The Guest Blog

Farrell: There Are No Coincidences

The Federal Reserve Bank of New York issued a press release Monday announcing the beginning of a program to expand its counterparty list to conduct reverse repurchases.

For those with a life that could care less about reverse repos it is a method of reducing the amount of liquidity in the system.

The Fed will sell securities to dealers (and now an expanded list of firms and not just primary dealers) with the agreement to buy them back at a later date. The sale of securities has to be paid for and that takes the cash out of the system. If you want to keep the cash (liquidity) out you, or the Fed, would have to keep repeating the trade. That they can do by making offers that can't be refused - which in the bond world seems like very small differences, but done for billions it can add up.

Federal Reserve

The Fed has made a lot of noise about the unconventional methods Bernanke and company will use to withdraw the vast stimulus that has been pushed into the system.

Reverse repos, raising the interest rate on the reserve balances banks have at the Fed (to discourage the banks from lending them), sale of Fed "CD's" for longer periods of time, and discount rate increases have all been mentioned.

I find Monday's announcement of expanded dealers in the repo trade to be timely as the velocity of money has just up ticked for the first time in a long time.

Velocity is nominal GDP divided by M2 - and I am so sorry for talking like that. It is how fast money circulates in the system. Money is created when a bank receives a deposit and then makes a loan. That loan is redeposited into another bank. After keeping some in reserve, that bank makes another loan which gets redeposited, and so on. The speed with which all this happens is the velocity of money. Velocity has been slow to nonexistent recently as banks have not made loans. That velocity is up ever so slightly is good news and could indicate some loan activity. The ever watchful Uncle Ben Bernanke is on the case and said we are prepared to move if we see incipient inflationary pressures.

We will reverse repo you to kingdom come if we have to (he didn't really say that - I made it up). But I don't think anything is imminent. However, Raymond Chandler, the granddaddy of all private eyes, said more than once "There are no coincidences."

Some sharp elbows are being thrown around the health care debate.

Speaker Pelosi has repeatedly said the House votes aren't there to pass the Senate bill as is. Some House Democrats question whether the health care bill would effectively curb costs. Conservative Democrats are raising questions about the bills abortion provisions and tax increases. Representative Bart Stupak (D-Mich.) said he's willing to derail reform it federal funding of abortion wasn't blocked. Some Democratic leaders say he has the votes to do that.

Liberal Democrats are upset the bill doesn't have a comprehensive government plan to compete with private insurers. Big labor objects to the tax on expensive health plans as that affects their membership who feel they have given up wage battles to get health benefits. It looks like the attempt to enact legislation would be to get the House to pass the Senate bill. Then vote on a separate reconciliation bill that would somehow address all of the objections. Or at least enough of the objections to get it through. I said a few weeks ago that the health care effort was over, and now it looks like there is a chance of passage. More knowledgeable folks than I give it a 40% chance of passage.

I think there is way more than a 40% chance of good jobs numbers coming at us very soon.

Productivity was a very strong 6.9% annual rate of growth in the fourth quarter and temporary jobs have surged. I don't estimate to the decimal (ever) but I am betting on a 100,000 job number very soon.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.