FOMC Minutes

by Larry Levin


US central bankers released the minutes of their recent meeting this afternoon, which sent the market lower. Temporarily. By the close, the market had forgotten nearly all that was released.

The surprising take home phrase in the minutes was the admission that the economy will suck wind for SIX YEARS.

Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longerrun path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.

Karl Denninger had a few comments regarding different sections of the report which can be found here:

http://market-ticker.denninger.net/archives/2504-July-FOMC-Minutes-Interesting-Observations.html

Interesting comments in the so-called "Minutes" (which are really more filtered notes that only say what they want, intentionally omitting anything "contrary", as we now know)

In his presentation to the Committee, the Manager noted that "fails to deliver" in the mortgage-backed securities (MBS) market had reached very high levels in recent months. Under these conditions, dealers had experienced difficulty in arranging delivery of a small amount--including about $9 billion of securities with 5.5 percent coupons issued by Fannie Mae--of the $1.25 trillion of MBS that the Desk at the Federal Reserve Bank of New York had purchased between January 2009 and March 2010

Wait a second - two months later these securities that were "sold" were not really sold - that is, they were shorted NAKED by the seller to THE FED?

Now is $9 billion material? It sure as hell is. It may be a small percentage of securities, but it's still $9 billion that the seller to The Fed did not have and still, two months later, could not acquire!

What did The Fed propose to do? Allow them to deliver something else! That's right - a "similar" security via a "coupon swap" operation.

So now one can fraudulently sell a security they do not own, to the tune of $9 billion dollars, and two or three months later we'll take something else you have and call it ok.

If you or I tried this - selling something we don't have and can't acquire, but we got paid for it, we'd be in some serious legal hot water.

On the broader economy:

The anticipated expiration of the homebuyer tax credit appeared to have pulled home sales forward, boosting their level in recent months.

No really? That's what a tax credit - or more credit in general - does! Appears? These clowns didn't anticipate this as the expected and normal response to this action?

We trust these people with a toilet plunger, say much less "monetary policy"?

Broad U.S. stock price indexes fell over the intermeeting period, in part reflecting deepening concerns about the European fiscal situation and its potential for adverse spillovers to global economic growth.

A bunch of computers playing with cheap Fed Credit had nothing to do with the rally - and bust, right? You guys really need some better liars on your staff. Seriously.

Consumer credit contracted again in recent months, as revolving credit continued on a steep downtrend.

Consumers are broke. You still haven't figured out that your policies have destroyed capital formation?

Oh wait - you don't care about that. Everything is debt to a banker, right? I get it. But so do small businesses and consumers, and even if they'd like to borrow, they're not credit-worthy - they're stuffed up to their eyeballs in debt as it stands!

Bank credit declined, on average, in April and May at about the same pace as in the first quarter. Commercial and industrial loans, after dropping rapidly in April, decreased at a slower pace in May. While commercial real estate and home equity loans fell at a slightly faster rate than in recent quarters, the contraction in closed-end residential loans abated, partly because of a reduced pace of sales to Fannie Mae and Freddie Mac. Consumer loans declined again, on average, in April and May. The amount of Treasury and agency securities held by large domestic banks and foreign-related institutions declined in May, contributing to a sizable drop in banks' securities holdings.

THE MARKET FOR DEBT AT THESE LEVELS IS SATURATED. YOU'VE ALREADY CUT RATES TO ZERO; YOU HAVE NO MORE BULLETS IN THAT GUN. ONCE THE SATURATION POINT IS REACHED THE ONLY WAY OUT OF THE HOLE IS TO STOP THE CRAP AND ALLOW THOSE WHO ARE BANKRUPT TO GO BANKRUPT.

Moreover, several participants observed that the decline in yields on Treasury securities resulting from the global flight to quality was positive for the domestic economy; in particular, the associated decline in mortgage rates was seen as potentially helpful in supporting the housing sector.

A crashing stock market will certainly be good for the housing marketplace - after all, that nice dive was what produced the flight-to-quality that drove down Treasuries.

Speaking of which, QE didn't do that, did it? Can we now dispense with this BS garbage about "Quantitative Easing" being in any way a positive thing and take a black sharpie marker to Bernanke's "I'll cap long term Treasuries!"

Sure you will Ben - by crashing the equity markets. That seems to be the only way you can, eh?

By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve's balance sheet could boost inflation expectations and actual inflation over time.

"Potentially unsustainable" fiscal position?

In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place. However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.

And what would those steps be? More QE? Didn't do jack last time. Hmmm.... rates are already at zero..... This could get interesting.

Good luck Ben. Your thesis invalidation continues, day-by-day.



Previous Day's Trading Room Results:

Trade Date: 7/14/10

E-Mini S&P Trades*
(before fees and commissions):


1) No "Secrets" trades filled.

2) Algorithm positions (10)

3) “Reading the Tape” positions (10) combined Secret’s, Algo, & “Reading the Tape” total… -1.25



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