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Seeking Cover: "Alive in a Bitter Sea" of Dollars
Watching the Bernanke Fed preparing to launch into monthly quantitative easing, on the one hand, and dealers literally drowning in dollars that cannot be placed in the banking system, on the other. What does it mean?
In fact, we hear from our sources in the channel that there are literally billions of dollars in cash sitting in non-interest bearing accounts that cannot be placed in banks. As my partner Dennis Santiago noted the other day, FDIC just approved the issuance of a proposed rule to implement provisions of Dodd-Frank to provide depositors at all FDIC-insured institutions unlimited deposit insurance coverage on noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012.
The clear message, at least to us is two fold: First, to competitively advantage banks seeking to retain deposits in the event of the return of duration to the fixed income markets. Second, to create the capacity in terms of no-risk funds facilities for refugees from fund land seeking to escape the apocalypse in U.S. residential and commercial exposures. No interest looks pretty good when others are getting haircuts -- including some skin and muscle tissue with the cut.
Where is this mountain of cash coming from? Primarily the equity markets but also corporates and bond investors quietly looking for cover. The demand for yield has pushed many spreads back down to silly levels, especially if your view of silly includes the possibility -- no probability -- that the private sector never left the dip. When banks are shrinking 4-5% annually, there is no place for the mountain of new dollars minted by the FOMC.
And the great shrinkage will continue for years. In its "Shadow Inventory Update" report, Standard & Poor's estimates that the principal balance of distressed homes amounts to about $460 billion. That figure is low. As we noted in our post on The IRA home page, "Exposure at Default: Does Bank America Have Any Alternatives for Countrywide?," we are about one quarter of the way through the foreclosure mess. That means another 10-20 percent shrinkage in the U.S. banking system.
Inflation? What inflation?
Regardless of QE or no, the markets seem to believe that the next move in rates is up. The action in the currency markets regarding the dollar suggests that this may be right. Thus fiat dollars are bubbling up from the floors in search of yield -- and moving into other currencies. A major negative catalyst such as haircuts for the bond holders of Anglo Irish Bank may be all that is needed to reset the U.S. yield curve closer to normal. But what is normal?
Ideas on normal are welcome.
Chris
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"A major negative catalyst such as haircuts for the bond holders of Anglo Irish Bank may be all that is needed to reset the U.S. yield curve closer to normal. But what is normal?"
Easy answer: Get the Federal Reserve out of the way of centralized economic planning, thereby releasing the invisible hand of the free market place and voila... a natural state of supply and demand for loanable funds, etc. Thats a dynamic normal. ;)
stupid jerk,,,##Inflation? What inflation?
all those factors will make $ weaker,, thus all $based commds will be prices up,,,thus
inflation.. ..
hey stupid,,, do you have children?? check out insurance/ education/etc prices last 2-3 yy..
what inflation...
summingup.. stupid jerk who knows nada..
alx
Inflation is more efficient, less dramatic, and more diffuse than default and bankruptcy, and it disrupts the balance of trust inherent in the system far less (up until the point of hyperinflation). That is why fiat is preferrable in an economic system; net real growth over time will be greater, though more volatile.
Bob Dalton and his brothers found that robbing banks of people’s savings was easier than working until honest people showed them the difference in Coffeyville, Kansas. The end of the Dalton Gang reminds one of Hayek’s prediction that central planners (who steal from the producers and give to themselves) will crash and burn. These people are stealing America. It isn’t the people who are making a $100,000 a year who are making it big, it’s the people who are making $1,000,000,000.
“Inflation is more efficient, less dramatic, and more diffuse than default and bankruptcy,” you say? IOW, it’s better to defuse the pain from bubblenomics fallout by cheating savers and all the people who work for a living by boombusting their home equity and devaluing their money by lying about inflation rather than having the bundlers of financial fraud, such as Goldman Sachs and JPM, go bankrupt.
And here’s the vote of the people on that "balalnce of trust in the system," according to Zero Hedge:
“ABC's weekly poll (09/22/10) of about 1,000 random people shows nothing at all good for the economy, which, oh yes, is now out of the recession, but not the depression. And for technicians out there, the reading of 46 dropped just below the 52 week average of -45.98. Joking aside, the report found that: ‘This week 89 percent of Americans rate the economy negatively, 75 percent say it’s a bad time to spend money and 55 percent rate their own finances negatively.’"
And you’re right, money is very cheap to make. Builders work hard to make a profit of 5%, auto makers sell cars from 1% to 2% above the cost of manufacture, but money manufacturers have no limit on profits—a few cents will print a $1 bill or a $100 bill; electronicallly the sky’s the limit.
Chris, thank you for the post. I always follow your weekly notes on the IRA. Always appreciated!
We are in a transition between a period of bubble expansion to one of contraction. The central banks worldwide are trying to prevent air from leaving the bubble, which, of couse is impossible. The banks are sitting on the money because: a) returns on most investments are poor at the current time b) they are hemorrhaging money with all of the bad debt on their books in the shadow and non-shadow banking industries.
The only way out of this mess is through proper asset evaluation. The very thing the CBs are afraid of finding.
Yup! Pay no attention to that black hole (world-wide debt level!)
Thanks, Chris, I really appreciate your work.
Can you please explain exactly what you mean by "non-interest bearing accounts that cannot be placed in banks"? I'm intrigued.
The general picture you're painting seems very much in line with what I've been harping on, which is that QE2 will be very different from QE1 because QE2 is going to be launched into a surplus of cash, whereas QE1 satisfied the post-Lehman mad dash to cash.
http://keynesianfailure.wordpress.com/2010/09/24/why-this-time-qe-really-will-spur-inflation/
Historically, people want 4%-8% return on savings/investment, because otherwise it takes too long to build any real wealth for retirement. And I mean real return, not 5% nominal return with 4% inflation or something.
In case you missed this from Telegraph.com.uk: Mr Bean says low returns on savings are part of the Bank of England's strategy… seconded, of course, by Mr Ben of the USFR central bank.
Savers Told to Stop Moaning and Start Spending:
Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today.
(823 comments)
27 Sep 2010 -- Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.
They should "not expect" to live off interest, he added, admitting that low returns were part of a strategy.
His remarks are likely to infuriate savers, who are among the biggest victims of the recession. About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.
The typical savings rate has fallen from more than 2.8 per cent before the financial crisis to 0.23 per cent last month.
Mr Bean said he "fully sympathised". But he continued: "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."
He added: "Very often older households have actually benefited from the fact that they've seen capital gains on their houses." ...
Mr Bean said that encouraging Britons to spend was one reason why the Bank had cut interest rates. They have been held at 0.5 per cent for 18 months, hitting rates offered on savings accounts.
The strategy had led to Mervyn King, the governor, receiving many letters of complaint. ...
Had the Bank not acted, "unemployment would have been higher, wage growth would have been lower," Mr Bean added.
The comments angered groups representing the elderly and those putting money aside. The Daily Telegraph has campaigned for protection for savers…
Official figures show that savers have lost about £18 billion a year in interest as a result of the Bank's response to the worst recession in a generation. ...
http://www.telegraph.co.uk/finance/personalfinance/savings/8028884/Savers-told-to-stop-moaning-and-start-spending.html
That piece of shit should be flushed.
I am getting 0.2% on my savings account. That can't be normal forever.
Forever? It's been true in Japan for 20 years ... two year bonds hit .44% yesterday, so some people are saying that this is going to last for at least two years.
Folks, check this out!
http://www.usagold.com/goldtrail/archives/another1.html
ANOTHER ( THOUGHTS! ) ID#60253:
All: I ask you, why did the world go off the gold standard in the early 70s? You have an answer, yes? For all the problems this created, could the countries not just revalue gold upward, to say $300 ( back then ) ? What was the real reason the world entered a period of "freely traded" "managed gold"? "
This question has more impact on the gold market of today than it did then! In days past, it was held as good knowledge that the US stopped gold backing to protect the dollar and keep gold from leaving to other shores.
But, in the same time frame, all central banks did sell gold to all persons, even the US. All treasuries held gold and dollars as reserves. To what end did the world financial system gain with the dollar off gold backing, and then allowed to "dirty float" against all currencies? Would the world not have been better off to find gold revalued to, say $300 and then begin a "dirty float"? Noone would have lost, and the inflation would have , at best, not have been worse!
Truly, I tell the reason for this action. The US oil companies knew that the cheap reserves were found. The governments knew this also. The only low cost oil reserves in the world at this time were in the Middle East, and their cost to find and produce was very low. It was known, that, in time, ALL oil would come from this land. As much higher US dollar prices were needed to allow exploration and production of other reserves, worldwide. But, how to get crude prices, up, when the Gulf States were OK to pump and produce in exchange for "gold backed dollars"? I will not name the gentlemen that brought this thinking to the surface in that era, but it was discussed. It was known that oil liked gold. It was known that "local oil" would be used up without higher prices. What if, the US dollar was taken off the gold standard, and gold was managed "upward" to say, $208 per ounce? The dynamics of the market would force oil to rise and allow for much needed capital to search for the higher priced oil that was known to exist! The producers would find shelter in gold even as the price of oil was increased in terms of a now "non gold dollar"! Price inflation would rise, but gold and oil would also increase. The dollar would continue to be used as the only payment for oil, and in doing so replace gold as the backing for this "reserve currency". All would be fair.
The war in 1973 and the Iran problem did make markets "overshoot", but all did work to the correct end. The result was "a needed higher price for a commodity that was, as reserves, in much over supply by the wrong countries"! It was known that the public would never have accepted this "proposition" as fair. To this end, we have come.
It was because we had already cheated on the gold standard and printed more money than the gold we said we had backing it. The world lost faith in the dollar and started exchanging the paper dollars for the gold. Even if we revalued they would not have stopped because we had already crossed the Rubicon. And history has proved that exchanging even revalued dollars for their gold backing would have been a good idea.
We were pretty huge dicks about the whole thing really. We tried to destabilize France and kill De Gaulle when they demanded their gold. And France sent a battleship to NY harbor to get what they were owed.
Your ignorance is well deserved.
"A trend is a trend is a trend. But the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?"
Sir Alec Cairncros
My father once told me something that has proven correct over my life; nothing ever stays the same. From this one may garner that the interest rate cannot remain low for much longer.
Why? If we are in a bond bubble, they may go down.