Originally posted by GRG55
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Below in what John Hussman, PhD, writes about "injecting liquidity" into the banking system. http://hussmanfunds.com/wmc/wmc071008.htm
October 8, 2007
The Bag Will Not Inflate, And Liquidity Will Not Be Flowing
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy
As expected, the Fed entered $28 billion of repurchases on Thursday to roll over existing repos that were due on that day. The Fed did not “add” or “inject” reserves to the banking system, nor has any amount of overall reserves been added in recent weeks. There have been no “permanent” open market operations, and “temporary” ones have been pure rollovers of existing repos. Aside from $3 billion that banks briefly borrowed from the Fed a few weeks ago, the Fed has not “added liquidity” through the discount window either. The total amount borrowed by the banking system through the discount window fell to just $202 million last week. Meanwhile, the total reserves of the banking system remain about $45 billion, nearly all of which represents temporary repurchase agreements that are continuously rolled over as they become due.
Fed Open Market Operations: http://www.ny.frb.org/markets/openmarket.html
Total Discount Window Borrowings: http://research.stlouisfed.org/fred2/data/TOTBORR.txt
Total Bank Reserves: http://research.stlouisfed.org/fred2/data/TRARR.txt
Roughly $30 billion of repos will roll over this Thursday; $24 billion of 7 day repos from last week, and another $6 billion in 14 day repos from the week before.
The reason all of this is worth noting is because investors are putting so much false hope on the notion that the Fed is “injecting” all sorts of “liquidity” into the markets. Analysts discuss this as fact, when they evidently have not even looked at the facts. They literally make things up and present their claims as truth. At one particular moment last week, a guest on one of the CNBC morning programs spoke authoritatively about the enormous amount of liquidity the Fed is pumping into the economy, and how “all that liquidity has to go someplace, and a lot of it is finding its way into the stock market.” At that point I stopped watching out of the instinctive will to live.
My immediate objection to that statement, of course, is that there is no liquidity being “injected” at all. The Fed certainly has a psychological effect on investors, provides coordinating signals to banks, manages an interest rate on a very stable $40-$45 billion pool of reserves through its “temporary” open market operations, facilitates the predictable issuance of $30-$50 billion annually of currency in circulation through its “permanent” open market operations, and even has a useful role to play in providing temporary liquidity in the face of seasonal factors (most notably, the year-2000 turn). But the Fed does not provide meaningful amounts of ongoing liquidity to the $6.3 trillion banking system (the quantity of loans has literally zero relationship with the small, stable pool of bank reserves, which has been falling since the early 1990's). Nor does the Fed control the $13.8 trillion U.S. economy. Foreign purchases of U.S. Treasuries outweigh the Fed's actions many, many times over.
My second objection is that the stock market is not some balloon into which money “flows into” or “out of.” Every purchase is matched by a sale. Every sale is matched by a purchase. Stock prices move because the buyer is more eager than the seller or vice versa. A purchase doesn't put money “into” the market, nor does a sale take money “out.” Even in the case of new issues, the proceeds go to the issuing company. Money “on the sidelines” stays on the sidelines. Stocks, bonds, commercial paper and currency simply change hands between Ricky, Mickey and Nicky. There is no stock market balloon holding all the money that people invest. There are only certificates traded between people at prices on which they mutually agree from day to day.
You can count on the fact that if you save $100, somebody, somewhere in the world ends up acquiring $100 worth of tangible investment goods or services. This is a well-known economic identity, and you can prove it. Even if you save $100 by stuffing it under your mattress, it must be the case that total spending has fallen short of total output by that $100, in which case we know that somebody has involuntarily accumulated $100 in “inventory investment.” Even if your $100 went “into” the stock market, the fact is that your $100 immediately went “out” of the stock market in the hands of the seller, and then to someone else, and someone else, until your $100 eventually made it into the hands of someone who used it to buy (or in the case of inventory investment, accumulate) real goods and services.
You know how flight safety demonstrations always include the phrase “even though the bag will not inflate, oxygen will be flowing”? Well the same is not true of “Fed liquidity” and the stock market. There is no bag that inflates, and if you look at the data, no liquidity is flowing either.
The stock market has advanced in recent weeks on very dull volume and relatively tepid breadth. This type of action is typically associated with short-squeezes and a backing-off of sellers, without robust underlying demand. If you look at the dull price-volume behavior, the trailing breadth in the recent rally, and the growing divergences between the major indices and other market internals, it is not clear that buyers are particularly eager.
Fed Open Market Operations: http://www.ny.frb.org/markets/openmarket.html
Total Discount Window Borrowings: http://research.stlouisfed.org/fred2/data/TOTBORR.txt
Total Bank Reserves: http://research.stlouisfed.org/fred2/data/TRARR.txt
Roughly $30 billion of repos will roll over this Thursday; $24 billion of 7 day repos from last week, and another $6 billion in 14 day repos from the week before.
The reason all of this is worth noting is because investors are putting so much false hope on the notion that the Fed is “injecting” all sorts of “liquidity” into the markets. Analysts discuss this as fact, when they evidently have not even looked at the facts. They literally make things up and present their claims as truth. At one particular moment last week, a guest on one of the CNBC morning programs spoke authoritatively about the enormous amount of liquidity the Fed is pumping into the economy, and how “all that liquidity has to go someplace, and a lot of it is finding its way into the stock market.” At that point I stopped watching out of the instinctive will to live.
My immediate objection to that statement, of course, is that there is no liquidity being “injected” at all. The Fed certainly has a psychological effect on investors, provides coordinating signals to banks, manages an interest rate on a very stable $40-$45 billion pool of reserves through its “temporary” open market operations, facilitates the predictable issuance of $30-$50 billion annually of currency in circulation through its “permanent” open market operations, and even has a useful role to play in providing temporary liquidity in the face of seasonal factors (most notably, the year-2000 turn). But the Fed does not provide meaningful amounts of ongoing liquidity to the $6.3 trillion banking system (the quantity of loans has literally zero relationship with the small, stable pool of bank reserves, which has been falling since the early 1990's). Nor does the Fed control the $13.8 trillion U.S. economy. Foreign purchases of U.S. Treasuries outweigh the Fed's actions many, many times over.
My second objection is that the stock market is not some balloon into which money “flows into” or “out of.” Every purchase is matched by a sale. Every sale is matched by a purchase. Stock prices move because the buyer is more eager than the seller or vice versa. A purchase doesn't put money “into” the market, nor does a sale take money “out.” Even in the case of new issues, the proceeds go to the issuing company. Money “on the sidelines” stays on the sidelines. Stocks, bonds, commercial paper and currency simply change hands between Ricky, Mickey and Nicky. There is no stock market balloon holding all the money that people invest. There are only certificates traded between people at prices on which they mutually agree from day to day.
You can count on the fact that if you save $100, somebody, somewhere in the world ends up acquiring $100 worth of tangible investment goods or services. This is a well-known economic identity, and you can prove it. Even if you save $100 by stuffing it under your mattress, it must be the case that total spending has fallen short of total output by that $100, in which case we know that somebody has involuntarily accumulated $100 in “inventory investment.” Even if your $100 went “into” the stock market, the fact is that your $100 immediately went “out” of the stock market in the hands of the seller, and then to someone else, and someone else, until your $100 eventually made it into the hands of someone who used it to buy (or in the case of inventory investment, accumulate) real goods and services.
You know how flight safety demonstrations always include the phrase “even though the bag will not inflate, oxygen will be flowing”? Well the same is not true of “Fed liquidity” and the stock market. There is no bag that inflates, and if you look at the data, no liquidity is flowing either.
The stock market has advanced in recent weeks on very dull volume and relatively tepid breadth. This type of action is typically associated with short-squeezes and a backing-off of sellers, without robust underlying demand. If you look at the dull price-volume behavior, the trailing breadth in the recent rally, and the growing divergences between the major indices and other market internals, it is not clear that buyers are particularly eager.
I am way too ignorant to sort out just what is the truth about the relationships of CB's and the liquidity issues. Does anyone know the truth and care to put it forth?
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