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The Fed Buys Last Week's Treasury Notes

Thursday, August 6, 2009, 11:11 AM

I've started a new service for enrolled members called the Martenson Insider where I will be putting my more timely and market-sensitive thoughts.  This week it is freely available to all.

Here's a recent example illustrating that the Fed's actions are more consistent with financial desperation than economic health.


In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.

This is at the upper end of their recent range of already exceptional purchasing activity.

If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US.  However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs") we can consider these additions of money as good as permanent themselves.

.

Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.

Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday).  Please note the specific CUSIP number circled.  Every bond in this auction carries this specific identifying number.



And now let's look at the detail for this most recent POMO:

Good grief!  Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn't even wait a full week!  A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public. 

The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers.  They'll have to do something with all that freshly minted  cash.....

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48 Comments

DavidC's picture
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Re: The Fed Buys Last Week's Treasury Notes

Hello Chris,

Astonishing. Thanks, as ever, for your fantastic investigative work.

DavidC

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Re: The Fed Buys Last Week's Treasury Notes

And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers.  They'll have to do something with all that freshly minted  cash.....

Ouch!

Could someone please make the markets conform to my personal beliefs? Thank you.

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Re: The Fed Buys Last Week's Treasury Notes

Holy cra*! Besides PM and physical foreign currencies what other vehicles are good for protecting against a dollar debacle?

Jeff

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Re: The Fed Buys Last Week's Treasury Notes

Thanks Dr Martenson, I think other articles have had titles like 'US Treasury Auction Fails' but this is the proof in the pudding.  And the pudding's gone bad!

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Re: The Fed Buys Last Week's Treasury Notes

Thanks so much.  I had suspected there was something fraudulent happening, now it's plain to see!

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Re: The Fed Buys Last Week's Treasury Notes

The Fed also bought another big old pile of Agency Debt today.

Thu 8/6/2009 3:07 PM

New York Fed purchases $19.2 billion net ($19.2 billion gross) in agency mortgage-backed securities

You know, because things are looking so good.

That makes today your average, regular $26.2 billion dollar day of thin-air money injection ($7 + $ 19.2).  To put this in context, today's fresh money operation, alone, would have been 88th on the list of yearly total output on the world GDP listing.

Why bother running a whole country when you can just print up an entire GDP in a single day?  Sooner or later folks are going to lose the subtle connection between dollars and sense.

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Re: The Fed Buys Last Week's Treasury Notes

Chris, All,

I think the bigger issue is the Fed's buying of GSE debt and securities. 

Even after all the recent long term Treasury buying, the Fed still has ~ $100 billion less in Treasuries on its balance sheet today than it did at the start of the mortgage crisis two years ago.   At the end of July 2009, the Fed had ~ $683 billion in Treasuries vs. ~ $352 billion in July of 2008 vs. ~$786 billion in July of 2007.   It's important to note that the mix of Treasuries on the Fed's balance sheet has changed from almost all short term bills, to about 2/3rds bills (short term) & 1/3rd notes (longer term).   Most believe the Fed moved to longer durations to keep long rates down.  I hold a different view.  I believe the Fed moved to longer term notes to prevent yields on short term bills from going negative as they did during the peak of the financial panic/meltdown.  I also don't believe the Treasury is having any difficulty selling debt.  Demand for Treasuries, especially Treasury Bills is very high.  I believe the Fed is simply replacing the Treasuries it sold during the peak of the crisis. 

If you want to see the face of monetization you need to look at the Fed's GSE debt and securities purchases.  Since the end of September 2008, the Fed has exchanged > $650 billion in freshly printed federal reserve notes (cash) for GSE mortgage paper.  Believe me when I tell you that at this point, the Fed IS the mortgage market.  And mortgage paper is the conduit that the Fed is using to flood the banking system with money.   And remember, the Fed has announced their intention to purchase $1.25 TRILLION in GSE paper.  Talk about a helicopter drop! 

BTW, the Fed's purchases of GSE paper are very likely illegal.  Per the Fed's CONgressional charter, the Fed is only allowed to purchase investments backed explicitly by the U.S. Gov't.  GSE paper is issued with an explicit warning that it is NOT backed by the U.S. Gov't. 

We are witnessing the biggest bailout and wealth giveaway in history.    

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Re: The Fed Buys Last Week's Treasury Notes

I just passed this great post on to Zero Hedge. They loved it!!

http://www.zerohedge.com/article/feds-ust-pomo-pyramid-scheme-exposed

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Re: The Fed Buys Last Week's Treasury Notes

This news is not new. I wrote about this a couple of days ago here ... http://financialsense.com/fsu/editorials/2009/0804.html

and followed up that article yesterday ... http://www.ronpaulforums.com/showpost.php?p=2247813&postcount=8 and this morning ... http://www.ronpaulforums.com/showpost.php?p=2249696&postcount=11

Brian

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Re: The Fed Buys Last Week's Treasury Notes

Hello Brian,

Welcome to Chris's site and many thanks for your links. It's fantastic that through the work of the likes of you, Chris, Karl Denninger, Tyler Durden et al that this information is coming out.

To me, as a reasonable and rational adult (I hope!), the most important thing is that we have access to the information so that we can make our minds up on the basis of the facts rather than the sugar-coated 'everything is OK' pap we are being fed by the pewors that be (one can't help feeling that by their actions, they are showing how absolutely petrified they are)!

DavidC

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Re: The Fed Buys Last Week's Treasury Notes

Thanks David.

You make like the predecessor to that article as well, "Fed Exit Strategy?" ...

http://financialsense.com/fsu/editorials/2009/0729a.html

Brian

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Re: The Fed Buys Last Week's Treasury Notes

This was picked up by Zerohedge and tweeted to the whole world.  You should expect lots of traffic.

I commented on his board (he had over 70 comments in ten minutes) and suggested that those folks might take a look at the Crash Course.

gonegolfin's picture
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Re: The Fed Buys Last Week's Treasury Notes

Chris said:

"They didn't even wait a full week!  A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public. "
 

Chris, the Fed cannot buy these treasuries outright from the Treasury at auction. The Fed cannot participate in Treasury auctions because it has no authority to lend to the Treasury. I discuss this here ... http://financialsense.com/fsu/editorials/2009/0804.html   

The Fed can only participate in an auction to the extent that it elects to replace any maturing treasuries in its portfolio. If the Fed elects to do this, this amount shows up in the "SOMA" line of the Treasury Auction Results report as it is replacing maturing debt and does not add to issued and outstanding debt.

Brian

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Re: The Fed Buys Last Week's Treasury Notes

The zerohedge article citing CM's excellent investigative work on this report has been cited over at iTulip by one of their major-league community members.  

Methinks if this keeps up the profile of this site (and Chris' work) is going to pop to a much larger audience...

I'll be stupendously psyched when I see Chris on The Daily Show in October...(crossing fingers for luck)...

VIVA -- Sager

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Re: The Fed Buys Last Week's Treasury Notes

Hi Sager,

It's to be hoped! I'll have the recorder set!

DavidC

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Re: The Fed Buys Last Week's Treasury Notes

Hello Brian,

Re Post 11 - thanks, very interesting. Juggling with knives?

DavidC

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Re: The Fed Buys Last Week's Treasury Notes

Super work/read Chris.

It was also picked up on Karl Denninger's site. (Wonder if he'll be explaining this to Dennis Kneale when he is on CNBC next.)

Take care

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Re: The Fed Buys Last Week's Treasury Notes

Karl Denninger picks up Chris's investigative work and also ZeroHedge

http://market-ticker.org/archives/1304-BLATANT-Monetization-Uncovered.html

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Re: The Fed Buys Last Week's Treasury Notes

.

As gonegolfin posted above, Section 14 (b.1.) of the Federal Reserve Act states that the Fed can only purchase treasuries from the open market except for rolling over expired issues.

www.federalreserve.gov/aboutthefed/section14.htm

It seems that if there was an excess amount of Fed purchasing in the open market, it would have dropped the overnight Fed funds rate toward zero. It did not. The overnight rate has been steady at 17-18 basis points for over a week. Before the auctions in question, the rate was actually lower.

The overnight rate shows nothing out of the ordinary as far as Fed monetization. However this does not mean that the Fed is not finding another way to show increased demand for the auctions.

-dan

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Re: The Fed Buys Last Week's Treasury Notes

I can not connect the dots, I am not that sophisticated on these matters. So, help me out.

“And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.”

What is the evidence the Fed. bought 47% ?   What is the chronicle of the events?  Thanks.

gonegolfin's picture
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Re: The Fed Buys Last Week's Treasury Notes

"It seems that if there was an excess amount of Fed purchasing in the open market, it would have dropped the overnight Fed funds rate toward zero. It did not. The overnight rate has been steady at 17-18 basis points for over a week. Before the auctions in question, the rate was actually lower."

deflationdan,

The Fed payment of interest (0.25%) on reserves held on deposit with the Fed is putting a floor under the Federal Funds rate. The reason that the federal funds rate is trading a little below 0.25% is because certain institutions that participate in the federal funds market (Ex. Fannie, Freddie, etc.) are not eligible to receive interest on their deposited reserves. Hence, they are offering their reserves in the open market for less than 0.25%.

Brian

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Re: The Fed Buys Last Week's Treasury Notes

http://alhambrainvestments.com/blog/2009/07/30/7-year-treasury-auction/

7 Year Treasury Auction

Posted by Joseph Y. Calhoun, III

The 7 year Treasury auction, unlike the 2 and 5 year earlier this week, is said to have gone well:

NEW YORK (Dow Jones)–Treasury prices jumped Thursday afternoon after a successful seven-year auction soothed investors and dealers burned by two disappointing Treasury note sales earlier in the week.

Treasury prices rose across all maturities after the $28 billion sale, the final auction in a record $115 billion offering of Treasurys this week.

The auction drew the most interest from large institutional investors, including foreign central banks, of the three note sales this week. This demand, known as the “indirect bid”, accounted for a robust 62.5% of the offering, compared with the 67.2% bid seen at the last $27 billion seven-year sale in June and an average bid in the low-to-mid 30% range.

The new notes were awarded at a yield of 3.369%, a bit below the 3.396% yield seen just before the sale, a sign of good demand. Bids totalled $78.59 billion, or 2.63 times the amount on offer, compared with 2.82 at the last sale and an average this year of 2.40.

Maybe it had something to do with this:

NEW YORK (MarketWatch) — The Federal Reserve Bank of New York bought $6.496 billion in Treasurys maturing between 2012 and 2013 on Thursday, its latest operation in a program intended to keep a lid on borrowing costs. Dealers submitted $20.308 billion to the central bank to buy. The amount purchased was roughly the same as at the Fed’s last buyback in this maturity range. Treasury yields remained higher on the day, pushing prices down, ahead of the government’s sale of 7-year notes.

The Treasury pushes them out the front door and the Fed buys them at the back door. Not exactly a long term plan….

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Re: The Unraveling: The Fed Buys Last Week's Treasury Notes

What is key is CM has documented what many here and other web sites have concluded for weeks (if not months).

Add data from this Chris post to this thread...offer within weeks (if not days) it is now impossible to say the emperor (I.e. US Gov't) is wearing clothes when he's not.

This post is now referenced in numerous web sites...it will get to (if not already) many key decision-makers in many countries (i.e China, Saudi Arabia, etc).

So...how long will it be before all US Treasury demand collapses ($100 Billion auctions scheduled next week) and what will happen then?

I think we know...any takers?

FWIW...just reinforces my view we will experience one or more significant financial events before the end of year.

Finally...wouldn't it be worthwhile to discuss what and how this will unravel?  Lets stop looking down at our feet as were walking.   Submit as a scientist and manager, how this happens is somewhat predictable (I've described this in my diary the past several weeks as the "capitulation phase").

Nichoman 

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Re: The Fed Buys Last Week's Treasury Notes

This is an extension of what happened on March 13th. 

On Friday China questions the “full faith” of the U.S. dollar. What this means is they will not bail out the U.S. with non-stop purchasing of Treasuries, the blood of the financial body.

On Sunday Bernanke does the first national interview a Federal Reserve chairman has ever done in 96 years. He says everything is fine and we’ll be back to business as usual by the end of the year. Then on Wednesday the Fed announces they will buy Treasuries until the end of days. So…

  1. China warns about the financial stability of the U.S.
  2. Bernanke goes on national television
  3. Says he’s from Main Street, just like you and me
  4. Then boldly lies about the economy

Three days later…

  • FOMC announces a final push of a desperate crisis management plan
  • U.S. dollar sees its 3rd biggest one-day decline ever
  • Fed is now matching all of China’s $1 trillion in Treasuries

For more details on the mechanics of this and the potential dangers:

Our Engineered Meltdown: End of the Beginning

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Re: The Fed Buys Last Week's Treasury Notes

Chris,

Great find, thank you.

"And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers.  They'll have to do something with all that freshly minted  cash....."

Doesn't this lack of demand for Treasuries suggest that most, if not all, of the Fed's handouts have flowed into all other asset classes on the hopes that the economy has rebounded? I would view this as an opportunity to buy into the Treasury market.

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Re: The Fed Buys Last Week's Treasury Notes

Goldman Sachs' Incredible Trading Returns are Literally Unbelievable

Golman is a primary dealer. Do you think there returns have anything to do with the fed and the Primary Dealers shuffleing the money around?

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Re: The Fed Buys Last Week's Treasury Notes

.

Thanks Brian. I forgot about the rickety floor.

However, I do not see why folks are so surprised at the Fed's actions. They have been jawboning the longer term treasury market for many months promising to purchase these longer dated issues in the open market. Now they are doing it.

In fact, Ben Bernanke in 2002 submitted this as a possible deflation prevention measure. He referred to the Fed's actions in WWII when they purchased longer dated treasuries in order to keep the government's borrowing costs down.

As long as the government hopes for a trickle-down effect by supporting the financial system at the expense of the economy, these measures will do nothing to stop deflation.

-dan

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Way To Go Dr. Martenson!

This post has over 9000 reads in what 8 hours? 

Dr. Martenson,

Its great to see you get the traffic that your excellent work deserves.

Kudos!

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Re: The Fed Buys Last Week's Treasury Notes

You go, Chris!  Excellent report, and congratulations on the coverage you're getting!

Nichoman wrote: 

"... it is now impossible to say the emperor (I.e. US Gov't) is wearing clothes when he's not.

This post is now referenced in numerous web sites...it will get to (if not already) many key decision-makers in many countries (i.e China, Saudi Arabia, etc).

So...how long will it be before all US Treasury demand collapses ($100 Billion auctions scheduled next week) and what will happen then?

I think we know...any takers?"

I'm wondering the same thing, Nichoman!  My spidey-senses are certainly on higher alert.   The thing keeping this illusion going is that the mainstream doesn't "see" what's going on (and don't want to get their boat rocked either).  But what happens once they do get a good look at what's going on behind the curtain?  Once the illusion is gone, it's gone. 

Whether or not this story contributes to breaking, the illusion for the general public, it certainly makes me want to take a harder look at whether I've done all I could/should to be prepared, and to speed that up!

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Re: The Fed Buys Last Week's Treasury Notes

deflationdan wrote:

Thanks Brian. I forgot about the rickety floor.

However, I do not see why folks are so surprised at the Fed's actions. They have been jawboning the longer term treasury market for many months promising to purchase these longer dated issues in the open market. Now they are doing it.

No doubt that the Fed announced well before the purchase program commenced on 3/25 that it would be purchasing treasury debt, specifically long term treasury debt. This is not the surprise. I have been covering this in writings for some time. But there is a difference between 1) the Fed going into the open market to expand its balance sheet by buying treasuries (this is not an atypical operation even in non-crisis years ... but the volume in $ is certainly atypical) and 2) the Treasury auctioning large amounts of debt and the Fed immediately subsidizing that auction (which is what they are doing). This is the closest thing to the Fed lending directly to the Treasury/Government that there is without actually doing it (it is also more innefficient in that it costs the taxpayers more). And this is disallowed by the Federal Reserve Act for obvious reasons. I think it is clear that they are working closely with the primary dealers (providing them backstop assurance) to ensure that these Treasury auctions not only are not disappointing (as perception is very important here), but that they look pretty good (especially at the long end).

Brian

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Re: The Fed Buys Last Week's Treasury Notes

Davos wrote:

Super work/read Chris.

It was also picked up on Karl Denninger's site. (Wonder if he'll be explaining this to Dennis Kneale when he is on CNBC next.)

Take care

... and the followup video

http://market-ticker.denninger.net/archives/1305-Monetization-And-Bernan...

Brian

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Re: The Fed Buys Last Week's Treasury Notes

Here's another posting of Chris's report quoted via the zerohedge article, at: http://wallstreetblips.dailyradar.com/story/the_fed_s_ust_pomo_pyramid_scheme_exposed/

Here we go!

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Re: The Fed Buys Last Week's Treasury Notes

What part of this sentence from the FOMC March 18, 2009 press release did you ignore at the time, forget about, or do you not currently understand:

"Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."

http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm

Heh! Gee! Right out there for all to see!  A conspiracy in plain view!

Let's do some math. $300 billion divided by 31 weeks equals... ~$10 billion/week.

Heh look! Your CUSIP 912828LDO is for ~$8 billion.

Ya don't think that this was part of, you know, the Fed's previously announced scheduled purchase of, you know, long-dated Treasurys to cap rates on the long end of the curve, do ya?

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Re: The Fed Buys Last Week's Treasury Notes

Debt Apocalyse, I don't think you understand the point that Chris was trying to make.  The 5 year auction was a complete DUD.  The next day they had to auction the 7 year notes.  And they got to make it look good after the disasterous 5 year auction. 

Primary dealers HAS to bid on every auction.  But there's no requirement on what kind of bid to submit.  If they bid low, the auction will be seen as a complete failure.  So the fed has to engineer an auction success.   Bernanke probably asked PIMCO's Bill Gross to bid high in exchange he's take it off Gross's books fast.  And a few days later that's exactly what happened.

Yes, the fed has already announced a $300 billion monetization campaign.  That's ongoing and has been happening.  Nobody is suprised by that.   What people here are jumping all over is the fact that they are blatantly trying to cover up WEAK auction results.   

There's a difference between doing a preannounced monetization vs asking the primary dealers to bid high so that they can flip the treasury 5 days later.

BIG DIFFERENCE.

George Orwell

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Re: The Fed Buys Last Week's Treasury Notes

Thanks Chris for explaining this game behind the scenes that ordinary folks like me wouldn't know about otherwise.  So how long can this game be sustained before it can't work, and what is the most likely outcome? - I read the possibilities in Brian's articles noted above.  What actions should we ask of the Fed instead and what actions should be taken to protect ourselves?

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Re: The Fed Buys Last Week's Treasury Notes

Thanks Chris for explaining this game behind the scenes that ordinary folks like me wouldn't know about otherwise.  So how long can this game be sustained before it can't work, and what is the most likely outcome? - I read the possibilities in Brian's articles noted above.  What actions should we ask of the Fed instead and what actions should be taken to protect ourselves?

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Re: The Fed Buys Last Week's Treasury Notes

Good question, Woodman.

The other thought that occurs to me is that since this info is so damning and is parsable by folks like Chris, one might wonder when it will stop being available say, like the M3 figure.

SG

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Re: The Fed Buys Last Week's Treasury Notes

Hello Brian:

Super job, I saw that. Both you and Chris did a great job, I should also mention that Nate pointed this out a little while back - his wasn't an indepth with Committee on Uniform Security Identification Procedures indentifiers, but he did point out that the PDs were the "buyers".

I think the greatest thing is that:

  1. the truth is getting vetted out
  2. it is making the rounds at blogs that have an incredible amount of heavy traffic

Take care, and super reads on the articles!

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Re: The Fed Buys Last Week's Treasury Notes

Davos wrote:

Hello Brian:

Super job, I saw that. Both you and Chris did a great job, I should also mention that Nate pointed this out a little while back - his wasn't an indepth with Committee on Uniform Security Identification Procedures indentifiers, but he did point out that the PDs were the "buyers".

I think the greatest thing is that:

  1. the truth is getting vetted out
  2. it is making the rounds at blogs that have an incredible amount of heavy traffic

Take care, and super reads on the articles!

Well said Davos!

Thank you,

Cat

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Re: The Fed Buys Last Week's Treasury Notes

Chris,

I just wanted to congratulate you on your eagle eye. Someone above linked to my similar post from last week, but I missed the fact that the Fed was buying the newly issued notes this week. I've done a followup post now:

http://alhambrainvestments.com/blog/2009/08/06/the-circular-flow/

Keep up the good work.

Joe Calhoun

Alhambra Investments

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Re: The Fed Buys Last Week's Treasury Notes

Davos wrote:

Hello Brian:

Super job, I saw that. Both you and Chris did a great job, I should also mention that Nate pointed this out a little while back - his wasn't an indepth with Committee on Uniform Security Identification Procedures indentifiers, but he did point out that the PDs were the "buyers".

I think the greatest thing is that:

  1. the truth is getting vetted out
  2. it is making the rounds at blogs that have an incredible amount of heavy traffic

Take care, and super reads on the articles!

Hello Davos. I think you misunderstand something that is important.

That the primary dealers are the buyers is not any news.  None at all. This is how the system functions ... they participate in various and sundry transactions with the Federal Reserve (temporary and permanent open market purchases of a variety of securities, but principally treasuries). The news that I broke in my article on Tuesday 8/4 at Financial Sense was that it has gotten to the point where the Fed is essentially lending directly to the Treasury … which is explicitly disallowed by a section in the Federal Reserve Act (which is why I pointed out to Chris that the Fed cannot participate in the Treasury auction, except for replacing maturing treasuries). When the Treasury can auction large amounts of debt and have the Fed support that auction by purchasing some of those same securities on the day of issuance, this in my opinion is violating the aforementioned section of the Federal Reserve Act. I then provided detailed CUSIP information linking the Treasury auctions and the Fed purchases. I also followed this article with the detailings of the Wednesday Fed purchases (posted Wednesday 8/5 on the Ron Paul forum) and then the detailings of the Thursday Fed purchases (Thursday morning 8/6 on the Ron Paul forum). Chris then came out with his article. And now we have quite a stir on this subject across the internet, as you have noted. :-)

My other principal point in that Tuesday article is that there should have been no surprise last week concerning the success of the 7-year auction on Thursday (even after poor 5-year and 2-year auctions) and I illustrated the reasons why.

It is important to concentrate on these two items. There are some Fed supporters that are missing the point (in blog land) and claiming that all of the buzz is about the Fed monetizing treasury debt (this is not the news, this is very old news). They are also pointing to some inaccuracies in Chris' post and in Zero Hedge's blog entry (which are in fact inaccuracies). This is not what the buzz should be about (and was not in my article). This was announced by the Fed apriori, it has been happening for some time, and it in and of itself is not news. But the items I mention in my article are news.

Brian
   

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cmartenson
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Re: The Fed Buys Last Week's Treasury Notes

Nicely done Joe,

I completely agree with your conclusion...it is central to my line of thinking as well:

I believe part of the problem is the perception - I would say reality - that Congress has no ability to stop spending. Extending the “cash for clunkers” program was a measly $2 billion but it sends a message to the market that Congress has no impulse control. The discussion of an additional trillion dollars of debt to pay for healthcare reform cannot give much comfort to current Treasury and dollar holders either. We may have reached the point where the rest of the world refuses to fund our irresponsible spending. We have 10 and 30 year auctions next week so we’ll find out soon whether this revelation has an effect.

Over the years I’ve watched a lot of emerging market economies get in trouble with too much debt and they always end the same way. The currency gets devalued and we send in the IMF to impose an austerity program in exchange for loans. We won’t be borrowing from the IMF, but a dollar devaluation seems a near certainty. And if we don’t get our fiscal house in order soon, the market will impose the austerity program for us.

We can either shape the future or have it happen to us.  I too see congress as preferring to be forced at some point in the future by circumstances over the opportunity to demonstrate understanding and leadership.  This has quite profound implications for nearly every investment strategy.

Edit:  I just put up a piece about the relationship between POMO activity and the stock market (link to article).  I've been tracking POMOs for quite a while (I began in 2006) and am continually amazed by what is transpiring today.  I literally never thought it could go this far.

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Davos
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Re: The Fed Buys Last Week's Treasury Notes

Hello Brian:

You wrote:

Reserve (temporary and permanent open market purchases of a variety of securities, but principally treasuries). The news that I broke in my article on Tuesday 8/4 at Financial Sense was that it has gotten to the point where the Fed is essentially lending directly to the Treasury … which is explicitly disallowed by a section in the Federal Reserve Act

I'm glad you clarified this. I'm not missing the point, I have read extensively about the fed, I know QE isn't something new, if you look at my post that you reference you will see "buyers" was and is in quotations. Meaning, as in, it isn't them, they aren't the buyers.

I'm usually a little hesitant when it comes to saying too much abou the fed, freedom of speach might cover Bernanke since he is an appointed official but they are a private company. GS took one blogger to court, this is a hobby for me not a business.

Again, thanks for all you do to promote transparancy and accuracy, the world will be a better place with it.

Take care.

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cat233
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Re: The Fed Buys Last Week's Treasury Notes

I took this off of The Daily Digest, Aug. 8, 2009.  I didn't want anyone to miss it.

Cat

www.PeakProsperity.com/blog/daily-digest-august-8/23831#comment-46510

cmartenson wrote:

Pinecarr - there were more than a few bloggers out there that conflated my own words with what Tyler Durdan said, then cast aspersions on the whole lot.  I fully stand behind what I wrote and the interpretations I drew.

In one case I posted a comment on one of those sites and much to that blogger's credit, he chose to feature my response which I think displays uncommonly good style.

Late Thursday evening I pennned a piece which responded to a post at the blog Zero Hedge which had originally been written and posted at the blog of blogger Chris Martenson.The piece by Mr Martenson discussed the most recent 7 year note auction and the subsequent Open Market Desk purchase of nearly $ 5 billion of those bonds while the ink han not yest dried on that bond.

Mr Martenson posted a response to my post in the comments section of that post. It is well written and I think that more eyes will have a chance to read his thoughts here rather than in the comments section.

Here is his response in its entirety:

Hello, Chris Martenson here.

Just wanted to say that while I applaud the interest in this subject, and I am in awe of the knowledge on display here, I believe that some of my words and intent have been taken out of context or misinterpreted.

1) My only point in raising the specific 7-year CUSIP purchase by the Fed last week was in the context of the troubled 5-year auction being followed by a miraculous 7-year auction that now appears less-than-miraculous due to that fact that the fed took 47% of the Primary Dealer take off their hands a few days later. Yes, that’s a dot-connection that seems entirely relevant to me not because it reveals a greater degree of manipulation (the $1.25 trillion MBS target seems a tad larger to me…) but because it possibly reveals that there’s rebellion brewing in the Treasury auction world. While this may be over-reaching, it could also be legitimate spoor to be read as we try and illuminate some of the path before us. I was not, repeat not, making any overt claims about the extent of monetization in my post, just that one odd coincidence concerning the 7-year auction. I do collect and have all the base data for all the auctions and I track them closely and the Fed is very much on track with what it said it was going to do so there’s not much of genuine interest there for me yet. But stepping in to assure a “good appearance” at a critical auction. I consider that quite interesting and newsworthy.

2) My comment about “A more honest and open approach…” for the Fed to pursue, as my long-time readers will attest, was not a comment about what is legally permissible by the 1913 FR Act (yes, I’ve read the whole thing) or normal operating procedure (yes, I know how the Fed & Treasury operate) but rather just another statement about another way that complexity obscures our official monetary and fiscal actions. I regularly opine that we would be better off by being more straightforward in our official reporting and actions. I honestly didn’t know that this piece, out of the thousands that I have written, would catch a bit of internet-lightening and so I wrote a quick piece with my usual audience in mind. In retrospect I wish I would have framed that sentence a bit more because it is now being bandied about as proof that I don’t know how the Fed actually operates and, therefore, the rest of the piece (and maybe more!) is bunk as well. Ah well, such is life on the intertubes.

So that’s it, I think it smells that the 7-year auction seemingly went so well the day after the 5-year fiasco and then days later we find out that the Fed bought nearly half of the total load carried by the Primary dealers.

Perhaps it’s just a quirk in the largest bond auction week in history, or perhaps it portends a dangerous shift in Treasury appetite and is a sign that the greatest bubble of them all (Treasuries) has a small tear developing at the edge. I will continue to track the edges of this fascinating story because I personally don’t want to be in the position of someday reading about it above the fold in the NYT with everybody else.

Here's a hat tip to

AcrossTheCurve

!

 

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LogansRun
Status: Diamond Member (Offline)
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Posts: 1376
Re: The Fed Buys Last Week's Treasury Notes

It's now been picked up by Michael Kosares at usagold.com

MK is the author of (I think) the most prolific book on gold investing "The ABC's of Gold".  His site and services are known worldwide.  Congrats CM!

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SagerXX
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Posts: 2120
Re: The Fed Buys Last Week's Treasury Notes

(hoping this isn't a double-up-on-somebody-else's-post)

Found a reference to this piece at 

http://www.gold-eagle.com/editorials_08/nielson081109.html

This was different than other pieces that cite CM's work/website in that he goes on for paragraphs as opposed to one quick hyperlink and then on with their own analysis...FWIW.

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Robbrian
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Re: The Fed Buys Last Week's Treasury Notes

Chris,

Since the Fed is monitizing on a limited basis, relative to total debt outstanding, is not possible for them to monitize the entire debt with new issues of currency and liquidate the repurchased debt rather than roll it over?

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Nacci
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Posts: 194
Re: The Fed Buys Last Week's Treasury Notes

If all Us Dollars are loaned into existence by the Fed and must, at some point be paid back with interest then all U.S. Treasury notes are purchased by the Fed.  

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