Nobel-ist Eugene Fama with Rick Santelli on CNBC today. There are plenty of chuckly moments but buried in the sniping was an important and - in our opinion - grossly uncovered point. As the "esteemed" Prof. says, " Short rates have fallen, despite the Fed's massive actions and a IOER rate that is intentionally "set higher than the market rate."

As our earlier Death Star posts indicated, this is a "floor" discussion that centers on shadow banking and the GSEs absence of Fed accounts. Dr. Fama is content to say don't worry about issuing short "debt" to buy long debt because its a wash but he is dismissive of the reality that a plethora of short market rates converge into or even through the IOER "floor." The FAFRRRF (Death Star) is a "shim" to support that spongy level. (Just raising the IOER far too scary I guess)

But what if delusional market participants - full disclosure I'm a card carrying charter member - are on to something when we opine that the CB cannot set both the quantity and the price (IOER) of its "good." More directly, if attempted, how would they luckily pick the proper (neutral, natural equilibrium to sound smart) rate. As we showed at the time, during the Taper/Convexity Vortex rate move, short money rates made consistent new lows. More dangerously, if policy were to gain traction, then the short/long swap would alter the shape of the curve rapidly and dramatically in the worst way - the advancing Bear Flattener.

I'm just a Dog watching TV, I see but cannot comprehend. Color me skeptical when Prize winning college professors tell me everything will be just fine. I was involved in a mess with some other Medal Winners called Long Term Capital.

2 thoughts on “Fama-Lama-Ding-Dong

  1. elliottwaveforex

    What FAMA-LAMA is actually saying is that by the time the FED will sell the US Treasuries it holds they will be worth less(because of higher interest rates) the what the FED payed in newly printed cash. Banks in the mean time are buying(using the cash from the FED) actual interest paying bonds from India and Russia pocketing the interest so it is a double win for banks. Now if these countries default the loss will be greater that what they stand to make(Greece). Assuming a default happens, the stock market crashes, people and business default on their debts and the inter-bank lending market freezes and the FED wants to sell their US Treasuries where will the money needed to pay for them come from???? (oversimplifying everything else) Interest rates will have to spike like crazy in order for the US Treasuries that where purchased at ridiculously high prices(0% interest rate) to be worthless and banks to muster the cash needed to pay for them. The FED could just hold the US Treasuries until maturity but this raises a different question CAN THE FED BUY UP THE ENTIRE WORLD since there is no limit to the amount their balance sheet can grow? If US banks use the freshly created cash to evenly buy up everything(or extend loans to corporations that buy up everything) without the world actually losing faith in the US dollar. And if I have an infinite amount of money cant I really manipulate where the world puts its faith applying the principal my infinite is bigger than your infinite??(tanking gold, oil and corn prices and any other currency that dares not pay interest on their debt) Please ask Mr. FAMA-LAMA these questions. And please give him another Nobel for saying that withdrawing liquidity will be a non event for the market


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