The Fed Officially Kicks Off the Next Recession!!!

[AGENDA21]

It is official. A recession is coming. How do I know? Because this week new Fed Chairman Ben Bernanke gave an official warning to bankers about commercial real estate loans. That is always the kickoff to a recession. It is the starter's gun, the national anthem before a ballgame, the opening hymn at a church service. Here is how it works. The Fed has three official tools to control the money supply: Setting reserve requirements (telling banks how much of their deposits they cannot lend. The higher the reserve requirements, the less loans, the less money creation by the economy). The second tool is open market operations. Here they set the amount of money in the system by buying or selling securities. Third is setting the discount rate, the rate of interest banks must pay to borrow money at the Fed. Theoretically, the higher the rate, the less money banks will borrow, the less they have to lend, and the less money that is created by the banking system.

However, there is a fourth tool, a stealth tool, which has more power and impact than the other three. It is called the Federal Reserve Bank examiner. He/she is the person who goes into a bank about once a year and decides which loans are good and which are bad. Based upon their holy edict, a loan is classified in one of several categories which determines how much money the banks must set aside from earnings to reserve for possible losses. It is completely an estimation game. So the rules can and do change, based upon the whims of the examiner, taking his marching orders from the Fed Chairman. If the Fed wants the money supply to expand, then Fed examiners come in with reasonable standards for review of loans, and classify those loans with a general leaning that they will be repaid according to terms. Thus banks do not have to reserve as much for possible estimated losses and are in effect not discouraged from making more loans. When the Fed wants money supply to grow, aggressive lending standards often get passing grades. That's when you business people will see your friendly bank commercial lender more often, jawing you into that expansion project you've been thinking about, inviting you to golf outings and ball games. They want more loans. They need your expansion project.

http://www.safehaven.com/article-4759.htm

[Joanne98]

1. Excellent article! K&R!

[Muddy Waters Guitar]

2. This and the inverted yield curve

do indeed suggest that a recession is quite likely. I worry that this one could be scary-- we're almost $9 trillion in debt as it is, and this would make it extremely difficult to attract foreign investment.

[peanutbrittle]

3. Where will the fed place the newly printed influx of money?

To drive the stock market?

[ret5hd]

4. maybe this will help answer your question:

http://www.daanspeak.com/InterviewMiddelkoop01Eng.html

in short, the fed has set up unregulated (untraceable) hedge funds in the caymen islands to directly support the stock markets AND to support the dollar.

[madrchsod]

5. it`s been sliding for several months now

i work in the printing industry and for the last few months ad revenues have been falling..not a good sign

[ixion]

6. we were out of the last one?

news to me...

[area51]

9. "we were out of the last one?"

You took the words right out of my mouth.

[IndyOp]

7. So what happens to the value of the dollar in a recession?

That's right, we who have to ask such naive questions do, indeed, exist.

Also - IF the value of the dollar drops do we have enough of a manufacturing sector left that our economy can be bailed out by exporting products?

Anything else you want to add is fine...

[ret5hd]

8. its a complex question...

that doesn't have a concrete answer. it depends on if it is an inflationary recession or a deflationary recession.

our new fed chairman, "helicopter" ben bernanke, has pledged to do all within his power to fight deflation. you might not know this watching the mainstream news, which has labeled him an anti-inflationist. but in reality, his fear...the thing that keeps him up at nights...is deflation.

first tho, you have to understand what he means by deflation. It's not consumer prices or wages...it's equity deflation that bothers him. real estate, stocks, bonds, etc. he has pledged that, if necessary, he will drop dollar bills out of helicopters (hence his nickname) to keep deflation from happening. he has said that it may be necessary for the fed to directly buy equities and real estate. he has even mentioned negative interest on savings, thereby forcing people to spend their money to keep the economy going.

so, i can probably guess that a deflationary recession is of less probability than an inflationary recession. but, hyper-inflation always leads to collapse and an ultimate deflation...with a "new" currency.

so, the real question is (in my mind): will a recession (this one or the next one or the one after that) be THE one that triggers a hyper-inflationary cycle that leads to a new currency.

but then, a lot of people (hell, maybe most) say that i am full of shit. :evilgrin:

[NYC]

14. No more M3 report of money supply.

I guess this goes along with the "helicopter" epithet.

[natrat]

10. isnt this where the billionaires swoop in and buy at firesale prices

[K8-EEE]

11. DU Financial Wizards, What Is A Normal Person To Do?

What do you invest in, before the GWB financial tsunami hits -- or what do you de-invest in?

[KAT119]

12. AS MUCH GOLD AS YOU CAN....

[AGENDA21]

22. As much as you can!!

[Greyhound]

13. Kat's suggestion is good, also get you money out of dollars and

out of the country, before everyone else starts doing it. One sure sign to watch for, and it will be tough because they're not exactly going to take a full page ad in the NYT, is when they start talking about any kind of a duel currency scheme where you have 'domestic' dollars for exchange inside if the country, and an 'international' currency for trade with other countries. This gives them free reign to let your dollars collapse, without hurting the uber-wealthy, who of course will have their dollars outside the country as tax-free 'investments'.

[Iowa]

17. First of all, there is no such thing as a "financial wizard"...

Anyone who claims to be a financial wizard should be avoided like the plague. When some "gurus" are predicting doom, other gurus can be found who are predicting good times. And when bears outnumber bulls, that is usually a BULLISH indicator.

What should an average person do? First, ignore those who think they have the answers - anyone who thinks they can predict the future is full of crap. Examine your asset allocation. Does it make sense for your age and your financial situation. Perform a gut check... Can you handle a 50% decline in your stock portfolio? How about 75%? Will you have what it takes to perform an annual reallocation? In other words, will you be able to BUY assets that are plunging and sell assets that aren't, when everyone else is doing the opposite? Examine annual returns of stocks, bonds and cash in the 1930s and during the inflationary 70s. Can you stomach what has already occurred? Examine how much you have in the stock market? Can you afford to leave it alone for 10 years? Personally, I don't have a penny in the stock market that I can't afford to leave there for 10 years - but that's just me. In case you're interested, this is my current allocation as a retiree:

STOCKS 31% (with a tilt toward value, small-cap value, and international)
BONDS 64% (mostly Long Term TIPS @ 2.5%, I-Bonds, and CDs)
CASH 5% (Emigrant Direct @ 4.25% and Money Market Funds)

Whatever you do, there are trade-offs - there are ALWAYS trade-offs. Remember that. There is no "right" answer that can be determined in advance - only in retrospect. So my advice would be this (and I am NOT a "wizard" - I'm just a guy who has had some success with investing):

--Avoid fear-based, knee-jerk reactions. Any huge move you make today, based upon fear, could cost you dearly. If your allocation doesn't make sense, by all means change it! But don't let your emotions drive your decisions.
--Determine a reasonable allocation that fits your age, your financial situation, and your gut - and stick with it until something in your life changes. Readjust to your original allocation every year or two, or possibly when the market makes a big swing. Other than that, leave it alone.
--Watch expenses. Don't use financial planners. Invest with low cost providers. Learn the ropes yourself.

And finally, as you can see, I don't invest on the basis of doomsday scenarios, but I do invest defensively. There have always been gurus predicting doom. If I had followed their advice I'd still be working. Someday they will be right, but it won't be because they were able to read the tea leaves - it will be because they are always there - you know, a stopped clock is right twice a day and all that. So find an allocation that won't leave you penniless if they're right, and won't keep you in a rut if they're wrong. That's about all an average person can do.

[K8-EEE]

19. thanks all!

Iowa, I guess my definition of "financial wizard" is a successful investor, like yourself! Thanks everybody for the advice, I HATE dealing with money & investment decisions but it's not like we have any choice in the matter, do we?

[Clara T]

15. What's the Fed Up To With the Money Supply?

December 23, 2005

What's the Fed Up To With the Money Supply?
by Robert McHugh

Over the past two days, December 21st - when our first Hindenburg Omen (of whatever cluster is coming) - and Thursday December 22nd, the Federal Reserve has conducted one of the largest two-day Repo injections of money into the system since back in September 2001. On Wednesday they added $18.0 billion in reserves and on Thursday they added another $20.0 billion. Is this a coincidence, coming right as we get another Hindenburg Omen? Probably not. Is something high-risk going on behind the scenes here? Let's review some facts at the Fed. On November 10th, 2005, shortly after appointing Bernanke to replace Greenbackspan, the Fed mysteriously announced with little comment and no palatable justification that they will hide M-3 effective March 2006. M-3 has been the main staple of money supply measurement and transparent disclosure since the Fed was founded back in 1913. It is the key monetary aggregate that includes Fed Repo transactions, that mechanism whereby the Fed increases reserves. The date when M-3 will start being hidden also happens to be the exact month that Iran will declare economic war against the U.S. Dollar by trading its oil in Petro-Euros on its new bourse. But there is more. The Federal Reserve currently has three vacancies within the 19 top Regional Bank and Board of Governor spots. Why? Part of ongoing wholesale resignations.



If a substantial amount of oil transactions will suddenly be conducted in Euros instead of Dollars, this should put pressure on the Dollar as folks exchange Dollars for Euros, jeopardizing the Dollar's status as the world's reserve currency, making it more difficult to print all the dollars the Fed wants to without driving the Dollar into the ground. Iraq threatened to do what Iran has threatened to do just before we went in looking for weapons of mass disappearance. If the Dollar tanks, Treasuries might not be far behind. If Treasuries tank, kiss the Housing-driven boom goodbye. Could the Master Planners be hiding M-3 because they anticipate they may have to monetize the Federal debt, buy our own Treasury Bonds during the coming economic attack against the Dollar? That would require a ton of new fresh money creation - too much to disclose. Could it be some folks at the top of the Fed do not have the stomach to be part of what is about to go down?

M-3 has a direct but lagging impact on financial markets. Look at the chart at the top of the prior page. Whenever M-3 rises, the Dow Industrials rise. Whenever M-3 is flat or declines, the Dow Industrials decline. The Dow Industrials are a bellwether for the economy. If we can monitor M-3, we can better monitor the future path of equities and the economy. It is wrong for the Fed to stop its disclosure for this very reason. Investors need to know in a free market economy, because M-3 infusion is centrally planned intervention into a free market system. Investors need to know when the Master Planners have decided to intervene. Our buy/sell signals were designed to pick up the scent of Master Planner intervention by analyzing supply and demand forces underlying the markets. So with or without a fully disclosed M-3, we will be able to continue to identify coming multi-week trends.

So what about M-3 the past week? The latest figures show that on a seasonally adjusted basis, M-3 rose 27.3 billion last week, a 14.0 percent annualized clip, and is up $76 billion over the past month, a 9.8 percent growth rate. But those are the massaged numbers. For the raw figures, fasten your seat belt. Are you ready? M-3 was increased $58.7 billion last week (that does not include the huge Repo infusions noted above), a 30.0 percent annualized rate of growth. For the past two week, the Fed added $93.5 billion to the money supply, a 24.0 percent annual clip. Over the past 6 weeks it is up $192.9 billion, a 16.7 percent Banana Republic hyperinflationary pace. This is nuts, folks - unless there is an incredible risk out there we are not being told about. That is a lot of money for the Plunge Protection Team's arsenal to buy markets - stocks, bonds, currencies, whatever. This level of irresponsible money supply growth makes shorting markets hazardous, yet at the same time says markets are at huge risk of declining. Maybe M-3 growth doesn't stop the decline this time. Should be a fascinating storm in 2006.

http://www.safehaven.com/showarticle.cfm?id=4331&pv=1

[Clara T]

16. Why Would the Fed Halt Reporting M-3 Data?

Why would the Federal Reserve wish to put a halt to the reporting of the M-3 data? Ah, the $6 million dollar question that we’re sure will provoke much debate and controversy in the months and possibly years ahead. Nevertheless, while it’s no secret that more money (debt) has been created in the US during the past four plus years than in the preceding one hundred years combined, a President who has yet to veto one single spending package sent his way, deficits ballooning out of control, consumers strapped with debt up to their eyeballs, record personal bankruptcies and perhaps soon to be foreclosures, horrific forces of mother nature, is the picture starting to become a bit clearer? The fact of the matter dear readers is that the “Master of Disaster” (Chairman Greenspan), has essentially created some of the world’s greatest asset bubbles (stock, bond and housing ring a bell) and in order to keep the punchbowl spiked and the partygoers feeling woozy, the powers that be have decided that the surest way to continue the affair into the late hours is to keep the printing presses running in overdrive.

And how does one determine how many dollars are flowing through the financial spectrum? Well, you guessed it, the M-3 data, which no longer will be published for public eyes. One may ask, “Why would the Fed be reluctant to disclose such information”? Well, let’s take a look at some other economic proxies that flow from our government bodies. For instance, the CPI (consumer price index), which measures the prices of consumer goods and services and is a measure of the pace of US inflation, continues to suggest that inflation remains tame and under control, at least from the “core” perspective. However, when examining the numbers closely, the government likes to “exclude” food and energy from the index, thus a “core” reading. Therefore, in simplistic terms, if you take out food and energy, not to mention healthcare, education tuition, and utilities, which for some reason the Fed does not perceive as necessary daily expenditures, you ultimately end up with a much lower reading than actuality. Therefore, while the general public is exposed to such daily expenses, perhaps the Fed is living in another world, whereby it is not necessary to eat, fuel their vehicles, turn on the lights, pay for their children’s education, receive hospital assistance when required nor heat their homes. Anyways, we think you’re starting to get the picture.

Furthermore, the BLS (Bureau of Labor Statistics), which provides employment data, appears to have their very own formulas for concocting desirous results. For example, when the BLS announces new jobs, they do so with a little creature called the “birth/death ratio”. What this vehicle does is determine how many jobs will be created based on the assumption of the number of births and deaths in any one given year. Thus for example, when the BLS reports that 200k jobs were created in a particular month, it’s not as though 200 thousand John and Jane Q public individuals were hired by the likes of IBM, Microsoft, Boeing, Johnson & Johnson etc. They are merely assumptions. Therefore, when dissecting economic data from governmental bodies, one much dig beneath the surface to determine the viability of such reports.

http://www.financialsense.com/fsu/editorials/marketpulses/2005/1202.html

[Neil Lisst]

18. Whoever wrote that knows his banking and Fed systems

This is the action that was begun by banking examiners in about 1985, when Reagan and his cabinet set out to let the air out of the early 1980s real estate boom.

[liberalla]

20. This is a great thread.

I really appreciate the many links and good comments in this thread, and am bookmarking to study later (my eyes are crossing) after I get some sleep. Recommended!

I've been concerned/interested in the M-3 change since it was announced in Nov.: http://www.federalreserve.gov/releases/h6/discm3.htm

Then it was revised last week: http://www.federalreserve.gov/releases/h6/Current/

[radfringe]

21. USA: Recession checklist (1st May)

http://www.fxstreet.com/nou/content/110700/content.asp?anunci468x60=Danske_Banner_051201&menu=macro

USA: Recession checklist (1st May)
• The inversion of the US yield curve (2yr-10yr) has rattled investors, as this phenomenon famously leads US recessions.

• However, the slope of the yield curve is not the only game in town. In this report we describe four other indicators that tend to lead US recessions. Based on these we argue that 1) The inversion of the US yield curve is premature in this cycle due to the bond yield conundrum 2) None of the other normal prerequisites for a US recession within a year are in place 3) The next US recession is not likely to come until the fed funds rate is hiked to 6% or above.

• Looking ahead, 3 of the 4 indicators are likely to start flashing red sometime in 2007, suggesting a possible US recession in 2008.

• Bond investors should be warned, however, that US recessions do not usually equate to good performance for Treasury bonds or European bonds. In fact, rising bond yields in response to the tightening of US monetary policy are nearly always an important catalyst for US recessions. This is also likely to be the case in 2008.

--------

"OFFICIAL" definition of a recession as two consecutive quarters of decline in real GDP.