by Iroquois » Sat Dec 24, 2005 7:13 pm
Ok, I still haven't learned the trick to posting images. So, to understand what I'm getting at here, you'll need to click the links to view the following images. The first two, are from the quoted text below, a blog post by the "Cunning Realist" about odd Fed liquidity injections in the days prior to the 7/7 bombings in London.<br><br>Here's charts he saved showing the relevant market data from back then.<br><br>Image #1, the size of the liquidity pool:<br>http://photos1.blogger.com/blogger/1801/901/1600/templondonattack3.jpg<br><br>Image #2, the the Fed's permanent liquidity injections over the same time period:<br>http://photos1.blogger.com/blogger/1801/901/1600/permanentlondonterror.jpg<br><br><!--EZCODE ITALIC START--><em>(on edit) For some reason I can't get the above two links to work. Maybe that's something intentional on the server side. To see them, either you'll have to cut and paste the link into your browser's navigation window or click on the link below for the original article and then click on the embedded images to see the larger ones.</em><!--EZCODE ITALIC END--><br><br>Now, I don't really know much about this myself as the mere mention macro-economics tends to make me lapse into a brief coma. But, click on the two next links for current versions of the same information and see if you can see what I see, the same pattern being repeated.<br><br>The liquidity pool:<br><!--EZCODE LINK START--><a href="http://12.42.70.96/FOMOOut.asp">12.42.70.96/FOMOOut.asp</a><!--EZCODE LINK END--><br><br>The Fed's liquidity injections:<br><!--EZCODE LINK START--><a href="http://www.bullandbearwise.com/SOMAChart.asp">www.bullandbearwise.com/SOMAChart.asp</a><!--EZCODE LINK END--><br><br><!--EZCODE ITALIC START--><em>(on edit) Note: These two images are dynamically created. The spike in the amount of cash that the Fed is putting into the markets of 8.971 billion dollars on 9/16/05 that I am alluding to will only be shown for a few weeks. Hopefully, this won't gain the relevence of the last such injection anyway.</em><!--EZCODE ITALIC END--><br><br>Here's the text of the <!--EZCODE LINK START--><a href="http://cunningrealist.blogspot.com/2005/07/following-money.html">July 12th blog post</a><!--EZCODE LINK END--> by the "Cunning Realist".<br><br><!--EZCODE QUOTE START--><blockquote><strong><em>Quote:</em></strong><hr>Tuesday, July 12, 2005<br>Following The Money<br>Does Alan Greenspan have some explaining to do?<br><br>Readers may recall that a few weeks ago, I wrote this piece about the relationship between Federal Reserve monetary policy and the price of oil. I speculated that because of the effect of excess liquidity, the Fed may have reached the limits of its monetary policy unless it wanted to risk sending the price of oil far higher.<br><br>Now things get more interesting.<br><br>Over the past few months, the Fed has been pumping an extraordinary amount of liquidity into the financial markets, even as it has continued to raise interest rates slowly and reassure the public with happy talk about the strength of the economy. As I explained previously, the Fed does this by maintaining a constant "pool" of temporary liquidity; importantly, it can vary the size of this pool and thus adjust the amount of easy money in the financial system. This money is "temporary" because the Fed essentially loans it out to intermediaries, who must pay it back within a specific period. Before it is paid back, however, it finds its way into stocks, bonds, oil, gold, and other financial instruments. In addition, the Fed also "creates" money to inject into the system that never gets paid back; this occurs via "permanent open market operations" which are an extremely potent way to provide liquidity to the market and the economy.<br><br>It is difficult to overestimate the importance to the financial markets of Fed-created liquidity. In a paper from August 2003, researchers at the Federal Reserve Bank of St. Louis wrote, "Open market operations are not another weapon in the Fed's arsenal, but the only weapon in its arsenal."<br><br>With that in mind, what happened last week is fascinating. Here are two charts of the Fed's recent level of activity. The first shows the expanding and shrinking daily size of the temporary liquidity pool. <br> The date (ending on July 8th) is indicated on the bottom of the chart, and the size of the pool in billions is on the left:<br><br>(Image #1 above)<br><br>And now, the Fed's permanent liquidity injections over the same time period:<br><br>(Image #2 above)<br><br>If these charts are difficult to see, you can click to enlarge them. In addition, a link to a clearer version of the top one is here, and the bottom one is here. Note however that these charts are updated daily to reflect new activity, so anyone using those links to view the charts will see current activity and not a screenshot of the specific time period I've shown here.<br><br>As the first chart shows, temporary liquidity hit a multi-year high on July 5th, which was Tuesday, and it remained highly elevated on Wednesday and Thursday. And the second chart indicates that "securities lending"---another way for the Fed to create liquidity in the financial system---saw a huge spike on June 30th.<br><br>It is important to understand that the Federal Reserve does not make these charts available. It only provides the raw data on its operations, and leaves it to the public to calculate the actual amount of continuing liquidity from day to day. Financial professionals generally consider this "man behind the curtain" stuff. Those who are aware of it don't like to discuss it, because it implies that stocks rise and fall based on something other than fundamentals and their own acumen. You will almost never see this discussed in the mainstream financial media, for example. And that's just fine with the Fed.<br><br>I watch these charts every day as a function of my job, and have for many years. What appears above is extraordinary activity---particularly the size of the "temporary" pool, which the Fed almost doubled to $40 billion in just a few days leading up to last Tuesday, despite the fact that oil was trading over $60. And since all that money provided by the Fed can be leveraged, the effect on the financial markets is magnified.<br><br>Why the need for all that easy money all of a sudden? The Fed doesn't take this sort of action for no reason, particularly when the price of oil is already at an all-time high. It does so in response to circumstances it predicts will create a need for liquidity, or when it specifically wants to support the stock market as it did after 9/11.<br><br>The terrorist attacks in London took place on Thursday. The Fed dramatically increased the pool of liquidity available for stocks to a multi-year high 48 hours before that---an ideal amount of time for that liquidity to filter into the market---and kept it elevated for the next few days. And indeed, it worked. The stock market saw heavy buying right at the opening bell on Thursday and has shot straight up since then.<br><br>Why did the Fed do this? Was it just another coincidence in our financial markets that somehow managed to immediately precede a major geopolitical event?<br><br>One person can give us some answers easily and quickly: Alan Greenspan. Doesn't it behoove him to do so before he rides off into the sunset a few months from now.<hr></blockquote><!--EZCODE QUOTE END--> <p></p><i>Edited by: <A HREF=http://p216.ezboard.com/brigorousintuition.showUserPublicProfile?gid=iroquois@rigorousintuition>Iroquois</A> at: 12/25/05 4:51 pm<br></i>
