Debt Bubble Chronicles: Does Bernanke REALLY Think QE Will Boost Home Prices… Or is He Simply Trying to Hide an Even Bigger Problem?

Phoenix Capital Research's picture

Sometimes
it’s worth putting things in context.

 

The world,
particularly the US, has been in a bond bull market for roughly 30 years.
During that time bond prices (black line) rose almost continuously, while
interest rates (blue line) dropped.

 

 

So here we
are, interest rates are the lowest they’ve been in 30 years, and Ben Bernanke
wants to make them fall even lower. His public reasoning is he wants to
maintain the housing market and spur investment in business.

 

But does it?

 

Interest
rates have been at 0% for nearly two years. Despite this as well as a massive
home-buyers tax credit, housing prices have, at best, stabilized a bit… but any
claim that low interest rates have stimulated a housing recovery is flat out
bogus.

 

 

As for low interest rates spurring investment in
business, this claim is also nonsense. I don’t remember seeing any headlines
about companies increasing their capital expenditures or hiring employees?
Instead big business is putting its excess cash to work with buyback programs.

 

§ 
Time Warner Cable plans $4 billion stock buyback‎

 

§ 
CBS Broadcasts Solid 3Q Results, Announces Stock
Buyback Program

 

§ 
Entergy 2011 EPS Target In Line With Views, Ups Share
Buyback

 

§  Visa Says Quarterly Profit Rises, Sets $1
Billion Buyback Plan

 

§  Rent-A-Center Boosts Stock Buyback Plan 33%
To $800M

 

Let’s be
blunt here. Corporations know that the recovery is not real. Revenues at
S&P 500 companies still remain 11% below their Spring 2008 levels. That’s
why companies are not bothering to hire or expand their operations (cap ex).
Instead, they’re buying stock in their companies.

 

After all,
companies only issue stock buybacks for two reasons 1) they think shares are
cheap or 2) they’ve got nothing better to do with the money. Given that the
same corporate insiders voting to issue these buyback programs are dumping
their PERSONAL shares hand over fist (the insider selling to buying ratio for
the month of October ranged from 229 to an unbelievable 2,019), I somehow doubt
these folks think their stocks are cheap.

 

Thus, both
of Bernanke’s claims (that QE will help housing and spur business investment)
are a crock. So what’s the REAL reason he’s frantic to kep interst rates low?

 

Derivatives.

 

According to
the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the
Second Quarter 2010 (most recent), the notional value of derivatives held by
U.S. commercial banks is around $223.4 TRILLION.

 

Five banks
account for 95% of this. Can you guess which five?

 

 

Gee, that
looks a bit like a list of the TOP banks Bernanke’s been bailing out/
backstopping/ funneling cash since the Financial Crisis began doesn’t it?

 

Now, why
would Bernanke be so hell-bent on keeping interest rates low? After all, how
much of the $223 TRILLION in notional value of derivatives is related to
interest rates?

 

Try $188
TRILLION.

 

Yes, thirteen times the US’s entire GDP
and nearly four times GLOBAL GDP.

Now, of
course, not ALL of this money is “at risk,” since the same derivatives can be
traded/ spread out dozens of ways by different banks as a means of dispersing
risk.

However, given the amount of money at
stake, if even 2% of this money is “at risk” and 10% of that 2% go wrong, you’ve
wiped out ALL of the equity at the top five banks… and likely kicked off
another systemic implosion at the same time.

 

If you think
Bernanke isn’t aware of this, consider that his predecessor, Alan Greenspan,
knew as early as 1999 that the derivative market, if forced into the open and
through a public clearing house would “implode” the market.

 

Don’t buy
ANY of Bernanke’s claims that he’s trying to help housing or business. If he
had ANY interest in helping the little guy, his track record wouldn’t be so
abysmal.

 

No, Bernanke
is doing one thing and one thing only: trying to shore up the overleveraged,
derivative-riddled balance sheets of the Too Big to Fails. He is sacrificing
the US Dollar, middle class, savings, and possibly even the Republic just to
aid his Wall Street masters.

 

Those who
aren’t prepared for what’s to come as a result of this miscreants policies are
going to lose a lot… maybe EVERYTHING.

 

Don’t be one
of them.


Good
Investing!

Graham Summers

 

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