Tags: Fed | Hiding | Looming | Economic | Disaster?

Fed Hiding Looming Economic Disaster?

Wednesday, 28 December 2005 12:00 AM

A balmy end to December in the northeastern U.S. has helped to keep natural gas prices down - and it's a trend that could continue all winter.

"The long-range forecast is for more warm weather," Michael Rose, trading desk director at Angus Jackson Inc. in Fort Lauderdale, Fla., tells Bloomberg.

"There's no doubt about it. When it's cold in New York, the prices go higher, and when it's warmer, prices go lower."

That could ease the anxiety of homeowners from Bangor to Baltimore and leave consumers feeling even more confident about the economy and their willingness to support it with their hard-earned money. Studies show that consumer spending drives at least two-thirds of the American economy.

And it looks like Americans will have more money to spend as demand for natural gas dwindles.

According to Bloomberg, U.S. heating demand should be 30% below normal through Jan. 1 and 22% in the week after that. Gas heating in U.S. homes will drop by 25% in January, too.

Temperatures in places like Philadelphia and New York reached 50 degrees on Tuesday, with more of the same on the way.

And that could be a boon to homeowners and businesses.

Says Bloomberg: "Gas for January delivery fell $1.283, or 10%, to $11 per million British thermal units [BTU] at 11:15 a.m. on the New York Mercantile Exchange. It was the biggest fluctuation of any commodity today. Gas prices are down 30% from a record $15.78 per million BTU on Dec. 13."

Natural gas is falling at the same time as crude oil prices are plummeting. Oil prices have slipped to the $57 per barrel range as crude oil for February delivery dropped by 1.6%. But even so, oil prices still remain about 40% higher than the same period a year ago.

There is no doubt that the decline in oil and gas prices had Americans seeing green this past Christmas season. And now new data indicates that this enthusiasm should carry over into 2006.

According to the recently released ABC News-Washington Post Consumer Comfort Index, U.S. consumer confidence is on the rise heading into the new year.

In the latest weekly survey, two of the three components of the ABC/Washington Post index were unchanged.

The percentage of consumers who had a positive view of their personal finances remained at 59%, while the number of Americans who felt good about the buying climate was flat at 37%.

The Conference Board's monthly consumer confidence survey, due out today, is expected to also show a rise for December.

Analysts expect a rise to 102 points in the Conference Board survey, up from 99 in November.

Traders who absorbed a rare holiday-season scare yesterday are breathing a tad easier on Wednesday as stock prices have climbed upward after signs that the yield curve has flattened.

Tuesday's inversion of the yield curve drove stocks prices down sharply as the national media breathlessly reported that such a development historically forewarns that a recession is imminent - except, of course, when it's not, as was the case in 1998, the last time the curve inverted.

In early Wednesday trading, the Dow Jones Industrial Average was up 20 points following a 105-point fall the day before. That came after the two-year Treasury note yielded more than the 10-year note for the first time in five years.

"But in electronic trade, the yield curve flattened, with the two-year note yielding 4.377% and the 10-year yielding 4.37%," CBS Marketwatch reported on Wednesday morning.

Ever hear of a "Hindenburg Omen?"

Robert McHugh has - and he wrote about it recently on the Safehaven.com Web site.

He says that in the near future, there could be a crash-and-burn scenario for the Federal Reserve, as it manipulates the money supply and fends off charges of disarray after three key board members resigned this month.

"On Thursday Dec. 22, the Federal Reserve has conducted one of the largest two-day repo injections of money into the system since back in September 2001," writes McHugh.

"On Wednesday they added $18 billion in reserves and on Thursday they added another $20 billion. Is this a coincidence, coming right as we get another Hindenburg Omen? Probably not."

More likely, McHugh says, there are higher-risk elements at work here.

He points out that on Nov.10, 2005 - right after White House budget adviser Ben Bernanke was tapped to replace Alan Greenspan - the Fed quietly reported that it would hide M-3 effective March 2006. M-3 is the broadest measure of money, used by economists to estimate the entire supply of money within an economy.

"M-3 has been the main staple of money supply measurement and transparent disclosure since the Fed was founded back in 1913," writes McHugh. "It is the key monetary aggregate that includes Fed Repo transactions, that mechanism whereby the Fed increases reserves."

McHugh also predicts that officials will start to hide M-3 in the same month that Iran declares economic war against the U.S. dollar by trading its oil in "petro-euros" on its new bourse.

While all that's a lot for the Fed to handle, there's more.

According to Safehaven, the Federal Reserve now has three vacancies in its regional bank and board of governors after a recent slew of resignations from key board members, including Philadelphia Fed President and Open Market Committee member Anthony Santomero, who was only with the fed for 18 months.

"That's very unusual," says McHugh.

"Fed Presidents are treated like gods. They have enormous power, prestige and presence. Why quit? He is far from alone. Over the past few years no less than six Federal Reserve Regional Bank Presidents have resigned. This is highly unusual."

McHugh's primary point is that U.S. monetary policy over the next year or so will rest in relatively inexperienced economic hands. That has caused the Fed to keep its financial decisions a secret, away from prying eyes like those of Mr. McHugh.

"Could the Master Planners be hiding M-3 because they anticipate they may have to monetize the Federal debt, [and] buy our own Treasury Bonds during the coming economic attack against the Dollar?" McHugh asks.

"That would require a ton of new fresh money creation - too much to disclose. Could it be some folks at the top of the Fed do not have the stomach to be part of what is about to go down?"

According to McHugh, M-3 has a direct but lagging impact on the U.S. financial markets. Whenever M-3 rises, the Dow Industrials rise, he writes. And whenever M-3 is flat or declines, the Dow Industrials decline.

"[But] the Dow Industrials are a bellwether for the economy. If we can monitor M-3, we can better monitor the future path of equities and the economy. So it is wrong for the Fed to stop its disclosure for this very reason."

M-3 figures for the week of Dec. 17 show that on a seasonally adjusted basis, M-3 rose $27.3 billion last week (a 14% annualized rate) and is up $76 billion over the past month, a 9.8% growth rate.

But those numbers are akin to the image people see in a funhouse mirror.

The actual M-3 figures, according to McHugh, show a rise of $58.7 billion - a 30% annualized rate of growth.

In the two weeks prior to that, the Fed added $93 billion to the money supply, a 24% hike in annualized growth. And for the six-week aggregate leading up to Dec. 23, M-3 was up $192 billion, or a 16.7% growth rate. McHugh calls the latter a "Banana Republic hyperinflationary price."

"This is nuts, folks - unless there is an incredible risk out there we are not being told about," concludes McHugh.

"That is a lot of money for the Plunge Protection Team's arsenal to buy markets - stocks, bonds, currencies, whatever. This level of irresponsible money-supply growth makes shorting markets hazardous, yet at the same time says markets are at huge risk of declining.

"Maybe M-3 growth doesn't stop the decline this time. Should be a fascinating storm in 2006."


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A balmy end to December in the northeastern U.S. has helped to keep natural gas prices down - and it's a trend that could continue all winter. "The long-range forecast is for more warm weather," Michael Rose, trading desk director at Angus Jackson Inc. in Fort...
Wednesday, 28 December 2005 12:00 AM
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