Luck Is The Residue of Good Design: Reserve Bank Transfers to the Treasury For 2013

"The Federal Reserve Board on Friday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $77.7 billion of their estimated 2013 net income to the U.S. Treasury."
Src: Fed Press Release, January 10, 2014

One has to wonder how much of the national debt the federal reserve should buy up. Since operating costs are fixed, essentially if The Fed bought 100% of Treasury debt it would essentially be an interest free loan since the "surplus" of all that debt payment would just go back to the Treasury.

If that statement isn't intuitive, here's the math:

• Pretend "total cost of servicing the U.S. Treasury debt" was $453.3 billion.
• Pretend 100% of that debt servicing payments went to The Fed.
• Pretend The Fed needs "$20 billion for operations" (see the press release difference between what they recently earned and what they just returned)

If they owned all the debt, the cost of servicing the national debt would be 20 billion, not 453.3.

• 453.3 - 20 = 433.3
• "total cost of servicing the U.S. Treasury debt" minus "$20 billion for operations" = "surplus to return to the treasury"
• 453.3 - 433.3 = 20
• "total cost of servicing the U.S. Treasury debt" minus "surplus returned to the treasury" = "the net cost of servicing the national debt paid out from tax revenues"

Here's a common everyday scenario of how that works.

Son: Dad, this car must be worth a million bucks! It's a classic!
Dad: No son, no one will believe you unless you could get someone to pay you that much.
Son to his rich Uncle: Will you buy this for me for $1 million if I pay you a kickback? I need to recover my 10 grand I put into it.
Uncle: Sure, here's $1 million.
Son to Uncle: Thanks here's your receipt for $1 million.
Son to Dad: Look dad, I sold it for $1 million!
Dad: Wow, that's awesome. Sorry I doubted you.
Son to Uncle: Here's $999,990,000 back. I really only needed $10,000.

Test question: What was the 'true' cost of the car the uncle bought?

So the argument against fear that China will dump all our Treasuries is silly. In a crisis, The Fed simply agrees to buy it and store it for safekeeping until such time as a market buyer can be found to pay a reasonable price. That's exactly what they did in the bank run. When the world was about to come to an end (circa 2008) everyone (virtually, not literally) sucked up Treasury debt in a panic as the asset of last resort on earth. Naturally, most of those people calm down and eventually decide to go buy something better like stocks, bonds at rates above 2%, houses, etc., etc. Meanwhile, the Federal government started dumping new Treasuries on the market to cover the cost of all the unemployed.

Net Result: Massive flood of Treasuries coming to a market near you!

Reaction: The Fed simply agrees to buy it and store it for safekeeping until such time as a market buyer can be found to pay a reasonable price. We now know, also, that this safekeeping time frame is about 5-6 years. Like a storm water retention pool, they open the door and "collect" the "flood waters" in a safe storage facility until such time as they can trickle it out into the streams without washing away all the neighborhood homes and cars (pun intended).

One might argue, with a flood of new money to China (i.e. printing press operations to buy it all up) the value of the dollar would collapse.

Fantastic! Two great things to come out of that:

1. All the friggin' money Microsoft, Apple, Intel, and whomever that is locked up offshore because they don't want to pay tax on it would be going down the toilet unless they cash it in and bring it back home. The risk management dealers in their internal Treasuries would quickly do the math and realize paying tax is cheaper than loosing purchasing power. Not only that, making products offshore would price them out of the domestic market bringing those products back to America's friggin' huge economy. Bringing back the money instead would allow them to build factories to build domestically for less money.
2. The prices of American goods and services (and labor) would become "dirt cheap" just like China. So all the companies in all the nations on the planet would suddenly be looking for ways to hire Americans to produce their goods and services. And American businesses who are paying dirt-cheap labor in China and India would be paying through the nose because of their more expensive currencies. Those televisions, iPods, phones, clothes, etc., etc., would be cheaper to make here than there. American cars would be a fraction of the cost of foreign cars, and the auto industry is a HUGE part of our economy.

China knows this. China knows they can barely care for their billions of humans even in a weak global economy with America on the edge. China knows their political systems would collapse if their unemployment rates started climbing like America's from Americans shutting down manufacturing in China. China knows a population addicted to government stability would never support their totalitarian regime if they were starving. China doesn't have America over a barrel, America has them over a barrel. Or maybe the better analogy is the good-guy bad-guy movie scene where each is pointing a Glock 37 at the other's face. It's left as an exercise for the reader to assign good and bad labels on the player's in this scenario.

While we prefer sound money over fiat money, we have to say, the QE policy by the fed not only was a shrewd solution to a global run on the bank, it was a shrewd political statement to China (whether intentional or by unintended consequence) that the U.S. will do anything it takes to secure the value of U.S. Treasury debt.

Just another fantastic real-world example of the Navy SEAL's training motto:

“Luck is the residue of good design."

Dollar Liquidity Swaps Become Permanant

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced on Thursday that their existing temporary bilateral liquidity swap arrangements are being converted to standing arrangements, that is, arrangements that will remain in place until further notice.
src: FRB Press Release

One might think they've been doing this for a while and finally made it official. Not so, at least not between the U.S. and Switzerland. According to the SNB, they stopped making this available back in February 2010 for a time, and then started up again on May 11, 2010. The Bank of England had a similar note about May 11, 2010. We're not sure what was specially about that day, but it's now permanently special.

Maybe they are making lots of money on this deal, or maybe they simply need it so much they finally admit they can never stop swapping currencies. One wonders if all the QE money is sloshing around so much the big brokers keep the Central Banks scrambling to keep the currency availability high for some HFT regimen in international bonds.

The Central Bank of Japan provided and interesting set of amendments revealing (at least for Yen/Dollar swaps) the Federal Reserve will set the interest rates without qualifications (they struck the methodology for rates and now just hand it over the the New York Fed.

Here are the links for further reading.
SNB Guidelines
CBJ Amendments
BOE Guidelines

Confused Market Mechanics

Someone posted today that market signals are conflicting. It might just be the commodity sell off and the side effects on the rest of the market, but only time will tell. What's interesting is a lot of commodity company stock prices are close to where they were in 2008 when the world as we know it was about to end. For more details and some links to market indicators, see our post on Seeking Alpha.

Risk, Risk, Everywhere

We try to avoid sending our readers to anything that smacks as an advertisement to sell newsletters, but sometimes the questions are relevant enough to justify addressing them head on, even if there is a sales pitch in there. Fortunately John Mauldin not only has a good pulse on the global investment community, but any sales pitch in his material is minimal compared to the content.

So with that, we point out some serious questions and concerns he addressed in a recent email which we happen to agree with. One might ask, how can you not agree with observations from the real world? Right, well, some do, so we just want to point that out.

From John's survey of readers, he concludes:

When everything is manipulated... you don't know the TRUE value of anything, right?

The Fed-driven fixed interest rates are breaking the backs of retirees (or near retirees), who find their nest eggs dwindling unless they take larger investment risks.

And the growing federal debt and the resulting "true" inflation is eating away at investors' capital.

They see interest rate risk, inflation risk, central bank and currency debasement risk, confiscatory tax rates... and bonds on life support, running out of air.

src: How to Find REAL in a World Full of FAKE

Stocks, Bonds, and Currencies doesn't agree with everything said or implied by John Mauldin or Grant Williams, but they have a long-standing reputation that justifies considering some of what they say. If you take a look at the video, come on back and tell us what you think.

Apparently the way to make money in publishing the news is to have a good database of past stories so you can paste the new name of the next story into your old copy. The folks over at MarketWatch appear to have taken the stories about the Greek debt crisis and replaced "Greece" with "Cyprus"

Seriously, don't these claims and fears sound familiar? To us it sounds like the same thing we read about when Iceland, Ireland, and Greece were set to destroy the E.U. and bring the global economy down with it.

"The problems may be worse than imagined, requiring changes to the bailout or making it unworkable."

"... the effect of capital controls ... will mean a prolonged recession which will make it impossible for [name_of_country] to meet its targets and repay its bailout debt..."

"the guarantee [plan_detail] is from the insolvent [name_of_country] government"

"...allocating losses to investors and bondholders may prove challenging in practice."

Source: 7 reasons Cyprus is more important than you think

Yup. Been there, done that. Time to go buy more high-yield bonds while the prices are cheap [again].

A Funny Thing Happened On The Way To The Treasury

Looks like the United States Government is officially over it's debt ceiling limit. More interestingly, the world financial system hasn't come crashing down [yet]. Here are a few excerpts from today's Publication of Daily Treasury Statements. A footnote on page 7 informs us:

* Act of February 4, 2013 temporarily suspended the debt limit through May 18, 2013.

We find that rather funny in itself. Did anyone (even in Congress) actually know they voted to pretend we don't have a statutory debt limit? <waiving parts=hands>Ignore that, look over here.</waving> Moving along now, just above that line we are given an important piece of information:

Statutory Debt Limit    *    *    *    $ 16,394,000

Ok, I hope you aren't laughing yet, because here comes the real punch line. Just above that informative piece in the column labeled 'Closing balance today':

Total Public Debt
   Subject to Limit        $ 16,710,017

If you aren't accustomed to high finance and really big concepts like "national debt", look carefully at the two numbers. Which one is bigger, the statutory limit or today's closing balance?

Yes indeed boys and girls, your illustrious leaders have blasted right on past the national debt limit and spent an extra $316 BILLION of your hard earned money. And of course we are to believe they'll have it all fixed before May 18th

If you have access to this article on a smartphone, you might want to bookmark it and pull it out when some cop pulls you over for speeding. Showing her the details, assure her with, "It's ok officer, our federal government has provided precedence for putting aside the rule of law for the expediencies of the day." Then present your expediency and assure here no one is harmed by your driving, so you should both just go on your way as you'll be complying with the speed limit tomorrow after you've had time to fix things.

I mean seriously, you've just read this and that's exactly what you are going to do, right? No harm, no foul, screw the law. It's a dumb law anyway.

For more fun, mark your calendar to watch the security markets in the third week of May. Option expiration for May is on the 17th. You might want to buy those June puts now while they are cheap.

U.S. Debt Service Hits Historical Low

With low interest rates come historical low debt servicing costs. Granted, this is based on the history of The Fed tracking this, so it might have been lower in the days of sound money (gold and silver) when the common worker paid for stuff instead of having the neighbors pay for stuff on credit, but still, it might explain the strong stock market, if not why the bump in payroll tax isn't killing everyone. Check out the chart for yourself at The Fed.

Great Recession, Recovered

At 98.0 percent of its 2007 average, total industrial production in July was 4.4 percent above its year-earlier level. Capacity utilization for total industry moved up 0.4 percentage point to 79.3 percent, a rate 1.0 percentage point below its long-run (1972--2011) average.
Source: Federal Reserve

Statistically, the US has recovered from the Great Recession with regard to industrial production. So if we have all that unemployment, it must be service industry related, or industrial production is a whole lot more efficient, doing the same amount of work with less people.

That being the case, maybe equity profits and prices are not in a bubble after all.

Shoot, Can't Get Free Money for Leverage Next Year

On one level, the subject statement is reasonably true. On the other level, the entity that does have access can simply make a loan to another entity that doesn't, using discount rate as 'cost basis' and some absurdly small spread as 'retail pricing'. Then, being a majority or sole owner of this separate entity's equity, provide profits back to the mother ship as dividends from it's equity stake in 'Best Year Placement Assets Selection Systems'

Never mind, as long as politicians retain bragging rights, regulators have something to toast, and investment banks can keep making markets, we can all sit back and make money on the next bubble adventure of the global bastardization of capitalism.

Three federal financial regulatory agencies on Friday issued guidance clarifying that the effective date of section 716, the so-called Swaps Pushout provision, of the Dodd-Frank Wall Street Reform and Consumer Protection Act is July 16, 2013. The guidance is being issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency after receiving inquiries seeking clarification about the effective date. Section 716 prohibits certain types of Federal assistance, such as discount window lending and deposit insurance, for certain uses to a swaps entity, subject to specified exceptions, with respect to its swap, security-based swap, or other activity.
Source: Federal Reserve Press Release

Why You Don't Want Government Controlling Social Security

First, they promise to take care of you and your future financial welfare:

The National Pensions Reserve Fund was established in April 2001 to meet as much as possible of the costs of Ireland's social welfare and public service pensions from 2025 onwards, when these costs are projected to increase dramatically due to the ageing of the population. The Fund is controlled and managed by the National Pensions Reserve Fund Commission. The Commission's functions include the determination and implementation of the Fund's investment strategy in accordance with its statutory investment policy. This policy requires that the Fund be invested so as to secure the optimal total financial return provided the level of risk is acceptable to the Commission.

(source: NPRF Home Page)

Then after they make a mess out of protecting your current financial welfare, they threaten your future welfare to compensate for their screw-ups.

In the first six months of 2011, the Government liquidated €10bn worth of National Pension Reserve Fund assets in order to contribute money to the EU/IMF bailout package.

Including this €10bn set aside for the support programme, the total fund size at the end of June was €20.8bn. This also comprises of the discretionary fund and directed portfolio, as well as bank investments of €5.5bn.

The discretionary fund has now been reduced in size to €5.3bn as a result of the liquidation of assets, according to the quarterly portfolio and performance update published today.

Including shares held in Bank of Ireland and AIB, the directed portfolio is worth €15.5bn.

(source: Business Leadership News)

If you're thinking, "That's ridiculous, that would never happen here" you must be twelve years old.

Let the Trade Wars Begin

Global anger swells at Fed actions

One can only wonder how this can end up good for the peons on every continent subject to the dictates of the global power mongers. If someone has some evidence to show how democracy benefits the commoner better than monarchies and dictatorships, we'd love to read it. Until then, we'll have to settle for finding ways to protect our ass-ets from the consequences of wars over national sovereignty.

The Democratic Process of Money Meddling

"...it is prudent of the central bankers to get a feel for where disappointment would actually set in."
(Source: E-piphany)

Our friend Mr. Ashton picked up the hints from a Bloomberg report. It is important to realize prices are never objective. It's true for houses, cars, and even U.S. Treasurys. So while one can despise the actions of the central bank, it's not exactly honest to claim they are stupid. As Bloomberg reports:

The New York Fed survey ... asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size.

That appears to be a pretty good line of questioning! Before they make any announcement next week (or not) they better figure out what kind of a statement is least likely to create a panic. One might even consider the expectations are so strong, if they don't announce QE2 next week we'll have a clear and noticeable collapse in something on Wednesday afternoon and on into the week. It is the fall, after all.

So it looks like the fed is actually working out the plan by getting surreptitious "feedback". It's prudent to presume an event has already been priced in by the time it happens. Even if one is skeptical of that principle, given this kind of clear signaling, the pros obviously know and are already preparing their portfolios.

Therefore, the fundamental questions investors need to get right are these:

a) What prices will rise when this happens? Obvously Treasurys, except the inflation factor may counter the whole supply/demand factor.

b) If profit taking kicks in at the announcement, where have those profits been accumulating?

Without the results of the survey, we peons are at a grave disadvantage trying to get those answers right. The one thing we can be sure of though, is that at 2 pm EST on November 3rd, being at your terminal with fingers nimble and ready is the wise plan.

Hindenburg Omen - Not!

It would be hard to find someone or group that can beat the quality of data that comes out of Bespoke Group. Today they made an astute observation that trumps the low quality blogosphere hype about the Hindenburg Omen. In typical fashion, Zero Hedge made another biased emotional appeal:

"Today, we just had another (unconfirmed) Hindenburg Omen."

As Bespoke Group points out, the facts of the matter refute the present perceptions.

"Call us crazy, but an indicator that measures the internals of the equity market should probably avoid using fixed income securities in its analysis."

The problem we see all too often in the internet world of truth is few people bother to actually take the time to understand the basis for these long-standing fundamental or technical indicators, nor take the next step to actually vet the information to see if in fact the data is in conformance with the statistical presumptions, requirements, a priori, and other critical factors.

We think one can take solace in knowing the low-quality data monitors who perpetually cry "the sky is falling" can be ignored more often than not. Notice Bespoke confirms the 2008 instance of the Omen, while Zero Hedge gets it wrong when they say the last Omen occurred during 2009. Not only is it statistically wrong, you can see from a chart if it had occurred it would have undermined it's reliability.

Our conclusion is that Bespoke is right and that Zero Hedge isn't filtering out fixed incomes, and therefore wrongly attributes an instance of the Omen to a point at which it never actually occurred. This is a good thing as it suggests the Hindenburg Omen is still a reliable indicator, if one can first learns how to read data and understand the meaning and abstractions of the words that make up the theory.

How's That Risk Curve Doing?

As our friends at Bespoke Investment Group point out, the market suggests we are not yet ready for higher-risk equity investments.

Compare that present influence with Pimco's Bill Gross discussion on market risks, namely how demand shifts toward the inner circle of safety during a crisis, then slowly back out the risk curve over time.

Note there are many risk vehicles not in Pimco's analysis; not because they don't exist or aren't relevant, but because there are so many layers and instruments. The key point is that bonds are less risky than equities, and preferred stock less risky than common stock.

The real rally is still taking place in risk circles inside of common equities, and the sell-off at earnings suggests we aren't yet ready to see a strong rally in equity.

There's No Place to Invest Capital

“If you look at financial markets, say, look at how much the Treasury is paying to borrow today, there is a lot of confidence, not just of Americans but investors around the world, that we’re going to find the political way to do it,” Geithner said. “There’s no alternative for us. We’ll be able to do that.”

So that's the optimistic spin on the U.S. Federal deficits and stagnating economy. Bloomberg spins the facts by beginning their title with "Deficits Don't Matter...".

From our point of view, the historical low yield on U.S. Treasury debt in the face of record high deficits indicates the investment world is saying the global economy is so bad there's no place to invest capital with any hope of getting a good yield -- might as well bury it in the back yard until some opportunity presents itself.

If you're unemployed, you better start thinking about how you can start your own business, because Corporate America obviously isn't going to do it for you.

The Whipsaw Song, by The Trading Tribe

Can't pass this up -- five old fogey stock traders get down and dirty with some Kentucky blue grass written especially for market-a-holics.

Happy Fourth of July!



You can find out more about The Trading Tribe at their web site.

Banks Are Not Intended to be Safe Place To Keep Money

We've been seeing rules like this lately with the phrase "prohibits branches of banks … from operating primarily for the purpose of deposit production."

Let that sink in for a minute --- if you want to run a bank, you can do X, Y, and Z, and many other things, but if you have a primary purpose of attracting deposits, it's a no-no -- slap you on the wrist, bad boy!!

Now put on your consumer hat. Why do you put your money in a bank? Isn't the primary purpose to ensure your wealth is in a safe place so you don't have to stash a bunch of money in a steel, tamper-proof, fire-proof, locked-down safe, and then carry wads of cash around where thieves can separate you from your wealth when you go buy something? From your point of view, a bank's primary purpose is to be a safe place to keep your money.

But the bank is prohibited from primarily attracting your interest in their safekeeping services.

We can't speak for you, but that explains a lot.

Declining GDP Can Be Good

The following is an open letter to John Mauldin in response to Thoughts from the Frontline Weekly Newsletter, Six Impossible Things. It ties in with another story at telegraph.co.uk about the rapid decline in money supply.

--------------------------------------

Good essay, as usual, Mr. Mauldin. Hey, ask a trusted scientist about dimensional analysis. Your delta force equation is slightly incorrect; it should be multiplicative, not additive. Conceptually it's right, but the formula is formed wrong and the implications may be very different when you use the correct dimensions and mathematical operations. You might characterize this with the label "Busy Boys ... Better Boys", from the 3-cent stamp I discuss at the end, where I reveal another time in American history that produced sustainable healthy economic output. In short, declining GDP might not be bad if we think about it a little deeper than our illustrious leaders who seem to be acting out of habit, not knowledge.

First Fixing the Formula
For your delta force equation the definition of productivity has to be "dollars per person", since "population" is clearly "sum of persons". Therefore, the plus sign is wrong; it must be "multiplied by". Think about it this way in dimensional analysis: if you get 10 miles per gallon and have 20 gallons of gas, how many miles can you travel? The formula is "M traveled = 20G x 10 MPG". Take away the numbers and just use dimensions: M = G x MPG.

The "per" in math means"divided by", and so the Gs cancel each other out:
G x (M / G) [in our case, 20G x 10M / G)]

Canceling out the Gs...
20 x 10M = 200M

You can't do that with addition: 20G + 10MPG = M is an invalid formula.

So look again at your delta formula. What you're saying is correct, but addition is the wrong operation and the implications are different when you properly put them into the correct mathematical dimension.

In dimensions, your delta force would be "Dollars" = "People" x "dollars per person" [D = P x D/P]. But there is still something missing. Some dollars per person are zero. My 5 year old productivity is zero because he isn't working. Likewise for the unemployed. Those have to be clarified as "working people" x "average dollar per working person".

Implications
It is not enough to "grow one's population", one must grow the population of people "that contribute to monetary productive efforts". If population grows, but the output of the new people are smaller than existing labor, it may not produce a rising GDP. To the extent new population produces less per person than existing population, GDP may decline if workers leaving the work force were more productive.

The corporation I work for is making this mistake. In the latest economic downturn, they got rid of highly-skilled labor because their wages and benefits were high, resting on imported immigrants with lower wages. The consequence now is that what they produce requires much higher labor input, because the inexperienced immigrants repeat many of the old mistakes the experienced laborers learned how to avoid. I'm not against immigrant labor, I'm just pointing out that low-wage immigrant labor may do more harm than good, even though low wage costs can increase productivity metrics. Wage-based productivity metrics can't tell you how much output was sacrificed.

There is a component of output, momentum, that doesn't manifest itself instantly with the replacement of high wages with low wages. Decay exists in everything. Poorly maintained plant and equipment break down more often. Poorly engineered products don't last as long. Poor quality of service and product diminishes customer willingness to return for more or refer others when needs arise.

If our economic stimulus programs don't produce another artificial credit-induced wave of consumer spending to make up for the diminishing sales of the old customers, the diminished momentum from displaced experienced labor is going to become evident when the consequences of the inexperienced low wage worker is reflected in declining output, increasing costs, or declining sales.

Busy Boys ... Better Boys
I think this single-minded focus on dollar metrics by economists, business managers, and policy planners is insufficient for solving the real problems facing the global economy. I have a 3-cent US postage stamp I found in my Mom's estate. It has no date on it, but others appear to be from the 1950s. This little 3-cent stamp speaks volumes about the decline in American culture, and it's impact on GDP when we consider the abstractions evident in the Delta Force equation.

It's a picture of newspaper boy on the left walking through a neighborhood. A bag rests over his shoulder with the motto, "Busy Boys ... Better Boys". On the right is a hand holding a torch with the motto, "Free Enterprise". Between them is a statement, "In recognition of the important service rendered their communities and their nation by America's newspaper boys."

We used to call that "work ethic"; it used to be a virtue. I don't recall seeing any government program honoring and extolling the virtues of work ethic like that 1950s postage stamp. Instead the focus is on entitlement, equality, and rights. It's evident, too, when you shop for products and services. Finding anyone with a work ethic that values one's contribution to others is rare, especially in the young. The predominant theme is one's right to income, or making a sale (getting one's money) at the cost of integrity and future product loyalty.

It isn't enough to just get more people earning wages, or keeping wages high to prop up tax revenues. The culture needs to re-discover the value of contributing to the success of others, which is the essence of the old work ethic. The idea that one's existence earns them a fair wage without consideration of their contribution is the essence of the decline in American industry and economic health.

Bad Can Be Good
Declining GDP or contraction of money supply are not problems in and of themselves. They are symptoms of something more fundamental. Whether they are good or bad depends on the essence of the underlying fundamental. A family that lives within it's means is a financially healthy family. If that family had a growing GDP (lots of economic activity based on new debt) they would be creating new money (increasing money supply) as they take on new debt and buy more products and services.

If they change their wayward ways, stop incurring new debt, reduce spending to conform to current income, they will flatten their contribution to GDP and contribute to a reduction in money supply. This is good for the family and the community, because there comes a point when economic activity shifts from debt service payment to new product and service output, but at sustainable levels. This was what characterized the decades following the great depression, an age where people understood the good things of life come from hard work, not easy credit.

If the old GDP reflected this old over-spending habit of the community at large (an addiction to "more stuff" now!), a declining GDP may be indicative of a more sustainable and healthy future. Furthermore, to the extent business learns to evaluate their output based on making product more desirable to the consumer, not only on price, it means a higher satisfaction (standard of living) and a more sustainable business model for business.

PIIGS - Propped Up By Hope

Maybe Governor Daniel K. Tarullo's testimony to Congress helped the stock market sell off yesterday. There's nothing better than a federal official making an official proclamation that "Europe is still in trouble, and it can mess up the U.S.,too. We don't expect another U.S. bank crisis, but ya never know!" That, of course, was a paraphrase. Actually, the direct quote was

...holding out hope that further financial disruptions can be averted

There ya go, Europe is propped up by hope!

Too bad the fed can't just get involved in more swap markets. Their excess profits are returned back to the US Treasury, and the last crisis not only earned $5.8 billion in interest on forex swaps alone, but cut the cost of federal funding from the flight to dollars.

It's good business being a central bank.

Over the life of the previous temporary swap program (from December 2007 to February 2010), all swaps were repaid in full, and the Federal Reserve earned $5.8 billion in interest. Finally, the Federal Reserve bears no market pricing risk in these drawings.

Analyzing Non-Borrowed Reserve Trends

Now this is interesting.

(click for full size)

Latest Observations from the chart. (full data series available from The Fed):
2009-12 968.670
2010-01 966.727
2010-02 1113.265
2010-03 1094.656
2010-04 1036.615

We see a drop from Dec. to Jan., but then a spike from Jan to Feb. It might not be coincidental the stock market was dropping after Jan. Money that flees equity risk may have been parked into the safety of bank deposits for a period of time, faster than banks were making loans. But Feb. to Mar. to Apr. we see either money has been flowing out of banks, or banks are lending more reserves into new loans.

It will be interesting to see in June what happens in May as this early May market turmoil reveals itself in the national metrics of bank balances. If the previous paragraph correctly identified cash flows, we would expect May's non-borrowed reserves to be up, based on the theory that retail investors sweep their proceeds into bank accounts and professionals sweep their proceeds into Treasuries.