Saturday, January 05, 2008

Robbing Peter to pay... Peter?

 I'm having a hard time understanding the results of the 'Slosh Report' URL link to the right under the Links list.  According to this, the Fed injected 124.8 billion into the markets on Friday, where only 12.25 billion was accepted.  A similar situation happened on Thursday, where $101 billion was injected and $10.5 billion accepted.  Things feel much different than they did on January 4, 2007, though there is only $4 billion more sloshing around than last January 4. 

This article tries to explain what the mysterious Fed really does with short-term liquidity, and what it is really doing... namely Jaw Boning.

The Fed – “Hocus Pocus – it's the same money!”

Last week, the Fed executed the first of its highly publicized “term auction” transactions. As I noted in A Little Acid Test for Fed “Liquidity” last week, the Fed had $53 billion in repos outstanding on Friday December 14, fully $39 billion of which were due to expire last week. This ensured that the Fed would initiate new repos of a similar amount. The acid test was whether the term auction repos would represent a) new liquidity, or b) just a different way of rolling over the same money. Last week, we learned the answer to that question is b.

You can follow along using the Fed's actual data using this link:

Source: Hussman Funds - Weekly Market Comment: Vanishing Act - Are the Fed and the ECB Misleading Investors About Liquidity? - December 24, 2007

What is the saying, "the US sneezes, the world catches a cold?"  I will be a bit more concerned when China happens to sneeze.  There are a lot more people in China.  Perhaps true liquidity is coming from non-domestic sources. 

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