Wednesday, May 6, 2009

The reality of what's real

http://www.minyanville.com/articles/...541/from/yahoo

I always like the truth in a nutshell


As more and more traders and investors view the recent rally through the eyes of technicals, we are closing in on the completion of the bear trap. Human beings are inductive: they see things and their preexisting views are reinforced by them. Rising prices beget rising prices until facts finally exact their toll. People assume others know what they're doing.

I came out of the airport terminal to grab a cab one night. The line was two hours long. The last person in line assumed the person in front of them knew what they were doing and resigned their fate with the rest. I decided to take a five minute walk to the next terminal, where I grabbed a cab immediately.

If people really did hard analysis on the current environment they would take a much different view. The Fed's balance sheet is not only irreparably massive, it is a mess with credit risk. When you hear people saying credit is improving, it can clearly be shown that the only areas of improvement are where the Fed has stepped in and become the market. The Fed has reduced transparency, not increased it.

Take any category where credit has improved and you will see that the Fed has taken and retains massive positions: Bank Credit Reserves increased over last year by $1.3 trillion, Agency Securities $70 billion, Mortgage Backed Securities $356 billion, Term Credit (LIBOR, the real headliner) $456 billion, Commercial Paper $238 billion (this market has shrunk dramatically so the Fed is basically the whole market),