NightBlogger

Market Ticker
What you’re seeing today is the utter fear in the hearts of people who have made (correct) bets that the financial sector is radically overvalued and these firms are bankrupt; they have now been told that bankrupt or not, you, the taxpayer, are on the hook for their insolvency, despite THEIR bad decisions. In addition the liquidity that was provided by the floor traders and others in the market who made those correct bets - many of whom will be broke today, literally - will permanent disappear from the market. More

Dan Yorcini
jsmineset.com
If anyone wants to know why bonds have been busy going nearly straight since the middle of July…. The first is Federal Agency Debt holdings in the New York Federal Reserve’s Custodial Accounts. The second chart is US Treasuries holdings in those same accounts. The third is total holdings in the Custodial Accounts. Foreign Central Bank holdings of US Federal Agency debt holdings hit a high water mark of $986 billion reported on July 17 of this year. This week’s data shows that those same Foreign Central Banks are now down to $968 billion. In five weeks time, foreign central banks have sold $18 billion worth of US Federal Agency debt.

Over that same time period, they have increased their holdings of US Treasury debt from $1.363 trillion to $1.441 trillion, an increase of $77.33 billion! For the entire 5 week period beginning July 17, 2008 to the present week, total custodial holdings have increased $59.71 billion. Foreign Central Banks have been quite busy unloading US Federal Agency Debt and acquiring US Treasuries in its place and then some. One would easily get the idea that they do not feel comfortable with it any more. Even a cursory glance at the Agency Debt Holdings chart shows that the last five weeks have seen the largest drop in this category over the life of the data series that I am using. While we have seen reductions in their holdings from week to week on occasion over the data range, this is the first time we have seen a reduction in US Federal Agency debt holdings that has continued for this length of time. More

James Turk
The Federal Reserve did not suddenly contract the amount of dollars in circulation. Its latest H.6 report shows that both M1 and M2 expanded in recent weeks, so there was no shortage of supply. The Federal Reserve did not raise interest rates during this period. Consequently, inflation adjusted interest rates remain negative. In other words, the annual inflation rate is higher than the amount of interest one can earn on a 1-year dollar deposit, which is highly inflationary and a major disincentive to holding dollars. There has not been any news exceptionally favorable to the dollar. In fact, the banking problems in the United States continue to mount, while the federal government’s deficit continues to soar out of control. On July 28th Reuters reported that “The Bush administration on Monday plans to project the U.S. budget deficit will soar to a new record…because of the slowing economy and an economic stimulus plan approved this year.” So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here’s the proof.

When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly. On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve’s custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.

So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff and doing so ignited a short covering rally, which is not too difficult to do given the leverage employed in the markets these days by hedge funds and others. So central banks pushed in one direction and funds and traders then stepped on board. In other words, central banks ignited the fuse of a bear market rally. With this intervention, central banks have bought some time. More

Thousands of dairy farmers from all over Germany rallied in Berlin on Wednesday to protest the low prices they receive from major dairies and supermarket chains. Twenty tractors lined up in front of Berlin’s Brandenburg Gate as the crowd, including many young farm workers, listened to speeches from dairy farm representatives.

Posters and banners at the rally testified to the militancy of farmers. They made clear that the current pricing policies of the major food retailing chains and the European Union were threatening the livelihoods of thousands of German small and middle-sized farmers.

Speakers at the rally brought solidarity greetings to the rally from farmers in France, Switzerland and Holland, making clear that the problem of increased production costs and declining returns was a pan-European problem. Prices paid to European Union farmers for milk have fallen by around 30 percent during the past six months, while the farmers’ production costs have risen dramatically. More