Friday, March 24, 2017

Major Economic Error

In "The General Theory of Employment, Interest and Money", pg. 81 (New York: Harcourt, Brace and Co.):: John Maynard Keynes' magnum opus, 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 and 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.

This is the source of the pervasive error that characterizes the sui generis Keynesian economics (that there's no difference between money and liquid assets), viz., the Gurley-Shaw thesis, the elimination of Reg. Q ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency Economic Stabilization Act of 2008, sec. 128. “acceleration of the effective date for payment of interest on reserves”, etc.

Even worse:

"The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves (IOR). The current IOR rate 0.5% would be higher than "the general level of short-term interest rates" which is imposed in the Law. George Selgin at the Cato Institute brought up the issue:

"[T] Fed couldn't raise its rates without breaking the law…Instead of paying banks more to hoard reserves, [the Fed] can tighten money…by selling off some of its trillion dollars in assets…Whether events will warrant tightening before the year is out is anybody's guess. But if the Fed chooses to tighten, it should at least do it legally." ("A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13. Italics are mine.)"

Saturday, February 18, 2017

Money Flows (volume X's velocity)

The distributed lag effect of money flows, bank debits (even using a surrogate metric, RRs), have been mathematical, indeed celestial (gravitational), constants, ∝, for 100 + years.

There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined by the FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives (in the present case just reserve "smoothing" and “draining” operations, the oscillating inflows and outflows, the making and or receiving of inter-bank payments).

Every year, the seasonal factor's map (economic time series’ cyclical trend), or scientific proof, is demonstrated by the product of money flows, our means-of-payment money X’ its transaction’s velocity of circulation (the scientific method).

Monetary flows (volume time’s velocity) measures money’s impact on production, prices, and the economy (as flows are driven by payments: “bank debits”). Rates-of-change Δ, in M*Vt = RoC’s Δ in AD, aggregate monetary purchasing power. Thus M*Vt serves as a “guide post” for N-gDp trajectories.

N-gDp is determined by the volume of goods & services coming on the market relative to the actual, transactions, flow of money. Roc's in R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services. Then RoC's in P, represents the price level, or various RoC's in a group of prices and indices.

Monetary flows’ propagation, are a mathematically robust sequence of numbers (sigma Σ), neither neutral nor opaque, which pre-determine marco-economic momentum. For short-term money flows, the proxy for real-output, R-gDp, it's the rate of accumulation, a posteriori, that adds incrementally and immediately to its running total. Its economic impact is defined by its rate-of-change, Δ "change in". The RoC, is the pace at which a variable changes, Δ, over that specific lag's established periodicity.

Friday, February 17, 2017

Sell Bonds

The temporary surge in rates during the first part of 2013 should not be discussed in terms of a "taper tantrum" metaphor. It was the macro-economic net precipitation of the expiration of the FDIC's unlimited transaction deposit insurance @ Dec 2012’ end. Hence, my call for a “market zinger”. It was an increase in savings velocity, where funds that were impounded and ensconced in a world-wide "flight-to-safety" (a re-alignment in a portfolio’s assets weightings), were once again, expeditiously re-invested (put back to work) outside of the commercial banking system (the only place where voluntary savings are actually matched with investment outlets via non-bank conduits).

I.e., “risk on” is not higher FDIC insurance coverage (the FDIC formally modified the assessment base in 2011 to include all bank liabilities), not increased Basel bank capital adequacy provisioning (which literally destroys the money stock), not an increased FDIC assessment fee on 1/1/2007, or 4/1/2009, or 4/1/2011, or an increased churn in speculative stock purchases (the transfer of ownership in existing assets).

All bank-held savings originate within the system, and are not invested (un-used and un-spent). They are lost to both consumption and investment. In other words, DFIs always create new money when they lend/invest. DFIs do not loan out existing deposits, saved or otherwise.

Long-term money flows (our means-of-payment money times its transactions velocity of circulation), or AD, will be on average much higher in 2017, than in 2016. Given that inflation and inflation expectations are historically the primary determinants for longer dated securities, it follows that nominal interest rates will rise in 2017 (and the Fed will follow the market).
Volume X's Velocity;

01/1/2016,,,,, 0.20
02/1/2016,,,,, 0.16
03/1/2016,,,,, 0.13
04/1/2016,,,,, 0.15
05/1/2016,,,,, 0.19
06/1/2016,,,,, 0.15
07/1/2016,,,,, 0.15
08/1/2016,,,,, 0.20
09/1/2016,,,,, 0.20
10/1/2016,,,,, 0.17
11/1/2016,,,,, 0.19
12/1/2016,,,,, 0.11
01/1/2017,,,,, 0.19
02/1/2017,,,,, 0.19 sell bonds short
03/1/2017,,,,, 0.21
04/1/2017,,,,, 0.21
05/1/2017,,,,, 0.24
06/1/2017,,,,, 0.20
07/1/2017,,,,, 0.18
08/1/2017,,,,, 0.21
09/1/2017,,,,, 0.23
10/1/2017,,,,, 0.23
11/1/2017,,,,, 0.20
12/1/2017,,,,, 0.13

Stocks Peak in March

Another technical trading signal, or reverse point wave signal (c. 85 percent chance of turning). According to short-term money flows (proxy for real-output of goods and services), March looks to be a peak in stock prices.

11/1/2016 ,,,,, 0.11
12/1/2016,,,,, 0.11
01/1/2017,,,,, 0.13 stocks peak (sell short)
02/1/2017,,,,, 0.10
03/1/2017,,,,, 0.13
04/1/2017,,,,, 0.11
05/1/2017,,,,, 0.10
06/1/2017,,,,, 0.08

Rate Hike

Especially in light of the TDF announcement, the Fed will probably raise rates in mid-March (part and parcel with stop/go monetary interest rate “transmission” management). Inflation, PPI & CPI, has just accelerated and the Fed albeit temporarily, is behind its inflation mandate / presupposed curve.

The Fed’s obtainable objective - is controlling the price level. It cannot control the stock of employment to any precision thru its supply and demand for money. Interest is the price of loan funds (credit), the price of money (as measured by the rate-of-change Δ, in bank debits) is the reciprocal of the price level (various price indices, or the Fed’s mandate which subjugates the gov’ts incentivized pro-rata share of the basket of actually “consumed” goods).

The FRB-NY’s trading desk (the U.S. Central Bank) exercises control over bank lending and money stock by its buying (expanding) and selling (contracting) of secondary, generally “off-the-run”, securities, or reserve balance altering operations (reserve draining and injecting operations, smoothing the receipt and payment of IBDDs), the level of required (legal, and in due course “complicit”) member bank reserves (vault cash and deposits at the Fed) in the system (i.e., by controlling “outside” or exogenous money, a DFI’s clearing balances, -> it controls “inside” or endogenous money).

As Dr. Richard G. Anderson, former senior V.P. and economist at the Maverick Bank, says: “Reserves are driven by payments”.

Note: Since the DIDMCA of March 31st 1980, all DFIs are subject to reserve requirements:

Reserve period computations, calculation and maintenance periods, pg. 18 in:

Unfortunately, according to the “monetary” economists at the Federal Reserve’s long-standing “maverick” District Reserve Bank, e.g., Daniel L. Thornton, Vice President and Economic Adviser:

See: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series
“Monetary Policy: Why Money Matters and Interest Rates Don’t” (his last paper before retirement, note that there is an old Turkish Proverb which states, “He who tells the truth should have one foot in the stirrup”

viz Thornton: “the interest rate is the price of credit, not the price of money (i.e., the price level.)”

“The Fed’s lending and investing activities not only change the supply of money, they also change the supply of credit. When the Fed makes loans or purchases assets (any asset) it alters the total supply of credit by the amount of the loan or asset purchase. It is this effect of monetary policy actions that causes interest rates to change. Interest rates would change even if the demand for money were independent of the interest rate. Hence, the interest elasticity of the demand for money is not necessary for monetary policy actions to affect interest rates. The effect of monetary policy actions on the supply of credit is sufficient for interest rates to change...”

Thus, changes in the composition and size of the Feds’ balance sheet (posited as “normalization”), and Central Reserve Bank Credit, might not be related to legal reserve management (the only available tool at the disposal of the monetary authorities, in a free capitalistic society, through which the volume of money can be controlled (not interest rate manipulation).

And reserves have not been “e-bound” (binding / restrictive) since Greenspan reduced the level of legal reserves by 40 percent since the S&L crisis, c. 1995 (when he couldn’t, or the banks couldn’t / wouldn’t, expand credit coming out of the 1990-1991 recession).

The Fed administers (re-sets its policy rate in a series of stair-stepping or cascading pegs) as a barometer, a contrived expectation’s signal and linkage of reserve supply relative to demand – which is a weak yoke or nexus to the entire yield curve’s term structure, to the level of the free-market’s clearing response, or nominal interest rates .

I.e., it is adjusting its supply of assets, relative to the market’s absorbing factors’ adjustments, principally, repos, currency, Treasury’s General Fund Account.

Balance sheet:

vs. legal reserve management:

Wednesday, February 8, 2017

Secular Strangulation

Martin Wolff (chief economics’ commentator at the Financial Times, London) defines secular stagnation as “chronically deficient AD”. The deceleration in R-gDp and inflation stems from not putting savings back to work outside of the payment’s system (a decline in money velocity, AD, and N-gDp). The 35 year bull market in bonds parallels this deceleration.

This “blue print” was presented in “Should Commercial Banks Accept Savings Deposits?”, Savings and Loan League’s, proceedings of the 1961 Conference on Savings and Residential Financing, May 11 & 12, 1965, pg. 40-48, by Professor Lester V. Chandler in his theoretical approach.

Chandler: “But surely a more basic and, over a longer run, a far more important objective is to secure some desired behavior of the level of spending for output—to achieve a certain level of gDp, or to cause the level of gDp to increase at some desired rate (sounds analogous to Scott Sumner’s N-gDp targeting on his blog “Money Illusion”?).

Chandler’s theoretical explanation was: (1) that monetary policy has as an objective a certain level of spending for gDp, and that a growth in time (savings) deposits involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of demand deposits, DDs.

Leland James Pritchard, Ph.D., economics, Chicago 1933: “This hypothesis rests upon the fact that the payment’s velocity of funds shifted into time deposits becomes zero, and remains at zero so long as funds are held in this form. The stoppage of the flow of these funds generates adverse effects in our highly interdependent pecuniary economy, as would any stoppage in the flow of funds however induced. It is quite probable that the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on gDp.”

And: ”the stoppage in the flow of monetary savings, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods”.

In other words, from the standpoint of the commercial banks, DFIs, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume. Whether the public saves, or dis-saves, chooses to hold their savings in the CBs, or transfers them to the NBs, will not, per se, alter the total assets, or liabilities of the CBS - nor alter the forms of these assets and liabilities.

I.e., Chandler’s theory was obviously denigrated by Cambridge economist, Alfred Marshalls’ “Money Paradox”. Thus Alfred Marshall’s “Cash Balances Approach”, P = M/KT, came to fruition in 1981 with the saturation in DD Vt.

As SA author WYCO Researcher said: “The velocity stayed fairly stable for decades, but then increased sharply partially because technology dramatically changed the payment methods/speed.”

I.e., the financial innovation on commercial bank deposits, reflected by its deposit rate of turnover (95% of all demand drafts clear thru transaction accounts), plateaued with the widespread introduction of ATS, NOW, and MMDA accounts in 1981. Money velocity has decelerated ever since (as savings increasingly became impounded and ensconced within the payment’s system - as encouraged by the complete removal of Reg. Q deposit ceilings):

The cash balances approach points out that the desire to hold more or less cash, rather than non-monetary assets, has its repercussions on the supply of, and the demand for, money. Adjustments in prices relative to the volume of money and real balances continue, unless interrupted, until a point of indifference is reached.

However, if the public on balance considers the real worth of its cash balances deficient, this will bring about an increase in the demand for money and a decreasing in its supply. The velocity of money will decline, and if prices tend to be sticky, sales, production, employment, and payrolls will fall off. This will lead to reduced bank lending, a decline in the volume of money (and this will not be compensated by an appropriate decline in prices). Under these circumstances equilibrium is never reached, and the public in seeking to increase its real balances so reduces its effective purchasing power as to create a condition of chronic stagnation.

What happened (the subpar R-gDp performance and slow recovery) was that Bankrupt u Bernanke destroyed non-bank lending/investing by the remuneration of excess reserve balances, IBDDs (inducing dis-intermediation for the non-banks exclusively). Thus, the non-bank’s, assets (& corresponding liabilities), dropped $6.2 trillion, vs. the CB system's growth of $3.6 trillion. The 1966 S&L credit crunch is the economic paradigm and precursor (lack of funds, not the cost of funds).

This is the cause of Larry Summers’ secular stagnation or an excess of savings over investment opportunities as originally described by Alvin Hansen in 1938 (as predicted in 1958 by Dr. Pritchard).

Keynesian economists have finally achieved their objective: that there is no difference between money and liquid assets.

The way to increase money velocity and force investors to buy riskier assets (risk-on) would have been, and still is, to get the CBs out of the savings business.

- Michel de Nostredame

Saturday, January 28, 2017

Buy SPX puts

There's an ominous pattern to R-gDp:

10/1/2007 ,,,, 1.4
01/1/2008 ,,,, -2.7 lower
04/1/2008 ,,,, 0..2
07/1/2008 ,,,, -1.9
10/1/2008 ,,,, -8.2
01/1/2009 ,,,, -5.4 higher (recession ending)
04/1/2009 ,,,, -0.5
07/1/2009 ,,,, 1.3
10/1/2009 ,,,, 3.9
01/1/2010 ,,,, 1.7 lower
04/1/2010 ,,,, 3.9
07/1/2010 ,,,, 2.7
10/1/2010 ,,,, 2.5
01/1/2011 ,,,, -1.5 lower
04/1/2011 ,,,, 2.9
07/1/2011 ,,,, 0.8
10/1/2011 ,,,, 4.6
01/1/2012 ,,,, 2.7 lower
04/1/2012 ,,,, 1.9
07/1/2012 ,,,, 0.5
10/1/2012 ,,,, 0.1
01/1/2013 ,,,, 2.8 higher (FDIC safety net lowered)
04/1/2013 ,,,, 0.8
07/1/2013 ,,,, 3.1
10/1/2013 ,,,, 4
01/1/2014 ,,,, -1.2 lower
04/1/2014 ,,,, 4
07/1/2014 ,,,, 5
10/1/2014 ,,,, 2.3
01/1/2015 ,,,, 2 lower
04/1/2015 ,,,, 2.6
07/1/2015 ,,,, 2
10/1/2015 ,,,, 0.9
01/1/2016 ,,,, 0.8 lower
04/1/2016 ,,,, 1.4
07/1/2016 ,,,, 3.5
10/1/2016 ,,,, 1.9

And money flows (volume x velocity) is lower in the 1st qtr. of 2017.