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By Art Cashin Director of Floor Operations at UBS

November 5 (King World News) - “Do We need A Dodd-Frank Rule For Central Banks? – I was paging through my friend, John Hussman's latest report and came across this rather astounding paragraph:


A brief update on the bloated condition of the Federal Reserve’s balance sheet.  At present, the Fed holds $3.84 trillion in assets, with capital of just $54.86 billion, putting the Fed at 70-to-1 leverage against its stated capital.  Given the relatively long maturity of Fed asset holdings, even a 20 basis point increase in interest rates effectively wipes out the Fed’s capital.  With the present 10-year Treasury yield already above the weighted average yield at which the Fed established its holdings, this is not a negligible consideration.

 

That becomes even more astounding when you add in this little tidbit from a recent Peter Tchir analysis:


The Federal Reserve now owns 50% of all treasuries maturing between 10 years and 15 years.  Some further congratulations appear in order for that achievement.  There are barely $100 billion of treasuries outstanding for the public to buy.  No wonder so many companies are issuing 10 years and longer.   The Fed has created such a void of paper that pension funds and others that want somewhat longer dated assets need to fill with corporate debt.  It probably means that at some point the 10 year point of credit curves should weaken (go wider) but for now there is so much demand that corporate spreads will do okay even with the new issue.

 

Talk about distortions.  Bear Stearns and Lehman were only leveraged at 30 to 1 but they collapsed like the house of cards they were.  Certainly the Fed is not a regular bank.  It can print money.  But bank runs are not only about money, they are mostly about credibility – and there is no printing press for that.  More on these topics in coming days.”


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Eric King

KingWorldNews.com

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