Monday, July 26, 2010

Some Monday Observations...

New Home Sales - The media ushered in the Commerce Department's new home sales for June with unusual ebullience and positive spin.  Seasonally adjusted new home sales, as reported, came in a little better than Wall Street was forecasting at 330,000 (please note:  seasonally adjusted - no one outside of the Govt's Ministry of Truth really knows what this means). The "spin" was evident in the headlined "23.6% sales increase" from May. What wasn't spelled out is that May's record low new home sales number was revised down even more from the originally reported - seasonally adjusted - 300,000 to 267,000.  The 300,000 reported for May is the lowest new home sales number ever reported going back to 1963. That should put the 267,000 in perspective. However, arithmetically, that downward revision lets the media/CNBC jump all over the "23.6% increase" from May to June. See how this game works? The seasonally adjusted, annualized number for June was 16.7% below the sales rate for June 2009 AND it was the worst June on record. In terms of the inventory being reported as declining, don't put any stock in that number. The way the Census Bureau accounts for new home sales and cancellations - it's been running around a 20% cancellation rate industry-wide for about 3 years now - cancelled homes are not added back into the new homes inventory. So the real inventory of new homes has been significantly understated for at least 3 years. Given that the Government is the entity that accounts for the new home sales market, this should not surprise anyone.

QE2 Anyone? You may be looking at it right here:

Everyone I'm sure knows this graph by now. "Excess Reserves" are the funds banks keep on deposit at the Fed which are "in excess" of mandatory reserve requirements. When you look at this number, understand that it comes from all of the worthless assets the Fed purchased from the banks. This graph above is EXACTLY why we did not have a completely collapsed banking system in September 2008. Also understand that Tim Geithner willingly slapped a Taxpayer guarantee on the value of the assets that the Fed bought from the banks to produce that graph above. In other words, WHEN - not IF - those assets collapse in value, YOU will be asked to reimburse the Fed. You like apples, how about THOSE apples?

Anyway, the Fed is currently paying interest on those excess reserves you see above. This was partially done to keep that money out of the general banking system, theoretically preventing the unleashing of inflationary forces into the system. But alas, the money has already been printed, it's backed by worthless assets, the underlying devaluation of the U.S. dollar has already occurred. Where is this leading? The Fed has telegraphed last week that it intends to stop paying interest on the excess reserves in order to stimulate bank lending by disincentivizing the banks from keeping those funds at the Fed. But to whom will the banks be lending? Home builders? Car manufactures? Blockbuster Video (going bankrupt)? Anyone out there starting up a new landscaping business? How about new golf courses - do we need anymore of those?  See what I'm saying?  If the Fed stops paying interest on the excess reserves, expect to see that money being funnelled into more Treasury auctions and into the stock market. You see? The Fed can start to unleash QE2 without even making a formal announcement, because it's already been created, just not put to work - yet.

I just realized I need to clarify one point.  That graph above is the by-product of QE1.  If the assets purchased by the Fed to create those excess reserves were worth 100% on the dollar, the Fed could reverse QE1 by selling those assets back to the banks now that they are supposedly solvent and thereby draining the excess reserves from the system.  However, most of those assets are completely worthless.  Bernanke knows it and I know it.  BUT, recall that the Treasury is guaranteeing those assets.  When the time comes to "monetize" them, the money will have to be printed up and the obligation will be transferred from the Fed to the Treasury.  BUT, the excess reserves held at the Fed will, by that time, already have flowed into the system - either in Treasury auction support, the stock market or more morally hazardous lending which is also guaranteed by Geithner's Treasury.  In this manner, the Fed has already - de facto - somewhat unleashed QE2, as the roots of QE2 are seeded in QE1.  Hope this makes sense.  If not, this will:
Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’  (Atlas Shrugged)


  1. Dave,

    I have posted my comments at the WSB:


  2. That would be plenty of cash to buy US debt sales....seems too perfect a plan.

  3. Great insight. Thanks

  4. US Mint Caught For Fraud; Rationing US Gold/Silver Eagles