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Debt Bubble Chronicles: Does Bernanke REALLY Think QE Will Boost Home Prices… Or is He Simply Trying to Hide an Even Bigger Problem?
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
PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to
come.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
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Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
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ES, au contraire, we are trying to get there as we speak (... er ... type) - Ned
Road trip notwithstanding.
What, the gold standard has never been tried? How about five thousand fucking years.
Jesus.
Cut him some slack. He apparently can't ever pass his final exams.
Am I completely nuts or have derivatives been used by these banks to actually pull future earnings forward? By locking in the income using a hedge they could claim the income today for fixed rate loans when borrowing sort-term with variable rates. They stick the loans off balance sheet as "all hedge and even", take the income and don't wait 30 years for the interest payments to roll in.
If true, then that really blows up when the counterparty cannot pay off the hedge when interest rates rise on the variable short term borrowing. The off balance sheet loans make a reappearance on the balance sheet and affect income.
IMO, borrow short and lend long has always been a screwed up system. But it explains why Goldman goes apeshit every time someone talks about raising rates.
Bart, whether you are completely nuts or not is a subject for another forum. As for your reasoning, well, I've been dealing with this mentality (try to run a project so there is money left at the end) and, by golly, I'm thinking I'm your kinda nuts.
Slurp everything into now. Future problems are for their successors.
dang
- Ned
Takes too long and there isn't enough time for that to payoff for some. Just suck it all out at once, sell stock and pay it all out http://www.bloomberg.com/news/2010-11-09/kkr-bain-to-take-third-hca-payout-as-debt-looks-better-than-public-offer.html
The BIS breaks the derivative reporting into two parts, exchange listed and OTC. A category of "other" is too frightening to think about. You can view the latest totals via several perspectives at
http://www.bis.org/statistics/derstats.htm
When you add the two report totals, you have more than a quadrillion in derivatives, so a little interest problem sets off a huge avalanche. Hope you can find high ground.
Such as Steve Ballmer's $1.3B worth of MSFT last week, which has to make last week a record for total insider sell dollar volume and selling to buying ratio.
one of these days it's gunna all crash and burn. Show wish I bought more ABK...
Yes, that mysterious shadow banking product known as derivatives. It is a bigger market than the world economy. Everyone thinks that Bennie is just trying to shore up the markets and trash the dollar. I am not fully sold on this notion. It might be his intention to appear as "saving the markets" while really setting it up for an enormous crash. People are no longer as euphoric about QE 2.0 as they were just a few days ago. The road to hell is paved with good intentions.
Thanks for the reminder ... derivatives is the tail wagging the dog.
Replying to the author, which I don't know how to do; Execellent analysis, I agree he's doing it because of large problems that may be realized at any time.
I agree, GW, we must be constantly reminded of the derivatives threat. Somehow it seems to get lost in the noise of the bubbling financial markets and all the QE/currency debasement anger .
BB is not insane. He is desperate to prevent the ignition of trillions in WMDs. If/when the scheme doesn't work, the whole game ends on a horrific note.
Since it's five banks that hold 95% of the WMD's/derivatives and we all know that if they're not insolvent now, they certainly will be in the near future, why don't we prepare to resolve them and not sweat the derivatives--they're nearly all owned by the BK banks! The remaining 5% can remain the problem of those who purchased them.
The way people run around chicken little-like about the Great Derivative Menance doesn't even stand up as basic arithmetic.
Think about it--the criminal banksters themselves hold all the derivative risk. It's like they're pointing guns at both sides of their heads!
Fuck 'em. Let them pull the triggers and we'll collect the corpses.
Make them do their best to make good on the putbacks first. Then let them pull the trigger.
derivatives are the heart of the dog...........you cant hedge on what is fixing to happen...........and they know it.........they have done the math.....BOOM
Jesus saves and Bernanke waves..... us on to Hell
LV