Sign That Fed is Pushing on a String?

This tidbit from the Wall Street Examiner came via reader Scott:

Once upon a time, when faced with a market meltdown the Fed would have pumped a wad of cash nto the market and it would have been good for a rally of a couple or three hundred points. Today the Fed added a whopping $16.75 billion, and not much happened. It’s not a good sign. The Federal government is pulling out all the stops here, but if the FCBs are no longer playing ball, it won’t matter. The game will be over. Tomorrow night we’ll find out whether the FCBs have taken their ball and
gone home, or whether they are still in the game.

The Fed appears to have pressed the panic button today, adding $16.75 in overnight repos against no expirations. We’ve seen the
Fed do this in the past when the market was on the verge of a meltdown through major support. For the stock market to have such a nominal gain in the face of such an enormous cash injection shows just how bad things really are. The huge add brought the 5 day net to an add of $17.85 billion before weekly changes PDCF and Discount Window that won’t be known until tomorrow night. The Fed also settled the usual 1 day forward 28 day term repo rollover.

This is indeed sobering news on both levels: that the Fed is rattled enough to break glass and administer oxygen, and that the patient barely responded.

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  1. doc holiday

    The patient needs to die and the synthetic life support is just a matter of keeping a zombie sitting up in bed — for the benefit of the widows in the oxygen tent, who are smoking joints. This is insane to drag out this game, because what the market needs, is a slap in the head and a full dose of justice, with investigations, indictments and boatloads of subpoenas, which will be linked and backed by grand jury hearings which will result in massive amounts of criminal conspiracy charges, resulting in serious prison time for the wall street and washington mafia coup!

    The wall street market will die along with global stock markets if we don’t see realistic prosecution of fraud, false and misleading information, collusion, conspiracy, malfeasance and a host of fiduciary breeches that are tied to this Bush era of non-regulation.

    If the markets do not see realistic attempts to provide justice in this systemic collapse, then it will take all that much longer to restore confidence in the systems. If our government fails to provide justice, it will fail as will our society. We can not afford to continue saving friends of Paulson, friends of Bernanke, friends of nepotism, friends of Mozilla, like Dodd, like every senator and congressmen that is connected to this ring of extortion that held America for ransom!

    No one is protecting America, but we need to ask if we should save the people and the mechanisms involved in this chaotic mess?? The insanity of this, is that so many guilty people are left in positions of power, where they will lay low like parasites and cock roaches and thus wait a few weeks, hide in the dark, and then go back to the business of granting themselves option grants an spinning bullshit out with accountability saved primarily for lobby groups that will push for better loopholes!

  2. Matt Dubuque

    As previously noted by this poster, there is only so much the Federal Reserve can do to prevent a DEFLATIONARY BURST.

    The Fed just isn’t as big a player in the global markets as they were when Milton Friedman did his best work in the 1960s, a time known as the Early Cretaceous period of central banking. That era has passed and we are now in the era of massive bank deregulation best described as the Eocene.

    Keep in mind that the transmission mechanism to the real economy of central bank actions has been dismembered with the addition of nonbank actors, offshore banking facilities and the explosion of derivatives into the mix. Gordon Sellon of the Kansas City Fed is the first person I know of who first began eloquently addressing this issue in the early 1980s. And as Corrigan has noted, this problem has intensified greatly since that time!

    Those who think the Fed can simply “reflate” the economy by “pumping money” into the system are sorely mistaken.

    But my judgment is that it may well to take a REAL depression for the Friedman jihadis and their PRIMITIVE mathematical constructs (that assume that exogenous shocks are distributed through the economy in a Gaussian manner) to understand this.

    It doesn’t matter to me. I can go with any scenario. but the growing TAIL RISK (i.e. it is still UNLIKELY, but this is a Cauchy environment of outcomes) is that a DEFLATIONARY BURST cannot be controlled by the Fed.

    We need a GLOBAL central banking response to a GLOBAL problem, COUPLED with sane and rational policies from the regulatory and fiscal authorities in the sovereigns.

    But tell that to Trichet, the Bank of England and Barney Frank. We’re not even CLOSE to having the broad consensus we will need to pull us out of this mess. All of them seem to be insurmountable obstacles to real progress to this writer.

    As previously stated, we need the 6″7″ Paul Volcker to smash some skulls together with full force to inform the naive what is at stake here.

    Only Volcker has the broad credibility needed to fix this.

    Volcker dismembered Arthur Andersen (something no person believed was possible), smashed inflationary expectations with his Belgrade moment in 1979, understood the wisdom of the Kansas City Federal Reserve branch when he set aside blind adherence to monetarism in the summer of 1982 and had the courage to tell the truth about Kofi Annan’s asinine (bordering on the criminal) administration at the UN.

    Matt Dubuque

  3. Dean


    Volcker was a good and effective inflation fighter. However, the system has already opted for a slow deflationary scenario ala Japan.

    I do not see at this point a sharp recessionary/depressionary contraction to get us out of it in the typical 18-month period.

    Are you a follower of Prechter’s Elliot theories and the fractal “golden mean” explanations?

  4. don

    The Volcker era initiated the decline of labor/income to subdue inflation. Labor/income has never recovered since, thus the need to substitute income with debt, and the shift to deregulation, privatization and all the advantages that that gave to capital at the expense of labor. Hence the beginning of the credit/debt bubble. To make a hero of Volcker is to ignore history.

  5. Anonymous

    A Cauchy environment? I’ve heard of the Minsky moment, but I assume you are talking about Baron Cauchy? The one Abel accused of being “infinitely Catholic, infinitely bigoted and infinitely mad”?
    So what is a Cauchy environment?

  6. John D

    Anonymous —

    Matt means Cauchy distribuion as opposed to Gaussian. A Cauchy distribution has a fat tail, if I recall correctly.

  7. STS


    I think Matt means Cauchy environment as in Cauchy distribution. It’s trendy to say that various random variables used in economic or financial models are Cauchy distributed because a) they obviously aren’t Gaussian, b) Mandelbrot made various arguments that Cauchy distributions might be more appropriate in some cases, c) it sounds cooler and more specific than just “not Gaussian”. It often doesn’t mean a whole lot ;)

    Yes “fat tails” are the usual reason for starting to talk Cauchy instead of Gaussian. Cauchy distributions have fat tails, but still have a lot of nice properties (like infinite divisibility) that allow them to be substituted in for Gaussians without inventing a completely new approach to modeling.

  8. doc holiday

    dean said…,

    LOL, yah, not a chance that anything will happen, but keep an eye on Paulson, as he will be the keynote speaker for SIFMA soon, and you can imagine that his friends there will thank him for a heck of a fine job and then chit chat about the way they want things to go down in The White House…

  9. Matt Dubuque

    The fastest way to understand Cauchy distributions is probably to start with Mandelbrot’s work “The Misbehavior of Markets”. Mandelbrot is the Sterling Professor of Mathematics at Yale and he invented the nonlinear mathematics of fractals.

    That book is here:

    There are MANY SERIOUS shortcomings in the book, but it is the fastest way for a layperson to get up to speed on the topic.

    Mandelbrot’s work was later expanded by Nicholas Taleb’s black swan work.

    Here is a short excerpt from an otherwise mixed review of the book which describes more fully the difference between bell shaped curves (Gaussian spaces) and distributions with fatter tails and greater kurtosis (Cauchy spaces):

    “The author renders a brilliant critique of modern finance theory. He criticizes all its components, including CAPM, the Efficient Market Hypothesis, and the Black Scholes model as being flawed. All these theories rely on two main assumptions. The first one is that market prices are normally distributed. The author, using price charts, demonstrates that market prices do not follow a normal distribution; but instead a Cauchy distribution. Such a distribution is associated with fatter tails. This means that catastrophic drop in market prices happen more frequently than a normal distribution suggests. The second assumption of modern finance is that market prices are independent of each other. Yesterday’s prices have no influence on today’s. The author makes a case that even if prices are not correlated, their volatility is correlated over time. Thus, big price swings tend to cluster. If a stock moved by 10% yesterday, it is likely it will move by an above average amount today even if we don’t know the direction of that change. He calls this correlation of volatility (instead of price) long-term dependence.

    Because the two main assumptions of modern finance are flawed, all related models are flawed as they understate risk. If such models understate risk, they actually overprice stocks and underprice options, and also understate the capital financial institutions should hold to withstand market risk.”

    Matt Dubuque

  10. Matt Dubuque

    Were these system RPS or customer RPS?

    GREAT BIG difference between the two. The two generally give divergent signals w/respect to the path of future Federal Reserve open market operations.

    Dean, I’ve been thoroughly familiar with Robert Prechter since he was a technical whiz at Merril Lynch in 1981. I have extensively explored his Elliot Wave work over the last 27 years.

    Nothing personal intended to you, and I mean that sincerely Dean. You seem like a bright and sincere fellow, but I find Prechter’s work to be absolutely worthless and a complete waste of time.

    Simply stated NONE of my work is done with a PROTRACTOR; I find them an abject waste of my time.

    Nothing personal intended, but you asked me directly and I felt compelled to answer directly. I have an overwhelming familiarity with his work and reject it absolutely.

    His best work was at Merril; since then it’s been a slow decline into trivia.

    Just my view and you of course are entitled to your viewpoint held in good faith.

    Matt Dubuque

  11. Anonymous


    I'm becoming addicted to your analogies! Sincerely meant!!

    In light of the first two paragraphs of your comment, I cannot recommend strongly enough a book Ive just commenced called "Internal Combustion: How Corporations and Governments Addicted the World to Oil and Derailed the Alternatives" by Edwin Black ( Im only up to page 40 but needless to say, the justice you refer to will never prevail as the practices are far too entrenched….

    Trust me, you'll enjoy the read (or at least the first 40 pages).

    Apologies for this digression to the thread.

  12. a

    “If such models understate risk, they actually overprice stocks and underprice options, and also understate the capital financial institutions should hold to withstand market risk.”

    Take, for simplicity, vanilla options on a stock. The amount of capital at my bank depends very little on the model (for vanilla options). It is determined by VAR. VAR looks at the variations of the stock in the past y days. Let v_i be one of these variations, and let S be the closing spot price yesterday, and let C(x) be the value of an option for spot x. VAR calculates C(S) – C(S * v_i) and says this is the profit/loss on day i for the option. Now while the value C(x) depends greatly on the model, the difference C(S) – C(S * v_i) depends much less.

    The model chosen is not really a major source of error. The big error is using VAR to begin with.

  13. Richard Kline

    Given the repo move and other recent actions, it is clear that the present crop of public financial officials will stop at NOTHING to support present (radically inflated) asset prices. This is folly, but predictable folly. Said authorities are beholden to the holders of said assets, and will put the full weight of public money behind the latter’s holdings. They will fail. Only continued buying at or near face will sustain asset prices. Instead, purchashers of all asset classes are paying less for patently overvalued assets cum paperjunk. There are far more assets than public money, hence even prodigious buying, primping, pimping, priming, and flummery of all suasions simply will not sum to the scale of the task. This is pitiable to watch—but excellent theater for those who enjoy watching capitalists demonstrate the rather small margins of their actual competence. *Sigh* Let’s GET ON with this.

    Yo Matt: Those two contentions by Mandelbrot seem obviously sound on their face. It would be worth reading his data survey at some point. Presently, I’m busy turning over data clods in the Pleistocene, so I’m all booked up through year’s end. I do share your intellectual derision for the Freidmanites, though; slack lot of ideologues whose theories are now getting their shite-eating comeuppance. I rather less share your liking for Volcker, but I would put the need “for another Volcker—or the first one” in a different perspective. In a major financial crisis, one can depend upon the public authorities to blow it, and we only see this once again. Why?: They are sold to the failed paradigm, and cannot bring themselves to abandon it and its elite, so they all go down together. It takes the bad crash to blow the reputations of the former bag men and bring in fresh (if not necessarily competent) faces.

    And on another tack, yes, I do think that the attempt to sustain asset prices is directly tied to Republican appointees trying to stave off a true crash until after the election, but this is a secondary driver of present public actions. The guys at Treasury and the Fed would do what they are doing now anyway, only slower and more selectively.

  14. Richard Kline

    Concerning Elliot waves, I study waves and cycles in many things, but I don’t drink the methyl alcohol that flows through these particular loops, no. It is in principle possible from my perspective that long term oscillations do happen in prices; in fact some have been documented. Modern exchanged traded paper is just _the last place_ I would anticipate such oscillations as forming. Nor would I expect the regularity of amplitudes as posited in the Elliot wave approach, nor even less the proximate regularity of phasing. A principle reason for my disagreement, one of many but by far the most salient one, is that behavioral drivers which act as inputs to pricing actions must be expected to have multiple oscillatory inputs in modern exchanges whose phasings and functions are disparate, hence preventing the formal regularity which the Elliot model anticipates—and it is exactly that regularity which should exite ones intellecutal skepticism.

    I’m not prepared to get knotted up in a long discussion of this issue, but just for the record we can and should wave bye-bye to Elliot’s model in favor of different tools.

  15. Anonymous

    A trend that is discovered by an individual might be of benefit to that individual. Once a large number of players acts on said trend, the trend is changed by the actions of the many.

  16. S

    Those who think the Fed can simply “reflate” the economy by “pumping money” into the system are sorely mistaken.

    Yu realize you are calling Ben Bernanke an ass. he laid out his plan to make inflation go up by simply printing money and buying assets in 2002. Do you think he has changed his mind yet?

  17. Matt Dubuque


    I’m not calling Bernanke an ass. Don’t put words in my mouth. That’s extremely insulting.

    I’m convinced I have read HUNDREDS more internal Federal Reserve working papers on monetary policy than you.

    Of course I recall Bernanke’s statement.

    What he claimed at that time is not directly helpful today.

    Quite a bit has changed.

    Get back to me in about 3 years with your rebuttal please.

    You need to learn some lessons about the relative influence of the Federal Reserve that I am unwilling at this time to teach you.

    Matt Dubuque

  18. Matt Dubuque

    Again, you can’t draw ANY competent conclusions unless you know whether these were customer repos or system repos. As a general rule, customer repos are much less indicative of the direction of future Federal Reserve open market policy than system repos.

    But if it WERE a customer repo, that WOULD be noteworthy at this size and would merit exploring.

    By contrast, if it were a SYSTEM repo, it COULD have policy implications, depending on a few factors.

    But as a general rule, you should ALWAYS view open market operations on Wednesday with a grain of salt.

    You can discuss them, but there is ALWAYS the caveat that this comes from a Wednesday.

    This is because Wednesday is settlement day and I’ve seen Fed Funds spike by up to 30 bp over the decades for settlement issues completely unrelated to policy direction.

    And keep in mind we just had the enormous GSE bailout and several parties positioned themselves ahead of time and Wednesday is the day they need to settle up.

    But that ONLY holds true if these were SYSTEM repos.

    Asking us to make a judgment on these RP operations WITHOUT knowing whether they are system or customer repos is the same as a doctor making a diagnosis on a patient with a persistent, troubling cough, without an X-Ray.

    No competent doctor would do so and NO competent Fed watcher would dare comment without knowing what type of RPs these were.

    Matt Dubuque

  19. Yves Smith


    That tone is not warranted. While I very much appreciate the substance of your comments, I have been considering saying something for some time.

    You may not be aware of it, but your tone is often presumptuous and condescending. That is really not called for.

    Second, and more important, you are taking up more space in comments, both in number and length, than anyone else, by far. As much as what you say is often interesting, this is not your personal soapbox. Please be more respectful of others.

  20. Dean


    Thanks for the flattery re:my abilities; I have to tell you these days I seriously doubt that I have any and most importantly that my judgement remains clear and unbiased.

    Re: Prechter I do not follow him nor abide by his philosophies either. The only reason that I brought him up is that the “cash+bond” scenario that you seem to advocate coincides with his position as well.

  21. Matt Dubuque


    The point I was making with this post is that the monetarist’s insistence on using primitive mathematical models that assume that exogenous shocks are distributed over a Gaussian space is absurd and needs to be discarded.

    Fortunately our modeling has improved to a point where we use Cauchy spaces to model more closely who feels what shock and how.

    Although still inadequate, such models are a vast improvement over the stupid assumptions that those Friedman types stranded in the 1960s shout that we must use in formulating monetary policy.

    Fortunately these yo yos are not in control of the Fed anymore.

    Unfortunately, they get the most attention in the illiterate financial media.

    Matt Dubuque

  22. Richard Kline

    So Dean, I’m sorry but I can’t provide you with references to better models: they do not presently exist (outside of entirely proprietary and so unassessable ones). There _are_ background cyclial functions in mass behavior, and better modeling of THOSE would make possible a backcloth of trends against which price movements could be more substantively modled, both by the techniques Matt mentions but via many other methodologies as well.

    Such background oscillations are at a sufficiently gross level that I’m skeptical personally that week by week asset pricing movements correlate with them at more than a trivial level. Month by month patterns may well be more discernable in time. The results may not be any better than competent technical analysis as presently performed, frankly. The advantage is that long term comparisons could be much more substantively modeled, which in turn would give a better foundation for assessing short term price differentials.

    There is some published work on long term cyclical processes, but the only papers I would say actually capture substantive underlying movements are not directly related to price data, and so of no real use for this discussion. My own work on this isn’t in publishible form, so until and unless it is I’m only kicking up dust and signifying something.

    But I do think I can state with confidence the point I made in the comment above, that multiple oscillating inputs of different phasing will impact price fluctuations, and so the neatness of the signature posited by the Elliot wave approach is significantly inaccurate for anything I understand of such functions, even before considerations of its substantive accuracy (or really inaccuracy). Taking the instance of quantum mechanics, one can in fact construct a methodology which is predictive without being explanatory or even explainable, but the E-wave just isn’t such a tool.

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