, an increase $777.104 billion or a 1 760.78% increase in just five months. The rate of change has slowed dramatically recently from a peak month over month change of 206.98% to “only” 34.74%.

This of course is exactly what the Federal Reserve intended when they embarked on a policy of Quantitative Easing.

The single largest component of Total Reserves is now Excess Reserves of Depository Institutions (EXCRESNS). In order to protect against unexpected deposit outflows banks are required to maintain a certain level of funds in reserve. Anything beyond this required level of reserves falls under the category of Excess Reserves. The Federal Reserve is hell bent on stuffing the banks so full of money they have no choice but to turn around and start lending it out…

That is THE MASTER PLAN that is supposed to save the world! Yep. Not even kidding.

The banks of course can’t find anybody or anything with the appropriate risk reward profile to lend more money to. They also can’t lower their lending standards any further, having scraped the bottom of the barrel with such brilliant ideas as “Subprime Lending” and “NINJA loans”. So they’re doing the only thing they can: HOARDING. Parabolic Excess Reserves are the consequence. Ben “Helicopter” Bernanke is furiously pushing on a string…

CONCLUSION:

The combination of a parabolic increase in Total Reserves and the stagnation of Borrowed Reserves had the effect of catapulting Non-Borrowed reserves back into positive territory.
The jump in Total Reserves has manifested itself as giant pile of Excess Reserves at the banks.

The liquidity provided by the Federal Reserve through its policy of Quantitative Easing is stuck in the financial system. The refusal of banks to lend is the bottle neck and the only thing preventing inflation. Since there is no economic incentive to lend the financial system will continue to de-leverage and destroy bad debt. The banks have been reduced to hoarding. Therefore, despite a massive increase in money, expect DEFLATION in 2009.

NOTE: The effects of Quantitative Easing are evident in the sudden increase in the Adjusted Monetary Base (AMBNS). In August 2008 the Monetary Base was $870.99 billion. By December 2008 the Monetary Base was $1 692.63 billion, an $821.64 billion increase or 94.33% in 5 months!!!

Bear Wedge: Breakout?

I first warned about it in Good Start to the Year: Beware the Bear Wedge and mentioned it again in Non-Farm Worst Since 1945: Market Likes It. After some reflection, the market sobered up and by the open decided not to like it. By the close today the market really didn’t like it.

This raises the POSSIBILITY of a breakout of the Bear Wedge. Confirmation is still required, but it already feels good…

Fund Fed Charts: Credit Extended to American International Group

Definition:

WAIG: On September 16, 2008, the Federal Reserve announced that it would extend credit to the American International Group (AIG) under the authority of section 13(3) of the Federal Reserve Act. This secured lending will assist AIG in meeting its obligations as they come due and facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

After the implosion of Lehman Brothers the Fed really lost their nerve and decided to bail out AIG. The bailout was strangely complex and stunningly large. Surprisingly AIG has actually managed to pay down a large portion of the $80 billion it borrowed from the Fed.

At the end of October AIG had actually borrowed at total of $89.5 billion. As of right now “only” $39.0 billion of the loan remains outstanding. Granted, the conditions of the loan were pretty harsh. With access to the TARP funds AIG probably just swapped out this “expensive” money for the cheaper kind.

Fun Fed Charts: Maiden Lane LLC

Definition:

WMAIDEN1: On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets.

Hmmmmm. I recall that EVERYBODY swore up and down that the taxpayer would totally make money on this deal. Well, Maiden Lane LLC started off with $30 billion in “assets” (I use the term loosely) that are now valued at $27. That is $3 billion or a 10% loss in just over 6 months.

Non-farm Worst Since 1945: Market Likes It

With every passing day it becomes more probable that the market is preparing a Bear Wedge on the NSYE Composite (NYA). The wedge is getting tight and the price is now sitting on the rising bottom trendline. A decisive down day today would result in a break DOWN and OUT.

As of 8:30 AM, the market actually likes the loss of “only” 524k jobs and an unemployment rate of 7.2%. Never mind that the revisions two the last two months were significant and unfavorable. Never mind that factoring in these revisions means that the 524k number was actually much closer to “world ending”.

The rumor amongst the equity guys is that these numbers are so bad that Obama will somehow accelerate his stimulus package. (That’s right, both not as bad as expected AND so bad that stimulus will be accelerated. That’s trader logic for you…)

In reality of course the job losses are the most since 1945. You know, when the whole freaking US military industrial complex wound down and the largest army in the world demobilized…

The fixed income guys would appear to have a higher IQ and have put in their “safe haven bids”. They can smell deflation and Armageddon and they don’t like it one bit.

The US dollar is strengthening against all major currencies.

The 920 area on the S&P500 (SPX) is the level to watch. A ninja might even hide patiently in ambush ready to snap off some shorts…

The 940 area is the danger zone. Pushing beyond that would result in the possibility of a lunge for 1000.

U.S. Loses 524,000 Jobs; 2008 Losses Most Since 1945 (Update1): “The U.S. lost 524,000 jobs in December, making last year’s collapse in employment the worst since the end of World War II and underscoring the severity of the recession President-elect Barack Obama will inherit.

The decline in payrolls was in line with forecasts and followed a drop of 584,000 in November, bringing job losses for 2008 to 2.589 million, the most since 1945, according to a Labor Department report today in Washington. The jobless rate rose more than forecast to 7.2 percent, a 15-year high, from 6.8 percent.”

Pakistan: Life After Removing the Floor Sucks

So back in August of 2008 Pakistan: Has Dumbest Idea Ever, Sets Floor for Stocks.

The floor essentially resulted in a market that went “NO BID”. So the offer sat at the floor level and trading halted. If you had your wealth tied up in the market you were now stuck. This of course caused some serious liquidity issues for various firms and individuals.

Let’s take a look at what happens when the ban is finally lifted… yup… pretty much what we all knew would have to happen. The market simply went and caught up.

Well, since that didn’t work to halt the slide the next obvious step is to blame the evil short sellers… For example if you ban short selling in select financial stocks the market will go up forever. Right?

Best Bailout Attempt Ever: Porn

Straight from CNN Politics... umm, not sure what to say. Cool?

I nominate this as the Best Bailout Attempt Ever.

Porn industry seeks federal bailout: “Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.”

Terra Incognita: Something the Market Will Explore Eventually

Yesterday’s plunge in equities should not have come as a surprise. The markets were flashing many warnings signs:

Percent of Stocks Above 50 Day Moving Average: Overbought
Volatility: Stretching Into Oversold
McClellan Oscillator, Super Overbought
Bullish Percent Index, Flashing Warning Signs
Good Start to Year, Beware Bear Wedge

Expect follow through on the downside today as Wal-Mart Cuts Forecast, Markets Cuts Stocks.

SPX: 15 minutes, 1 month

Price closed right on support yesterday. A drop below would accelerate into route down to about 870.

If support between 860 and 870 fails to hold, we'll all find out what the Abyss looks like up close and personal right quick.

SPX: 60 minutes, 1 month

Any bounce would likely fail at resistance between 915 and 920.
There could be some minor support around the 885 area.

SPX: 60 minutes, 3 month

The fall back position that must be held by the last few Bulltards is the 820 area. Failure here would result in a test of the November 2008 lows of 741.

Below that lies Terra Icognita, something the market will explore most vigorously sometime in the first half of 2009.

Wal-Mart Cuts Forecast, Market Cuts Stocks

Look out below when even this monster discounter can’t meet or beat expectations…

Pre-market Wal-Mart (WMT) has gapped below the rising trendline from the October 2008 low, the 20, 50 and 200 day EMAs (blue, red and green lines). Prices have broken DOWN and OUT of an Ascending Triangle.

This will HURT the broader equity indices because WMT was one of the few places left for the “long only” crowd to hide.

The road is now open for a test of the October lows around $46 area…

Wal-Mart Cuts Fourth-Quarter Forecast; January May Be Unchanged: “Wal-Mart Stores Inc. cut its fourth-quarter forecast and said January same-store sales may be little changed.”

Time Travel: Equities Adjusted for Real Inflation

The excellent post Fun with Gold over at EconompicData reminded me of an old post of mine called The Lost Decade which was an update to the post the 11th Hour. I’ve posted the updated chart of the S&P500 / Gold ratio.

As of right now, equity values adjusted for real inflation now put us back to 1989!

In Fun with Gold the charts of the Case-Shiller Composite / Gold ratio are very informative. In terms of gold, house prices have absolutely crashed all the way back to 1997 levels!

When the S&P500 (SPX) hit the old record high set in late 2000, everybody got excited. It looked like the economy was doing well and the markets were doing well. Nothing was further from the truth. It was all an illusion.

In nominal terms, the S&P500 had indeed made it back to the old high. However, in real terms the S&P has been in a seven year Bear Market.

To adjust the S&P 500 for inflation look at the SPX:GOLD ratio chart. Purchasing power, as measured by how much Gold it takes to buy the S&P 500, had been rising steadily since before 1980. Then in 2000 something 'broke' and purchasing power has been declining rapidly ever since.

The effects of years of both terrible fiscal and monetary policy started to manifest themselves in 2000 when the great 'Tech Bubble' finally burst. At the time the Fed had a clear choice: Let the bubble deflate and clear the path for strong future growth, or delay the inevitable with a massive injection of liquidity by cutting rates to 1%. At the time it was INFLATE or CORRECT. The Fed chose INFLATE. The current global real estate and liquidity bubble was the result as other central banks largely employed the same policies. (You can thank Alan ‘The Maestro’ Greenspan)

Official measures of inflation (such as CPI) greatly under estimate inflation. The formulae and the contents of various inflation calculations are all in debate. No matter. Keep it simple. Look at Gold. Gold has risen sharply and has now accelerated its rise. Or put a number of other ways: Your purchasing power is DISAPPEARING. INFLATION is HIGH and ACCELERATING. (Just yesterday the Fed actually came out and explicitly promised to STEAL at least 1% of your wealth annually via inflation.)

What does all this mean? The SPX:USD ratio chart illustrates what the S&P 500 chart would have looked like had the US dollar stayed even instead of declining like it has and continues to do so.

For most of 2008 the US dollar plunged from record low to record low. Now with a zero interest rate policy and quantitative easing, the dollar can only continue to decline as the US economy continues to weaken. BOTTOM LINE: The last Bull market was nothing more than a great illusion. Equity price gains haven't even been able to keep up with REAL INFLATION (Gold). Eventually, (after a period of deflation due to massive credit destruction) Fed policies (quantitative easing) and a falling US dollar will result in a SERIOUS wave of inflation.

Dumbest Moments in Business 2008

Check it out: Dumbest Moments in Business 2008

I would actually put the apparent number three event as the number one dumbest event…

3. Paulson's 3-Page Plea
Days after Lehman Brothers collapses and two other giants teeter on the abyss, Treasury Secretary Henry Paulson submits his plan for saving the U.S. financial system. All of three pages, the proposal seeks carte-blanche access to $700B in government funding to buy up troubled mortgage assets with scant details on how or where the money will be spent. Just as galling, he includes a provision in the bill that will exempt his spending from court challenges. Congress axes the legal cloak. But the damage is done, and the proposal fails in the House -- triggering another massive market sell-off. -- By Colin Barr, Fortune senior writer

4. Bloating up the Bailout
Maybe three pages wasn't such a bad idea after all ... When Congress is done with it, Paulson's proposal for saving the U.S. financial system balloons to 451 pages and is loaded with pork barrel spending -- including, unbelievably, a cut in taxes on toy arrows and an extended tax break on "wool products." Backers of the arrow tax exemption -- section 503, for the record -- say it reverses a wrongheaded 2004 law that sharply increased tax rates on cheap kids' arrows. -- By Colin Barr, Fortune senior writer

Satyam: Just Another Scam, Tide Going Out

“It's only when the tide goes out that you learn who's been swimming naked.” –Warren Buffett

Oh man is the tide ever going out. Turns out one helluva lot more people were naked this time around than expected.

This latest scam is truly amusing. Allow me to highlight some of the funnier elements…

Satyam Chairman Resigns After Falsifying Accounts (Update4): “Satyam Computer Services Ltd. Chairman Ramalinga Raju resigned after saying he falsified earnings and assets, prompting a collapse in the stock of India’s fourth- largest software-services provider.”

Lets start with the company name: Satyam.

“Satyam, which means “truth” in Sanskrit, plunged in New York trading, after earlier dragging down India’s benchmark index, in a scandal described as “horrifying” by markets regulator C.B. Bhave. Raju’s reign unraveled in the past month as a shareholder revolt blocked the asset purchases, a World Bank ban kept Satyam from bidding for orders and four directors quit.”

Interesting. Already hilarious. But wait, it gets better…

“Of Satyam’s reported cash and bank balances of 53.61 billion rupees on Sept. 30, 50.4 billion rupees was non-existent, Raju said in the letter sent to the Bombay Stock Exchange.

Operating margin in the quarter ended Sept. 30 was 3 percent of revenue, instead of the reported 24 percent, Raju said. The company’s revenue was 21 billion rupees, 22 percent less than the inflated figure of 27 billion rupees that had been reported.

Raju arranged 12.3 billion rupees “to keep operations going” at Satyam over the last two years by pledging the founders’ shares and raising funds from other sources, he said.”

So basically almost all the ‘cash’ didn’t actually exist and neither did the profit margins. Since none of these assets and none of the earnings powers is real it is devilishly clever to pledge what amounts to being worthless shares as collateral to get real cash.

How classic is it that the banks get left holding the bag? Worthless shares for a loan that can’t be paid back. Excellent risk management! Again!

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It was like riding a tiger, not knowing how to get off without being eaten.”

Ah yes. Once the ponzi scheme gets rolling the magic of compounding really becomes a bitch. Damn those exponential functions straight to hell!

“Raju, who won the Ernst & Young Entrepreneur of the Year award in 2007, has an MBA from Ohio University and is an alumnus of Harvard Business School, according to Satyam’s Web site.

Satyam in September was awarded the Golden Peacock Global Award for Excellence in Corporate Governance by the London-based World Council for Corporate Governance. The council today withdrew the award.”

Haha! They even won an award for excellent corporate governance. I’m guessing they hand those out over a quick coffee and a handshake. I mean to expect serious due diligence tests before placing such an award would be just ridiculous. Right?

“This company had a five-star independent board and it had a leading auditor and still it managed the con. So the question is why only Satyam, why not every other company.”

Awesome! I can actually almost see the confidence imploding! You don’t even have to be an economic masochist to see that this sucks for India. This can’t be good for all the Angry Jobless Indians and the Social Contract.

NOTE: Astute readers may have recognized former Iraqi Information Minister Muhammed Saeed al-Sahaf from the picture at the top of the post. I humbly refer you to his Treasury of Deathless Quotes. The sheer audacity of his lies seems appropriate during these dark economic times.

Nibbling Short on Realestate, Again

In yesterday’s comment on Foreclosures Triple: Housing Recovery is Just Crazy I was asked if I was getting into SRS (UltraShort Real Estate ETF). I have indeed begun to scale. Below is my technical rational:

Price is up against the resistance of the declining 50 day EMA (red line) and above the support of the rising 20 day EMA (blue line). Horizontal support also exists around $35 where prices bounced off the October low.

The real serious resistance can be found around the $43 area at the 38.2% Fib. I've started scaling into SRS because I'm not confident that IYR will make it that much higher.

Other more macro reasons are:

McClellan Oscillator, Super Overbought
Bullish Percent Index, Flashing Warning Signs
Good Start to Year, Beware Bear Wedge
Volatility: Stretching Into Oversold
Percent of Stocks Above 50 Day Moving Average: Overbought

Percent of Stocks Above 50 Day Moving Average: Overbought

The market is severely overbought for a Bear Market rally when 83.4% of all stocks on the NYSE are above their 50 day simple moving averages.

Considering that equities are overbought as I’ve mentioned in McClellan Oscillator, Super Overbought, Bullish Percent Index, Flashing Warning Signs, and Good Start to Year, Beware Bear Wedge, and with Volatility: Stretching Into Oversold I’m looking to sell equities on any weakness.

EDIT: I think Cobra may have beat me to the punch on this indicator today. Check it out here.

Volatility Stretching into Oversold

The Volatility Index (VIX) is stretching down into oversold territory as measured by the 10/10 MA Envelope. However, that doesn't mean we can't continue to 'slide' down the envelope band a while longer.

Considering that equities are overbought as I’ve mentioned in McClellan Oscillator, Super Overbought, Bullish Percent Index, Flashing Warning Signs, and Good Start to Year, Beware Bear Wedge, I’m looking to sell equities on any weakness. The VIX being this oversold acts as confirmation of my ‘get ready to short massively’ bias…

Note: Normal technical analysis doesn’t apply to the VIX as it is a derivative of a derivates. However, some statistical measures such as MA Envelopes are still relevant and useful.

Fed: We Promise to Steal From You

“significant risks that inflation could decline and persist for a time at uncomfortably low levels,” –Fed Minutes Dec. 15 – 16 2008

Is it even possible for inflation to be so low as to be uncomfortable? Awww crap, my wealth isn’t decreasing in value nearly fast enough? Dammit, I can’t pay this loan back if it isn’t inflated away faster? My money is worth way too much! Print more to depreciate it! Is that the thought process?

It is now clear that the very real specter of deflation has the Fed publicly panicking.

The discussion at the Fed now revolved around the proposal of setting an explicit target for inflation. While the discussion, the proposal and the mechanics of enforcing it are all pretty complex the whole sordid thing can be summed up and explained to even a young child such that they would understand completely. The explanation would go something like this:

“We promise to do everything in our power to steal at least 1% of all your wealth each and every year. If we discover that for whatever reason we were able to only steal less from you, we hereby promise to try harder. Make no mistake about it, you should expect and plan for us to steal at least 1% of your wealth from you, whether you like it or not. However, we will take great care not to steal more than about 2% every year.”

Isn’t a fiat currency regime coupled with central banking fun?

(We will deflate anyways. But that’s another story for another post.)

Fed Officials Revive Discussion of Explicit Inflation Target: “Federal Reserve officials revived the prospect of setting an explicit target for inflation to counter the risk that the worst economic slump in the postwar era will trigger a broad decline in prices.

The Federal Open Market Committee at its Dec. 15-16 meeting discussed ways to avert deflation while approving a reduction in the benchmark interest rate to as low as zero, according to minutes of the gathering released yesterday. The FOMC also considered increasing emergency loans that have doubled the Fed’s balance sheet to $2.3 trillion in the past year.

Policy makers “face considerable uncertainty about how inflation expectations could evolve,” said Brian Sack, deputy director at Macroeconomic Advisers LLC in Washington and a former Fed economist. “That enhances the argument for taking the further step and adopting an explicit inflation objective.”

By setting a goal for price increases, the central bank would adopt a measure that the U.K., Sweden and other countries have used to anchor policy and build credibility with the public. Chairman Ben S. Bernanke made a target one of his priorities when he took the helm three years ago, though a 2007 review of Fed communications stopped short of that objective. Now, with inflation retreating and the economy contracting, a target could be used to justify a more expansive policy.

One measure of inflation, the personal consumption expenditures price index, minus food and energy, could rise at less than 1 percent this year, and only 0.5 percent in 2010, according to forecasts by Sack’s firm.

‘More Explicit’

Central bank officials discussed providing “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability,” the minutes said. Such a target may “help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low.”

An inflation goal would reinforce expectations that the central bank will make a commitment to withdraw cash when the economy shows signs of a recovery.

Some policy makers last month saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will probably “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”

Fed officials saw “substantial” risks to the slumping economy last month and indicated “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes.

‘Dark Document’

“Rates are going to be low for a long time,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “They see the economy as extremely weak. It is a dark document.”

Economic growth declined in the third quarter at the fastest rate since 2001 as unemployment rose and home values, housing starts, auto production and consumer spending fell. Analysts downgraded forecasts last month, with economists at Morgan Stanley and JPMorgan Chase & Co. predicting a contraction in gross domestic product of about 6 percent for the fourth quarter, the biggest decline in 26 years.

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Federal Reserve Bank of San Francisco President Janet Yellen said in a Jan. 4 speech. “It’s worth pulling out all the stops” in a fiscal stimulus.

U.S. employment fell by 500,000 jobs in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.

Alternative Tools

Policy makers discussed an array of alternative policy tools at the meeting last month, including communicating their expectations for interest-rate changes and expanding the balance sheet by taking on more loans and bonds that private creditors refuse to hold.

The FOMC also discussed setting a target for growth in measures of money, such as the monetary base. While a “few” policy makers favored a numerical goal for money growth, most preferred a more open-ended “close cooperation and consultation” with the Fed board on how to expand assets and liabilities.

“Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy,” the minutes said.

The central bank will have difficulty scaling back its auction of loans and other emergency programs without upsetting the bond market, former St. Louis Fed President William Poole said in a Bloomberg Television interview.

‘Substantial Reaction’

“The market will take that as being a signal that monetary policy is tightening and that is going to set off substantial reaction in the bond market, maybe the equity markets too,” Poole said.

President-elect Barack Obama yesterday called for a record stimulus to prevent the recession from deepening. His plan aims to create or save 3 million jobs and may cost about $775 billion.

Policy makers discussed “possible refinements to the committee’s approach to projections,” including providing more information about individual views on “longer-run sustainable rates” of unemployment, inflation and economic growth.

The committee, after Bernanke’s urging, started publishing three-year forecasts for growth, inflation and unemployment in the minutes of the October 2007 FOMC meeting.

The third year of those projections is viewed by analysts as a signal of policy makers’ preferences for prices, unemployment and growth. The third-year projection may be less valuable in communicating goals because slack in the economy may continue to depress inflation through 2011, Sack said.”

Economic Masochism or Bulltardation

Apparently some neuroscientist has come up with a fancy new mental disorder. He calls it "Economic Masochism". I call it "Searching for the truth" or "Trying to figure out what the hell is really going on."

You decide.

A quick fix of course would be to ban all negative words and symbols. We could spin everything in a positive way… oh wait… that would be the highly contagious mental ailment commonly known as BULLTARDATION.

The last global pandemic of Bulltardation finally burned itself out in 2007 after 'going global' for the first time in history. Academics and medical professionals still aren't sure if those who suffered from the disease had permanent brain damage before they became infected, or if it was a consequence of being ravaged by the disease. Either way, survivors of the disease will never quite be the same.

Catching the economic anxiety bug: “Hymie Anisman, a neuroscientist at Carleton University in Ottawa, has diagnosed a new and highly contagious ailment for the recession era: economic masochism.

It was a pal who first exhibited the symptoms many people are experiencing these days -- although this man's case is extreme.

"I have a friend who sits all day going through various journals online and various blogs as if he wants to find more bad news. He's read it all 20 times, he's knows what's there. It's almost like he's addicted by it. But every once in a while he'll get some little glimmer that will reinforce some little glimmer of hope," Dr. Anisman, who studies the effects of stress, said in a recent interview.

Indeed, whether they are seeking it out or not, people seem to be digesting unhealthy doses of bad economic news these days, through hysterical headlines, their own bank statements, their investment brokers' grim excuses or water cooler commiseration sessions.

Even those who still have jobs and who aren't depending on their life savings to enter retirement aren't immune, Dr. Anisman said.

All the doom and gloom of the market mentality may be helping make the economic dire straits a self-fulfilling prophesy.

"This is one of the problems of course in the economy is that everybody follows the leader even if they don't understand," he said. "Look at yesterday's stock market. Not much has happened other than to reduce the interest rate, the prime rate ... but the stock market suddenly went up 300 points on some ephemeral hope. We have this herd instinct. If everyone is feeling crappy, we feel the same way."

Uncertainty and a lack of knowledge is what the market mindset feeds on.

People who experience loss -- of their job or all their money -- typically feel depressed, said Dr. Anisman, while those who aren't sure what's wrong or who are waiting for the other shoe to drop are afflicted by anxiety without knowing quite how to cope.

He likens it to the contagious fear of another terror attack in the aftermath of 9/11 -- but on a much larger scale and with the potential to affect many more people.”

Angry Jobless Indians, Social Contracts

Allow me to highlight some of the scary stuff below…

Indian Exporters May Cut 10 Million Jobs on Recession (Update2): “Indian exporters may fire as many as 10 million workers by March as the global recession curbs demand for clothes and jewelry, eroding Prime Minister Manmohan Singh’s popularity before nationwide elections.

“The year 2009 is going to be the worst year in history,” A. Sakthivel, president of the Federation of Indian Export Organisations, an industry lobby group, told reporters in New Delhi today. “Exporters don’t have orders beyond January.” The commerce ministry estimates 500,000 jobs may be lost out of 150 million workers at textile mills, manufacturers and jewelers.

Singh’s Congress Party-led government faces an election contest by May as the economy grows at the slowest pace in six years and a record stock-market rout erodes savings. Singh’s top adviser Montek Singh Ahluwalia on Jan. 2 ruled out further aid for the economy after two stimulus packages in a month.

“There’s really nothing the country can do to avoid a further period of economic pain and job losses over the next few months,” said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore.

International trade will shrink in 2009 for the first time in more than 25 years as economic growth slows and commodity prices slide, the World Bank said on Dec. 9. World trade volumes will probably contract next year by 2.1 percent, hampered by exchange rate volatility and flagging import demand.”

Probably, in the first quarter of 2009 optimism will carry prices up to the major resistance level of around $26 on the India Fund (IFN). This level provided support from 2006 thru to the middle of 2008 and will bring formidable supply to market. The declining 200 day EMA (green line) is already below this level and will provide resistance as well.

Patiently sitting in ambush with orders to sell short around these levels will provide the lowest possible risk entries for the inevitable drop into the Abyss...

10 million unemployed you men make for a 'volatile' political environment in the world's largest, messiest democracy where an election goes well if only a few small bombs go off.

Other major export economies are in just as much trouble. In China: “The figures are horrifying.” In China, the social contract is that the government creates widespread economic prosperity. In return, the plebs won’t make trouble for the ruling patricians. They also won’t demand political liberty. Export jobs in China are disappearing as fast as in India and the social contract is about to be severely stressed.

Foreclosures Triple: Housing Recovery is Just Crazy

The lag between failing to pay your mortgage and ultimate foreclosure is quite a number of months during the best of times. The sudden and complete implosion of the economy has made it all but impossible to process all these foreclosures in a timely manner. Therefore, even these horrific numbers are in actual fact much much worse.

Everybody has heard of the people who stopped paying months ago but haven’t been evicted because the bank just can’t get around to them. So imagine how long it will take fore the massive job losses in October and November of 2008 to translate first into stopped mortgage payments and then second into actual foreclosures?

Foreclosures in 2009 will absolutely rocket. House prices will go cliff diving from even these levels…

A 2009 recovery in real estate prices is pure delusional fantasy. Foaming at the mouth, bat-shit crazy type fantasy… Gary Busey style crazy… zero interest rates or not.

Metro-Area Foreclosure Sales Tripled in First 10 Months of 2008: “Foreclosure sales in the 25 largest U.S. metropolitan areas almost tripled in the first 10 months of last year as rising unemployment and falling home values made it tougher for homeowners to sell or refinance their mortgages.

Motivated sales, which include foreclosure auctions and banks selling homes taken over for non-payment, increased 193 percent from January to October 2008 from a year earlier, New York-based real estate data company Radar Logic Inc. said today in a report. Conventional sales rose 6 percent in that period.

“Lenders are motivated to sell foreclosed houses as quickly as possible to get as much of the loan recovered as possible,” Radar Logic Chief Executive Officer Michael Feder said in an interview. “They have a tendency to accept deeper discounts relative to other sales, to the point where motivated sales are driving the market.”

Home prices fell in 24 of 25 U.S. metropolitan areas in October, Radar Logic said, as unemployment hit a 15-year high in November. Almost half the homeowners who bought in 2006 now owe more on their mortgages than their houses are worth, making it difficult for them to refinance without bringing cash to the closing, according to Seattle-based real estate data company Zillow.com.

Forty-one percent of October home sales in Los Angeles and Phoenix were foreclosure auctions or financial firms trying to recoup lost loan value, Radar Logic said.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record, according to RealtyTrac Inc., a Irvine, California-based provider of default data.”

Bailout Bitter

A new beer called Bailout Bitter.

Brilliant. I suspect people will be drowning their sorrows in this brew for years to come... especially after really high taxes (to fund the bailouts) and the ravishes of first deflation and then massive inflation leave Joe Sixpack with just enough discretionary income to afford nothing else.

China: Fun Bear Market Rally

The CBOE China Index is above the now rising 20 and 50 day EMAs (blue and red lines). The price is now challenging the down trendline that began in May 2008. However, the market is now overbought and I expect a 'false breakout'. It would appear that momentum will take prices up thru this resistance.

Even as the index hit new price lows at the end of Nov, the MACD did not confirm, foreshadowing this bounce. I last mentioned China in China: “The figures are horrifying.”:

“While the figures may be horrifying, the charts aren’t. The first and steepest down trendline has been broken on the CBOE China Index. Prices are above the declining 20 day EMA (blue line) and up against resistance on the declining 50 day EMA (red line). For the bounce to become something a little bigger and more interesting the pivot high of 355 needs to be successfully challenged.”

On the first sign of weakness I will be exiting my long China positions and immediately flipping short. This is nothing more than a fun Bear Market rally.

Never forget, that the conditions on the ground in the real economy continue to deteriorate rapidly.

The easiest way to trade China is via various ETFs, such as FXI.

McClellan Oscillator, Super Overbought

The McClellan Oscillator hit the highest overbought reading in more than 3 years. Today's reading blasted past even the last record reading of 99.46.

Historically, only the largest spikes presented tradable countertrend opportunities and there was a lag of several days from the spike to the actual turning point in the index. This worked for both long and short trades.

The current overbought reading is higher even than all the readings during the last Bull market...

The best way to use this indicator is in conjuction with a whole bunch more. For example, although the market is off to a Good Start to the Year, Beware the Bear Wedge and notice The Bullish Percent Index, Flashing Warnings Signs.

If you’re thinking, “What the deuce is the McClellan Oscillator?” click here.

Bullish Percent Index, Flashing Warning Signs

The NYSE Bullish Percent Index (BPNYA) has gone from 'holy shit, the world is going to end tomorrow' territory straight back into 'don't worry, be happy' territory. Both are extreme. It does make sense to scale out of those longs established in the last few months of 2008 and to start looking for enticing short candidates.

I said start. The sweet spot on the S&P 500 for index shorts is somewhere between 950 –1000. Individual stocks may present opportunities much earlier. For example I have completely exited my technology and financial long plays today, but still hold at least half of all my commodity plays. As mentioned early today in Oil, Another ‘Trouble in the Middle East’ Bounce I believe that oil itself and by extension various oil equities still have room to run…

The NYSE Bullish Percent is calculated each day by dividing two numbers:

1) The number of NYSE stocks which has "buy signals" on their Point and Figure charts. (P&F? Confused? Click here to get some education.)
2) The total number of NYSE stocks.

Oil, Another 'Trouble in Middle East' Bounce

A bounce to $50 and even $55 isn't excessive. Prices are now above the declining 20 day EMA (blue line) and should gravitate to the 50 day EMA (red line).

This is nothing but a technical bounce that happens to co-incide with the classic 'Trouble in the Middle East' trade. So don't get too excited.

Oil Curve Steeper Than '99 Shows Possible Gain in '09 (Update1): “The steepest plunge in crude prices on record may be setting up oil investors for a rally this year, if history is any guide.

The so-called forward curve of futures contracts traded on the New York Mercantile Exchange suggests oil will rise 28 percent to $60.10 a barrel by December. The curve looks almost the same as 10 years ago, after Russia’s default and the collapse of the Long-Term Capital Management LP hedge fund raised concerns that a global economic slowdown would reduce energy demand. Crude prices fell 25 percent in the final quarter of 1998, the steepest drop in seven years.

Bets on a recovery paid off then as the Organization of Petroleum Exporting Countries cut production 6.9 percent, causing prices to more than double in 1999. Now, OPEC is pledging to reduce supply 9 percent, companies from Royal Dutch Shell Plc to Valero Corp. are postponing new energy projects and central banks are cutting interest rates to end the worst financial crisis since World War II.”

The first Fib is far far away at around $77 and prices would likely require one hell of a geopolitical catalyst to get that high... Israel slapping Gaza around just isn't that catalyst.

Oil Rises a Third Day; Gaza Attacks Threaten Mideast Stability: “Crude oil rose for a third day after Israeli troops entered the Gaza Strip, escalating the conflict and threatening stability in the Middle East, the largest oil- producing region.

Oil gained after thousands of Israeli troops crossed the border on Jan. 3 to capture bases that Hamas militants have used to launch rocket attacks on the country. Saudi Arabia, which last month announced with fellow OPEC members the group’s biggest ever production cut, raised the price of all the crude types it exports to the U.S.”

Another way to play commodities of course is via the Canadian equity index or the various Canadian ETFs.

Canadian Stocks Have Best Start Since 1977 on Commodity Rally: “Canadian stocks notched their best first day of the year since at least 1977 as commodity producers rallied from last year’s record drop on higher oil and metals prices and prospects that government spending will spur demand.”

Good Start to the Year, Beware Bear Wedge

In an excellent start to the New Year, the NYSE Composite (NYA) broke up thru both the last swing high and the now flat 50 day EMA (red line). The last few days of 2008 included both a Major Accumulation Day (Dec 17th, 2008) and a small cluster of ‘minor’ accumulations. Volume remains anemic and needs to pick up quickly to validate this bounce.

We could easily bounce to one of the first Fibs and 'undo' the forced, panic liquidation of the last few months of 2008 (Oct, Nov).

Beware, that this rally is already looking like the notorious Bear Wedges that occurred frequently throughout 2008.

Related Posts:
Bear Wedge: Breakout
Equities: Bear Wedge, First Cracks
Equities: Bear Wedge, Overbought, Looking Weak
Another Bear Wedge, Financials Overbought
Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL
Cracks in the Bear Wedge