Ben's Cohiba

Bruce Krasting's picture
Last Sunday night I wrote about the coming week:

If next Friday the Buck is lower across the board and the BoJ is a bit bloodied Ben Bernanke will light a cigar.

Okay, so our boy Ben is smoking a big fat cigar tonight. He could not be happier. Everything is going his way.

-On the week the dollar got crushed against the majors.

-The Japanese central bank did get its nose bloodied. As of the
close in NY they are down about $700mm on the 9/15 intervention of $25b.
It’s not just the money (actually it is the money). They lost a battle.
The USD/JPY has to go lower. The BOJ has tipped their hand. They are
playing defense. And that is losing strategy. Their internal effort at
QE just got trumped by Ben’s weak dollar policy. They must be pissed.

-Euro group chairman Junker (ZH article) said the weak dollar will hurt EU growth. Sure it will. That is what Ben wants. He wants to export our deflation to our “friends”. They also must be pissed that Ben is dishing this out to them.

-The gold moves were impressive. If I were at the Fed and watching this
near daily slap in the face I would be unsettled. I wonder if they even
care. At one time they did, but not in the last few years. Ben is
probably pleased with the ratchet up in gold. He not only wants to boost
inflation he wants to increase expectations on inflation. High marks on
that score for the week.

-Stocks keep going up. Why shouldn’t they? A weak dollar makes top line
numbers of a big chunk of the S&P look better. Also, you have to
look at what money is competing with. The five-year closed at 1.1%.
After-tax that comes to 0.7%. Against a very low rate of inflation the
tax adjusted yield guarantees the investor a negative 8% return. Not
hard to beat, one would think. So stock multiples have to widen. Right?
If so, can we do this forever? If not, how long can we continue?

-The commodity numbers are blowouts. Sugar, wheat, corn, copper, every
off the run thing you can think of and of course oil are all on the
rise. This is coming home to shoppers soon. Ben is just delighted at
this. He has been preaching the need for inflation.

-Possibly the most significant achievement by Bernanke this week was in
shaping public opinion. Through the press and direct comments from Board
members the word went out, “The Feds gotta do something about the unemployment thing”.
And sure enough the NFP numbers confirm that the private sector is not
doing enough to cover the job losses by the states. So now the thinking
is, “That guy BB had it right. We have a real problem again. I am glad that our pal Ben is going to do the heavy lifting.” Look for the press to confirm this over the weekend. It's part of the propaganda.

So Ben has every reason to celebrate this evening. Everything on his list has a +
next to it. I’m looking at the same list and I want to puke. Raise the
cost of things that we consume by trashing the dollar is what we need?
Destroying savers so they are forced to cut consumption is a cure? For
whom? Piss off our “friends” and “investors" is good
policy? We shall see. It’s hard to blunt the argument that a good stock
market is synonymous with better times. But this market is bought with
POMO. And everyone knows it.

There is another thing that Ben can celebrate this evening. He is
clearly running the entire show. Treasury has had not one word to say on
the monetization of our financial system. I always look into things and
ask why? Tim Geithner is out, is why. We just have to wait for the
election. Between then and now Tim will be used as cannon fodder in a
face saving effort at avoiding a trade war with China. Summers is gone.
So Ben is holding all of the cards. Exactly how he wants it.

 

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euclidean's picture

>Normally the markets do this and it is a self adjusting mechanism.

BK, me thinks this is what the markets are trying to tell you. Why are people so polarised to think that this is not happening already? No-one wants the USD right now for obvious reasons, better opportunity being a primary one. Oh, that and a $615trillion naked derivatives market. But you go on to describe one possible outcome in your reply that I refer to.

Stop thinking poor bugger me - the mechanism of which you speak has been knocking on the door of the US for several years now. Any of the 'cure'(s) mandates that several steps must be followed in sequence. Either the entire world joins in monetary debasement to oblivian or sensible monetary and fiscal measures are enacted to preserve what is left of the 5c paper before it becomes something to wipe your arse with.

In any case, many are (justifiably) criticising actions to start 'something' (step 1) - everyone thinks they might even have the best 'step 1'. But they have not defined the game plan - i.e. what should come first - jobs? debt management? inflation/deflation (+ve or -ve)? Pick any 2, but not all 3. Then step 2 is managing the consequences. Step 3 might be a recovery when balance begins to restore. But wait long enough and a primary issue important enough will percolate to the top to force the hand and align everyones efforts.

You're thinking in terms of a magic/silver bullet which isn't going to happen - it can't without something first suffering. So they are firing buckshot aimlessly in the hope of hitting something. The problem is more that the bunker is made of straw.

anony's picture

Why do you say 'exactly how HE' wants it?

He's the front, merely a puppet on an international financial string being pulled this way and that, told what to do and when, so that the precious few who are really calling the tune attract even more pelf to themselves and  whatever bank account in some foreign domicile Ben and all the rest get to secret their gains from their moves.

 

 

the grateful unemployed's picture

hmm, so Bernanke tries to put a bid under the political incumbents, the danger being the Tea Party might acquire enough power to stop QEII, (which is why the POMO driven rally is being rolled out, for one thing it helps demonstrate to the rebels that even if they take the capital they don't control the highways. We can still move the money around. Wall Street appreciates their efforts too)

The price they pay however is a weakened balance sheet. Its like one of those video games where you keep shooting the monster until his defenses break down. The difficulty with the Feds dabbling in the political situation is their mistaken notion that nominal gains are what matters, which ignores the leverage third parties can exert, such as that 1% Nader took from Gore in 2000.

Playing politics is not their game, and they will get burned if they try it. To take a stand on unemployment merely underscores the futileness of their actions. Truly they have expanded their power beyond their charter, but at the cost of their balance sheet. The rogue traders are waiting for them in the alley. Flash Crash coming and the bottomless selloff. There is no one left to buy the next bottom, because the Fed will have seen their fingers slammed in the cookie jar.

thegr8whorebabylon's picture

Still waters Bruce.  Beautiful.

Let the great culling commence.

tom's picture

Spot on. What are our German friends for if we can't beggar them by devaluing against their stubborn austerity? The nerve of those Asians and Latins, thinking they can deflect by devaluing right back at us. They ain't seen nothin yet!

MiningJunkie's picture

Never underestimate the replacement power of U.S. stocks within an inflationary conflagration...think Zimbabwe.

We are in a Fed-induced bear market in the purchasing power of U.S. FRN's (cash).

And the big losers are: the global middle and working classes and retirees living on fixed income.

Oh yeah - and anyone short ANYTHING denominated in FRN's is fucked.

Vive la Ben!

Disclosure: I am long gold and gold stocks (plus silver) since 2001.

99er's picture

"Breaking News: China Takes Fannie and Freddie Hostage"

It would not surprise me at all if discussions between the US and China this weekend in Washington are focused on the possible outright exchange of Agency paper for US Treasuries of all tenors--a result of the realization that real estate MBS are appropriately marked to zero. China, in addition to its $755 billion in government securities, holds over $400 billion of Fannie and Freddie issues and now--with the "mortage mess"--realizes that it will be unable to get a bid. That's a hell of a lot of shit to be holding in your hands.

China has a gun and holds America hostage.

http://www.newsmax.com/Newsfront/China-Cuts-Back-U-S-/2010/02/17/id/350073

 

tom's picture

Breaking news, dateline February?

China's not directly at risk from the mortgage mess, which will makes losses for the US government and owners of private MBS, not for owners of GSE issues, which are de facto guaranteed by the federal government. (The GSEs guarantee them, and the federal government bails out the GSEs' losses).

That said, the mortgage mess is one more step towards US default on its debts to China.

99er's picture

Sorry about the confusion: "Breaking News" is a joke; the problem, as we know from William Black, is an old one. Only now China and institutional investors around the world will soon realize that there may not be a bid for Agency paper because the MBS held by Fannie and Freddie (purchased near par from TBTF banks) may actually be worth zero. That is, the entire fraud is becoming unraveled.

Edit: See this.

http://www.huffingtonpost.com/2010/09/25/wall-street-subprime-crisis_n_7...

RoRoTrader's picture

Bullard came across yesterday as dazed and confused implying doubt about the need for QE, if at all.

ODD for that kind of hesitation in public given that Bullard was out in the early stages of the verbal intervention with the NY Times piece using the scare of deflation as a prop to put QE up as the viable solution.

If you are right taraxias then how does the FED manage the comedown post Nov 3? Or, does it just not matter after election day?

The FED must be aware of the risk of a no bid market in the event of a rude shock you describe as a possibility.

taraxias's picture

Anyone who presumes that the FED, the BoJ and the ECB are not acting in coordination is naive (sorry Bruce, otherwise I love reading your stuff).

Here's the deal.

The FED is delivering (as promised) an insanely rising stock market to Obama (POMO alone couldn't have gotten us to these levels) to help the Dem's cause in the mid-terms, while the rest of the world in the mean time gets cheaper energy. Uncle Ben knows that this is not sustainable since it threatens the very existence of the FED and the course will change violently after the midterms.

Those who convinced themselves that a trillion plus monetization ANNOUNCEMENT is coming are in for a rude shock. Uncle Ben is bound by no law, he can still provide enough money for our out of control spending government to function through stealth monetization.

And Bruce, HE DOES care about gold, always has, always will. It's the only thing that continues to shine a light on the FED's activities and Uncle Ben knows it. I expect a big "correction" is coming.........and I'm a goldbug.

Ned Zeppelin's picture

Obama is an employee of those who are directing the Fed's policies. Nothing the Fed does is for a sitting President. The sitting President answers to the same board of directors as Ben.

alexwest's picture

Bernanke is crying a river... 

why ?? check out us debt at http://www.publicdebt.treas.gov/opd/opd.htm

on sept 2010(end of fin year) it was +13.6 trln $... do you know diff one year earllier 1.7$ trln...

according CBO (monthly treasury statement didnt out yet) 2010 receipts AKA all taxes were 1.9 trln $..

so that makes US FEDRAL DEFICIT IS ALMOST 100% ( 89%)... 

I'd give this ponzi scheme 2,max 3 years before it blows off..
alx

99er's picture

Another Take

Anyway, this $144 billion in additional federal debt, accumulated in Two Freaking Days (TFD), is, annualized at this astounding rate for each of the government’s roughly 250 working days per year, an outrageous $18 trillion a year! This incomprehensible sum is about $5 trillion more than the entire GDP of America! And more than half of GDP is already composed of government spending right now! We’re Freaking Doomed (WFD)!

http://www.atimes.com/atimes/Global_Economy/LJ09Dj01.html

Rob Jones's picture

It seems that QE is creating a lot of liquidity which is going into treasurys, bonds, stocks, and commodities. But somehow it doesn't seem to be creating any jobs. So I somehow doubt that Ben is celebrating this evening.

I also wonder whether how much the recent decline in interest rates was actually caused by QE. Certainly QE had a big effect. But during the housing bubble a huge amount of money was going into the purchase of mortgage backed securities. Then the bubble collapsed and the MBS market went with it. So now where is all the new investment capital going to flow, given that MBS is no longer an option? My guess would be into treasurys, bonds, stocks, and commodities. So some of the effects that we are attributing to QE may really be due to the collapse of the MBS market.

The question which is probably vexing Ben and others is how to create jobs. I don't see how treasury purchases (where a lot of the liquidity now seems to be going) is going to lead to new jobs. Stock and bond purchases might be partly used to fund new companies and new factories (if there was any sign that demand was going to pick up). Higher commodity prices might lead to job creation in mining and agriculture (although not necessarily in the US). A lower dollar might help somewhat, although it may just shift production from Japan and Europe to countries that have tied their currencies to the dollar.

What would really help would be a policy to increase demand for goods and services. Why is demand low? Partly because a lot of people are struggling to pay down mortgages on houses that they probably shouldn't have purchased. In theory, lower interest rates should help these people. But many may not be eligible for refinancing. Some form of debt forgiveness might help with this.

But another reason why many people may be cutting expenditures is that the dotcom and housing bubbles mislead them into saving too little for retirement. Now they are cutting back their spending in order to make up for lost time.

I don't see a way for the Fed to magically fix all of these problems. Let us just hope that they don't wreck the currency trying.

99er's picture

From Men Who Smoke Montecristos

One conclusion was crystal clear: Expect realignments in financial power both globally and nationally. The financial services industry worldwide will never be the same. Asian and Latin American banks survived the storm better than U.S. and European banks. Therefore, the global pecking order among financial institutions is shifting.

http://www.forbes.com/2010/10/08/aig-rubin-summers-markets-stiglitz-soro...

zen0's picture

What I dimly understand from reading the meanderings of the Governor of the Bank of Canada, G20 and Basel III recommendations lead towards a more guerilla banking system worldwide, where a Lehman collapse would not threaten the whole system.

Whether they can do it or not remains to be seen, but Bernanke etc. are trying to preserve a system that has had its day.

The world doesn't want to put up with American hegemony anymore, because American institutions have become corrupt and incompetent, but like an abused spouse, they have to extricate themselves with extreme caution.

chopper read's picture

but like an abused spouse, they have to extricate themselves with extreme caution.

 

priceless analogy.  viciously accurate. 


zen0's picture

The best cigar I ever had was one I got in Trinidad de Cuba. A woman in a nick-nack store was rolling them. She had one on display that was at least 2 feet long.

It cost maybe 2 American dollars and was delicious.

Ben can't even hope to get one like that, unless he goes on the lam.

99er's picture

Does Sheila Bair Have Balls?

The Federal Deposit Insurance Corp. has authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis.

The lawsuits were authorized during closed sessions of the FDIC board and haven’t been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC’s acting general counsel, said in an interview.

http://www.bloomberg.com/news/2010-10-08/fdic-may-seek-more-than-1-billi...

doolittlegeorge's picture

You need to provide the evidence of the "current QE."  all i've heard is chatter.  needless to say "the chatter is worse" although that is not in my opinion why Chairman Bernanke is in deep dookie.  Paying our country's Judges, Generals and Admirals in money that hasn't been burnt beyond recognition comes to mind.  We'll ignore "the rest of us" since "we're just canon fodder for a nuclear armed Pakistan who we are currently bombing."  The idea that "we are exporting deflation" I also find "out there."  How is it possible to debase one's currency and "export deflation"?  If you say "because the price of food is soaring" you will cause me to disagree.  Now you could argue "because you have no food anymore" and I will acknowledge that as a possibility. I believe that's called "starvation" though and not "deflation."  I could be "definitionally challenged" however.

Bruce Krasting's picture

A policy that has at its core the objective of devaluing ones currency is a "beggar my neighbor policy". It has the affect of making others less competitive just by manipulating the currency. When we devalue versus the Euro it is also a subsidy for John Deere, CAT, Boeing and hundreds of others.

But this is exactly what Timmy G. has been bitching about this week. The terrible Chinese are being so mean by manipulating their currency that we should punish them with sanctions. The US Congress said so.

Complete bullshit. The Chinese are doing exactly what we are doing. Manipulating their currency value with purely domestic considerations as the motivation.

Who are we fooling with this crap? Ourselves? Shame on us then.

 

 

earnyermoney's picture

Everyone's pissed coming into Washington for the annual IMF meeting.  Destroy the value of the dollar knowing the Chinese currency will fall in tandem all the while hoping this action increases pressure on our "friends" to ratchet up the pressure on the Chinese.

Got a feeling the Chinese will give Bernanke the middle finger.

zen0's picture

If everybody does it, who is in the best position to win at losing?

99er's picture

Chart: SPX

Ben may prefer a Montecristo next week.

http://99ercharts.blogspot.com/2010/10/spx_08.html

Leo Kolivakis's picture

Bruce,

A+++...vintage, one of your best ever!

Ned Zeppelin's picture

Leo does hate it.  He's trying reverse psychology.

Bruce Krasting's picture

Actually I would prefer you hated it.

b

gwar5's picture

It's a freight train waiting for a streetcar named disaster.

chindit13's picture

Orzag, Romer, Summers, Rahm, Jones,.....

Axelrod wants to go home, too.  As does Gates.

The line at the West Wing cafeteria just got manageable.  And I believe Simon Property Group posted a sign on W. Executive Ave. that says "Space to Let".  That could help the deficit if they can lure a tenant.

As for Tim, I believe he is going to play the part of Wilmer in the Maltese Falcon, taking the rap for the whole nasty crime.  Fittingly, he and Elisha Cook, Jr. are about the same size and tend to wear the same bewildered mien.

 

Fred Hayek's picture

The cheaper the treasury secretary, the snappier the patter.

jeff montanye's picture

geithner the gunsel.  about to have his jacket pulled down and his .45 removed.

Species8472's picture

How will inflation help? It only helps the debtor if income that is available to service the debt rises with inflation. For most people that will only happen if there is some demand push and a wage price spiral. Not guna happen any time soon.

It will only happen for the gov if the ecconomy improves and tax revenue rises.

 

 

euclidean's picture

Are you missing the bigger picture here? You have a large trade deficit and poor domestic activity. A weak currency is what saves you, not a strong one. It is a free riding policy that pressures domestic production by increasing the cost of imports while increasing your export revenues without having a tariff or levee. It also encourages foreign investment as it makes it cheaper to invest in the US.

Saying a weak USD is doing harm is rubbish. You want a weak currency to help get you out of the shit in times like this, as it is a better friend to you than a strong USD. Foreign investment will decide the price/yield like every other time in history. Apart from smelling it, you can see the bottom in the US economy now would be a time to buy US.

But I don't think the market is all that strong for myopia, corruption and negligence right now.

Bruce Krasting's picture

Take a look at the post war chart of the Yen. Then look at the Deutche mark and how it became the Euro. They had strong currencies for 60 years. We have been going in the opposite direction. Who did win that war?

When your system is based on fiat money it is dangerous to debase it. Unwanted consequences are the result.

DoctoRx's picture

Re Japan, we continue to win.  They work and in return they get depreciating dollars.  They continue to pay for Pearl Harbor IMHO.  Re Germany and Europe, more complex.  But we have troops on their soil still, not the other way round.

Orly's picture

If I may suggest that the USD was on a plateau by itself until deliberate debasement occurred in order to level the playing field between the major Western currencies after the Second World War.

What we are witnessing is the end-game of said equalisation in the post-war world with all the Western powers, including the Japanese, going through the spasm of the process.  Once the USD basically comes to some stasis relative to the other major currencies, we can easily beat down any sort of renminbi/won/peso "Axis of Evil."  I have no doubt.

Divisi cademus.

Thanks, Bruce.  I have noticed that you keep saying that we are exporting our deflation to our poor "friends."  In a future article, will you explain what that means exactly, plus the mechanism the Fed is using to perform such a trick?  I would appreciate it.

Orly

Bruce Krasting's picture

Orly, This is simple. A currency adjustment is the mechanism where a deficit country cures its problems. We have no jobs and we have a big current account trade deficit. What would fix that? A devaluation of the currency. Normally the markets do this and it is a self adjusting mechanism.

If tomorrow morning you woke up and the Yen rate was 60 and the Euro was at 2.00 you would see that the US would stop importing "stuff". The stuff that we make here would be cheaper overnight so we could sell some of our "stuff".

As a result we would sell more planes and tractors and all the other stuff. As this happens we would have to hire more people to make all this stuff that now everyone wants. So our jobs picture would improve.This would cause inflation in the US and cost workers jobs outside the US. So we would be exporting our deflation elsewhere.

Of course this would cause all manner of problems. It would not be a "cure" at all. It would just cause distortions and inflation. As the inflation runs its course the advantage we got from devaluation would go away as we would once again price ourselves out of the market.

Orly's picture

Gotcha.  So you're saying that we basically switch shoes with the other party and now their economy is in deflation while ours would begin growing.  We put the shoe on the other foot?

Thanks, Bruce.  I appreciate all of your very interesting ideas.  They are thought-provoking and elicit quite an eclectic thread every time.  Very enjoyable stuff.

:D

RoRoTrader's picture

Orly,

Forget about the deep BK.......think about us........last week we had the chance to get long the DAX. Remember?

Orly's picture

And I said it was a really bad idea.

DAX6K, remember?

Now if you'll excuse me, I have a sudden need for a shower...

/:

RoRoTrader's picture

Yea, so what is it supposed to mean?.......hmmm, BK probably knows, but I don't........what are you, like a farmgirl with a PhD or something?

Orly's picture

It means that to go long DAX here would be unwise.  The German Index will follow the SPX down on this next leg.

The near-side target for the DAX is 6,000 (6K).

:D

 

I went to a farm once and found that horses frighten me.  They're giant!  And no Ph.D. here, I am afraid.  I am just a charting junkie who loves 4X and with no formal education in economics whatsoever.  (So, please forgive my ignorance at times...)

The best education I have had in trading was lucking upon a textbook about the Psychology of Crowds at a garage sale in Clarion, Pennsylvania.

The lesson: extremes don't last but no one wants to be in the middle for very long.  Very enlightening.

I got that book for a buck.

RoRoTrader's picture

So, I was right Orly, you really are a sweetheart. A smart one too. No wonder BK likes you so much. And others also.

I only picked the DAX last week because it sold off first, maybe out of Euro centric anxiety, and then looked like an easy trade long for a few hundred points off support lows.......

From here out, who knows? And, I certainly don't pretend to know, although I have the feeling of an attack coming on.

Then, lets hope we are in the kill zone together.

No matter what, I'll be thinking about you.

http://www.youtube.com/watch?v=7SuSsvJUqKI

 

I lived in Lexington when I was a boy. Down the street from the Green where the famous battle of the Revolution was fought against the British.

Sort of the same kind of a fight this time around, if you ask me. Just different names, faces and numbers.

 

 

 

Kayman's picture

Hey euc

EVERYBODY WANTS A WEAK CURRENCY.

The biggest components of the U.S. trade deficit are Chinese Imports and Foreign Oil.

China pegs its Yuan to the USD and squeals like a stuck pig whenever someone suggests they are cheating in the currency game (they are.)

And all our Politicians (including Mr. Hope and Change You Can Believe In) have promised to get this country off its Foreign Oil Addiction for decades. How's that going for ya?

And I cannot agree that trashing your currency will attract foreign investment.  Hot money, maybe, Long Term Investment- doubtful.

euclidean's picture

Kayman, the BushCo & Dumbsfeld MiddleEast Oilfields Subterfuge Act is in full swing, So not long now to wait for the oil dependency issue to disappear. You should be seeing declining imports already not just from a comatosed economy. Iraq was a success, but only half what Iran will yield. As for your assumptions, politics can blame the world on poor currency rates and still win government. It's the ponzi scheme of the USTreasuries and Fed Fumds rate that is to blame for most of the USD selloff currently, funded in Yen borrowings to add an arbitrage margin for the cherry on top. This way Japan is the blind leading the blind.

ThroxxOfVron's picture

Here, let Me light that for You, Ben.

 

Every Condemned Man is entitiled to one last smoke...