Dark Skinny

Today, in their usual manner, the Fed gave away $630 billion to the markets. Without permission, they just did it. They are unstoppable aren’t they? And look what effect this has had, world markets have plunged and hit new lows. The single American Bank Wachovia has assets of nearly $700 billion. So is the US government going to save just that bank with its loose change of taxpayers money ? It certainly couldn’t afford to save anyone else. Truly laughable. This is a wonderful example of The Fed “pissing against the hurricane”. Again.

From the PFXGlobal Site:

“I am usually anti-conspiracy. Not because I think policy makers are morally above it, rather I think it is because they are intellectually below it. However, you have to agree that this particular issue was definitely under-reported today. While everyone watched the Democrats and Republicans in a slap fight, the Fed slipped several hundred billion USD (or at least made it available) into the market. What do you think; was the drama on Capitol Hill a red herring? Either way, I still say there is a ton of opportunity for traders.

If you think the Fed/Treasury team was stymied in their efforts to flood the market with $700 billion today you would be mistaken. The fed increased swaps with just about every central bank out there to $620 billion from $300 billion and increased lending limits to $75 billion for 84 day loans.

A swap with another central bank is essentially a currency pair trade. The Federal Reserve in the US is acquiring foreign exchange reserves through the swap by selling USD to other central banks. Obviously the Fed does not usually enter into transactions like this and does not keep the same size of an FX reserve like most other central banks do. This shift in behavior is supposed to help the other central banks distribute more USD to their domestic banks to prevent global liquidity problems.

What that means is that the Fed is injecting a lot of cash (specifically USD) into the market to try and ease liquidity pressures. In order to keep rates this low, commercial and private lenders have to be willing to loan at low rates. Increasing the supply of the USD should (in theory) decrease its cost and therefore increase credit flow. Unfortunately, based on today’s movement towards a stronger USD and JPY, the plan does not seem to be very effective yet. This is not a big surprise. Fundamentally changing the risk environment in the market is no easy task and that is what the Fed/Treasury team is trying to do. The capital markets are massive and composed of millions of individual participants. Forcing them all to accept your view that risk is overstated right now is not going to be easy.

This has implications for the deal that is floundering in the US House of Representatives. If this injection was not enough will another $700 billion help? What about another $700B after that? Are they merely digging the proverbial hole deeper? In light of current market behavior I think the USD and JPY still look like strong buys whether congress passes a bailout or not.”