Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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