With the dollar falling and gold rallying off the lows, today a legend in the business sent King World News a powerful piece discussing a $2.7 trillion problem, commodities, gold and mutual fund cash levels being at an all-time record low.
From Art Cashin's notes: "Beating A Dead Horse – Redux – While Wall Street and the financial media are consumed with "when" the Fed will hike rates, there continues to be little to no discussion of the mechanics of the rate move. It's worth time to look at the process.
When the Fed begins to move rates, the vehicle they will use is the Fed Funds rate. Fed Funds are reserves lent by one bank to another to keep the borrowing bank in compliance with Federal Reserve "reserve requirements." In the old days, like back when I started, the Fed would add and subtract money in the system and use the Fed Funds rate as a thermometer to tell them how light or loose money had become through their actions. This system was less than perfect since there were occasional "surprise" spikes or plunges due to unexpected circumstances.
To smooth things out the Fed switched to targeting the Fed Funds rate to hint the level of tightness and interest rates it was shooting for.
The current target for Fed Funds is officially 0 – 0.25%. In theory that means the Fed wants no bank to have to pay any higher than 0.25% to borrow excess free reserves from another bank.
But, the problem here is that there are presently about $2.7 trillion in excess free reserves in the banking system, and, to avoid any disruptive accidents, the Fed is already paying the banks 0.25% to keep those reserves at the Fed. For another bank to borrow free reserves, they would have to top the 0.25% risk free rate the Fed is currently paying. Thus, de facto, the Fed Funds rate is already 0.25% bid – offered at some higher level.
Further, to keep that $2.7 trillion from flooding the system, the Fed will have to hike its bid along with any hike in Fed Funds. So, the Fed might wind up paying 0.35% on reserves, effectively making the Fed Funds 0.35% bid – offered at some higher increment.
This is definitely not your father's Oldsmobile.
Overnight And Overseas – Shanghai closed down 1.1% after a frantic final hour rescue rally came up short of plus territory. Tokyo rallied and is nearing the June highs. Baby Asian tigers had rebound rallies in high volume, reversing concerns about a 1997 rerun talked of earlier this week.
Europe is generally mixed with little changes either side. Commodities are weaker with oil and gold under pressure. U.S. futures are a touch softer.
Consensus – End of month and Fridays have not been kind to stocks or gold this year. Watch for increased volatility in oil. Jason Goepfert says mutual fund cash is lowest ever, making them vulnerable to redemptions. Stay wary, alert and very, very nimble. Have a wonderful weekend!" ***Later today KWN will be releasing the remarkable audio interview with Dr. Paul Craig Roberts and you can listen to it when it's released by CLICKING HERE. Dr. Roberts discusses a world on the edge of chaos, the turmoil in the gold and silver markets, what surprises to expect and much more.
***ALSO RELEASED: Richard Russell On What Is Really Happening In The U.S. – PCR Weighs In On Greece And The IMF CLICK HERE.
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The audio interviews with Robert Arnott, Eric Sprott, John Mauldin, Stephen Leeb, Egon von Greyerz, Nomi Prins, Gerald Celente, Andrew Maguire, Michael Pento, Dr. Paul Craig Roberts, Rick Rule, Bill Fleckenstein, David Stockman, Chris Powell, Dr. Philippa Malmgren, Marc Faber, Felix Zulauf and Rick Santelli are available now and you can listen to them by CLICKING HERE.