Bum Bear Rumors Jude Wanniski September 21, 2001

There are all kinds of rumors about imminent bombing attacks on Afghanistan and Pentagon warnings and threats of more bombs practically everywhere else. Please be assured these must be bears trying to recover some of the ground they lost earlier today. My best sources tell me there are no such plans to bomb anything over the weekend and I remain reassured that the Ridge appointment will keep the warriors at bay while diplomacy continues at a feverish pace around the world. One client wondered if Ridge would be able to break into the debate between hawks and doves in support of Colin Powell. Ridge, Treasury Secretary O'Neill and Vice President Cheney are personal friends. O'Neill is not a hawk.

Monetary policy has not changed from our last missives. The Fed's addition of nearly $100 billion in liquidity last week is steadily being drained off and our guess is that three-quarters or more has been mopped up as of today. There has been no systemic add to liquidity, which means the repurchase agreements announced every day this week have been smaller than the ones expiring. The Fed added $82 billion in an over-the weekend repo last Friday, which marked its largest ever one day reserve expansion. The Fed's balance sheet has shrunk steadily this week. Today the Fed added $1 billion in an over the weekend repo as a $7 billion repo expired, which continues the process of normalizing the balance sheet, as Greenspan said would be happening in his Senate Banking testimony this week. The funds target, remember, is supposed to be at 3% and traded almost at zero at times this week, but is now inching back. To the degree the gold price might have reflected this liquidity bubble, it might back down a bit when funds are again trading at 3, but we believe gold went up primarily because of the "terrorist tax" that burdens the economy and will come back down if and when the risk of war recedes.