For Thursday November 21, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets and watch closely to see what trend develops.  Cash positions (including currency) and price inflation hedges are still recommended.  There is too much uncertainty in US markets right now to make an investment recommendation, although it is probably safe to hold any currently owned equities through the end of the year.

Technical Comments:

The S&P 500 declined 0.36% on Wednesday on volume below Tuesday and lighter than the 30 day moving average, making Wednesday a light-volume down-day.  The daily market data remains a mix of bullish and bearish days with no pattern fully developed.  If the S&P 500 declines about 38 points on Thursday (-2.1%) our stop loss algorithm could trigger and change our market forecast to an uncertain trend.

Subjective Comments:

US markets were up prior to release of the FOMC minutes.  After the minutes implied QE “tapering” could occur in the “coming months”, markets fell and closed down for the day.  We continue to emphasize paying attention to what the Fed does and less so to what they say.  We encourage ignoring their words as they are apt to be indecisive or outright deceptive.  However, there is growing evidence to suggest the members of the FOMC are incredibly ignorant of basic economics.  If this is the case then what FOMC members say can be somewhat suggestive of what might come.  Still, it appears the FOMC members have no idea the difference between printing money (QE) and the growth of the M2 money supply.  Consider these comments by FOMC member, James Bullard, President of the St. Louis Fed.  The incredibly stupefying, jaw-dropping comment from Bonehead Bullard was that he would like a study of negative interest rates for excess reserves!

Allow us to explain why this stupidity should bestow Mr. Bullard with frequent public ridicule in perpetuity.

If you’re confused, don’t feel bad.  The Fed deliberately uses terminology designed to be confusing.  Fed-speak must to be translated to plain English, and then it becomes clear how plainly stupid (or evil) their ideas are.

Term: IOER = Interest On Excess Reserves

IOER is the interest the Fed pays banks to deposit excess reserves with the Fed.  When you deposit your money in a savings account at a bank, they pay you an interest rate.  IOER works the same way, only the Fed is the banker’s bank.  Positive IOER means the Fed pays interest on the deposits.  If IOER is zero, then the Fed pays nothing on those deposits.  Per Wikipedia, “On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances (“IOER”) as well as required reserves. They began doing so three days later. Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008…”  Since IOER became legal with this law, IOER has been 0.25%.

So what is a “negative interest rate for excess reserves”?  Negative IOER means instead of paying interest to banks for depositing money at the Fed, the Fed would be charging banks for making deposits.

Let that sink in.  If you asked a warehouse to keep your precious property stored safe, the warehouse would charge you a fee.  If you wanted to store your money in a warehouse, you would pay a fee.  If you want to earn a profit you can buy Certificates of Deposit, Invest, or deposit your money in a fractional reserve bank.  The bank will pay you to deposit your money.  If you had put your money in a savings account with the expectation of earning interest, what would you do if your bank notified you they were changing their policy and no longer would you earn interest on your deposits, but instead you would be charged a fee for the service of keeping your money in the bank?  Seriously, what would you do?  What do you think most people would do?  It appears Bonehead Bullard would like a study to find out what would happen!

Let’s save this Bonehead the time a study would take and answer the question right now.  Negative IOER will cause banks to withdraw their excess reserves from the Fed.  We’ll go further and guess banks would desire to then use those funds to make loans and earn a profit.  Why do we make this deduction?  Well right now banks are earning 0.25% interest on those excess reserves.  As of 11/13/2013 there are $2,378,573,000,000 Dollars of excess reserves ($2.379 Trillion Dollars).

Math: $2,378,573,000,000 * 0.25% = $594,643,000,000

Banks are earning nearly $600 Billion per year in interest on those excess reserves at 0.25% IOER!

So, we deduce the loss of $600 Billion per year of profit (profit, not revenue) would be motivation to encourage banks to MAKE LOANS.

How does Bonehead Bullard not know this?  Fed Head Bernanke knows increasing IOER to higher (non-negative) rates would motivate banks to keep the deposits at the Fed instead of making loans.  Here is what Bloomberg News reported April 8th of this year:

Federal Reserve Chairman Ben S. Bernanke said the Fed will raise the interest rate on excess reserves as its primary tool for tightening monetary policy rather than selling assets from its balance sheet.  “The principal tool that we contemplate is the interest rate paid on excess reserves,” Bernanke said… in response to audience questions at a conference in Stone Mountain, Georgia.

The FOMC members are blabbering about “Taper” or “Increase Purchases”, which means some are saying “we should not print money as fast as we have been” while others are saying “we must print more money faster”.  To Taper, or Not to Taper, that is the question.  Well, if they are stupid enough to implement NEGATIVE IOER, then “Taper” will not matter.  The positive IOER of 0.25% is what has caused the years of money printing since 2008 to accumulate as $2.38 Trillion of Excesses Reserves!  Flip IOER from positive to negative, and watch out!  The resulting acceleration of bank loan originations would explode the growth rate of the US M2 money supply.  There would be a market rally, but there would also be massive price inflation.  The only way to implement negative IOER without these consequences would be to increase the required reserve percentage, and that is something the Fed can do but they are not talking about it.

The members of the FOMC are flat out crazy.  They are mad.  Worse, they think they are sane and doing the right thing.  Printing money is never the right thing.

Stay out of the stock market.  With FOMC members issuing public statements and making speeches about “Taper Yes” and “Print More”, there is nothing but excessive confusion.  This moronic comment about Negative IOER is not only a monument to lunacy, but it might cause banks to change their behavior.  Just as banks started accumulating excess reserves in late 2008 ahead of the implementation of the first ever positive IOER, banks might begin drawing down their excess reserves ahead of a change to a negative IOER.  This could easily lead to accelerated fractional reserve lending and in turn accelerated M2 money supply growth.  If this happens, we’ll become very bullish.  Be ready.  Finally, price inflation hedges will have huge gains if all of the above happens.  They remain good long-term investments.

One Response to For Thursday November 21, 2013, We Recommend Against Investing

  1. Pingback: For Tuesday November 26, 2013, We Recommend Against Investing | Thirteen Star Publishing LLC