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My Ex Bonds and Ben Bernanke
Three-four years ago I had a nice bond portfolio. For a guy who should
have know better I completely boinked it up. I fell prey to the worst of
errors. I let disbelief guide my choices.
I had a bunch of high coupon NYS GO Muni’s. Almost all of them have been
called. I had 5 and 5 1/2% Agency MBS. I knew that was subject to
prepay, but I never expected to get 80% cashed out. The corporate’s were
high yield so I kept the maturities short. Most have been paid off.
Net-net my fixed income is down a cool $150, 000. I have managed
equities and at my age I am not going overboard on that. I think all
preff stock is junk. I will not buy JNJ for a 3% yield and lose a 1/3 of
my equity. And I am not going out far on the curve when there is no
payback. So I am screwed. Losing this much income makes it hard to plan
for expenditures. Relying on the equity market to earn a stable income
is not possible.
So if you lose that much income what do you do? I cut fixed and variable costs.
-I left my high-end golf club. Saved $30k on that. Last I checked there
were 70 out of 270 members looking to do the same thing. Talk about a
leading indicator.
-I had my eye on a new A-6. Call that $30k with the trade. I nixed that
plan so a few folks in Wolfsburg have a car less to build.
-My farm pickup has gone to work six days a week for the past 12 years.
The help, the rust and the big loads have beaten it to pieces. I need
something that will push snow, so that is another $40k. Screw that, we
will drive the piece of crap until it dies.
-I was thinking of asking a lady to come with me for a few weeks to
Europe. Saved at least $10k there when I never brought the topic up.
Funny thing is, she’s there now with another guy. Possibly he does not
have a “duration” problem.
-I have an endless list of trades working for me. Plumbers, carpenters,
masons, electricians. I usually budget 30k for this. These guys are all
calling me up to see if I am okay and do I have some work? I tell them,
“Next year”.
-My apple orchard needs pruning and the tree guy came over to talk about
it. I also told him next year. The risk is we have heavy wet snows and I
will lose trees so I am taking a gamble. Another 10g saved.
-I give 10% of my income to various forms of charity. I am not doing so
this year. $15k to the plus, but I don’t feel so good about it.
That adds up to $165,000. But I know something will break and I am
hoping to come in at the $150,000 that I lost to the bond market. If
nothing breaks I will find something “good” to do with the extra.
Ben Bernanke does not give a rat’s ass about me. Nor should he. There
are plenty of situations that are screaming for help that are much more
important than I am. I have no problem with those priorities.
Ben is probably going to be working on his speech as he flies out to
Jackson Hole. It will be an important presentation that many will focus
on. I am sure that he will acknowledge the weakness in the economy. He
will point to the recent steps he has taken and he will promise to do
more “as necessary”. In other words, ZIRP will be with us for a long
time yet to come.
Bernanke has a better handle on the numbers than anyone. He knows we are
hitting an economic wall. But he can’t figure out what to do so he
looks in a college textbook and reaffirms his belief in Keynesian
economics and voodoo monetary policy. The only medicine he understands:
zero interest rates. The poor guy must be wondering why his efforts have
failed so miserably. He is now looking at a questionable future. If he
steps on the gas with QE2 and fails, he will go down in the books as the
worst fed governor in history. I think is going to fail miserably.
How many people look like me? A million? Three million? Five million? It
is many more than you might think. If it is 3mm then it translates to a
drop in consumption of $450 billion or 3-¼% of GDP. So without the me’s
of this country contributing to consumption we have a tremendous drag.
We need 3-1/4% growth or the social obligations/debt will eat us alive
in a few years. We’re not going to see that growth. QE is the culprit.
And Bernanke does not get it.
Note: The NY Times
had a front-page story by Sewell Chan that spelled out his thoughts on
the dilemma Bernanke faces. He started the column with these words:
Bernanke to Offer Outlook as Fed Weighs Bolder StepsOn Friday Ben Bernanke will offer his outlook on the economy and explain the Fed’s recent modest move.
This is a dangerous understatement by Mr. Chan. Until very recently
Bernanke and the bulk of the board members had been signaling that the
next move in monetary policy was going to be a return to normalcy. The
Fed’s recent move to initiate the first step in QE-2 is a 100% u-turn on
what has been said/promised for the past year. There is nothing modest
about that step. The markets have shown they don't like it. Every
additional measure that Bernanke takes will lead to more
dissatisfaction. Ben can’t connect these dots. He thinks the solution to
our problem is to create free money so the commercial banks can
generate big income to absorb the big losses. It is a dead end policy
for the real economy.
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Bernanke is a fool, but he is not an idiot. He is just now beggining to see the bitter fruits of his "labors", ie. failure.
Ironically, the student of Great Depression 1.0 will go down in the history books as one of the chief architects of GD 2.0
Betchya that truck out lasts Obama.
Welcome to the new normal.
Fed's tools: (1) endless non-recourse collateralized loans or swapping of FRNs for crap assets under a variety of alphabet soup programs, including GSE debt; (2) ZIRP and (3) "pure" QE: buying Treasuries for FRNs (arguably a variation of No. 1, if this keeps up.) Other than that, there's nothing else to do. The Emperor has no clothes. Ben's speech will be a disappointment. But green by 330 pm! Must go back above 10K!
LMAO... I bet the truck works better too.
This all started (2001) with a mild recession (though it felt much worse if you were in tech) and a modest credit contraction. However, by dint of great effort and perseverance, our intrepid financial overlords managed to turn it into a full-fledged disaster.
If they'd just left things the fuck alone, we would probably be much better off than we are now.
Disagree. It all started in 1913.
Disagree. It all started in 1913
Bingo. Things won't improve until we get rid of the IRS, the Federal Reserve and every single entitlement program ever designed to mislead producers into sharing with undeserving consumers.
We live in a culture of criminality.
Partly true but it got worse after 1982 - thats when the 401k programs started. The 1971 gold std abandonment was no less of a culprit..
Bruce,
Seriously, take a look at JNK, no not JNJ that you dismissed, but JNK.
Outstanding, Bruce.
Bruce, thanks for proving that not all traders are asses. You are my one "must read" writer here at ZH and this piece just bumped you a couple of notches higher. Good work.
Great article (though I don't think anyone should feel guilty about not giving away their money to charity or anything else).
I think everyone is going to discover frugality as the new normal. Either voluntarily sooner as you (and many others of us here), or involunarily soon enough, which will be much less pleasant.
Did'nt Ayn Rand write a book about the "virtue of selfishness" or something. Objectivism: hard but fair
True. But enlightened self interest is not about screwing everything that will take a thread. It's still a team effort. Many of the 'looters' are only on the dole because they broke their back working, so they need a little mutual aid until they're back on their feet.
If we fuck everything that moves, there's eventually nobody else with any wealth left to take advantage of.
Without charity, when you break your leg hauling logs, the guy who finds you doesn't offer aid, he simply kills you and takes your logs. And that's NOT what Ayn Rand was about.
As in all things in this life, there's a balance required between the poles or total chaos ensues.
Selfishness has a powerful place... but in scaled decision networks a less-powerful force on the individual level... has an even greater power to distort managerial decisions over-time... Biological Altruism... or more precisely the fuzzy nature of its boundaries related to natural human community size... (Dunbar's Number)
In fact, its the force behind groupthink and its distortions of reality...
Ayn Rand & Alan Greenspan: The Altruism Fly in the Objectivist Ointment
Compensation and the Social Network
Which is precisely why any social body larger than a band of hunter-gatherers is going to trend toward unfairness over time.
On Creating Communities (Part 1)
"frugality as the new normal"
I'll never forget what a senior sell-side salesman once told me: "Buy a house you can afford and pay it off quickly. In this business, high debt is signing your death warrant."
Take it from me, as long as you have your health, family & friends, nothing else matters.
Hope you're doing well health-wise, Leo
+100
As a result of the stimulus programs let me be the first to welcome you to the newly impoverished 0% income beneficiary crowd.
In the words of the immortal Mrs. Heather Mills McCartney; "I think I shall go shave my leg."
Add me to the list, though only at 30% of your lost contribution. So far.
Nice truck, though. Had one just like it, only yeller.
"Ben Bernanke does not give a rat’s ass about me."
Of course not, and neither did Alan Greasepan! All these guys care about is pandering to Wall Street's elite who will set them up nicely once they retire. They don't want you to save, they want you to speculate. They're going to force retired people to gamble by slashing rates and engaging in QE 2.0. But people would rather make pennies than lose money speculating. They're not going to compete with the wolves and the HFT algos. We are reaching the end stage of Casino capitalism - financial cannibalism. If the big boys are nice, they might leave you some scraps to chew on.
BTW, nice piece Bruce. Keep them coming.
Or...if we little boys are nice we will line them up against a wall rather than a public air dance.
Bro Leo...Alan Greasepan...lol!
Btw...if the scraps arent suffiecient, we may have no recourse but to chew on the Big Boys. It happened in France not so long ago.
Whenever those slimy Wall Street weasels used to visit us in our pension offices, we'd want to take a shower after the meeting. Some were decent and provided valuable analysis and information, but most were looking to score on some deal and treated us like a perpetual source of funds.
Leo, such rational logic from you today! I hope you and Bruce both have a nice weekend. (I'm still not buying solars though)
Greenspan should go down in history as the worst chairman, that sleezy little fuck brought it to a whole new level...
"I was wrong"---Crazy Al Greenspan
Leo: Looks like some a-hole junked you for speaking the truth about the Wall Street criminals. They really do dislike it when their true nature is called out.
Bruce, thank you for the personal piece; I think that this type of sharing/reflecting is important for our community(ZH et al).
Agreed. Bruce thank you for the human element/aspect to this crisis. If anyone has ever read "The Cosmic Serpent: DNA And the Origins of Knowledge", I wonder if the trees and mother nature - the much bigger picture - is behind all of this.
No theory should be left unturned. = )