Monday, July 9, 2018

Fundamentals Indeed Pecede Technicals

It's funny, but not ha, ha.  You see a number of new posts claiming to have hit / predicted the bottom.  But all these technical traders look at the turn, a number of days after the actual turn; - not before. So it's not therefore a prediction.  That's the problem with technical analysis.  Technical trading signals are generally ones that require movements in the action to have already shown up in the charts. 

As an example, see Avi Gilbert’s Market Watch article: Published: July 9, 2018 11:37 a.m. ET

Opinion: Technical charts point to S&P 2,800 — and then a pullback

“So, this week (as of Monday July 9), as long as we don’t see a major S&P reversal below 2,730, my expectation is that we can rally back up toward the 2,800 region to complete the a-wave of this rally off the 2,700 support region.”  How reassuring!

 Fundamental's indeed precede technical's. 

It's not trivial.  All boom / busts, since 1942 were both predictable and preventable. And the most critical information has been discontinued.  This information could be used for the on-line, real-time, immediate streaming of economic activity (absent the laborious and ”amalgamated” or chained-market value composition (economic time lagged, *batch*-processing, of an “advance estimate”, a “preliminary estimate, and a “final estimate”, and subsequent revisions), of the final output of goods and services.

So any deviation to the actual path of the inflation adjusted economic trajectory can be literally fine-tuned.  The FRB_NY’s “trading desk” can hit whatever target is set (but not by its current transmission mechanism).

The G.6 Debit and Demand Deposit Turnover Release was discontinued in Sept. 1996 for spurious reasons. I, and some others, William G. Bretz of “Juncture Recognition in the Stock Market”, “The Bank Credit Analyst”, etc., understood how to use the Fed’s figures (then, the longest running time series published).

No one at the Board of Governors understood how to use the #s (but the BOG discontinued it regardless). That included Paul Spindt’ debit weighted indices (who tried and failed). I once helped with the 4 year review, the justification for its continued use.  I faxed several examples to Ed Fry, its manager.

See: New Measures Used to Gauge Money supply WSJ 6/28/83.  Neither Barnett nor Spindt, nor the St. Louis Fed's technical staff: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy *WAS ACCOMMODATIVE* before the financial crisis when judged in terms of liquidity. — use accurate money flow metrics reflecting changes to AD.

See: Fed Points

“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. Depositors moved funds from savings accounts—which are included in M2 but not in M1—into NOW accounts, which are part of M1. As a result, M1 growth exceeded the Fed's target range in 1982, even though the economy experienced its worst recession in decades. The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987.”

The plateau in money velocity, the transactions velocity of recirculation, occurred because of the saturation in bank deposit classification in the 1-2 quarters of 1981 (the widespread introduction of ATS, NOW, SuperNOW, and MMDA bank accounts).

Stephen Goldfeld labeled this type of disparity: “instability in the demand for money function” (Keynes’ liquidity preference curve) as a “case of the missing money”, whereas it was simply related to, e.g., the “monetization” of commercial bank time deposits (ending gate-keeping restrictions), the daily compounding of interest, etc., all of which occurred within the payment’s system. It supposedly “presented a serious challenge to the usefulness of the money demand function as a tool for understanding how monetary policy affects aggregate economic activity.”

This misdirection charged that “advances in computer technology caused the payments mechanism and cash management techniques to undergo rapid changes after 1974. In addition, many new financial instruments (e.g., proliferation in the use of repurchase agreements) emerged and have grown in importance. This has led some researchers to suspect that the rapid pace of financial innovation since 1974 has meant that the conventional definitions of the money supply no longer apply. They searched for a stable money demand function by actually looking directly for the *missing money*; that is, they looked for financial instruments that have been incorrectly left out of the definition of money used in the money demand function.”

“Conventional” money demand functions over-predicted money demand in the middle and late 1970s; and under-predicted velocity since 1981, and not just (PY/M), or income velocity, Vi. Thereby M2 was substituted for M1. However, “broad money” substitute measures (vs. “narrow money” or “near money”), or highly liquid assets, “additional variables which do not accurately measure the opportunity cost of holding money”, conflate American Yale Professor Irving Fisher’s:“flows with funds”.

“The recent instability of the money demand function calls into question whether our theories and empirical analyses are adequate. It also has important implications for the way monetary policy should be conducted because it casts doubt on the usefulness of the money demand function as a tool to provide guidance to policymakers. In particular, because the money demand function has become unstable, velocity is now harder to predict, setting rigid money supply targets in order to control aggregate spending in the economy may not be an effective way to conduct monetary policy.”

In other words, no money stock figure standing alone is adequate as a guide post for monetary policy.

The G.6 was discontinued, according to the Federal Register, because:

“The usefulness of the FR 2573 data in understanding the behavior of the monetary aggregates has diminished in recent years as the distinction between transaction accounts and savings accounts has become increasingly blurred (And that’s also what Chairman Alan Greenspan said about M1). Further, the emphasis on monetary aggregates as policy targets has decreased. In addition, respondent participation has declined over the last several years. For these reasons, the Federal Reserve proposes to discontinue the survey and the related statistical release.”

And funny again, we knew this already. In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal" Its 2nd proposal: "Requirements against debits to deposits"

After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", Nobel Laureate Dr. Milton Friedman had declared RRs to be a "tax" [sic].

These #s aren’t good #s.  The #s shouldn’t require interpretation.  Nothing’s been optimized. There’s been no concerted effort to right the economic world.

"But opinions vary widely on what M1 and the other, broader Fed measures really mean. The experimental measures are designed to resolve some of the confusion by isolating money intended for spending, the money held as savings. The distinction is important because only money that is spent-so-called “true money” – influences prices and inflation"

Thursday, June 21, 2018

Bankrupt-u-Bernanke does not know a Debit from a Credit

People are largely oblivious to anything which does not impact their personal lives.  See:

“…the bigger question is “Why do we ignore other people’s problems?”.

As Republican Alf Landon’s daughter wrote me, Senator Nancy Landon Kassebaum, back: 11/4/81:

 “Today, less than two years since the DIDMCA was established, most of the liabilities have been deregulated with no change in the asset structure that would enable payment of higher rates to depositors”.

The response of the monetary authorities and state legislatures was to give the thrifts more and more discretion in lending (opportunities for self-dealing where greed and fraud reached monumental levels in the thrift industry).

Michael Hudson definition of *financialization* is apropos: "a lapse back into the pre-industrial usury and rent economy of European feudalism".

There is essentially only one macro-economic problem: the delusional Keynesian macro-economic thinking / persuasion, John Maynard Keynes’ “optical illusion”, pg. 81 in his “General Theory”, which maintains that a commercial bank is a financial intermediary.  It is both cut and dry.  The remuneration of interbank demand deposits exacerbates this economic regression.  The 1966 Savings and Loan “credit crunch”, where and when the term “credit crunch” was first coined, is the antecedent and paradigm.

This Romulan cloaking device vastly exceeded the level of short term interest rates which is still illegal.

See: "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves. The IOR rate was always higher than "the general level of short-term interest rates" which is imposed in the Law. "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13.

The resultant dis-intermediation for the NBFIs (where the size of the NBFIs shrank by $6.2T), an outflow funds or negative cash flow, left the DFIs unaffected (the size of the DFIs grew by $3.6T), and thus exacerbated the depth and duration of the GFC.

I.e., since Roosevelt’s 1933 Banking Act, dis-intermediation is a term that only applies to the non-banks.

Never, from the standpoint of the entire economy, from the standpoint of the payments’ system, are the commercial banks conduits between savers and borrowers.  The DFIs pay for their new earning assets with new money period – not the other way around.   But don’t ask a banker, don’t ask SA author Jeremy Blum: “How Accurate Is Bernie Sanders' Diatribe Against Big Banks?”
The implications in the flow-of-funds, in the savings-investment process, are profound.  Bankrupt-u-Bernanke pontificated that a “credit crunch”, is a “capital crunch”.  Not so.  The “lack of funds”, is not the same as the “cost of funds”.   It is a confusion of “stock” vs. “flow”.

Leland J. Pritchard, Ph.D., Economics - Chicago 1933 was 30 times smarter than Albert Einstein, i.e., Einstein’s “very revoluntionary” 1905 epochal papers were generally accepted 3 years after their publication.   Prichard’s 1963 “very revolutionary” paper has yet to be recognized: These compendium of articles were personally commissioned by John F. Kennedy and his administration:
“Profit or Loss From Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386

Disintermediation, an outflow of funds or negative cash flow, which Bankrupt-u-Bernanke mis-diagnosed as a “capital crunch” in his 1991 paper in response to the Savings and Loan debacle, “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995” and (2) the July 1990 - March 1991 recession (another “credit crunch”).
It was BuB’s prelude to his mis-guided policy response to counter the GFC or TARP [to issue equity warrants, to stabilize bank capital ratios], occurs because the inventory of outstanding loans is funded at levels which can no longer be supported by rolling over older funding: short-term, retail and wholesale funding.

Just think about it, the countercyclical burden of the imposition of the requirement to add bank capital literally destroys the money stock, dollar for dollar.   See:  Steve H. Hanke’s “Basel’s Capital Curse”

De toute évidence, Bankrupt-u-Bernanke does not know a credit from a debit.

Tuesday, June 19, 2018

The Nattering Naybob's "Elephant Tracks"

Notes:    Series ID:  REQRESNSW

“Effective February 2, 1984, reserve computation and maintenance periods have been changed from weekly to bi-weekly. Series with data prior to February 2, 1984 have [ *different values* ]reported from one week to the next. After February 2, 1984, the value repeats for 2 consecutive weeks.”  And the G.6 Debit and Deposit Turnover Release was the longest standing time series until it was discontinued in September 1996.

In other words, like most of the Board of Governor’s data, the FRB-STL’s “time series”, there are constant revisions and various reconstructions, to both definitions, calibrations, and reporting frequencies, none of which you can “splice” seamlessly back together.

Readers obviously haven’t yet grasped the significance of “The Nattering Naybob’s” apt coinage -  { ELEPHANT TRACKS }.

The irony is that the FRB-NY “trading desk” (the U.S. Central Bank) blatantly “white washes” and thus surreptitiously “conceals” its previously reported #s, or banksters’ complicity (i.e., lagged maintenance accounting). 

There is an explosive political problem here (one that will certainly attract sharp criticism and the ABA’s reprisal).  The banksters, represented by the American Bankers Association lobbied to eliminate legal reserves, to wit: the “Financial Services Regulatory Relief Act of 2006”

The justification for the FSRRA of 2006 was: “These measures should help the banking sector attract liquid funds in competition with nonbank institutions and direct market investments by businesses”

That should scare readers because the non-banks don’t compete with the member banks.  The DFIs do not loan out deposits.  The NBFIs do.

One of the FSRR’s provisions” “the Board–as authorized by the act–could consider reducing or even eliminating reserve requirements, thereby reducing a *regulatory burden* [sic] for all depository institutions”

Not so. The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves.

An injection of IBDDs is like “Manna from Heaven”, costless to, and showered on, the payments’ system.  A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money (not a tax at all).

If the Fed puts through buy orders in the open market, the Federal Reserve Banks acquire earning assets by creating new inter-bank demand deposits. The U.S. Treasury recaptures about 98% of the net income from these assets. The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn't earn any interest on their balances in the Federal Reserve Banks.

On the basis of these newly acquired free reserves, the commercial banks created a multiple volume of credit and  money. And, through this money, they acquired a concomitant volume of additional earnings assets. How much was this multiple expansion of money, credit, and bank earning assets? Thanks to fractional reserve banking (an essential characteristic of commercial banking) for every dollar of legal reserves pumped into the member banks by the Fed, the banking system acquired about 93 (c. 2006), dollars in earning assets through credit creation.

See: “Bank Reserves and Loans: The Fed Is Pushing On A String” - Charles Hugh Smith

See: “Quantitative Easing and Money Growth: Potential for Higher Inflation” - Daniel L. Thornton, Vice President and Economic Adviser

In the 1980 Chase: “Business in Brief”, this statement appears:

“…the fed has never made a convincing economic case that reserve requirements are needed at all.”

This opinion seems to be widely held in the banking community. Such opinions ignore the dynamics of money creation. As long as it is profitable for borrowers to borrow & commercial banks to lend, money creation is not self-regulatory. This observation would be valid even though the fed did not use R * as a device to guide open market operations.
See also: Lawrence K. Roos, Past President, Federal Reserve Bank of St. Louis & past member of the FOMC (the policy arm of the Fed) as cited in the WSJ April 10, 1986

"...I do not believe that the control of money growth ever became the primary priority of the Fed. I think that there was always & still is, a preoccupation with the stabilization of interest rates".

In other words, monetarism has never, anywhere, been previously tried.  Paul Volcker never changed the Fed's operating procedure, viz., targeting non-borrowed reserves, as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described and documented in his 3rd edition of “Open Market Operations” published in 1974. He let the economy simply burn itself out.

Paul Volcker’s version of monetarism (along with credit controls: the Emergency Credit Controls program of March 14, 1980), was limited to Feb, Mar, & Apr of 1980.  With the passage of the DIDMCA, total legal reserves increased at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 year’s-end). 

By mid-1995 (a deliberate and misguided policy change by Alan Greenspan in order to jump start the economy after the July 1990 –Mar 1991 recession), legal, i.e., fractional reserves (not prudential), ceased to be binding – as increasing levels of vault cash/larger ATM networks after 1959’s liberalization, and retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating "low-reserve tranche" and "reservable-liabilities exemption amounts" c. 1982) and lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.

Monetary policy should delimit all legal reserves to balances in their District Reserve bank (IBDDs, like the ECB), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959). 

Never are the commecial banks intermediaries in the savings-investment process. From a systems belvedere, member commercial banks, DFIs, as contrasted to financial intermediaries, non-bank conduits, NBF: never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or times “savings” deposits, or the owner’s equity, or any liability item.

When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) - somewhere in the payment’s system. I.e., commercial bank deposits are the result of lending, not the other way around.

The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, & other Governmental Jurisdictions, & every person, etc., except the commercial & the Reserve banks.

Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

F. Scott Fitzgerald: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

You have to retain the cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”.

Steve Keen: "A 'Loanable Funds' loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends."

See: Philip George: “The riddle of money, finally solved”

The expiration of the FDIC's unlimited transaction deposit insurance is prima facie evidence, hence my "market zinger" call.

John Maynard Keynes couldn’t do it:

In "The General Theory of Employment, Interest and Money", John Maynard Keynes’ opus ", pg. 81 (New York: Harcourt, Brace and Co.), gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make his statement correct, viz., the Gurley-Shaw thesis.

Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in American Yale Professor Irving Fisher's truistic: "equation of exchange".

And after Alan Greenspan After 1995, the commercial banks became non: “e-bound” (Dr. Richard G. Anderson’s term).


Quantitative Easing and Money Growth:
Potential for Higher Inflation?

Daniel L. Thornton (former senior economist, FRB-STL)
D.L. Thornton Economics LLC

A cogent example: If I remember right, the #s below were the *bi-weekly* figures I was confronting with prior to my gold post:

2007-01-31    47426
2007-02-07    39015

There was an $8.4 billion drop in complicit reserves before the financial markets even reacted.

But MSN Money's Jim Jubak reported that people thought Feb 27, 2007 started across the ocean. "On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier".  That’s how MSN refugees got tossed out, debunking MSN’s commentators.  Good propagandists and fake news rule, are relied upon as credible sources by the masses.

In fact, it was home grown. It was the seventh biggest one-day point drop ever for the Dow. On a percentage basis, the Dow lost about 3.3 percent - its biggest one-day percentage loss since March 2003.

I didn't say stocks because the blog was about gold.

flow5 (2/26/07; 14:34:35MT - msg#: 152672)

Suckers Rally   If gold doesn't fall, then there's a new paradigm


But these are the #s that economists, like John Cochrane and Ben Bernanke, use to “prove” [sic] that money is neutral:

2007-01-01    44.607
2007-02-01    42.582
2007-03-01    40.671
2007-04-01    42.498
2007-05-01    44.075
2007-06-01    43.866
2007-07-01    42.909

You won’t find much difference in the seasonal variation using other yearly figures.  So it looks like nothing’s there, or anywhere, to upset the apple cart!

And contemporaneous reserve accounting was in effect during “Black Monday”.

So, if you couldn’t figure out why stocks were down today, then now you know.  This is the 4th seasonal inflection point, on 6/20/18, a lower low in weekly NSA “total checkable deposits”.


----- Michel de Nostradame




To Spencer Hall



Thu 11/16/06 9:55 AM


Spencer Hall (

Spencer, this is an interesting idea.  Since no one in the Fed tracks reserves, such a coincidence in the data perhaps confirms that the Fed funds rate settings have been correct.

Sounds like an essay topic.  I think I will examine it.

Thanks for the idea, and for writing.


Richard G Anderson
Federal Reserve Bank of St Louis


Note aside: “Lagged reserve calculation was used from the late 1960s until 1984, when contemporaneous calculations were implemented. But the Fed decided to revert back to the lagged calculation in 1998 in order to obtain more accurate data” Investopedia reports

Note aside: “Effective with the reserve maintenance period beginning July 30, 1998, the required reserve system was shifted from CRR to new lagged reserve requirements (LRR) with reserve computation periods for weekly reporters starting thirty days before the corresponding reserve maintenance periods. Under the new LRR regime, the lag in counting vault cash toward required reserves was lengthened from sixteen days to thirty days for institutions reporting weekly on the FR2900. In other words, the average vault cash held during a reserve computation period would be applied toward required reserves in its corresponding reserve maintenance period.”