Altruistica

"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

27 December 2006

THE DOLLAR BUBBLE; INFLATION SUPPRESSION; AND, UNEMPLOYMENT

A great post explaining the scam of continual coupon passes


The bubble in the dollar has been enabled by five distinct groups:

1. OPEC;
2. Bank of Japan;
3. Bank of China;
4. The Fed; and,
5. The money center banks.


The first three institutions are enabling the dollar bubble by recycling their dollar into treasuries – vendor financing if you will. However, there seems to be a continual misunderstanding about the role of the fed and the money center banks. The fed previously stated role is to protect the viability of the currency. Of course, we know that this is hogwash. And, its role has now even changed into ‘inflation targeting' and ‘full employment.' Basically, the fed is set up based on the ideas that rising prices are both useful and necessary. So, onward to the trade cycle.

TWO CLASSES OF CREDIT
Here is where the general misunderstanding occurs, that there are two classes of credit:

1. Commodity credit; and,
2. Circulation credit.

A healthy economic expansion is based on commodity credit which is the transfer of savings from the saver to entrepreneurs for productive expansion (China). This withholding of consumption allows for ever greater levels of production; and is limited by the amount of saving.

Then there's circulation credit – which is credit granted out of funds especially created for this purpose by the money center banks. Credit is created out of nothing, it's the creation of more fiat money; and is basically inflation. It increases the amount of money – and money substitutes; and is spent as if it were proper money. By increasing the buying power of these debtors – it creates additional demand. Where does this demand manifest itself – short term? In the bond market and in the stock market. For there is a breakdown between commodity credit (previous saving) and circulation credit. And, this increase in circulation credit generates a tendency to drop interest rates blow the height they would have reached without this manipulation.

RUBBER MEETS THE ROAD – THE COUPON PASS

It's quite surprising to see various bloggers dismiss coupon passes as non-events. IT IS THE PRIMARY TOOL OF THE FED TO BREAKDOWN THE LINK BETWEEN COMMODITY CREDIT AND CIRCULATION CREDIT. The fed certainly places a premium on their coupon pass activity. Here are just a few examples.

In 2005, the fed was concerned with this series of down days.

4/13/2005 1,173.79 (13.97)
4/14/2005 1,162.05 (11.74)
4/15/2005 1,142.62 (19.43)
4/18/2005 1,145.98 3.36
4/19/2005 1,152.78 6.80
4/20/2005 1,137.51 (15.27)

Then what happens? Out of the blue

4/21/2005 1,159.95 22.44

Where did this day come from? Well the next day the fed began a series of coupon passes – and usually there is about a three month period between when the passes start and when the equity markets top out.

4/22/2005 1,152.12 Pass
4/27/2005 1,156.38 Pass
5/10/2005 1,166.22 Pass
5/5/2005 1,172.63 Pass
5/20/2005 1,189.28 Pass
5/25/2005 1,190.01 Pass
5/31/2005 1,191.50 Pass
6/16/2005 1,210.96 Pass
7/22/2005 1,233.68 7.079% Level three months later and 7% higher.

How about this series of days this year?

5/10/2006 1,322.85 (2.29)
5/11/2006 1,305.92 (16.93)
5/12/2006 1,299.32 (6.60)
5/15/2006 1,294.50 (4.82)
5/16/2006 1,292.08 (2.42)
5/17/2006 1,270.32 (21.76)
5/18/2006 1,261.81 (8.51)

The response?

5/11/2006 1,305.92 Pass
5/19/2006 1,267.03 Pass
5/23/2006 1,256.58 Pass
5/31/2006 1,270.09 Pass
6/6/2006 1,263.85 Pass
6/12/2006 1,243.04 Pass
12/22/2006 1,422 8.88%

This one took a while to take hold. But, this along with the pre-election pump – and we are a cool 8.88% higher – with 1 1% down day since July.


CREDIT EXPANSION
Now, the rate of interest really is a market phenomenon; for the market aspects of the economy do structure wages; prices and INTEREST RATES. However, the downward manipulation of interest rates changes the overall calculation of business decisions. And, US interest rates have been decidedly manipulated downward by the aforementioned entities. But, look what this downward manipulation of interest rates has done:

1. The US industrial base has been gutted;
2. Gross mal and mis investment (the dot.com variety); and,
3. Gross mal and mis investment (the housing variety).

Actually, this list could go on and on and on. And the fed is now so addicted to this increase in circulation credit that the viability of the currency is in question; raw material prices are soaring; oil and gas prices are soaring. All the while, sans financial earnings & oil and gas; profits from productive industries have significantly declined.


CONCLUSION
In conclusion, the coupon pass activity, all $44 billion of it, has a massive impact. It's important to note the fed only has open market holdings of $773 billion. And, with the changes in reserve requirements it's really impossible to know the complete impact – or the direct impact - or linkage, to how interest rates swirl around this interference. However, with this activity, with the breakdown between commodity credit and circulation credit, with governmental/fed tampering with the market and market data, the imbalances grow ever greater. When the imbalances of interest rates and markets corrects, the recalculation of the profitability and viability of an endless variety of projects will be thrown into disarray. The artificial prosperity fill quickly fade to foreclosures, failures, unemployment and depression.

The fed is at a crossroads of whether to continue their expansionist policies before a complete breakdown of the entire monetary system or after. I, for one, would rather have the fed, and our government, deal with the public honestly – for once.

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