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Why The Ongoing Push To Inflate The Debt Overhang By The Fed Is Suicidal
One of the once again widely accepted market certainties is that the economy has now openly reentered a deflationary phase. Nothing surprising here, and it is consistent with huge demand for UST paper, as every incremental auction demonstrates, an outcome that will eventually confirm yet again that credit is leaps and bounds ahead of stocks (today's most recent record of gold priced in Euros is not an indication of inflation or deflation, but merely of mistrust in paper - a totally separate dynamic). Yet, as always, the market is not efficient, and does not exist in its own vacuum - every analysis about market trends has to include at the very top, an assessment of what the Fed will and will not do. And the Fed is fully determined to inflate the economy by any means necessary: the debt maturity cliff in CRE, in Financials, and even in the LBO HY names, is rapidly approaching (yes, that long REIT trade may soon be in jeopardy if nothing is done to "fix" the first issue). Therefore Bernanke has T minus 2 years and counting to pull an ink-stained rabbit out of his monetary printer. The problem, as David Rosenberg points out in his letter from today, is that due to the short maturity profile of government paper, an all out attempt to reflate will certainly lead to that most expected black swan of all - a failed bond auction, absent fully-blown debt monetization. It would also have various other unpleasant side effects, such as a complete eventual collapse of the economy, which is the second backstop reason why gold will likely continue going higher, despite numerous risky-asset liquidation episodes still to come.
Some more perspectives from Rosie:
IT’S STILL ABOUT DEFLATION
Maybe this is why Bill Gross was rumoured to be in buying long Treasuries late last week. It is never too late to change one’s mind, and secular trendlines offer all sorts of opportunities to do so. Imagine the labour market softening at a time when underlying inflation is running below a 1% annual rate. And, we haven’t even seen the full impact of the stronger U.S. dollar and the pullback in commodity prices hit home yet. If German bund yields are heading down to 2½%, make no mistake — Treasury and Canada yields are not far behind.
We highly recommend The Deflation Dilemma (page 18) and A Winding Path to Inflation (page 84) of the current Economist. The second article is particularly enlightening because it shows how ineffective a policy aimed at creating inflation will be because the bond maturity profile of most industrialized countries is short. Over half of U.S. government debt and 40% in Germany and France roll over within the next three years and so an overt policy to inflate away the massive public debts will be self-defeating if the bond vigilantes demand a higher premium upon refinancing time. Besides, an inflation-is-always-around-the-corner culture still permeates most central banks: the Bank of Canada hiking, the Fed district banks clamouring for a rate hike, the tightening moves this year by India, Brazil and China, as well as the refusal on the part of the ECB to go beyond shifting the composition of its balance sheet and actually expand it in a classic quantitative-easing style.
The biggest problem here, as in dealing with North Korea, is assuming rational behavior out of the Fed, namely one which seeks the best possible outcome for as many participants involved. This is very flawed assumption. The Fed will merely do what is in the best interest of the Wall Street oligarchy, and will most certainly ignore the implications of an increasingly diluted US balance sheet, which even without a new episode of QE, is currently ongoing courtesy of the massive incremental losses incurred by Fannie and Freddie, which have become nothing but a backstopped trash receptacle for all the worst paper in the US mortgage market. The fact that these are still not on the official balance sheet is nothing short of a travesty. Yet even the marginal benefit of GSE dilution will end, and at that point the Fed will be forced to flood the market with even more money. And as we learned over the weekend, the ECB is unlikely to follow the Fed into this most recent printing bonanza. This simply means that the euro will keep on dropping up until some point, at which point the focus currency of devaluation will once again become the dollar, as the schism between the Fed and the ECB becomes fully-blown. At that point, expectations of a controlled deflation or inflation will go out of the window, as we will be in an unprecedented environment, where no historical parallels have any application. At that point, the only safe-haven will be non-dilutable assets, be they vulcanized tires, wheelbarrows, gold, and anything that the Fed can not print billions of on a daily basis.
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Yes it is...
Unless you're Johnny Bravo, then you like to invest in fairy dust and unicorns.
Pixie dust and dragon tails are much better. I dip the tails in hot sauce and snort the pixie dust for one hell of a wild ride. Though I understand ground up unicorn horns are better than Viagra.
CD,
Don't forget vulture brains. NPR piece today of the threat to African vultures. It seems vultures are smart enough and have the visibility identify a sick or wounded animal at great distance. Hence local medicine men are making a good living selling vulture brains to folks who believe it will enable them to better see which are the best wagers to make in the local gaming pools.
e.
No way...I thought africans were deeper and purer and nobler than white people and were in tune with the land and all of that...?
You're saying that vulture brain method doesn't work? Sounds more plausible than some Technical Analysis I've seen.
Must have something to do with all that colonial oppression by climate control and electrical power
"At that point, the only safe-haven will be non-dilutable assets, be they vulcanized tires, wheelbarrows, gold, and anything that the Fed can not print billions of on a daily basis."
There is no safe and there is no reward without risk. Living is dangerous for your health.
You will need to be able to produce food and protect your food storage, good luck when the non-funded liabilities stop being fed. Might want to invest in a rabbits foot for luck because you are probably going to need that this time. Most are going to have luck --- hard luck.
I can skin a buck and run a trotline...
http://www.youtube.com/watch?v=I4s0nzsU1Wg
Nice song.
Unfortunately 7 Billion people suddenly skinning bucks and running trout lines might be a bit more pressure than the natural "system" can handle.
Trotline. Now move back to the city :)
http://www.marshbunny.com/stjohns/trotline/trotline.html
lol
and CD, I'd expect a good number of those folks to not make it too far should this happen. I guess I'm fortunate enough to live on the ICW where fish can be caught off the dock as well as shellfish and whatnot...
Gotta get the garden going, though.
Long live Awendaw
"Trotline. Now move back to the city :)"
Spell check made me do it. I put in trotline and spell check told me I was wrong.
I believe everything spell check tells me. :>)
See.......trout line..... it wants to change it again. ;p)
You might want to talk to your sponsor about that.
LOL
My sponsor is Bill Gates.
And Bill Gates told me to always trust spell check............unless it's not an official Microsoft spell check product. So clearly ZH doesn't use Microsoft. :>)
cognitive, thank you for your insane articles.
as for 7 billion survivalists suddenly scouring the hinterland you are dead on. most young people i know cannot light a fire, catch a trout or rabbit or wipe their arse without a healthy supply of double ply. the life of entitlements is about to end. many will find salvation thru family and friends who can adapt and are willing to share as supply systems break down.
bill buckner forecast the unfolding events with an eerie precision about 2 years ago. his suggestions included making friends with butchers and bakers and farmers.
the largest group of victims will be those who are in shock as things unfold and are unable to mentally adapt to the new way. this will be no small feat in a world of guns and hunger without airconditioning and abundant clean water. not to mention transportation and refridgeration. i hope this collapse can be stretched out for another few years so as many as possible can make some preparation. i am not optimistic about that though.
prayer will help.
Prayer won't help. It might provide hope, but it should be quite obvious that if there is a god, God doesn't give two shits about anyone.
Now all you have to worry about is the rest of the lemmings.
I was in Louisiana 2 days after the Hurricane hit, saw people walking around covered in mud and were begging for water. Yet, they were we surrounded by fresh water which they could have made fit to drink.
There will be obstacles to overcome, no doubt...But my town has voted no to public water so as to keep developers out. They are somewhat united...and some still use outhouses in some places...those folks sell veggies/fruits right up the road. I think I'm pretty lucky where I am now....for many others, not so much.
Our neighborhood has refused to pave roads and whatnot as to keep from being incorporated into the city. Our neighborhood pond is stocked with bass/bream by a resident in the neighborhood. One fella that does landscaping takes care of the irrigation/roads on his own time....several other families have horses and farms there. The people in the neighborhood are pretty united when it comes to needing to band together....Hurricane Hugo proved that...
anyways, I'm just rambling now, but hopefully none of this will ever be experienced as it will still be very difficult.
I want in.
How much do I need to buy a small piece of land there?
Give me a clue of the wereabouts. Long Lat. will be good
Hugo is probably the clue you need.
or the name of the town mentioned earlier... ;-)
that said, there are plenty of Yum Yums that have invaded my fine region that don't even know how to mow the lawn....they are about 20 miles south of us.
God's country, as my mom used to call that neck of the woods. :>)
http://en.wikipedia.org/wiki/Awendaw,_South_Carolina
She from around these parts? It is still nice...the people are nice, but plans for developing a huge tract of land that Int'l Paper sold popped up a few years back. Thank God the economy tanked (to an extent). One of the residents of the hood (his family) put in an offer of $8M (I think) to buy property and keep it like it was...he got outbid by Vanguard, though.
Land still sitting there, bare from the harvesting of trees...and that makes me sad.
Some of y'all might enjoy this video
:-)
It has a reference to gold, too...haha
http://www.vimeo.com/850345
LOL
Tell me that's you in the video. Lie if you have to but tell me that's you. :>)
unfortunately, not me...
pretty good for a local guy, though, eh?
They weren't covered in mud, they were black.
Mako,
Growing up, I heard cracks about certain people that weren't smart enough to boil water. This is the first actual case report I have heard about.
Boiling the water will do a lot to make it "safer," but it won't do it all.
To remove the most common parasites (cryptosporidiam and giardia) the water must be filtered or distilled.
Other waterborne critters are worse.
The dumb thing about the Katrina aftermath is that these people wandering around begging for water had millions of gallons of fresh potable water all around them: in the water supply pipes. Open a fire hydrant.
Finally! Good to see you promote this song. It plays in my mind everytime I hear about each newly exposed negative economic Black Swan.
Should link up a cafe press mug with the quote on it.
If you string out a trot line, you'll have pretty a nice meal with a little bit of work (fresh pan fried catfish anyone?) faster than you could trade in your cold coins for a Big Mac.
Trotline B****s!
Look
The ultimate deflation event of all time bar none was 2008, that amounted to a temporary $300 drop in gold.
The bancruptcy of Goldman, Lehman, Citi, AIG, Wells, GM, B of A, you name it, amounted to a $300 drop in gold. That would bring todays gold price to $944. Big fucking deal.
Yet it did show that it was either the dollar or gold that was going to make gains in that situation. The dollar did and gold didn't.
If no asset is safe in that situation then both the dollar and gold would have fallen.
Don't screw around -- if you invest in fairy dust, BE SURE TO TAKE PHYSICAL DELIVERY.
Aside from the illegality, and the logistical nightmare that sourcing, transporting and securing it would be; my choice for inflation resistant asset of the year remains a warehouse full of raw opium.
Growing the poppies is still legal...
Just came back from a trip from Southern California. Literally EVERY strip mall along the way from LAX to Ventura county has For Lease signs on them. It was frightening to see the levels of vacancies. Some of the parks were completely vacant!! Why anyone sees a rebound in CRE is beyond me.
I'll see your vacant SoCal CRE and raise you a flush of vacant SE Florida CRE.
But I think Detroit has us both beat...
You are correct. Detroit is a wasteland. It's actually fascinating(and downright scary) to see what can become of a city in decline.
see death of johannesburg blog for a similar story on another continent. It's almost as if there is some unknown link between the two places, some connection that would explain the similar outcomes...
Sorry for the OT rudeness, but:
CNBC NIPPLE ALERT
Caruso Cabrera, left nipple only WTF
Pimpco full on stated, last week, that they were buying (recommending being synonymous with buying, ones assumes) "high quality government bonds".
Unfortunatley for Pimpco investors, they also sold half there gold holdings.
El-Erian Cuts Gold, Urges `Stay on Sidelines' for Stocks, Motley Fool Says By Wes Goodman - Jun 2, 2010
Pacific Investment Management Co., which runs the world’s biggest mutual fund, recently cut its gold holdings in half in its multi-asset products, Co-Chief Investment Officer Mohamed El-Erian said in an interview published on the Motley Fool website.
Gold may weaken as the result of “deleveraging” among borrowers worldwide, El-Erian said.
Investors should favor high-quality government bonds as a source of income and “stay on the sidelines” with regard to equities amid concerns about European sovereign debt, he said, according to the article.
To contact the reporter on this story: Wes Goodman at wgoodman@bloomberg.net
I call Bullshit on tha sale of gold.
Talkin tha book.
Isn't "high-quality government bonds" an oxymoron?
Is your question rhetorical? ;)
Perhaps ironical is the better adjective? :-)
BTW, great posts. Follow you religiously.
Awesome. Thanks bud.
You do great work as well. Lets keep it up!
Well today they eat crow. I hope for their sake they are full. Wait, no I don't, because I could care less what all these funds do. Snake oil salesmen, the whole stinkin' lot of 'em!
Whether you agree with him or not, you have to admit taking advice like this from the world's biggest bond fund manager is a bit like asking a barber if you need a haircut.
Doesn't do them the least bit of good to inflate because the bulk of future US obligations are inflation-indexed anyway.
That doesn't mean they will remain inflation indexed.
Actually, it would do them a HELL of a lot of good, as those obligations are only indexed to the manipulated and woefully lowballed CPI, NOT to inflation per se.
How much do you want to bet that when real inflation is running at 10%, the CPI will be less than 4%?
Can I make that bet in 2013 dollars? >:)
The US banks will always buy Treasuries - the Fed guarantees there will be positive carry and they don't need to hold capital against it, so it is literally free money, regardless of the underlying inflation rate.
In fact, the banks will willingly play along as they need inflation more than anyone...
Yeah--But a failed auction doesn't have to actually have no accepted bids (Like Brazil's,etc. ) It can just have a crappy Cover number or lots of "other" buyers and Tyler and you bunch of flaming misfits would be all over it on these pages (and you know everyone reads this now). Tyler broke the story big on Brazil's dead Auction and the Market tanked! Coincedence.... I think NOT!
The Fed can directly or indirectly monetize every auction as a function of the spread to FFR.
Remember, USTs are the black letter repoable collateral.
Hopefully unamerican investors like Bill Gross and his hedge fund get burned on this trade. Couldn't happen to a more deserving guy. Treasuries at 2%, that's just asking for trouble.
It's alright folks. A new iPhone has arrived to save us all. I think everything is going to be alright....
I have a penchant for giving credit when credit is due.
by HarryWangeron Sun, 06/06/2010 - 16:27
#398542
".......Oh, and don't forget Apple tells us tomorrow that they implanted iPads in every newborn."
Wanger is out in front of all trends. So is Leo, if the trend happens to be stock in solar companies.
Commission to Study Deficits is Broke
Randall Hoven
June 07, 2010
sinclair mine set
Actually the IPhone collapse will pretty much indicate the end to the uber-consumerism era.
When you cannnot sell to the same guy every year, the newer version of a expensive trendy gadget, which production and distrib costs are about 2/5 of final retail value, credit sponsored consumerism will be over, and the paradigm will shift.
I agree. It blew my mind to see an individual buying the newest version of the ipod year after year. That makes for a tenuous business model.
Apple is in a bauble.
Not so coincidentally, AT&T is taking away the flat fee for unlimited broadband on new smartphone plans.
http://gigaom.com/2010/06/02/att-shuts-down-the-mobile-broadband-buffet/
The HTC Evo has been selling really well too.
Wonder how well the Iphone will withstand all the new smartphones coming in to market..
Wasn't too long ago that a number of posters here were calling Rosie a loon (sorry, couldn't resist). Where did those people go? Rosie, you're all right. There I go again.
Back to the "Qui Bono"?
Wall street or main street? We already know the answer. And, what will the Fed do when more muni securities fail. There are a lot of debt instruments accumulating near that cliff you mentioned,
I don't know where Rosie is writing from, but the weather is nice & sunny all week in Montreal. :)
You know, Leo, I only recently realized that you are a resident of eastern Canadia.
That in and of itself explains a LOT, including your kneejerk deference to authority and the existing (and corrupt) power structure.
+1.....LMAO!
Inflation only comes from the USG now.
There is no source of credit expansion in the private sector because they actually have to turn a profit. Private credit in the form of positive ROI endeavors is over with.
The USG never actually has to repay its debts to the Fed with real assets. If the Fed were to try to "collect," sure there'd be times like Andrew Jackson, but they know who has all the guns.
The banks make money no matter what the currency is as a function of interest and the rest of their ponzi bullshit.
If I had to guess (and I'm slow, I'm sure I've seen other people come to this conclusion a long time ago), I would say that deflation via the current credit contraction is impacting / will impact stuff I already have (like my house value), as well as my service-sector income; and inflation via moneyprinting impacts stuff I need to buy, like food, gasoline, utilities, medicine...possibly rents and rental income...and all the other commodities needed for survival.
The future:
Private credit re-expansion? ...no time soon, that I can guess.
Fed pumps out more and more paper dollars? ...it looks like they have to.
Middle class? ...squeezed dry and then desiccated (because, after all, the sun will come out tomorrow).
Taxes? ...up.
Employment? ...down.
Spending programs? ...up. Until...
Austerity? ...coming soon.
Angry protest, riots, mobs? ...right after austerity.
Martial law? ...the 'law-abiding' people will welcome it, cheer it.
Temporary official suspension of Constitution and elections? ...see Martial Law.
'Temporary' becomes 'Permanent' after lack of improvement? ...outlook is not good.
And/or: 'rescue' by outside government or super-government power? (UN, IMF, Superfriends' League of Justice) ...possible.
1984? ...back to the future.
+$1242
That was the best article written on the subject in a long time.
When Mish convinces Max Kieser to jump ship from inflationist to deflationist then you know how contentious this debate really is.
One or two weeks ago Keiser shifted to deflation, at least as a precursor to inflation.
Apparently there is a Fatwa out that calls on men to drink women's breast-milk , or rida' al-kabir. A high-ranking Saudi, Sheikh Abdul Mohsin al-Abaican, a consultant at Saudi Arabia's royal court, has issued a fatwa asserting that women could give their milk to men to establish a degree of maternal relations and get around a strict religious ban on mixing between unrelated men and women. The man going into a house would be made symbolically related to the women by drinking milk from one of the women. This would preclude any sexual relations between the man and the donor woman and her relatives.
I have no idea how this connects to the Fed inflating but it seems more relevant than the weather in Montreal.
Leo was just so excited that the sunny local weather finally gave him the chance to reap some value from those Chinese solars of his.
WTF the Chinese are stealing sunlight now? Those bastards.
Were all Fed / treasury employees at the Apple conference or were they following the live blogs, while gold moved to its all time high. What's going on over there, get in and sell some 'paper gold' I want it below $1230 by 4 o'clock!
Yes, sir! Very sorry about that, we were looking if they had an app to fix our budget / trade / debt / broken system / euro / china / oil leak .....
We'll get to work right away. Gentlemen, start your engines........ This is the captain, Bernanke, I want flooding by cash, much better than helicopter droppings.....
Is the FED effectively trapped before the Midterms? Only to be the lender to crisis of the last resort. Yes.
What can really be done by the FED other than to watch the liquidity drain out.
As bad as it is, it was always the plan.
At some point the injected "stuff" (I will not call it investment), would have to be ended.
The investments made were not on behalf of sustained economic growth.
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Time and time again I think of scenarious for the FED to start QE2, but both are outside the normal plausible economic actions of theft, they are linked to crisis;
1) A State like California needs a bailout or they default.
2) The market for US seovereign debt collapses. First on the long end, and then working its way to the short.
Other than crisis, Ben has played his hand (Aces and Eights). With programs like ARRA only half expended, and other actions from the administration to accelerate spending, Ben is just a spectator until crisis, and does everything he can to pad the Treasury purchase pipeline.
He has become a US sovereign debt pimp. HuggyBEN.
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The dynamics of the Midterms will essentially box the FED in. Congress will not act on a huge QE bill because previous actions have failed, and a 2nd stimulus is not an option with ARRA only half expended. The trust is gone, politicians have proven they no longer can find a solution, or even grasp the underlying causes.
There will be a lot of questions asked of Politicians; and the answer will come up, stupid and greedy.
----------
The politicians acted foolishly, purchased a nonworking solution with a now expired debit card, and then are confused by their stupidity, and scattered by the political process.
Mark Beck
Another fine post Mark Beck. + $1240
Is an iPad a non-dilutable asset?
Yes, I've been converted to a deflationist too... at least in the short term. I still think that inflation will happen in the long term due to the policy response to deflation.
Another change has been that my timeline has stretched out. I think we're looking at deflation for at least the next few years and overall we're looking at a ten year long Ka-Poom:
http://www.itulip.com/kapoomtheory.htm
Once more, for the record.
Ponzi's are inherently unstable, and that instability increases over time. Low rates on treasuries are more evidence of the obvious.
If 2% treasuries lose half their value, as they easily can, they still only yield 4%. Absurd by any standard, but a laugher with most informed opinion regarding hyperinflation as a done deal.
This is larger and more complex than anything we have seen before, but it is in no way different. It's a matter of when, not if, the paper is toast.
Amen to that quote...a-freaking-men.
By the way, both No Korea and Fed act rationally, neither are crazy as we would suppose, its just that their aims/goals may seem crazy, or short-sighted, but given their goals, they are very rational. Want to hold onto power at all costs, even in a completely untenable situation, even nuking is a rational idea..it may keep you or your descendants in power...