Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

The Federal Reserve Has Attempted to Corner the Credit Market

Interest-Rates / Market Manipulation Sep 26, 2009 - 02:45 AM GMT

By: Submissions

Interest-Rates

Best Financial Markets Analysis ArticleDaniel Aaronson and Lee Markowitz write: During a market corner, a buyer accumulates an asset with the intention of driving the price higher without any regard for its true value.  Additionally, the buyer amasses such a large holding that market prices cannot remain elevated without continuous buying.  For example, when the Hunt Brothers cornered the silver market, silver rose from $11 per ounce in September 1979 to nearly $50 an ounce in January 1980.  Eventually, the Hunt Brothers stopped buying silver as they ran out of capital and the market for silver dried up.  As happens with all market corners, when the buyer disappeared from the market, the price of silver spiraled downward.  The Federal Reserve, knowingly or not, has cornered the credit market.


At the beginning of the credit crisis the Federal Reserve lowered short-term interest rates in an attempt to ease financial market strains.  With the credit markets still not functioning properly, despite the Federal Funds rate being set in a range of 0 – 0.25%, the Federal Reserve devised a new plan to lower market interest rates for individuals and corporations.  This plan, otherwise known as quantitative easing, called for the Federal Reserve to print money in order to buy bonds on the open market as well as guarantee investors from losses on other bonds.

Currently, the Federal Reserve is in the process of buying $1.25 trillion of agency mortgage-backed securities, $200 billion of agency debt, and nearly $300 billion of private credit (this excludes the $300 billion of Treasury purchases and also assumes that all buying programs are completed as stated by the Federal Reserve).  To put this $1.75 trillion buying spree into perspective, PIMCO, the world’s largest bond fund manager, managed $841 billion as of June 30, 2009.  Essentially, the Federal Reserve has not only become a new bond market participant, but also will have grown to twice the size of the largest market participant in approximately one year.  The entrance of such a large indiscriminate buyer helps to explain the rapid resurgence of credit markets.

The end of the Federal Reserve’s credit market corner (assets that are cornered always collapse) could be sparked by a number catalysts.  First, private investors may realize that bond prices are unjustifiably high and will sell them into the market faster than the Federal Reserve can buy them.  Secondly, the Federal Reserve could slow its purchases, leading to lower marginal demand for bonds if not eliminating demand entirely.  A third and more devastating outcome that could result from the Federal Reserve’s quantitative easing would be a Dollar collapse. 

Interestingly, on Wednesday, the Federal Reserve announced that it would slow its involvement in credit markets.  Previously, the Federal Reserve was going to complete its $1.75 trillion program by December 2009, but now it has extended the program until March 2010.  In doing so, the Federal Reserve has lowered its average purchases for the coming 3 months.  This maneuver should prove problematic because the Federal Reserve’s buying power has been paramount in reinflating the credit market bubble.  While the Federal Reserve hopes that the recovering economy allows for moderate tightening, the real reason for altering the purchase program is the Dollar’s continued decline and the Federal Reserve’s fear of ending its purchases too abruptly.

The Federal Reserve’s attempt to manipulate the credit market is a path to ruin.  Although Ben Bernanke might believe that the recession and economic crisis are over, the Dollar’s decline to new 2009 lows is a signal that an orchestrated market corner cannot succeed.  As a result, the Federal Reserve’s ability to continue its supportive endeavor is clearly being undermined.  Despite the market corner appearing effective during the past six months with most asset prices having rallied, bond prices will one day begin to fall, and when they do, it will be clear that the market corner has failed. 

Daniel Aaronson - daaronson@continentalca.com
Lee Markowitz - lmarkowitz@continentalca.com

Continental Capital Advisors, LLC
Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

© 2009 Copyright Continental Capital Advisors, LLC - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules