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2&3, 3&4 or 4&5? That is the Question.

Bruce Krasting's picture




 
I think this day chart of the 30 year says it all. After the very stinky
NFP numbers the bond made a predictable jump higher. But it wasn’t long
after that the air started leaking out and the bond closed on the lows.

Why the stinky price action when we get a big miss on NFP number? QE and
the talk of stimulus done it. The numbers were so bad that by 9:30
talking heads and pundits concluded that the tax cuts were coming and we
might just get a break on Social Security payroll deductions any day.
Forget about restraining QE-2; the talk went straight into high gear
with the only question; “How big might QE-3 be?”

So with that gibberish in mind bonds headed to the crapper while gold
set new highs. The confirm that QE is now driving bonds lower came late
in the day when there was a convenient leak of a Sunday TV appearance by
Ben B. The only quote leaked was: “We might do more”. Stocks liked that talk and ended up; while the bonds ratcheted down another notch.

I am pleased that the market has made the connection that more QE and
more stimulus is bad for bonds. The market is the only discipline left
that may slow the insanity creeping over D.C. When market forces turn on
the “New Monetarism” and shut the door on the insanity, the policies
will change. Until they get hit hard over the head the Fed will continue
to print. We are getting closer by the day. Consider this graph of the
long bond since QE-2 was announced:

Long rates have backed up by 40 bp in just the past month. The exact opposite reaction that ‘the Bernank’ wants.
How deflationary is this increase in interest rates? Mildly so. My
guess is that the impact of rising rates exactly offsets the stimulative
benefit of keeping short rates at historic lows. Yes, more debt is
financed short term than long, but a back up in mortgage rates and the
increase in long term fixed rate capital for municipalities and
corporations will offset any benefits from ZIRP.

On the question(s): “Will interest rates fall from the current levels
of ~3% for ten-year and ~4% for thirty-year to the 2%/3% that Bernanke
is trying to engineer? Or will they rise to the 4%/5% that is staring us
in the face?

In my opinion we are headed to 4% for the tens and at least 5% on the
30- year. QE is going to produce the exact opposite results of what was
intended. Consider this chart of where the US stands on debt. Please do
not point to Japan as the example of why rates will have to fall in the
US. Japan is/was in a much different position than America.

At the heart of Bernanke’s dilemma is the following graph on the labor
force participation. Bernanke wants to juice the economy back to a
level where the slack in labor participation rises back up to where it
was in 2005. He believes that this is the Fed’s mandate. He wants to
turn the clock back. But he can’t. The lines on this chart gapped down
as a result of the 08 recession, but the trend toward a lower level has
been in place for a decade. Aging demographics, an economy too dependent
on consumer consumption and globalization that makes US workers less
productive make it inevitable that the US faces a much higher level of
un/underemployment. Bernanke is not buying that conclusion. He feels
that it is his mission to push against the laws of nature. The market is
pushing back. The market will win. Ben will fail.

I am not a fan of Greenspan. I think he got us into the mess we are in.
But I do respect his opinion. On the question of whether the US would
change its ways he had this to say recently:

"The only question is, is it before or after a bond market crisis?"

Too bad Bernanke is not listening. A bond market crisis is inevitable as a result.

 

 

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Sun, 12/05/2010 - 08:48 | 779323 David99
David99's picture

Wiki-information

China has the fastest train services in the world
china is the largest car consumer.
china is the largest car producer.
china is the largest GM car consumer.
china is the largest energy consumer.
china is the largest primary-energy consumer.
china is the largest renewable energy producer.
china is the largest renewable electricity producer.
china has the largest installed hydropower capacity.
china has the largest installed hydro-electric capacity.
china has the largest installed solar thermal power(solar hot water) capacity.
china has the largest hydroelectric power station (Three Gorges Dam).
china is the largest wind turbine producer.
china is the largest solar panel producer.
china is the largest Lithium-ion battery producer.
china is the largest Lithium-ion battery consumer.
china spends the largest in clean energy investment.
china is the largest exporter.
china has the largest mobile users.
china has the largest internet users.
china has the largest broadband users.
china has the largest current account surplus.
china has the largest forex reserves.
china has the largest bank by market value (ICBC).
china has the largest bank by deposits (ICBC).
china has the largest bank by profit (ICBC).
china has the largest bank by number of branches (AgBank).
china is the largest meat producer.
china is the largest cement producer.
china is the largest cement consumer.
china is the largest coal producer.
china is the largest coal consumer.
china is the largest gold consumer.
china is the largest gold producer.
china is the largest platinum consumer.
china is the largest palladium consumer.
china is the largest copper consumer.
china is the largest steel consumer.
china is the largest iron ore consumer.
china is the largest zinc consumer.
china is the largest aluminium consumer.
china is the largest nickel consumer.
china is the largest tin consumer.
china is the largest lead consumer.
china is the largest cotton consumer.
china is the largest silk consumer.
china is the largest paper consumer.
china is the largest natural rubber consumer.
china is the largest pork producer.
china is the largest pork consumer.
china is the largest grain consumer.
china is the largest rice producer.
china is the largest rice consumer.
china is the largest soybean consumer.
china is the largest wheat producer.
china is the largest tomato producer.
china is the largest consumer of Japanese exports.
china is the largest consumer of South Korean exports.
china is the largest consumer of Taiwanese exports.
china is the largest consumer of North Korean exports.
china has the largest airport.
china has the largest mall.
china has the largest high-speed rail network.
china has the fastest train in the world.
china has the largest population.
china has the largest labour force.
china has the largest company by market value (Petrochina).
china is the largest online gaming market.
china is the largest construction market.
china was ranked number 1 in gold medals won at the 2008 Olympics.
china has the largest mobile network (China Mobile).
china has the largest home appliance manufacturer (Haier).
china is the largest home appliances consumer.
china has the largest army.
china has the largest golf facility (Mission Hills Golf Club).
china is the largest market for power equipment.
china is the largest metal consumer.
china has the largest reserves of rare earth metals
china is the largest producer of rare earth metals.
china is the largest emerald consumer.
china is the largest jade consumer.
china is the largest pearl consumer.
china has the largest microwave producer (Galanz).
china is the largest tobacco consumer.
china is the largest beer producer.
china is the largest beer consumer.
china has the largest air carrier by market capitalization (Air China).
china had the most expensive Olympic games ever (2008 Beijing Olympics).
china is the largest holder of US government debt.
china has the largest bridge (Donghai Bridge).
china has the largest total waterways length.
china has the largest high-speed railway network size length.
China (Asia-pacific) is the largest aviation passenger market.
china is the largest Smartphone market.
china is the largest PC manufacturer.
china has the largest insurance company by market capitalization (China Life Insurance).

china is the 2nd largest economy.
china has the 2nd largest stock market by market capitalization.
china is the 2nd largest importer.
china is the 2nd largest luxury goods consumer.
china is the 2nd largest oil consumer.
china is the 2nd largest manufacturer.
china is the 2nd largest spender on R&D.
china has the 2nd largest installed windpower capacity.
china is the 2nd largest Audi car consumer.
china is the 2nd largest Lamborghini car consumer.
china is the 2nd largest Maybach car consumer.
china is the 2nd largest Lexus car consumer.
china has the 2nd largest Renewable energy capacity.
china is the 2nd largest destination for tourists.
china has the 2nd largest bank by market value (china construction bank).
china has the 2nd largest bank by profit (china construction bank).
china is the 2nd largest military spender.
china has the 2nd most billionaires.
china is the 2nd largest advertising market.
china is the 2nd largest computer consumer.
china is the 2nd largest global search market.
china has the 2nd largest total expressway network length.
china has the 2nd largest road network size.
china has the 2nd largest total rapid transit system.
china is the 2nd largest diamond consumer.
china is the 2nd largest electricity producer.
china is the 2nd largest electricity consumer.
china has the 2nd largest scientific research papers.
china has the 2nd largest sovereign wealth fund by total assets.
china has the 2nd largest number of brands in the world's top 500 brands. (79 brands)
china is the 2nd largest lottery market.
china is the 2nd largest grocery market.
china was the 2nd largest receiver of foreign direct investment.
china is the 2nd largest country by land area.
china is the 2nd largest corn consumer.
china is the 2nd largest LCD market.
china is the 2nd largest energy producer.
china is the 2nd largest energy consumer.
china has the 2nd largest Lithium reserves.
china is the 2nd largest linseed(flax) producer.
china is the 2nd largest aluminium oxide producer.
china is the 2nd largest bauxite producer.
china is the 2nd largest salt producer.
china is the 2nd largest bentonite producer.
china is the 2nd largest poultry producer.
china is the 2nd largest poultry consumer.

china is the 3rd largest Ethanol producer.
china is the 3rd largest Ethanol consumer.
china is the 3rd largest wood consumer.
china is the 3rd largest paper consumer.
china has the 3rd largest railway network size.
china is the 3rd largest BMW car consumer.
china is the 3rd largest Porsche car consumer.
china is the 3rd largest Rolls Royce car consumer.
china is the 3rd largest Bentley car consumer.
china has the 3rd largest stock market by daily average turnover (trading value).
china has the 3rd largest number of world heritage sites (38).
china has the 3rd largest tidal power station (Jiangxia Tidal Power Station).
china is the 3rd largest Lithium producer.
china has the 3rd largest Lithium reserve base.
china is the 3rd largest sugarcane producer.
china is the 3rd largest dry bean producer.
china is the 3rd largest wool producer.
china is the 3rd largest hop producer.
china is the 3rd largest green bean producer.
china has the 3rd largest coal reserves.
china has the 3rd most number of global 500 companies in Fortune Magazine (46 companies).

china has the 4th largest number of millionaires.
china has the 4th largest installed biomass capacity.
china is the 4th largest Mercedes-Benz car consumer.
china is the 4th largest Jaguar car consumer.
china is the 4th most visited country by international tourist arrivals.
china is the 4th largest copper producer.
china has the 4th largest total pipeline length.

china is the 5th largest consumer market.
china is the 5th largest fast food consumer market.
china has the 5th largest patent filings.
china has the 5th largest gold reserve holdings.
china has the 5th most international tourism receipts (earner)

china has the 6th largest number of patents granted (21,519).

china has the 8th largest patents in force (59,087).
china is the 8th largest wine consumer.

china is the 9th largest date producer.

And the list is very big

Sun, 12/05/2010 - 12:58 | 779536 Bruce Krasting
Bruce Krasting's picture

Thanks for this list. I knew it was big, but not this impressive. Wait a few years, the may got ot the tope of the list for everything, including dates.

Sun, 12/05/2010 - 12:32 | 779487 dizzyfingers
dizzyfingers's picture

Apparently one of the things that China lacks is fresh water - a big problem. They're getting it from the US, another big problem. In light of the fact that water is scarce in China (google China desertificaiton), this may be a very serious problem for debtor USA's citizens. Water is life.

Sun, 12/05/2010 - 12:59 | 779538 Bruce Krasting
Bruce Krasting's picture

Did not know we were sending them water. Expensive. Where did you hear this? Tks.

bk

Sun, 12/05/2010 - 02:17 | 779127 honestann
honestann's picture

Economists should be an observational science, like astronomy.  A rational man in a rational society observes what others do, identifies consequences and patterns, draws inferences about causal relationships, learns from them, and acts accordingly.

The moment economists become part of some kind of social engineering activity - as in "central planning" - they become predators and destroyers and enslavers.

The USSA is going the way of the USSR... how obvious.

Sun, 12/05/2010 - 03:43 | 779188 StychoKiller
StychoKiller's picture

Economics as practiced is really Astrology, i.e., Fortune-telling.  Woe unto the Economist(s) that do not tell TPTB what they want to hear:  "Spending more will fix all problems!"

Sun, 12/05/2010 - 04:10 | 779209 David99
David99's picture

I can't understand FED's policy of spending.

 

Shall I ask my son/ family to go out and spend as much as you can so that we can become rich. Is it possible?

Sun, 12/05/2010 - 21:15 | 780622 honestann
honestann's picture

No, but then again, you can't print more money at zero cost.

And you can't take money and lend it to others at interest.

If you could, you'd be a happy predator too!

Sat, 12/04/2010 - 23:51 | 778967 BigDuke6
BigDuke6's picture

i think accusing people, who are looking at things rationally, of being socialists is depressingly illustrative of how the whole 'reds under the bed' nonsense got traction in the 1960's.

look at yourself and ask whether you want that for the usa.

we've moved on.

 

 

Sun, 12/05/2010 - 00:40 | 779004 TheGreatPonzi
TheGreatPonzi's picture

*

Sat, 12/04/2010 - 20:34 | 778730 monopoly
monopoly's picture

Bruce, that was an excellent post and I totally agree. 30 year over 5%.... Game over. the Bernank is doomed. The question is will Princeton take him back when he sets in motion the Revolution.

Long TBT

Sat, 12/04/2010 - 17:49 | 778513 ebworthen
ebworthen's picture

You said: 

"Aging demographics, an economy too dependent on consumer consumption and globalization that makes US workers less productive make it inevitable that the US faces a much higher level of un/underemployment."

Exactly.

However, Ben and Economists of his age bracket cast their minds back to the America of the 50's and 60's in terms of growth, production, and employment; ignoring that eutopian government mandates combined with corporate/banking greed whored the future out to foreign slave labor and capital shuffling long ago.

Sat, 12/04/2010 - 17:20 | 778463 revenue_anticip...
revenue_anticipation_believer's picture

"That is the Question"

THAT really elicited some high quality commentary

...one thing, i 'forgot'; repeated over and over in the S&L Crisis was "lend long at high interest rate, finance short at low interest rate => a normal, non-inverted yield curve...." 

the Fed MUST force the short end yields BELOW the long term....absolute yields are subordinate.....'force' meaning a direct/indirect subsidy...accounting-wise FASB it is generally accepted that business/banks show a profit, EVEN if it needs to be FASB faked, etc

....hence the business 'profits' that are presumed to imply a 'discountable stream of profit-cash flow..' from which a pretend P/E and pretend growth rate can be pretended to justify the prices paid for the Stock Certificates...

I mean, nobody down really deep, in the group unconscious, REALLY believes that the USA/Euro banks and other businesses, are making a REAL PROFIT, but the NEED/hopium and human/animal spirits are always positive, that IS the DEFINITION of a living being...even in released, aircraft crew audio tapes of the last seconds show focus on LIFE, mostly...there used to be posted such things...from courtroom transcripts...

it is only a 'rigged monetary/debt adjustment game' to maintain the necessary illusion...suopch illusion, as will encourage business REAL physical expansion, Domestic Consumer REAL physical purchases of actual 'consumables' that dissapear and are needed again and again...like food, like medicine, like gasoline, like electric power....all that...

the illusion => belief structure is all important in the money system, Gold/fiat is really a non-issue, a straw man...it is the overall 'credo, therefore i will expand my business; credo, therefore i will not hoard gold/silver, i will spend/consume in the expectable 70% of GNP...

Keynes, you know, was about 'demand destruction', about failure to believe, failure to spend, failure to lend...which in 1936 WAS the issue...and he was right THEN...

if belief really fails, then 'demand destruction' = permanent economic behaviour change 

a depression mentality, the frugality of both supply/demand ... equivalent 'shortage' of cash money = high short term rates, major scrutiny on loans, major holding back on spending, great emphasis on holding cash equivalents, hoarding, holding gold/silver...emphasis on holding on to what you got, focus on end-times, end-of-life issues, focus on a no-fun future...

QE2/3/4 whatever...is still, less bad than a permanent extended 'demand-destruction'....its only money, even gold is nothing excepting an act of desperation...it is not a consumable, not a metabolic life-sustaining movement/activity...it represents the permanence and purity of finality in life...death over Life...

 

 

 

 

 

Sat, 12/04/2010 - 16:57 | 778422 ConfederateH
ConfederateH's picture

Bruce, it is you and all the other "tax the rich" socialists that have gotten us into this mess. Employment will not go up until the "the rich" gain some more confidence.  One key issue is the looming tax increases.  If taxes are raised on the "rich" that you so dispairrage, then this malaise will just keep getting worse. 

The only thing that could turn this sucker around is a significant tax cut along with a significant cut in the size and intrusiveness of the federal government.  Of course a tax lover like you just can't grasp this simple fact, so things are certain to continue getting worse.

Sat, 12/04/2010 - 19:31 | 778643 Bruce Krasting
Bruce Krasting's picture

CH, Do me a favor and look through the budget and tell me where you get a trillion to cut. Now if you want to cut the military go ahead and try. No sale. So yes, higher taxes (and less spending) is necesary if you want to avoid the bond crisis that Greenspan called for.

But we are not going to get that. We will get the opposite. And one day the crisis will happen.

The 'Socialist'

Sun, 12/05/2010 - 01:29 | 779065 Tsunami Effect
Tsunami Effect's picture

I began responding with cutting Fed Govt. employees.  But that's "only" about $300B if you just fire everybody.  A 10% haircut seems easy to do with just salaries = $30B.

http://www.bls.gov/oco/cg/cgs041.htm

So where does the 3.5t go to?  There's three buckets, servicing the debt 700B, defense 800B, and health&human services 850B.  If you add in transfer payments through Dept of Ed., Dept of Agriculture (food stamps), Dept of Labor, HUD, and so on, you get to well over $1,000 billion in transfer payments from taxpayers to recipients.

What do you think emerging markets like India, China and Russia spend on "Health and Human Services" for the poor?  $3b combined?  The answer is obvious but "third world" isn't it?

If you cut 10% off everywhere, there's $350B.

If you force reparations as repayment for our military defending regions all over the world over the last 30 years, what's that worth? 500B? 5T? who knows?

Maybe Bernanke's got the best idea.  Just issue more debt and keep on buying it at the FRBNY.  Yeah the dollar get's killed, but that eventually forces domestic consumption to go way up?

Sun, 12/05/2010 - 12:48 | 779518 the grateful un...
the grateful unemployed's picture

kinda makes you wonder about the wisdom a taking on long term debt in a deflationary economy?

Sat, 12/04/2010 - 23:23 | 778931 the grateful un...
the grateful unemployed's picture

we always underestimate the ability of these people to keep it going. For one thing the DOD budget is bloated and corrupt. No doubt half the federal deficit accrued during Bush was stolen, and is in foreign banks. The administration threw pallets of money out of the back of pickup trucks in Iraq. No accounting. Obama was bought off, and even subnormal America knows it. There's at least $1T there.

Should we nationalize Goldman Sachs, might be another $1T there. 

Protectionism is a slogan from the past which holds no relevance. Impose duties on CHina until they either float their currency, or RAISE their standard of living. Might be another $1T there. Theres lots of money out there, BBen is printing it, nobody I know is getting their hands on any of it, how about a few use taxes along the way.

How much does a guillotine cost? (couple thousand?) Now that's what I call leverage.

 

 

Sun, 12/05/2010 - 12:50 | 779521 dizzyfingers
dizzyfingers's picture

Agree. Bring it on.

Sat, 12/04/2010 - 17:25 | 778471 Spalding_Smailes
Spalding_Smailes's picture

Not sure about Bruce and taxes but ...

 

You are 1000% correct. A tax cut puts money in your/our pocket.

Sat, 12/04/2010 - 16:01 | 778340 greenewave
greenewave's picture

To find out more about the Imminent Collapse of the Global Economy, watch this video "Wall Street Thieves, Bailouts Galore, Broken America" at (http://www.youtube.com/watch?v=I93dzfs8WIc).

by Anonymous

The United States economy is rotten at the core and has been stolen from the American people by the Wall Street Thieves that drove the Titanic into the iceberg in the first place!!

Sat, 12/04/2010 - 16:48 | 778407 Spalding_Smailes
Spalding_Smailes's picture

Greenwave,

 

Whats up. How about some insight, back and forth.

I busted your balls but I'd like to see you post some thoughts, peace out... My dad said Arizona has been great this week.

Sat, 12/04/2010 - 15:58 | 778335 JonTurk
JonTurk's picture

Bond markets are the harbinger of sorrow...

Billy Gross is out of bonds before QE2 was announced, now he is acting like an anarchist blog writer... hats on hats off

Sat, 12/04/2010 - 16:18 | 778367 Orly
Orly's picture

I, for one, am glad he changes his mind and his stance when the situation changes.  My account with him is up big.

Thanks, Bill. Mohammed.

:D

Sat, 12/04/2010 - 15:55 | 778325 windcatcher
windcatcher's picture

Ah Yes, the infamous secret Federal Reserve (not Federal or a reserve but a private bank) has finally released some financial bailout figures for the American taxpayer. For us, it’s like the first pictures of the Gulf Oil well disaster two months after the incident and after months of being lied to! Alas, all we get is just a few pictures of the blown out oil well!

 

The criminal and psychopathic bankster financial New World Order is right on schedule. It seems that the skillfully planned and executed (conspiracy) Mortgage Fraud, Mortgage Electronic Registration System and the Wall Street derivatives market is the Federal Reserve Central Bank’s economic weapon of mass destruction resulting in the loss of national sovereignty and enslavement of the masses under debt to the World Banksters who created the debt.

 

Congress is openly BRIBED (Roberts Supreme Court said it was OK) and are in the World Banksters bag (Treason). Put their names on a list of things to do.

 

The mortgage fraud paper and assets are coming home to Papa to be sanitized and reissued. There is no mortgage fraud crime, by plan, the Fed will simply print more fiat money and buy back their fraudulent mortgage backed securities that were dealt out from their owners. - For FREE- Oh, TAXPAYER debt.

 

The Federal Reserve Central Bank wins, they OWN our assets and our debt and the American people and our government (and most of Europe) is enslaved to them by debt forever- game over (they think).

Sun, 12/05/2010 - 12:44 | 779506 dizzyfingers
dizzyfingers's picture

You have insights, so... can you outline a plan of action for us out here, one that could shake off the bankster leeches? 

Sat, 12/04/2010 - 15:16 | 778266 NOTaREALmerican
NOTaREALmerican's picture

Good posts.   I can't comment at work (the site is blocked at my Zombie) but I always enjoy your posts.  

The nation's debt grid is interesting, never saw it formated as such.

 

 

Sat, 12/04/2010 - 14:46 | 778223 merehuman
merehuman's picture

snake eating its tail. a good beginning.

Sat, 12/04/2010 - 14:16 | 778180 DavidRicardo
DavidRicardo's picture

"Long rates have backed up by 40 bp in just the past month. The exact opposite reaction that ‘the Bernank’ wants."

 

The reason should be obvious to you: it's because the market is expecting more.  And there will be more.  There will be $70 trillion of bailouts.

 

The question is: why?  And the answer is contained in Table A.4 published each month by the BLS.  It shows unemployment in the class which has a Bachelor's degree or higher.

 

Before you read on, guess what that figure was for November (and I know BLS figures are BS--more on that below).  Don't look below until you've guessed:

 

 

 

The answer is at the bottom of this post.  Now, even if you double this figure (or even triple it!) to get the true underemployment figure for this class, it makes no difference.

 

This is far and away the most powerful class in the U.S., and the fact of the matter is that most of them are still trudging off to their cubicles.

 

The point is, there is STILL A LOT OF MONEY TO LOOT FROM THE MIDDLE CLASS.  So Mellonesque liquidation with proceed blithely on, to loot it.

 

What we've seen so far is Fed experimentation on this class, to see the reaction to the looting.

 

And...surprise!!  THERE IS NO REACTION AT ALL.  This class--which has the political power in the U.S.--doesn't care, doesn't even really know, what is going on.  The frog in boiling water.

 

So there will be looting until the BLS figure for this class is 20%.

 

If you're such a smarty pants, if you know so much, tell me the month and year this figure will reach 20%.  If you think it never will, shut your mouth.

 

 

 

 

 

 

 

 

 

 

 

Answer: 5.1%

Sat, 12/04/2010 - 15:13 | 778256 I need more cowbell
I need more cowbell's picture

I see you have been junked on previous posts with this perspective, but I think it is an interesting take, and worthy of consideration along with others.

Except for the "shut your mouth" part, grow up.

Sat, 12/04/2010 - 16:44 | 778403 cosmictrainwreck
cosmictrainwreck's picture

LOVE your avatar. Reminds me of the babes on the latino game shows

Sat, 12/04/2010 - 15:04 | 778233 Mark Medinnus
Mark Medinnus's picture

Interesting format.   Question:

how much depends

 

 

 

 

upon

 

 

 

 

the few ink

 

 

 

 

drops

 

 

 

 

placed in intervals

 

 

 

 

between

 

 

 

 

the blank white

 

 

 

 

spaces?

Sat, 12/04/2010 - 14:15 | 778179 malek
malek's picture

They can orchestrate a stock market crash to get people to rush into bonds once more -
then we will have 2%/3% again...

Sat, 12/04/2010 - 14:43 | 778218 Rainman
Rainman's picture

....methinx a slip of the European high wire act will be a factor in an equity pullback and flight to perceived safety. Since the USA provides 1-5 funding to the IMF, a well-timed commitment balk would be sufficient to achieve a desired result should 10yT yields start to get away.

Of course, a major equity correction is undesirable to the puppetmasters for many bad reasons and certainly runs afoul of the Plan, but soon there will have to be "least worst" choices made. 

Sat, 12/04/2010 - 14:23 | 778190 kaiserhoff
kaiserhoff's picture

Sure, but what does that do for Citi, which is already almost a penny stock?  Ben is running out of options.  That happens to Soviet Central Planners.

Sat, 12/04/2010 - 13:49 | 778161 zero intelligence
zero intelligence's picture

When market forces turn on the “New Monetarism” and shut the door on the insanity, the policies will change. Until they get hit hard over the head the Fed will continue to print.

 

This has been my conclusion since 2004. The 1970s devaluation trend ended ONLY when Paul Volcker took over the Fed AND he was willing to do anything, with any consequences, to make the inflation stop.

It is much worse today. Now the printing press is also financing the government, and holding the banking system together. The consequences of stopping are greater now than before.

The interesting thing today is that Bruce Krasting, a fairly mainstream guy, has figured this out. That is when big institutional money starts to move.

Sat, 12/04/2010 - 13:42 | 778151 Tsunami Effect
Tsunami Effect's picture

Finally, what BB would do to fight "deflation" (i guess as indicted by Core CPI).  This is the next phase and the most risky.  People reading this site kind of get it already, but what do you suppose might go wrong once these policies are fully implemented?

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Sat, 12/04/2010 - 13:52 | 778148 Spalding_Smailes
Spalding_Smailes's picture


At the heart of Bernanke’s dilemma is the following graph on the labor force participation. Bernanke wants to juice the economy back to a level where the slack in labor participation rises back up to where it was in 2005. He believes that this is the Fed’s mandate. He wants to turn the clock back. But he can’t. The lines on this chart gapped down as a result of the 08 recession, but the trend toward a lower level has been in place for a decade.

 

Ben must know the shadow banking complex is broken. This created the easy credit over the last 25 years. He must know that the credit flow will never reach this level again unless they get the securitization market or something like it rolling again.

Banks are cutting back on credit available for people & business. The deflation from the breakdown is global ...

 

You really put forth great info and ides, keep it up BK !!!

Sat, 12/04/2010 - 13:36 | 778138 Tsunami Effect
Tsunami Effect's picture

For those of you who don't want to read the entire speech, here are the relevant passages:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

.....

To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.

Sat, 12/04/2010 - 13:24 | 778119 Tsunami Effect
Tsunami Effect's picture

Here's your blueprint for what BB is going to do. If you can suffer through the entire speech, the game plan he laid out way back in 2002 to fight deflation.

Now the Professor BB is out to prove his thesis right.  No matter what the facts (inflation) and what the cost (dollar destruction).

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

 

Sun, 12/05/2010 - 02:17 | 779129 Oracle of Kypseli
Oracle of Kypseli's picture

In theory, he may be right in the way he would fight deflation. However, he is not considering that wage increases may not be there and unemployment being stubbornly high. Therefore, creating demand may not be easy or even possible, If you can not afford a new car at $15k you can not afford it at $10K and if the banks do not lend, nothing happens.

I think that's his worry. Oversupply of everything, no credit, high unemployment and no wage increases. Check mate.

Sat, 12/04/2010 - 13:43 | 778149 Attitude_Check
Attitude_Check's picture

I loved this quote after describing in detail how to debase the value of the $ to fight deflation.

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar. (emphasis mine)

 

HAHAHAHAHAHAHAHA!!!!!   NOOOOOO we will NEVER debase the $,  Stong $ FOREVER (quick Jed set the printing presses to 11!)

 


Sat, 12/04/2010 - 13:18 | 778110 Orly
Orly's picture

I thought that it was mainly the yield curve that mattered more and not so much the absolute yield percentage.  If I am not mistaken, the yield curve is still pretty high.

That doesn't answer the question as to why banks won't lend in this environment.  I also thought that a steeper yield curve was what banks thrived on in making loans.

Where am I wrong?

Sat, 12/04/2010 - 23:13 | 778919 jm
jm's picture

The problem is low loan demand.  Bad credit are desperate for cash.  Good credits are in debt reduction mode.

Sat, 12/04/2010 - 14:04 | 778171 kaiserhoff
kaiserhoff's picture

That's what the text books say, Orly, but bankers are uniquely positioned to understand their own local and regional economies. I think they see what we see; epic unemployment, an explosion in health care costs, family balance sheets shot to hell. Small business loans just aren't happening. That should tell us something.

Sat, 12/04/2010 - 14:24 | 778188 Orly
Orly's picture

It sure does and that is the conundrum I am not completely understanding.  I can't decide whether Bernanke expected these reactions (being quite the conspiratorial field mouse that I am...) or, as he also says in his speech (paraphrasing...), "You know, we can try to theorise about fighting deflation but we really have very little experience in having real rates at zero for sustained periods."

If he did not expect this reaction, then a crisis in bonds- and by that I suppose one would mean rapidly dropping prices with rapidly increasing yields- may be just on the precipice of collapse.

He must know and probably has been well aware that banks aren't making loans to small businesses, yet there seems very little concern for this lack of monetary injection in what I would think would be the simplest way to get money into the economy.  Granted, I can understand the once-bitten-twice-shy attitude of the banks but they must realise that the only way to sustain their business is to get back to grass-roots lending.  The fact that they don't seem to understand this, coupled with the Fed's lackadaisical attitude toward business lending... and something just doesn't add up.

It is only one small layer of the onion that this seeming contradiction resides in.  There must, therefore, be an ulterior motive at work.

I truly believe it is to bury the Chinese.  Basic-necessity inflation over there is supposed to start like wildfire in the early part of next year, according to an artilce I read (I think CNBC...) over the week-end.  Since it is not a monetary inflation but a commodity/necessity inflation, instead of making the stock market ramp, it will make the Chinese markets, including the Hong Kong real estate market, tank.

By extension, the emerging (equity...) markets will also wither and crash.  By extrapolation, it appears that 2011 is going to be beyond brutal for the Chinese.  Maybe that is the ulterior motive?

Anyone have any ideas on how this "unseen consequence" of rising long-bond yields may play into this scenario?

Sat, 12/04/2010 - 15:05 | 778252 I need more cowbell
I need more cowbell's picture

Is there any demand for new credit from small businesses? To what end, expansion? In what growing markets?

The banks aren't lending conundrum may be little to no demand with reversion to historic norms of ability to pay back, collateral, etc.

Don't know myself- any bankers out there?

Sat, 12/04/2010 - 15:34 | 778272 Spalding_Smailes
Spalding_Smailes's picture

A friend of mine owns a large manufacturing company in Illinois (130 -140 people) Metal shop.

He had purchased 2 million of new equipment over the last 4 years before the crisis. His sales went from 37 million  down below 10. As thing have started to pick up in the last 4 months he need money/loans to cover bills. After 30 years of doing business with the same bank never missing 1 payment they are making his life hell.

They took away his line of credit (2 million) and any new money (say a check for 300,000) is taken from his account and used to pay down his last loan, he did not agree to this ...

The CFO told him they grew too fast(the bank) and are sitting on many,many bad loans/debt(CRE). They will not extend new credit until they get their books in order.

A very large bank (market cap 900 million.) Over 100 banking offices.

 

But he also told me PNC was in the Chicago area now big and they are handing out new loans but he cant take his business to PNC until he pays down more of his debt. He hopes to move in 6 months.

Sat, 12/04/2010 - 17:04 | 778429 reload
reload's picture

Similar story here in the UK. Politicians (occasionally) and journalists bang on about `the banks have to start lending to small business again` Most business owners are watching their customers cope with increased taxation and lowering job security, and for the most part they dont want loans - they want customers with some disposable income. Exporters are enjoying the weak pound, but even those with strong order books are charged penal rates of interest for loans.  As you say the banks expanded their loan books with reckless and negligent abandon between 2002 & 2007, RBS was literaly shovelling money at anybody with a real estate project. It was all about market share, fuck the quality of the loan book. Now they have blown their ballance sheets to pieces they have more staff working on `restructuring` than on traditional banking. But hell, traditional banking is so last century, tax payer money is better spent on Algorithmic trading and front running the fed is an easier way to make bonus.   

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