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UNDERSTANDING CONFLICTING SIGNALS

There has been much speculation recently in the financial press regarding the health of the Commodities Bull Market that began earlier this decade.  Recent setbacks in the price of gold, crude oil, natural gas and gasoline have led many market pundits to speculate that the commodities bull has run its course and we’re on the threshold of an economic contraction.

Accompanying the cat calls for an impending recession is the familiar deflationist pleas for the Federal Reserve to begin lowering rates to avert a possible deflationary collapse.

For now, at least, it would appear that the Fed has taken heed of these cat calls – and put monetary tightening on pause.  

At Least…..So It Seems

While interest rates govern the demand for credit, the Fed has other “tools” at its disposal which can alter the amount of money [liquidity] in the banking system on a temporary or permanent basis.

While the Fed has been sounding hawkish via the media they have quietly been ADDING liquidity through Open Market Operations [Repos] known colloquially as TOMO [temporary open market operations] and POMO [permanent open market operations].

Without going into a long and drawn out explanation of the difference between TOMO and POMO – let’s just say the effects of TOMO are temporary while the effects of POMO are permanent and hence, have a more powerful influence.

The last 10 temporary open market operations are appended below, listing the date of operation, amount injected into the banking system and duration of the injection:

Oct. 16             4.5   B              1  day

Oct. 13             7.0   B              4  days

Oct. 12             8.75 B               1  day

Oct. 12             6.0   B              14 days

Oct. 11             5.5   B              1  day

Oct. 10             9.75 B               2  days

Oct. 06             7.0   B              5  days

Oct. 05             4.75 B               1  day

Oct. 05             9.0  B               14 days

Oct. 04             9.25 B               1  day

These liquidity additions to the banking system have the REVERSE effect of raising interest rates.  To make a long story short, some of this “added liquidity” has made its way into the equity markets – propelling stock exchanges, like the DOW, to new record highs.  And while certain commodities, mentioned above, have “taken it on the chin” so to speak, others like the base metals – nickel, copper, zinc – to name but a few, have not only held their values but have gone on to all time record “nominal” highs:                 

While so much of what we read in the financial press might seem “conflicted” – is the Fed tightening enough, are they done, is the commodities bull market finished, has the stock market topped – these are all questions whose answers lie in correctly interpreting the machinations of mostly unseen and seldom discussed macro shifts of “ice berg sized” chunks of cash.

Rob Kirby

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