Monday, September 27, 2010

9/27 3:40

I'm showing 5 down from the high.
Pima posted a comment regarding bank buying of equities.  Here is how I see it:
The Fed makes the reserves available to banks to lend. If banks choose not to lend the reserves then money supply does not increase and money is not created out of thin air.  Lending is the only way to increase the money multiplier.  Banks are not lending now because they are maintaining low risk tolerance. 
That being said, banks can present securities to the Fed against which they can borrow.  However, banks don't need to collateralize loans with the Fed in order to borrow, they can go to the private market at ultra-low rates (compliments of the Fed) and obtain funds.  This used to be easier pre-crisis but is still available to banks today in that they can use the commercial paper market, inter-bank market, or securitize segments of their loan portfolios.  However, banks have low risk profiles nowadays so they leave it up to their clients to buy stocks. Trust departments are the only significant source of bank exposure to equities, other than investments in other financial instutions.  Banks don't want to use the Fed Discount Window because it indicates weakness in their financial condition and leaves them vulnerable to deposit outflows.


  1. thanks, Steve.

    The one piece of the puzzle though that is still a mystery to me is why is it that the market rockets skyward on POMO days?

  2. Steven congrats on your latest short. Looks like the market is finally cooperating!

  3. "Banks are not lending now because they are maintaining low risk tolerance."

    Actually banks want to lend - that is their main business. The problem is fewer creditworthy potential borrowers, but also potential borrowers worried about the future of regulations, taxes and the economy. In other words, people and businesses do not want to borrow. The Fed is doing everything possible to promote lending, but you cannot force people to apply for a loan.

  4. 2-way street. As long as banks can buy higher-yielding treasuries at ultra-low short-term rates they will make their margins and can afford to maintain high credit requirements. On the borrowing side few good credits combined with macro uncertainty and governmental hostility keep the number of people walking through the doors down.

  5. pima
    Direct intervention by Fed and Treasury can be accomplished with barely a ripple on their balance sheets. Just a billion in futures is enough to send shares soaring. I'm not saying that this is happening, but we had a string of 2:00-2:30 rallies for 8 days running on extremely low overall volume up to the magic hour. The funds could be removed from the market once enough participation was sucked into the rising prices. Futures can also disguise who/what is doing the buying and selling.

  6. Question for you, Steve: I completely agree the gov't, the Fed, GS etc are manipulating the market. Isn't Elliot Wave Theory based on free market conditions? How can Elliot Wave function in an artificially manipulated market? (whether or not you agree that the market is in fact manipulated). Seems like those guys are well aware of what the bears are thinking and could be using that for bear hug setups (short squeezes).

  7. Let me post a reply.