LINK

Now I wonder why they don't want this type of story to be told to the general public.

THE Federal Reserve is being driven to distraction by Y2K.

Even as the Central Bank has been publicly tightening monetary conditions through three interest rate hikes this year, it has been quietly pumping money galore just in case the Millennium madness being predicted actually does happen.

Michael Belkin, a Fed expert who writes the Belkin Report, says Alan Greenspan has allowed $70 billion in cash to flood the U.S. monetary system in recent weeks and has created something called a "repo option." These options could leave the monetary system awash in another $426 billion in additional emergency cash in the next few weeks.

"This all adds up to the biggest Fed credit expansion ever. This monetary boost is wildly stimulative for the U.S. equity market in the short term," Belkin says, "but will leave equities painfully vulnerable to a crash once the Y2K-related credit expansion is withdrawn in the new year."

In recent weeks the Fed has allowed the nation's money supply to soar and has liberalized collateral requirements for government securities dealers doing business with the Fed.

Last week alone, the government's M-3 money supply figure rose at an annual growth rate of 12 percent. That's more than double the normal growth and far above what the Fed would generally allow.

But the repo options, which were first sold on Oct. 20, are the thing that could pump more money into the nation's monetary system the quickest.

Financial insitutions that buy these options can convert them quickly to cash in a pinch.

Ironically, this liquidity burst comes at a time when the Fed is pretending to be very stingy. The third rate hike of the year that came a couple of weeks ago was billed as the Central Bank's "get-tough policy."

By the Y2K actions really means that the Fed isn't the Scrooge Wall Street fears but really a very generous Santa. And a Santa who's petrified about the New Year consequences.

What the Fed has been doing could help stocks rise nicely over the short term. As I've already said, there are only a few hurdles that could get in the way of bigger bubbles by year end.

But the Fed's generosity in itself could be a big long-term problem for the financial markets.

The bond market would normally rally if it thought the Fed was being diligent in fighting inflation. And that's precisely the message that the three rate hikes should have conveyed.

But bonds have, instead, been very weak despite the Fed's supposed nastiness and rates have risen beyond where the Fed intended.

And that is leading many to believe that investors worldwide are wise to the Fed's Santa Claus ruse.

That's also why the U.S. dollar has been so weak. And why, traders say, the Fed was forced to rig the bond market last week with massive purchases of all maturities of government securities.

The prognosis? The stock market should have a very easy time between now and year's end -- even easier than I first thought.

But there could be trouble later when word gets around about the Fed's dirty little secret -- so don't go spreading this around.

-- y2k dave (xsdaa111@hotmail.com), December 04, 1999

Answers

The recent rise has been a beautiful thing to see. It reminds me of a blooming rose. Of course, after the bloom . . .

Zev

-- Zev Barak (zev@no.com), December 04, 1999.