Deceptive And Treacherous

I was a stockbroker from 1969 to 1995. In all those years we were interested in whether the FED reported net-free or net-borrowed reserves. For the period 1969 to 1982, the DJIA traded under 1000 and broke above finally in 1982-4:

Notice, after the market broke out, net-borrowed reserves were really never an issue again until 2008! Hat Tip to the Big Picture.

Tis latest chart shows Net-borrowed reserves massively negative, unlike anything in the 1970s and I’m wondering if it isn’t understated because of the change in the way the figures are calculated.

By definition, nonborrowed reserves are equal to total reserves minus borrowed reserves. Borrowed reserves are equal to credit extended through the Federal Reserve’s regular discount window programs as well as credit extended through the TAF.

It is worth noting that the Federal Reserve Bank of St.Louis changed it’s way of calculating net-free or borrowed reserves, again, at the end of 2007.

Prior to 2003-01-01, the data are calculated as excess reserves minus total borrowings plus extended borrowings.
From 2003-01-01 till 2007-11-01, the observations reflect excess reserves minus total borrowings plus secondary borrowings.
From 2007-12-01, the definition changes to excess reserves minus discount window borrowings plus secondary borrowings.

In December 2007, Econbrowser wrote “…the Federal Reserve injected $27.75 billion dollars in reserves in the form of traditional open market operations, a number that exceeds last week’s average daily borrowing by two orders of magnitude.” Now the FED is upping the ante:

The Fed said it will conduct three auctions in June; each will offer $75 billion in short-term cash loans. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.

IMO, we may be looking at a market that is much like those years from 1969 to 1982. It doesn’t mean you can’t make money in that kind of market. It just means it is deceptive and treacherous.

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