Via e-mail, I received Tyler Durden’s post on supposed Fed stealth monetization of debt via an allegedly stealth repurchase of a big chunk of the Treasury’s latest 7 year bond issue on the Fed’s open market desk.
Full disclosure: Tyler Durden has been a guest blogger here, I think he often does a very good job in covering technical trading matters where the significance of their activities might escape the layperson, and is quite diligent at using his access to information not in the possession of most bloggers or journalists. So he does provide a very useful service. But having said that (and I have told him this privately and it has been pretty much ignored) he tends to hyperventilate, which discredits him even when he has a legitimate target. And he does not seem to know the limits of his knowledge, and will also take on issue where he does not know enough to discern what is significant and what is mere noise.
So to today’s object lesson, This is the bulk of Durden’s post; feel free to click through and view the snapshots and few additional comments:
In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace. As Martenson points out:
“A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.”
The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed’s immediate prompt monetization of a large part of the directs’ balance.
Now I do not pretend to be a bond market or a Fed operations maven, but I know enough to know this analysis is a crock.
You cannot conclude ANYTHING about whether the Fed or any central bank is adding or draining liquidity by looking at a single day of open market operations! You need to look at what has been happening over a period of WEEKS AND MONTHS, and not just supposed Now if someone did that analysis (which is even though it is only simple addition, is still pretty painstaking), they might indeed prove that the Fed is monetizing beyond the $50 billion a month it says it is buying in Treasuries. But one day of activity on the open market desk proves precisely nothing. And the fact it bought the new issue? If it did want to buy something (and you’d need to look, as I said, at the whole pattern, repo rolls as well as “permanent” open market operations, since the Fed has used repos to mask liquidity mopping-up operations in the past).
And why would they buy the recent 7 year issue? Because it was the most recently offered, and therefore the most liquid! Duh!
A real bond market maven, John Jansen, took a dim view of the Martenson assessment:
The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.
So to complete the operation quickly and cost effectively, they would opt to buy that issue. Pretty neat and surgical and quick.
I guess I am not so good at marketing myself as I wrote about this on April 2, 2009. So there is absolutely nothing unique or special about today’s transaction by the Open Market Desk.
The reporting and discussions on the topic at some of the other blogs contain factual errors which should make one suspect the bona fides of the authors on this topic…..
The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”.
Some will counter that the distinction is one without a difference but in discussing such an esoteric topic and in presenting oneself as expert on that topic one should get the facts absolutely correct. So to make the egregiously incorrect statement that the Federal Reserve issued those bonds should be a warning signal that the author has waded into an area where he lacks some expertise regarding fundamental and elemental facts.
At that point I would stop reading the story…..
Mr Martenson asserts that the Federal Reserve has quietly bought the bonds and secreted them away on its balance sheet. (That is nearly verbatim.) Well it does not appear that they did it so quietly or so secretly as he was busily posting the results of that transaction and discussing it in the blogosphere not very long after the transaction took place.
Mr Martenson also avers that a more honest and direct approach would have been for the Federal Reserve to buy these bonds directly in the auction.
Let me say that I am not entirely certain on the next point but at 1120PM I feel confident enough to write it: I believe that the Federal Reserve can only buy securities from the Treasury when it rolls over maturing holdings. The Treasury only resurrected the 7 year note in March and consequently the Federal Reserve would have no bonds to roll in the auction. Ergo there lack of participation.
I will make certain of that point in daylight hours tomorrow.
I get things wrong now and again, but when I know I am writing in areas where I am not certain of my knowledge or my sources, I signal that be either saying I am sticking my neck out, by offering multiple theories, or by toning down my language. And I do correct posts or add updates (once in a while, early leaks from MSM sources have been spectacularly erroneous). I worry that this sort of reporting will only serve to diminish the credibility of blogs generally.
Update 4:00 AM: An anonymous reader pointed out that Jansen softened some of his original attack:
I do think I owe Zero Hedge a bit of an apology as I misinterpreted his comments about the Fed issuing bonds. On a rereading I see that he makes the point that the Treasury is the issuer.
While Jansen strives to be fair, he was correct in singling out the sentence that got him going as being off base, even if his attack was off target in its particulars. Durden called the Treasury the puppet of the Fed. That’s completely backwards. Read Willem Buiter. The Fed has been acting as an off balance sheet entity of the Treasury, or what he calls a quasi-fiscal agent.
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First time commenter.
I agree with half of what you're saying. The Fed never bids directly at Treasury auctions, at least not that I'm aware of. The Primary Dealers could have sold them an older batch of Treasuries I guess, and this problem wouldn't exist.
At the same time, however, Durden and Martenson make a somewhat valid point even in the context of your argument that money supply has to be measured beyond one auction. The fact is that the Fed announced a 6 month program to "monetize" or buy up to $300 billion in U.S. Treasuries.
Is it monetization? It's a drop in the bucket compared to what the Treasury has to raise. In its basest use, "monetization" implies the Fed will buy up all the new U.S. government debt, which is not true.
I think given the extremely light volume in the equity markets, Durden makes a reasonable inference that the Primary Dealers may be using the boosts to buy up stocks.
Anon of 2:59 AM,
If you read the Durden piece, it is quite overwrought and accusatory and it fails to deliver the goods.
First, the Fed has an announced program on to buy $50 billion a month. Monetization is policy right now. So the question is whether this $7 billion open markets purchase is truly an additional liquidity injection or not.
You need to look at a MUCH larger pattern. The operation at a single day on the desk tells you nothing. They make a big accusation and specifically point to the purchase of the most recent issue as a smoking gun. Their case here, as Jansen (who is a bond market guy) says is non-existent. Second, they are likely wrong about another tidbit in the piece, that the purchase was from a single dealer.
I hate to say it, but I know people who have schizophrenics in there gene pool, and they tend to reason like this. Sometimes they make brilliant connections that no one else sees. But they also like to connect dots for the sake of connecting dots, and perceive significance where there may be none.
Yves,
I'm curious if you can explain why the 7yr auction went so much better than the 5yr auction the prior day (according to Denninger:http://market-ticker.denninger.net/archives/1267-US-5yr-Bond-Auction-Effectively-FAILS.html http://market-ticker.denninger.net/archives/1304-BLATANT-Monetization-Uncovered.html)
Actually, while I'm no doubt asking you dumb questions about the 5 vs7yr auction, I guess I might ask another one: how exactly does Wall Street view itself and their bailouts right now?
Mainstream media portrays WS as gloating over this and abusing the process. Fair enough–that's been my perception as well.
Yet Tyler Durden and many of the posters on his site (and yours–and nearly every good financial blog site, for that matter) are clearly on or from WS, and they seem to be as disgusted about the entire thing as everybody else (I thought they were a part of the making of it??).
Anyway, it's not terribly relevant–maybe just the questions of an emerging schizoid who's trying to connect some dots for the sake of it :)
Incidentally (http://acrossthecurve.com/?p=7671) :
By John Jansen on Aug 7, 2009 | Reply
Brian,
I do think I owe Zero Hedge a bit of an apology as I misinterpreted his comments about the Fed issuing bonds. On a rereading I see that he makes the point that the Treasury is the issuer.
I can't say why two auctions went differently, but even though 5 and 7 years seem very similar, they do fit in different places in portfolios. Normally you would expect a weak auction to lead to more sloppiness, but if market participants thought the 5 year auction went off too cheaply, some might have though the weakness was overdone and increased their orders at the next auction.
Making connections is not schizoid. Obsessively making connections might be.
Anon of 3:47,
While Jansen is bending over backwards to be fair, which is commendable, he was correct in the line of his original attack, if not the particulars. Durden called the Treasury the puppet of the Fed. That's completely backwards. Read Willem Buiter. The Fed has been acting as an off balance sheet entity of the Treasury, or what he calls a quasi-fiscal agent.
"Making connections is not schizoid. Obsessively making connections might be" – that is how you make money by being different from everybody else.
My impression (after reading the original Martenson post and then ZeroHedge and Denninger's versions)
is that NONE OF THEM expressed astonishment about the Fed buying T-bonds.
The point was that the Fed SEEMED to have asked Primary Dealers to over-purchase the 7-year bonds, with an understanding that the Fed would immediately take them off their hands.
IOW, the PD's would NOT have bought that huge amount of 7 year bonds otherwise.
And if they hadn't (goes the reasoning) the auction would have failed – a disastrous event.
I suggest you stop shooting from the hip at bloggers you think are shooting from the hip.
unirealist ,
It appears you did not bother clicking through to John Jansen's post on this topic back from April. He made it clear back then that the Fed prefers buying "on the run" or the newest, most liquid issues. The newly issued 7 years fits in that category. That is completely consistent with their recent practice, which has been conducted in the open. Durden is acting shocked and Martenson alleging that this is somehow hidden or conspiratorial.
So who is shooting form the hip here?
Durden called the Treasury the puppet of the Fed. That's completely backwards.
Actually neither way is correct, as they are two legs of the same beast. The head of the beast is of course the banking interests.
Does anyone think that the Treasury is run by public servants? Other than Barofsky, are there any public servants at high levels in the Treasury?
It's interesting to note that in the United States Department of Justice, despite the illegal actions that were perpetrated by the Bush administratoin, there were a few good men that stood up to the administration's disregard for the rule of law.
While such good people in the U.S. Department of the Treasury may be revealed later, at this point, it doesn't seem like they exist (other than Barofsky).
(Elizabeth Warren is not in the Treasury Department, so she doesn't count.)
I do not disagree with the idea that the Treasury is completely captured by the banking interests. But that actually goes back to Rubin. When Clinton had his 1994 Congressional rout, backing a strong dollar policy (a reversal of his earlier stance, BTW) got him Wall Street backing he badly needed to fight off resurgent Republicans. The banking control has become more obvious with the crisis. It was easier to disguise it when all boats appeared to be rising.
Hello, what's this about? Stress in the blog world?
This has nothing to do with whether the Fed bought bonds that it had issued vs. Treasury. Mr. Durden did not say that so I am confused on that point.
The question is: Is the Fed pursuing a policy of Quantitative Easing to stimulate the economy, or are they intervening in the market to achieve a short term impact to the credit market?
Mr. Durden's contention is that this is intervention. The timing and actions by the Fed last week were not in the normal course of business. They timed their purchases to achieve maximum impact to the credit markets. And boy were they successful. Look at the bond market from last Thursday. The market exploded up seconds after the 7 year was announced. That would not have happened were it not for those well timed purchases by the Fed.
So the question that Mr. Durden begs is, Is the Fed intervening??
I think the answer to that is yes. They are acting in the market to achieve a short term impact to the bond market. This is a very significant ramp up of their activities. It suggests that they are very worried about rates in general and the stability of the bond market.
So if the Fed purchases were "Intervention" Mr. Durden would be correct. If they were part of a "normal" effort by the Fed to expand money supply Mr. Durden would have been wrong.
I am not qualified to make the distinction between what is Intervention and what is normal. It is possible that Mr. Durden is not either.
But, I think we all agree that Mr. Jansen at "Across the Curve" is an expert on these matters. So let's defer to his words on this matter. This from his Blog last Thursday:
"The Open Market Desk will intervene and place its stamp on the market when it purchases Treasury debt which matures between May 2016 and May 2019 later this morning."
Mr. Jansen calls the Fed action Intervention. Exactly what it is.
Mr. Jansen and Mr. Durden are saying the same thing. So whats the fuss about??
This all stems from the results of the 5 year auction which some at least have called a "failed auction" (see http://market-ticker.denninger.net/archives/1267-US-5yr-Bond-Auction-Effectively-FAILS.html) . The "failure" was a surprise, so the next day's auction was bound to generate interest (in the results). You would have to think that the phones were being worked hard to make sure enough bidders showed up, so the "uproar" over the repurchase is somewhat expected. Something smells fishy here .. and with more than a few billion dollars of new debt hitting the street in the weeks and months to come, the early "failure" of the 5 year does not auger well for what lies ahead.
Yves,
JJ is no more expert than TD. I've followed both from inception and JJ commentary, while plain vanella can;t compare to the wholistic approach by TD re lev loans, cds, derivatives and corporates/govs. Moreover, TD navigates the entire FICC and equity complex in a manner that JJ does't match.
JJ has an ax to grind in that he used to workj at the NYFRB (I recall). Correct me if I am wrong. That said, this is a debate about technicalities. TD is making a point about the auctions which neither you nor JJ address. That is, Is the Fed intervening in the market to clear decks for auctions. Look at their actions of purchasing in the am to auction in the afternoon.
I guess its ok if they "only" but 50B a month? Isn;t that the point. Whether they are buying on the run or off the run, this isn;t nearly as complicated as the "experts" would have you believe.
Its simple: treasury auctions, Fed prints notes to buy them back. Why debate esoteric mechanics when the point is that simple.
Why is it left to a blogger (TD) to yet again breaking a supremely important story? The HFT scandal was not even mentioned by MSM, SEC etc. until Tyler starting sniffing around.
FED and Treasury are colluding together, who cares who's which's puppet? Detail without distinction in my pov.
Never thought I'd see the day, that you defend the FED against this charge — especially with all their machinations and manipulations thus far? They are propping up by any means possible…now resorting to snake eating its own tail.
Yves is bringing it this morning!
To Bruce Krasting and S who state that the Fed is intervening:
It appears that Durden channeling Martensen is making a dramatic assumption on the basis of a single day in the open market. I didn't get the impression from Yves' post that she is stating that she "knows that the Fed is NOT surreptitiously intervening"…rather, I got the impression she is simply saying that one should not draw conclusions and hyperventilate on the basis of such a small sample.
And that it's these knee-jerk kind of conclusions that diminish the credibility of blogs.
Hell…I wouldn't put anything past these guys at the Fed. But Durden has made some wild assertions…and that blog stretches credulity on a daily basis.
The fact of the matter is that it's a Financial Tabloid put together by some very smart people.
But it doesn't negate the fact that tomorrow morning there's a damn good chance that Tyler Durden will splash a cover story on Zero Hedge that Tim Geithner is the alien love child of Hank Paulson and Xena the Warrior Princess. And that Lil' Tim was put on this earth to be the keeper of Goldman Sachs' Secret Proprietary Flash Trading Algorithmic Alchemy.
Yeah, I see. Still believing in experts, are we?
This is akin to music labels or publishing companies buying their own records or books to push their product up in the charts or book rankings.
If nothing else it is pretty much dishonest and it may show that interest in treasuries is not that great anymore, which might be a problem for the US at some point.
Yves, I agree with you about TD hyperventilating, but I would like to understand a few things about this issue.
I does seem to me that the Fed wink, winked at the primary dealers to make the 7-year auction go well, especially after the bad press surrounding the 5 year. The Fed must have thought there was a chance that the auction (in a fairly new and rare maturity) might have drawn little interest and possibly failed–an event which would only have exacerbated questions about the current policy.
My questions would be: does the Fed normally buy up almost half of a new issue in the course of its open-market operations, and why is it buying longer maturities as part of its open-market operations, since these are supposed to be aimed at short-term interest rates (or so I have been told)?
Is there anyone who can put some numbers to the percentage of a new issues that the Fed normally purchases as part of its open market operations?
The Fed's purchase of half of a new Treasury issue–if I'm reading this data correctly–sure sounds like monetization to me. If it quacks like a duck. . .
I'd love to be talked out of this line of thinking, because if it's correct there are going to have to be some serious changes in the way I invest.
I'm not a bond maven either, but it would be stupid for the FED to do something so blatantly destructive to their credibility with so much debt in the pipeline. The real story is what did Hank Greenberg do with the money?
Rob Kirby has done tremendous work regarding JP Morgan's interest rate derivatives. Although a bit esoteric I think that's where the real story is.
http://www.kirbyanalytics.com/
Sorry about the shoddy data on my part–it looks like the
Fed purchased 15% of the issue, not almost half. Still, is this normal?
Dan Duncan
I have been a fan of Yves from the getgo. That said, I wouldn;t call that article hard hitting. In case you missed it the only way the american people will be aroused is through a little poupulist sensationalism. Yves has been harping on the same points for years in a more demure fashion. TD does it in a slightly more aggressive fashion. His cadence doesn;t dilute the message. By the way if you are interested in aliens you should read abovetopsecret. And to that end check out the article in Slate re the future of the USA. Indeed the futurists, for what it is worth, suggest perousing all these outside the norm information sources for a "possible" glimpse into the "possible" whether probable.
Zerohedge offers more "insightful" commentary on an hourly basis than the collective MSM does monthly. As for the blog comps there are varying opinions as to what constitutes analysis. All are good reads – Yves being among the best. There is however a distinction between someone who does critical analysis vs. responding to the MSM. As far as I am concerned ZH is one of the few blogs that tackles issues not spoon fed by MSM. The shooting fish in a barrel gets old when it comes to the MSM. Perhaps that is what has everyone in the sphere so perturbed. No one has a monoploy on truth – but safe to say ZH has done a better job than anyone at ferreting out that which remians sacred among the legions of MSM pleebs.
Go read Gladwell's essay in NYer re the CEO of Tibco and his daughters CYO team. TI mike offer some insight into those unwilling to play by the "rules"
BTW Yves – good that you removed that open ID thing.
Thank you for picking at ZeroHedge where it should be done. Screaming for the sake of screaming does not clearify anything, and I completely agree on your analysis of that blog. Just because someone sends a daily stream of words into the blogosphere with a few added graphs etc, does not mean that person is a financial wizard or knows all ins and outs. True knowledge on the world of finance is often hard to find on the blog, especially outside equities.
Yves you missed it BIG TIME. Its very clear that unless the Fed implcitly (or privately explicity) guarantees the funds for the Primary Market Dealers, the dealers would not bid! Period. Who would they sell them to if not the Fed?
Its very clear that the snake is eating its tail and that the end is this corruption cant be far off, that being default or serious commodity hyperinflation. The commodity markets are telling us that the monetization argument is spot on.
PAY ATTENTION YVES..youre losing it!
A blogger pissing contest!
woohoo! cool!
Sorry Yves, but I also think you have got hold of the wrong end of the stick here. I explain why in detail in a post on my blog, but in a nutshell, the point is that, for good reason, the Fed is not supposed to increase its treasury holdings in auctions, so when it buys a large chunk of a new issue a few days after the auction, it is not unreasonable to wonder whether the Fed is observing the spirit of that rule. The issue is not about the amount of liquidity added (so it is legitimate to discuss a single treasury auction), but how the liquidity is added.
Anon10:35
Far from a pissing contest, this is one of the major strengths of blogs–people can go through different interpretations of data and hopefully come to better conclusions.
The economics behind Tyler's article is wrongly premised. It's based on a "loanable funds" doctrine of government borrowing, which is predicated on a non-existent gold standard. In reality, government spending is never constrained by the quantity of bonds that the markets are willing to purchase; rather, bond sales are undertaken to provide an interest bearing alternative to cash and excess reserves. The fact that a 7 year auction "fails" simply reflects a desire to hold more fiat money (for whatever reason) and less higher yielding bond paper.
Government spending is only constrained by private sector willingness to provide goods, services or assets to government in exchange for government money which is ultimately derived from the public's desire for money with which to pay taxes and to hold as net saving. Anything for purchase in terms of the domestic currency can be had through government creation of fiat money.
I had a great deal of interest in the 7-year bond. Then the price got, by my calculation, a bit rich. Then I find out that the Fed has purchased from the PD's something north of 10% of the issue. The effect of the Fed's purchase was to hold interest rates flat.
So, the Fed is in the market attempting to hold interest rates down. Anything wrong with that? According to its charter the Fed is supposed to foster market stability and encourage full employment. What's wrong with that?
Just about everything the Fed can do works to create false or misdirecting price signals. Any time the Fed buys Treasury debt it is putting money into circulation. Any time it sells Treasury debt it is taking money out of circulation. Those actions have long been taken to the turf of the Fed. Almost since its creation in 1913, the Fed has been effectively monetizing the Federal Debt. TD etal can go over the top all they want and miss the fact that the events surrounding the 7-year bond are a fly on the elephants ass. The canard that needs to be addressed is that the Fed can foster, direct, manipulate the economy in ways large and small.
See what is! We can't borrow our way to prosperity!
It never ceases to amaze me when some bloggers (like Yves) completely take out of context what someone else says and then blast away at it.
My issue with MONETIZING the debt is that BERNANKE SAID UNDER OATH THAT THE FED WOULD NOT DO SO, WHILE IT WAS IN FACT DOING SO.
The buying of "on the run" securities – that is, nearly "as and when issued" through the printing of new money is the definition of monetization.
Is defending PERJURY now part and parcel of Naked Capitalism?
I guess so.
Over at The Market Ticker I will continue to point out perjury as the offense against our legal code that it is.
Can any of you guys read? This is a really simple point. One day of open market ops means squat. The Fed could be monetizing big time on its open market desk or this means nothing when you put #s together. Have you done this? Has TD done this? This is a legit issue and all I see is knee jerk defense of TD and no one doing the work, No wonder this country is going down the tubes.
marshall@
"The economics behind Tyler's article is wrongly premised. It's based on a "loanable funds" doctrine of government borrowing, which is predicated on a non-existent gold standard. In reality, government spending is never constrained by the quantity of bonds that the markets are willing to purchase; rather, bond sales are undertaken to provide an interest bearing alternative to cash and excess reserves."
uhm yeah bonds are mechanism to halt the market from imposing a gold standard. I wonder what would happen if the fed simply decided the whole biond thing was awaste of time. Actually by your logic the treasury only pasy interest becuase it is a changinbg "preference" I guess there is no cost to money. I suggest you look at the gold price over the past decade- there is a price to be exacted. The only thing you get right is that the treas/fed uses debt backed money to fight back the market desire to return to a standard.
S,
If they held a surprise auction at 3am tonight and didn't tell anyone it would probably fail too.
All the auctions show is a maturity preference of those participating.
The ability for govt to spend is not inherently constrained by this process. Auctions inherently function to support term rates and not to fund spending. There are no consequences one way or the other apart from the term structure of rates at that point in time.
The use of the term "borrowing our way to prosperity", reflects a misunderstanding about the nature of modern money, which is not externally constrained the way we were on a gold standard. That was my main point. The other point is if the private sector has a desire to net save (that is saving out of income flows minus tangible investment in durable assets) greater than zero at what could roughly be considered full employment or full capacity utilization or potential output, unless some other sector or combination of sectors (say foreign and government) is willing to deficit spend an equal amount, there is no reason to expect the economy to achieve full employment.
In which case, all the output of all the unemployed productive resources is irretrievably lost…until we discover a time machine.
So yes, if the private sector desires to net save at full employment, the only way to prosperity, as in full employment and no irretrievably wasted output, is through some other sector borrowing (deficit spending) to an equal and offsetting amount. If the private sector wants to net save at full employment income levels, somebody needs to deficit spend and needs to be issuing liabilities for the private sector to accumulate as financial assets. Otherwise, income will fall short of full employment levels.
I realise people have an ideological hang-up about the government actually contributing to our prosperity, but this is the 6th grade algebra of financial balances…which remains beyond the grasp of most professional economists, although Krugman is starting to get it, as you will see in the note linked below.
http://neweconomicperspectives.blogspot..com/2009/07/employing-krugmans-cross-farewell-mr.html
My apologies in advance for this not being a germaine to the 7yr Fed OMD operations, but it needs to be said…
Narrator: I want you to listen to me very carefully, Tyler.
Tyler Durden: Okay…
Narrator: My eyes are open.
[Script from end of "Fight Club"]
Marshall@
Gov't don't contribute to prosperity – they destroy it by sucking up the productive capital you appear to be so concerned about and deploy it in a redistributive manner to mostly unproductive works. I realize this is beyond the grasp of most economists, but shrinking a balance sheet from an irrational level only to fill the void with irrational levels of gov't debt to buttress the old irrational and unstable economic equilibrium is stupidity.
This is a supply side problem. Don't take my word for it – go check out the world bank talking about destroying capacity globally to fend off vicious deflation (although wouldn't that constitute compounding the irretrievable productive capacity loss?) They are not good economist.
Productive capacity funded by excess debt is not productive. It is malicious – indeed a good economist might even argue that that it is even worse in that it creates massive distortions in the allocation of scarce resources – or is that the point? Gross leverage has become the new "made in the USA" which is why it is understandable that some – not 6th graders mind you – find it inconceivable to grasp. That haze is thick.
"If they held a surprise auction at 3am tonight and didn't tell anyone it would probably fail too"
Actually per your own logic it would depend on whether people pref to get paid nothing from a suppressed yield curve. Such preferences would foretell the outcome. In economics people act rationally right?
"All the auctions show is a maturity preference of those participating"
Yeah this is what the Citi SIV manager convinced himself. Same syndrome afflicting the UST – and your right it is the preference of the buyers. Their motives are not benign of course.
"The ability for gov’t to spend is not inherently constrained by this process"
Marshall@ cont'd
Yes I read the cross of gold speech too, only I don't view discipline as a nefarious force. As for misunderstanding the nature of money, this is best left to the academics with whom I have spent enough insufferable time. If money's role has changed, somebody ought to tell those holding fiat (oh I fogot most Americans don;t have any savings, othher than inflated home and stock equity). I see your point on money not mattering in this context, but for the other end of the excretion tube, our funding partners.
While you lament the standard, doesn’t; a pernicious rise in the base metal complex (Gold aside) not impose a standard nonetheless? Gold is a store of value which time tested doesn't subject itself to the whims of fleeting central bankers. That is why it is where it is. Money on the other hand has become a perverse vehicles of the central banks to pretend that they can sustain consumption disequilibrium levels under a dollar/commodity standard.
The simple math of balance sis of course obfuscated by economists who assume away artificialities (or externalities for the white helo crowd) like perverse central bank policy and leverage induced asset inflation. So that deficit that you are so fond of funding to close the gap (or whatever the CBO or Krugman pin it at) is nothing more than an illusion. This isn't a demand problem it is a supply problem. As an aside, what's the problem with Africa? if they only had a central bank because of course debt is a whimsical vehicle for preferences. Zimbabwe, eurika.
The leverage haze pulled forward massive demand and gave the lie to what is sustainable (at least in the USA). I would put more credence in your argument if you at least made the argument that the collective whole needed to see their standard rise at the expensive of who? Oh how inconvenient, looks like that balance doesn't inure to yours truly. You make the same sophmoric savings preference arguments in drag of course that greenspan made and still makes. That time has passed.
You also make the same argument that Yellen made, in other words deficits don't matter unless they are permanent. Huh? Well by my reading, since 2000 the US has lost 1 million jobs. I know productivity right. But wait, wages are also down as are hours worked. Productivity right? But GDP grew by 5 trillion? And Exports are down? Something is out of balance. Hugh Hendry does a good job of articulating how massive demand was pulled forward (Google search it on FT.com).
"the only way to prosperity, as in full employment and no irretrievably wasted output"
Yes we need 5 LCD in every pot and 3 traded in clunkers, put it on the card please.
"I realize people have an ideological hang-up about the government actually contributing to our prosperity, but this is the 6th grade algebra of financial balances…which remains beyond the grasp of most professional economists, although Krugman is starting to get it, as you will see in the note linked below."
2 words: "fuzzy math"
"he tends to hyperventilate, which discredits him even when he has a legitimate target. And he does not seem to know the limits of his knowledge, and will also take on issue where he does not know enough to discern what is significant and what is mere noise."
The same could be said about every regular media outlet in the country from local radio news stations to the NY Times. I have noticed that in recent months Bloomberg.com has taken to posting headlines that when one clicks through to read, the only content is a statement "Story to Follow".
As far as I am concerned, Durden's bombastic style takes nothing away from the lines of inquiry pursued at the site. This individual is pursuing legitimate questions…let the targets of same provide us with clear answers rather than ad hominem attacks or platitude-filled press releases.
Marshall@
One final question? if I offered you free money at midnight would you show up?
Here's a snip from Tyler's post:
The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed's immediate prompt monetization of a large part of the directs' balance.
He doesn't seem to be hyperventilating about what the Fed did, but asking what they did, if anything.
If its true that the Fed did go to the Primary dealers before the auction and told them they would buy from them soon after, that would be manipulating the markets.
So instead of a simple monetization of the debt, the Fed would be creating the impression that there was more 'market' demand than there really was.
To S:
What are you talking about? OK, you've been a fan of Yves' and clearly you're a HUGE Tyler Durden fan. Great.
OK, now that we got that out of the way, I'm simply asking: Are you arriving at the conclusion that the Fed is surreptitiously intervening on the basis of a single trading day? [Because that appears to be Durden's sample size.] If you have something besides an opinion on whether the Fed is conducting itself this way, then by all means…please share.
Also: At the end of your response to me, you wrote:
"BTW Yves – good that you removed that open ID thing."
What is that supposed to mean?
Am I supposed to be relieved?
And here's another odd statement from you to another commenter:
"One final question? if I offered you free money at midnight would you show up?"
Yeah, I know it was a part of an ongoing exchange the two of you were having…but still…kinda weird.
cm,
Do you read the news? The Fed has officially devoted up to $1.050 trillion to manipulating the markets, $300 billion in Treasury purchases and $750 billion in mortgage paper. That's why this thread is so off beam. Market manipulation is official policy. Only question is if they are doing more than they have already said they are doing.
Like Dan said, one day of action on the desk proves zip. Durden is off making accusations with no proof. And contrary to what all you fans think, that DOES discredit him, makes it real easy to dismiss him, Is that what you want?
If you were really on his side, and really want things cleaned up, you'd want him to turn it on when he has the good, not for daily sport to keep you all wound up. This firing off pot shots and having misses makes it easy to ignore him as noise.
It's all semantics anyway you look at it. The meaning is the same here and in China. The final unpalatable truth, that I have acquired a taste for, is the outcome, and that is something that pleases me, being that the sure bet is short the 10s and 30s.
It don't matter to me who the bitch is, Fed or Treasury, although I agree that it's the Fed that's wearing the heels at the moment. Not that there's anything wrong with that.
It's not a big deal……
However, if I hear you take sides with the likes of a Gasparino or Kneale, I'm dropping you like a hot knish. I hope that this isn't what this is all about….
Best regards,
Econolicious
As as been mentioned, the Fed has bought over 1T of Tbonds and Agencies.
It has worked so far. Interest rates for the 10 year are at 3.85%. Without this constant intervention rates would be much higher. Possibly 5%. If that were the case mortgages under 400K would be at 6+% and for homes worth $1mm the rate would be 8+%. That would be a wipe out.
There is not much room to wiggle here. Another 1.5% on long term rates would be a tipping point. Bernanke knows that. So he is risking everything.
A question for Mr. Jensen. I was on a currency desk for many troublesome years. I talked to the Fed FX desk almost every day. Other CB's called to chat as well. They had a very good sense of what supply and demand was. They expressed their concerns and objectives.
You were on the other side. With the Fed and on the bond desk. Did you talk with the primary dealers? Did you make an effort to get a handle on what actual S/D conditions were?
If yes, then do you think that is occurring today?
I hope you say yes. I am sure they talk with PDs very regularly.
Now a specific question. There is a public announcement on these buy backs. Do the PD's know this before I do?
Dan@
The snarky personal attacks is unbecoming as is the big brother bad as$ routine. Comes off as wanting, sad and pathetic.
Whether I have an opinion matters not. I do not believe I posited one about TD's opinion or the ones you ascrive to him.
But since you asked I'll give you my opinion. People who spend their time debating what is and isnt monotizing based on one data point miss the boat entirely. As one comment states: it is official policy. Whether technically they buy an on the run or off the run or $50 billion in agencies is rather irrelevant isn't it. I do know that that the little thing called mosiac theory is a powerful tool. Changing definitions of indirect bidders whether benign or not and the timing of said change would cause anyone not captured as Yves like to say to ask more questions. Coupon passes in the near vicinity of an auction add another data point. Bernanke not knowing what is being done with those FX swaps is another. Etc… You and I speculating over the manner in which a stated goal is implemented is uhm worthless.
It does however lead to the later point, which was the thrust of what I wrote. To repeat there is a difference between responding to a main stream media article and doing critical analysis. Like him or not – I view him as yet another interesting read – TD in the course of a few months has stired up a hornets nest in the Senate (Schumer) and elicited editorials from the likes of the NASDAQ CEO(in today's FT). Can you point me to a similiar blogshpere initiated article that instigated such agressive action other than the Dan Rather memo takedown?
You obviously have strong feelings about ZH/TD. You should go over there and channel your inner hate. It would be quite a marvel to see two titans go at it.
As for the open ID issue, the comment section for a while was closed to people who didn't have an open ID. Unless I missed something? Nothing nefarious. Really.
As for the comment on printing money at midnight see the first comment by good old Marshal. Actually it is not wierd at all. I was being ironic; the nuance was obviously lost.
Yves,
I've been reading the ZH blog for months and all I can say is that there's something in ZH that doesn't fit with your approach to the analysis that you carry out in your own blog. For "Tyler Durden" and others who comment there, everything is a conspiracy. To me that means that they know very little of what they are talking about. They want an echo chamber, but you should not take any part in promoting it.
Hello, Chris Martenson here.
Just wanted to say that while I applaud the interest in this subject, and I am in awe of the knowledge on display here, I believe that some of my words and intent have been taken out of context or misinterpreted.
1) My only point in raising the specific 7-year CUSIP purchase by the Fed last week was in the context of the troubled 5-year auction being followed by a miraculous 7-year auction that now appears less-than-miraculous due to that fact that the fed took 47% of the Primary Dealer take off their hands a few days later. Yes, that's a dot-connection that seems entirely relevant to me not because it reveals a greater degree of manipulation (the $1.25 trillion MBS target seems a tad larger to me…) but because it possibly reveals that there's rebellion brewing in the Treasury auction world. While this may be over-reaching, it could also be legitimate spoor to be read as we try and illuminate some of the path before us. I was not, repeat not, making any overt claims about the extent of monetization in my post, just that one odd coincidence concerning the 7-year auction. I do collect and have all the base data for all the auctions and I track them closely and the Fed is very much on track with what it said it was going to do so there's not much of genuine interest there for me yet. But stepping in to assure a "good appearance" at a critical auction. I consider that quite interesting and newsworthy.
2) My comment about "A more honest and open approach…" for the Fed to pursue, as my long-time readers will attest, was not a comment about what is legally permissible by the 1913 FR Act (yes, I've read the whole thing) or normal operating procedure (yes, I know how the Fed & Treasury operate) but rather just another statement about another way that complexity obscures our official monetary and fiscal actions. I regularly opine that we would be better off by being more straightforward in our official reporting and actions. I honestly didn't know that this piece, out of the thousands that I have written, would catch a bit of internet-lightening and so I wrote a quick piece with my usual audience in mind. In retrospect I wish I would have framed that sentence a bit more because it is now being bandied about as proof that I don't know how the Fed actually operates and, therefore, the rest of the piece (and maybe more!) is bunk as well. Ah well, such is life on the intertubes.
So that's it, I think it smells that the 7-year auction seemingly went so well the day after the 5-year fiasco and then days later we find out that the Fed bought nearly half of the total load carried by the Primary dealers.
Perhaps it's just a quirk in the largest bond auction week in history, or perhaps it portends a dangerous shift in Treasury appetite and is a sign that the greatest bubble of them all (Treasuries) has a small tear developing at the edge. I will continue to track the edges of this fascinating story because I personally don't want to be in the position of someday reading about it above the fold in the NYT with everybody else.
marshall,
thanks for the excellent explanation. i think you're right about ideology getting in the way, but it's such a deeply held and unquestioned ideology that it's hard to even know it's there. at least that's the way it's been for me (non professional and only now this past year attempting to learn about these matters).
in addition to excellent the Economic Perspectives from Kansas City blog you mentioned (and sometimes post at), i've found billy blog very helpful. and warren mosler's recent post Update: 7 Deadly Innocent Frauds is a simple (and entertaining!) explanation which i wish everyone would read.
can you suggest any additional links for further reading for those of us still trying to wrap our heads around these ideas?
Yves, thank you for picking up an interesting post which I read before noticing your post and also for allowing me to post the second anonymous comment.
Tyler Durden's and other post, as far as I understand after long scraching my head, tries to raise a question of confidence in a market.
Suppose that there is a product market with the sole seller and a lot of buyers, among that 20 some well-known big buyer-wholesaler, and most ordinary buyers need to buy from the big wholesalers.
One day, the sole seller announced a product sell plan of 100 units, and a freind of the sole seller later announced, with a less publicity, a possibility to buy all of thme from the big wholesalers a few days after the planned sale. Some market observers found, after these events, that 47 units the wholesalers bought went to the friend of the seller.
Can you maintain the same level of confidence in this product market you had before after knowing these findings and numbers (is this market normal, is the pricing fair)?
I think Tyler Durden has made a legitimate point. The fact he mentioned does raise suspicion that Fed is participating Treasury auctions via a proxy though one does need more facts to make a conclusion.
I am agnostic about whether Fed is puppet of Treasury or it is backward and it seems there is no consensus about that. So it is weird to attack him on that point and that is not very relevant to the point Tyler is trying to make.
Brutus:
And since the quarrel
Will bear no color for the thing he is,
Fashion it thus: that what he is, augmented,
Would run to these and these extremities;
And therefore think him as a serpent's egg,
Which, hatch'd, would as his kind grow mischievous,
And kill him in the shell
I am Jack's inflamed sense of rejection.
The Fed, a private bank and arm of the Bank of International Settlements, controls the treasury. Ask Henry Paulson who told him to threaten Ken Lewis of Bank of America. The sooner we banish the Fed from our shores the better we will be.
Heli Ben is not Heli anymore. He fears deflation yet he cannot inflate. I believe that rising interest rates is deflationary, and that this is why he must protect the bond market, keeping house flippers in foreclosures and car buyers and the Chinese happy.
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