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On QE3, Wall-Mart, Munis and the briar patch for the banks
A “proper” subsidy?
What’s the proper function of the Muni bond market? Keep in mind that
this is not ‘free money’ we are talking about. Munis are tax-free. So
there is always a subsidy attached to their issuance. Building a new
bridge or highway has benefits for the public. Financing school
construction and all manner water/sewer projects also benefits the
public. There are dozens of example I could give where the tax subsidy
is justified as it creates a greater common good. But not this one:
It’s over (QE that is)
All of the Fed talk of late points in one direction. There will be no
QE3 after 6/30/2011. We have not heard from Bernanke on this. I doubt we
will. But I do expect that either the WSJ, NYT or WAPO will have an
article in the next week or so that has the Chairman’s words embedded in
the story. That article will be the point in history were the QE experiment actually dies.
We will still have QE1-Lite. This is the re-investment of principal from
MBS holdings. Given that interest rates have risen significantly the
prepay speed of the MBS is going to slow to a trickle. Future POMO
operation will be in the $10-15b monthly range. They will have little to
no impact.
The question in my mind is will we see a reversal of the QE consequence
to the big markets? Is the private sector economy able to operate
successfully without $100b a month in POMO? We are about to find out.
IMHO the Fed should have started the process of regularizing credit
costs a year ago. They should never have done QE2. If that had been the
case we would not have seen the big jump in equities. Inflation would be
somewhat tamer. But they chose instead to step on the gas at precisely
the wrong moment. Bernanke got spooked by bad numbers in the summer. He
made a bad choice and when he got pregnant with QE2 nine months ago he
got stuck with the policy. To have changed direction at midstream would
have meant that Ben would have to acknowledge the mistake. Not likely.With the benefit of hindsight even he would (privately) admit to that today.
But now we have to (again) go through withdrawal of a short-term sugar
high. That has always been messy in the past. Uncertainty (AKA:
Volatility) is going to have to rise as a result. Fast markets are coming.
Rumors of News?
WASHINGTON
(MarketWatch) — Officials at five major banks involved in
home-loan-service settlement talks have been summoned to Washington for a
face-to-face meeting with state and federal regulators, the first since
a proposed settlement leaked out.
I wish I were at this "friendly" chat. Look for this to be the “Big Fix”
to the mortgage foreclosure crisis. The big banks will yell and scream
at all the proposals. In the end this will cost them at least $20b. But
they will love the results.
Remember the Uncle Remus story of the rabbit who begs to be thrown in the briar patch?
Brer
Rabbit shuddered. "Hanging is a terrible way to die! Just terrible! But
I thank you for being so considerate. Hanging is better than being
thrown in the briar patch.
Scratch out my eyeballs! Tear out my ears by the roots! Cut off my
legs! Do what'nsoever you want to do with me, Brer Fox, but please,
please, please! Don't throw me in that briar patch!"
We know how that story ended….
Speaking of briar patches, getting eyeballs torn out, and having legs and arms hacked off, how about that Wal-Mart - Supremes story that is due out today?
The shares are $52. I think that is a neutral price. Meaning the market
does not know how to handicap this massive lawsuit. It should break one
way or the other. It should do it by the close. My bet? The Supremes
fold 5 to 4. There will be no class action law suit against the company
that "America Loves" (to hate).
»
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They fixed the problem. http://www.morningliberty.com/2010/06/27/barry-soetoro-bp-engineers-discover-new-oil-spill-remedy/
so the 20b fix you suggest, what form do you think it takes?
Ok if there is no QE then who will be buying at these rates? I have to assume the PDs appetite will be reduced when they can no longer play "Flip This Bond" with the Fed a week or two after issuance. World issuing a lot of new debt so it's not like there isn't vehicles for capital to sit in, and there is an epic amount of roll this year in treasuries. I got ot think QE goes because if it doesn't seems that by necessity rates must rise to coax out the capital needed to fund the legendary deficits, and higher rates will further drive said deficits...
Yeah Ben might not be liking the corner he's in but don't see how he gets out. Even a market collapse will only scare so much money into Treasuries, and the epic deficit is here to stay, like a sunrise. Is there really 1.5 trillion a year in new capital begging to go into bad US Treasuries (assuming all the prior holders roll of course)?
Good question, IOW how bad would things have to get? My guess is they are going to get much, much worse before they get better. It's the only way Geithner can continue to finance this scam and keep interest rates down.
But that's the thing, how low can markets be driven and spooked to keep money in Treasuries? Where will the fresh money come from after the panic money has already settled in? If the debt was closer to our trade deficit I could see it, but 1.5 trillion is a lot of dollars. It's more then most GDPs in the world, and we deficit spend that just in one level of government in one nation and a yearly thing.
Think there is a lot of normalcy bias as to how big that number really is. 2.5% of estimated world GDP, that has to go into the maw every year just to keep things stable, and again assuming 100% roll from current participants. And it's not like the rest of the world isn't trying to deficit spend their way out at the same time.
All roads lead to Rome. Possible buyers for Timmy's paper:
1) Flight to safety, world-wide maybe $$2T-$3T
2) Pensions, 401Ks, IRAs, possible $3T-$6T
3) Nationalize the biggest banks, $2T
4) Wealth tax on U.S. citizens world wide, $500B
$7.5T would keep the lid on things for at least 5 years.
I'll give you 1, that's somewhat likely. But doesn't 2 impact 1? I mean many market participants are not to sharp, but when a country seizes retirement assets to fund it's deficits that should be a warning that "Hey maybe something is wrong". 3 no way. First I doubt they have that kind of assets when netted against real liabilities, second, come on who is calling the shots in this country? 4 is possible but sadly 500b ain't what it used to be. So if done in the proper order could probably squeeze out 3ish years worth of deficits. But each suggestion triggers it's own panic and brings in another wrinkle of chaos into an already unstable system.
Like in the case of #1 it's likely that Uncle Sugar will once again bail out TBTF which would expand the deficits. #2 is the last refuge of a criminal government, and I see that near the end of the game. #3 is simply impossible, better chance JPM or GS does a leveraged buy out of the country then nationalization.
Even natural events cause problems, like God forbid Japan become a net seller of Treasuries! So this game could go on for years but I expect it to be very bumpy and I expect Zimbabwe Ben to use the press, either openly or in secret to give Tiny Tim a nudge.
#2 and #3 are Francisco D'Anconia's Money Speech come to life.
Things can't get any worse until they do.
Anyone for making Mugabe Fed Chair?
They pull the plug, and smart money will hit the sidelines, and I see a huge bump for PM's.
The Mkt will drop like a rock.
This will not cause a MAJOR drop in PM's(physical), THIS time.I see a rush into them, afterall what is left?.
Anyone with half a brain will not be into UST's, or Bonds.
This will be fun to watch, another legal rape with advance notice, and still the lemmings get it.
Or, the entiore thing is headfake, and they continue printing and keeping it a secret, who is going to know FOR sure.
If the Mkts stay UP, we know their lying thru their teeth.
See I actually think PMs will go down. Maybe even the physical price, after all would be a great time to load up for the boys who have been sitting on the side to load up before the next leg of the comedy. But I'm not worried, I'll just hang out in my positions. Short of a miracle like cold fusion the ponzi will spiral apart in the coming years. Even cold fusion could probably only add 10-20 years to it before it once again overwhelmed the real economy.
I disagree. What other market has the liquidity and depth to absorb the flight to safety inflows? There is only one destination (for now) if TSHTF.
I can see them doing a downdraft in the market once the smart money gets out.
Why?
It will usher in the "trade in your 401k/IRA for guaranteed govt plan" play. This was rumored about over the past couple years. They will offer people a partial restoration of the losses they will incur. Just one more step for absolute control by the government elites.
If/when there is a 401k, IRA nationalization head for the doors because the game is going to get extra crazy. No point keeping up the facade of America once all the wealth is stripped away. Take that away from the masses and what is their net worth? For many it would be quite low or even negative. Oh course would also then be entirely dependant on the gov for retirement...huh wonder if the gov would like to see said retirees shuffle off their mortal coil a little early.
its either that or bail out the pension funds. the path of least resistance is to keep levitating the markets. we bailed out the banks, it hardly seems wrong to bail out the pension funds, who bought their paper from the same banks, although it sure does imply the system is a total farce, M2M. 2012 will interesting if Obama loses to someone who can swing the red state majority like Bush, even though 2/3s of the country is urban, and blue, the underpinnings of Fed policy would be pulled out from under them. .
They could bail out the pension funds by why bother? That's money for the people, and we know where the politicians loyalties lie. Will bailing out the banks and not pension funds be unpopular, you bet. But what can the people do? Vote Red Team, vote Blue Team? Since the entire system is captured the people have no choice but to sit there and take it till there is enough anger to do something.
And I could care less about the President. It's one suit or another represeting the same intrests. Might as well be Kermit the Frog, then we could all ask who's hand is up his ass.
Gov Browns attack on redevelopment has put CA cities in a bind, no more corporate welfare. Browns attack was made because he saw cities (like mine) doing joint corporate projects, buying millions of dollars of property, at the same time they are closing schools, turning off street lights. The massive corporate takeover of America (soon they will run the schools, police, and fire departments) has slowed for a bit. Will it play in Chicago? Doubt it. At least CA won't become a system of toll roads, toll schools, toll police and firemen. There's never enough quarters to get that pesky kitchen fire put out.
Recently CALPERS suggested they might have to downgrade their earnings expectation 1/4%, which sent a chill through Sacramento, because that means the state has to make up the difference. So its tough, crash the stock market, and the states are in a bind. Keep feeding the corporate beast and you might be lucky to exchange one beast for another. If the corporate security which replaces your neighborhood cop decides your neighborhood doesn't rate a franchise, your quality of life suffers. I have hope that CA will still be a good place to live in ten years, and Chicago, well they will still be producing guys like the one in the WH.
+1
Good insight and extrapolation.
From Bernanke's perspective, QE2 was not a mistake, despite its wrong-headedness. His objective was never to ensure the long-term economic health of the nation. His objective was to artificially inflate, for as long as possible, the equities market, and to facilitate the continuance of leveraged speculation in other markets. He succeeded. When judgement day comes, Bernanke will pull a Greenspan. Big whoop. What? You think he's going to have trouble sleeping? He doesn't work for us.
+1
Bruce, you forgot to link the image of the book\
http://www.walmart.com/ip/1693626
The Fed is looking down the road a few months and sees a tsunami of treasury sales. The first wave will be Japanese redemptions to help finance their recovery efforts, followed by a Chineses wave as PBoC cashes in some chips.
Obama thinks he's safe over in the kiddie pool, does Geithner have his water wings inflated?
I'll believe it when I see it.
Yah and the US will end their 1.6 Trillion dollar deficit on that day as well.
Bruce - don't know how you believe QE(x) can stop? Do you believe the government can find true religion and come closer to a balanced budget? Do you believe there is a buyer out there at these yields for $5T per annum ($3T in rollover, $2T in new) of US treasuries? Absent the POMO, SS surplus, and many other mechanisms to soak up the huge flow of T's, wouldn't rates skyrocket only putting more pressure on Fed for ever greater QE due to interest payment escalation?
How do you account for these and say no more QE? Do you believe there will be some other mechanism to soak these T's up and avoid a financial melt down going into a presidential election year? Glad to hear you out.
I think there will be a QE3 or some such program and it may be some sort of purchasing of Japanese and other sovereign bonds as well as US municipals. Or another support method to prop them up - additional tax advantaged status, new friendly accounting rules on them or altered amortization of losses.
Several purposes were served as the Fed kept interest rates artificially low. In addition to pushing investors into equities in seek of higher returns than the less risky yield of Treasuries. It also kept debt service on Treasuries and other debt instruments pegged to Treasury rates from exploding despite the enormous increase in debts of all forms of governments - Treasuries, government backed mortgages, munis, and much sovereign debt. Just imagine what Greek and Irish bond s would have to pay if the US 10 year were closer to its historical average of more than 6% In the 1980s it averaged more than 10%. The past three years it has yielded less than at any time in the past 50 years.
When US Treasury rates rise . . . and they will, servicing debt will become ever more difficult. And the financial system (and banks that hold many of interest bearing securities) will again be thrown into crisis - one of their own making despite the ongoing Fed bail.
Other than keeping rates low, the Fed and Treasury have given up on helping the housing market. Prices will continue to go down for real estate even as food and gas prices go up.
http://credibleclarity.com/CC/Blog/Entries/2011/3/28_QE_-_Another_wave.h...
+1.6 Trillion
Perfectly put.
Until somebody provides a convincing answer to the question "Who's going to take the Fed's place in the line to buy the trillions in debt that Timmay is projecting to issue every year as far as the eye can see'? I don't see how there is any chance that QE can end. Of course, they might replace it with an identical program sporting a different name, so that technically the QE program has ended, but those Treasuries won't buy themselves.....
Agreed. Let POMO stop on 6/30 and let's see how long it takes to start QE3 once the Dow breaks 9000.
Look at what happened last year when QE1 ended. Rates plunged as Risk-Off set in and money rushed into Treasuries.
When the pain seemed like it would not end, Bernanke stepped in with the Jackson Hole speech.
Why can't history rhyme?
Everything you say is true. I'm not sure how this will work out. I said messy. That might be the way.
Keep in mind that the vast majority of the very big debt issuance will happen in maturities under 4 years. A very liquid market. Totally global when it comes to funding. Keep also in mind that I said no more QE. ZIRP will be with us for some time yet.
Is the US going to have a failed auction over the next 18-24 months? "No" is my opinion. After 24 months all bets are off. If we do not have our house in order by then there will be a problem. And then we will have QE3,4,5. But that also will be the end of what we used to know as the financial strength of the US. Game over if we do a redo of QE. Bernanke knows that.
Bruce,
Increasingly I think that you are right, though I also don't see how the US (and so many other govs) can keep running such massive deficits without ongoing money printing. I don't think that there will be an official QE3, but what about QE2 lite? I.e., not letting the balance sheet shrink like QE lite? And are there other ways the central banks can continue effectively monetizing debt with it being less obvious? Buy each others' government debt?
i'm sure that the UK is already doing that. i suspect that the BoE is buying treasuries in return for FED bailouts for Barclay's bank, but i might be crazy
How do you know who buys that shit? Maybe we are already in QE-n and we don't know that? China buys something (if the news is correct), Japan won't buy anymore, UK, Spain, Germany, France, Italy, the whole Europe is out of question. Asia and S.America, maybe few billions what about rest? Who left, Marsians?
As always, Bruce, I appreciate your perspective on these sorts of things. My guess is that "messy" is the last thing TPTB want heading into an election cycle, and I would expect them to do anything/everything in their power to keep things propped up until after they get across the 2012 finish line. Once across the line *anything* goes.
spot on
that'll be the day when they allow a "20-30% correction" leading up to Nov. 2012
also, ZIRP cannot survive without QE, too much debt rolling over and too massive deficits need to be funded here, in europe, everywhere.
once you go down the QE path, there's no coming back. That's exactly what the markets are pricing in now and melting up despite a barrage of bad news.
The King is Dead! Long Live the King!
I think rather than the rabbit and the briar patch, we've glommed onto the wrong story. Its actually more like Bernanke meets the tar baby banks. Once you touch them you help them, you can't get free.
B of A new logo should include a tar baby, or maybe the entire federal reserve building sinking into quicksand.
I wonder if Whiting collects a fee for laundering BP's debt.
BP essentially IS Whiting, IN. The city was formed around Standard Oil when it opened the refinery in the early 1900s.
It's the smallest city in Indiana at a bit over 5000 people. The refinery used to make up about 85% of their tax base, but that is down to about 60% due to a massive reassessment by the state about 8 years ago.
As hard as it is to believe, the local cities here in NW Indiana raped big business for more than 80 years. Large tax bases provided by the steelmills and oil refineries has allowed political corruption to flourish. "Free" money for 80 years allowed local politiicans to build HUGE patronage armies and perks for citizens. Whiting has over 300 employees for a city the size of 5000, and that is down considerably from what it once is. East Chicago (next door and home of 1/3 of the refinery and home of Inland Steel (now Mittal) had 2000 city employees for 38000 people.
How many bars? With all that gas making going on in town there must be a lot of drinking too?
"As hard as it is to believe, the local cities here in NW Indiana raped big business for more than 80 years."
<Rolls eyes>
You know you're right about that: it is hard to believe, very. Personally, I don't know of many businesses that have managed to survive 80 years of being 'raped' by all the profits they garnered.
Well a number of them have not survived, seeing that 2 other oil refineries in the area have closed in the last 20 years, 3 major steelmills have gone bankrupt, and others have closed significant portions of their operations ....
You have no idea the amount of local government pork spending that was driven by tax bases that were 80% filled with industry. Voters didn't care about the waste because they didn't have to pay for it. Now that they are gone, suddenly (rightfully so) they want austerity because its coming out of their pockets. Dozens of local politicians have been convicted of corruption charges in the last 10 years.
"Dozens of local politicians have been convicted of corruption charges in the last 10 years."... Sorry, I'm confused: are these convictions originating from corrupt politicians raping big businesses (which would be a new one for me), or did you mean they were busted for something more along the lines of accepting 'kickbacks', which is where big business uses politicians to rape small business? I mean, if they have actual convictions on record it sounds like they are way ahead of most of the rest of the world; though I can certainly see why big businesses would want to ship out if this is the case.
It's my understanding that the vast majority of businesses around the world fail simply because they suck at what they do relative to the economic/political conditions under which they have to operate; 'being raped by cities' rarely enters into it, and, IMHO, strikes me as quite the stretch; at least for the larger institutions. Could you be more specific?
how resolved will bernanke be if the markets are fast to the downside?
is there such a thing as a controlled downdraft ? I see one coming.
i agree. a controlled downdraft is a rare event if it exists. i too see / feel / believe a big one is coming.
People have 'felt the next big one' for the past 18mos. My advice is don't fight the Fed. When the game is rigged, they can't lose...
Laws of nature and physics can only be fought for so long, what goes up must come down, for every action there is an opposite and equal reaction. Only a matter of time.
agreed. since all i have is physical there's no need on my part to fight the fed.
I'm in the same position; don't feel any need to fight anybody. The Fed is doing a real good job of shooting itself in the foot; don't seem to need any help.
Yes, I'll admit I've been surprised by how resilient equities have been in what by most standards last summer would have seemed a disastrous news quarter.
But...playing with house money is not the same as fighting the Fed. I'll give back some potential upside participation to protect against what I still think look like some pretty hefty downside risks, thanks.