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Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame
Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the Fed's latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation. Whether or not the Fed will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty. And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the Fed's balance sheet, and how the change in composition in Fed assets will impact all marketable asset classes. We have conducted a rough analysis on how QE2 will reshape the Fed's balance sheet. We were stunned to realize that over the next 6 months the Fed may be the net buyer of nearly $3 trillion in Treasurys, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.
A Question of Size
One of the main open questions on QE2, is how large the Fed's next monetization episode will be. This year's most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke's next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a Fed that is known for "forceful" action. Others, such as Bank of America's Priya Misra, have loftier expectations: "We expect the size of QE2 to be at least as much as QE1 in terms of duration demand." As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities. It is thus safe to assume that the Fed's QE2 will likely amount to roughly $1.5 trillion in outright security purchases. However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.
A Question of Composition
Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant rebalancing the Fed's balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio. This is a critical fact, because once it becomes clear that the Fed is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero). What is very important to note, is that as Bank of America's Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities: "Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%." (full report link)
The fact that declining rates creates a feedback loop on prepayments, which in turn results in more security purchases and even lower rates, is most certainly not lost on the Fed, and is the primary reason for the formulation of QE Lite as it currently exists. Indeed, those who follow the Fed's balance sheet, are aware that the MBS/Agency book has declined from a peak of $1.3 trillion on June 23, to $1.246 trillion most recently, a decline of $53 billion, which has been accompanied by $25 billion in Bond purchases, resulting in such direct FRBNY market involvements as $10 billion weekly POMOs. These, in turn, are nothing less than a daily pump of liquidity into the Primary Dealers (who exchange bonds boughts at auction for outright cash) by the Fed's Open Market Desk, which then liquidity is used to the PD community to bid up risk assets.
If we are correct in our assumption that on November 3, the Fed will announce a $1.5 trillion new asset purchase program, the implications of the previous observation will be dramatic. We additionally believe, that unlike QE1, the Fed will be far less specific as to the composition of purchases this time around, specifically for the aforementioned resion. As the Fed adds an additional $1.5 trillion in total assets, and as 10 Year rates, and thus 30 year cash mortgage rates, drop, the prepayment frequency of the Fed's existing MBS/agency book will surge, until it approaches and surpasses BofA's estimated 90% in a very short period of time. And courtesy of its QE Lite mandate, the Fed will purchase not only $1.5 trillion of US Treasurys as part of its new QE2 mandate, but will actively be rolling those MBS and Agencies put to it by the general public. As a result, it is our belief that over the six months beginning on November 3, the Fed will end up purchasing almost $3 trillion in US Treasurys in total. This can be summarized visually as follows:
As the chart shows, while the Fed's balance sheet grows from its current level of $2.3 trillion to $3.8 trillion, it is what happens to the Treasurys held outright by the Fed that is most disturbing: from $800 billion, we expect this number to surge to nearly $3.6 trillion in just over half a year, a massive increase of almost $3 trillion. The implications of this asset "transformation" on the Fed's balance sheet, not to mention those of US retail and foreign investors, and capital markets in general, will be dramatic.
Offerless Bonds?
One of the main problems facing the Fed in indirectly monetizing US Treasurys (keep in mind the proper definition of monetization is the Fed buying bonds directly from the Treasury, as opposed to using Primary Dealer middlemen, which is how it operates currently), is that there simply are not enough bonds in circulation to be bid, under its current regime of operation! Readers will recall that as part of existing SOMA guidelines, the Fed is limited to holding at most 35% of any specific marketable CUSIP. Furthermore, applying the SOMA limit to the $2 trillion in upcoming next twelve month issuance, means that in the interplay of the prepayment feedback loop coupled with collapsing rates, the Fed will need to either change the cap on the SOMA 35% limit, or the Treasury will need to issue far more debt to keep up with the sudden expansion in the Fed's outright, and not just marginal, capacity for incremental debt. Priya Misra summarizes this conundrum facing the Fed best:
We examine the Treasury market to analyze which part of the curve might benefit the most from Fed buying if it embarks on QE2. The constraints will come in term of the 35% SOMA limit as well as current outstandings and issuance profile. Table 5 provides the breakdown of average SOMA holdings and eligible dollar amount outstanding by sector. We estimate that in the nominal coupon universe, there is currently $1.3trillion in outstanding eligible issues for the Fed to buy. We compute eligible number of issues as the amount the Fed can buy without breaching its SOMA limit of owning 35% of the issue size. Considering that the Fed has not purchased 0-2 year securities in either QE1 or the reinvestment program so far, the eligible universe reduces to $935billion. Interestingly, $560bn of this is in the less than 7 year sector.
While the total eligible securities may seem like a low number in the context of QE2, we expect $2.1tn in gross issuance over the next year. Adding 35% of this gross issuance to the total, the Fed will have $1.67tn in eligible nominal outstanding to purchase without breaching the 35% limit. However, depending on the total size of QE2, much of the buying might have to be concentrated in the 2-7 year sector. To the extent that the Fed wants to keep long end rates low, it might have to increase the 35% SOMA limit, or the Treasury could change issuance.
We believe that the resolution to the limited supply question will be found promptly, as the last thing the US government and Treasury need is to be told that they need to issue more debt. We are confident they will obligly handily. From a purely structural perspective, suddenly the entire UST curve, and not just the "belly", will be offerless, as the Fed will now have a mandate of buying up virtually every single bond available in the open market, and then some! What this means is that rates will promptly plunge, and while many have noted the possibility that the 10 Year drops below 1% upon the formal announcement of QE2, we believe there is a very high probability that even the long-end can see rates drop substantially below 1%, while the 10 Year approaches 0%. Keep in mind that this move will not be predicated upon inflation expectations whatsoever (and in fact we believe this is merely the first step to an outright monetary collapse also known in some textbooks as hyperinflation), but merely as a means of frontrunning Ben Bernanke, as the entire bond market goes offerless, knowing full well that the Fed will buy any bond below its theoretical minimum price of 0% implied yield (we leave it to our readers to determine what this means price-wise on the curve). It also means that the Fed will finally cross the boundary into outright monetization, as Bernanke will be forced to directly bid for any new paper emitted by the US Treasury, to maintain the tempo of its purchases.
Asset Implications
As we have noted above, the immediate implication of the vicious (or virtuous if you are Ben Bernanke) feedback loop of collapsing rates, prepayments, and accelerating UST purchases, is that mid-and long-term rates will likely promptly approach zero, as every UST holder realizes they are now the marginal price setter in a market in which there is a bid for any price. The Fed will merely render the traditional supply/demand curve meaningless, and any bonds offered for sale at any price will be bid up by Brian Sack. The implication on stock prices is comparably obvious: to readers who have been confounded by the impact on stocks when there is $10 billion worth of POMOs in a week, we leave to their imagination what the impact on 4x beta stocks will be once the Fed floods the market with $90 billion worth of weekly liquidity, which is what we calculate to be the peak repurchase activity between the months of January and March, as QE2 ramps up to its full potential. In this vein, analysts such as Deutsche's Joe LaVorgna who this Friday came out with a note advising clients not to "Fight the Fed" (link) may take the message to heart. After all, if this last attempt by the Fed to spur asset price inflation, in which Bernanke is effectively telling the consumer that a house can be had for no money down, and for no interest ever, thereby eliminating the risk of price deprecitation, fails, it is game over.
And speaking of game over, we dread to look at a chart of the DXY in early 2011. The dollar will plunge, pure and simple, as the Fed makes it clear that it will not tolerate currency appreciation. Also, don't forget that as a side effect of QE2, another component that will surge in addition to Fed Treasury holdings, will be excess reserves held by the banks. If we are correct in estimating that the Fed's assets will explode to $3.8 trillion, then bank excess reserves will skyrocket by a factor of 150% from the current $1 trillion to well over $2.5 trillion. The immediate casualty of this will be the US Dollar: one needs to look no further than 2009 to see what happened to the DXY when excess reserves increased by $1 trillion, in order to extrapolate what happens when it becomes clear that Bernanke is prepared to put any amount of liabilities on the Fed's balance sheet in its latest reflation attempt. And if anyone had doubts about the Fed being able to successfully absorb $1 trillion in excess reserves accumulated through QE1, all those concerns will be put to rest once the number hits $2.5 trillion, or more.
Which brings us to gold. Needless to say, once the full "all in" realization of just what QE2 means for risk assets and capital markets sets in, gold (and other physical commodities) will promptly go from its current price of $1,300 to a number well in the five-digit range. We leave it up to our readers to provide the actual digits.
In summary, David Tepper may well be right that stocks will benefit from QE2, as will Bonds and as will commodities. In fact, every asset class will explode in a supernova of endless liquidity. To be sure, all of this will be very short lived. Very soon, all those assets denominated in fiat paper, will promptly collapse in the great black hole of reserve currency devaluation, as it becomes clear that the Fed will stop at nothing to win the race of global currency debasemenet. And of course, none of this is to be confused for an actual improvement in the economy, as QE2 will result in a dramatic and irreversible deterioration in the US, and thus global, economy, which, once the initial euphoria from QE2 recedes, will promptly progress to isolationism, protectionism, currency wars and exponentially accelerating monetization of each and every asset class, thereby rendering price discovery irrelevant, as central banks around the world stampede into irrelevant capital market, each buying up as much of everything as their printing presses will allow them, until the ink runs dry.
At this point we refuse to pass ethical judgment on the Fed's actions. The Fed will do this action regardless of what happens on that other fateful event scheduled to take place on November 3. If it does not, asset prices will collapse leading America into a deflationary vortex of deleveraging, and Bernanke is fully aware of this. The only reason the market has found some validation to the September risk asset surge, is the "certainty" of QE2. Were this to be taken away, stocks would plunge, as would all other assets. And since the Fed is uncontrollable, and unaccountable to anyone, it is now impossible to prevent this line of action, whose outcome is what some may be tempted to call, appropriately so, hyperinflation. The direct outcome will be an explosion in all asset prices, although we continue to believe that of all assets, gold will continue to outperform both stocks and bonds, as recently demonstrated. Those who are wishing to front-run the Fed in its latest and probably last action, may be wise to establish a portfolio which has a 2:1:1 (or 3:1:1) distribution between gold, stocks and bonds, as all are now very likely to surge. We would emphasize an overweight position in gold, because if hyperinflation does take hold, and the existing currency system is, to put it mildly, put into question, gold will promptly revert to currency status, and assets denominated in fiat, such as stocks and bonds, will become meaningless.
And while Zero Hedge refuses to condemn what is now openly an act of war against the US middle class and the country's holders of dollar-denominated assets, by Ben Bernanke, who is fully aware what the implications of QE2 will be, we were delighted to read a brief note by none other than Bank of America's Jeffrey Rosenberg, who analyzes the costs of QE2, and comes to a politically correct conclusion which recapitulates everything said previously.
The costs of QE 2 in our view however go beyond the cost benefit analysis Chairman Bernanke highlighted in his Jackson Hole speech. There, the Chairman highlighted two key risks to additional purchases of longer-term securities. First, that they do not know with precision the effect of changes in Fed holdings of securities on financial conditions. On this point we have emphasized on numerous occasions that the main consequences of QE1 to date have been financial asset inflation. Further purchases under QE2 hence in our view would likely be limited in impact to furthering this process of asset inflation. However, the costs of even further asset inflation would likely accelerate the risks associated with what we characterize as conditions conducive to the growth of a credit bubble: low global yield levels, tight credit spreads, and an excess of demand for credit relative to supply. While those characteristics create asset inflation and form the backdrop of our near term bullish outlook on risky asset class performance, the risks of sparking future credit bubbles with their attendant systemic risk consequences grows under a scenario of QE2, in our view.
It’s the (lack of) confidence, stupid
The second risk highlighted in Jackson Hole by the Chairman concerns the confidence effects of Fed’s ability to exit accommodative policy and shrink the size of its balance sheet. While we agree with the notion that the key risk is one of confidence, the confidence impact of greater near term importance may lie less with concern over the Fed’s eventual ability to exit and more with what expanding QE2 says about the Fed’s confidence in its ability to utilize monetary policy to address deflationary risks.
Bernanke acknowledged that fiscal policy needs to be part of the policy response and that “Central bankers alone cannot solve the world’s economic problems.” In our assessment, further liquidity injection beyond some additional marginal transmission mechanism into mortgage refinancing or housing affordability would achieve little impact on the real economy. Much of the liquidity benefit of QE1 for the commercial side of the economy already remains on display in the form of very high rates of corporate refinancing activity. Additional rate declines from QE2 would add only marginally to those trends well underway. For smaller corporates or small business, QE1 did little to expand lending, though QE1 likely did prevent even further declines in lending. However, QE alone appears incapable of leading to expanding lending as the problems today shift from one of supply to one of demand. Chart 5 illustrates the stabilization of lending and how most of the Fed’s expanded balance sheet remains in the form of cash, not loans. Chart 6 shows that even as banks have eased underwriting standards, the demand for loans remains low.
Rather than liquidity – and its potential augmentation from expanding QE - the key issue behind the inability to see credit expansion and the weakness of monetary policy more broadly to affect a more positive economic outlook is confidence. And this leads to our final cost analysis on QE2. Where confidence stands as the key issue for the economy, expanding QE2 may end up doing more damage than good as the confidence loss from a Fed indicating its fears of deflation through expansion of QE2 as well as the follow on loss of confidence from the diminishing impact of further QE leads to a loss in confidence whose costs outweigh those of the benefits of further reductions in long term rates.
Perhaps at this point it is prudent to recall what the first definition of credit is:
1. Belief or confidence in the truth of something.
By that defintion, America's "credit" has ran out.
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Yes, Gandhi was right: "First they ignore you, then they ridicule you, then they fight you, then you win."
Because, in the end, they destroy themselves, the trick being to stay as far away from them as possible.
Bump that Glaucus. Far far far far
It's all about protection at this point. were too busy with condomation to be bothered with condemnation
Condemned nation?
condom nation.
Readers are reading and doing not much else.
Speak for yourself OGW.
Exactly !!!!!
Complaining by posting in blogs IS NOT what's needed.
Nothing short of civil disobedience will change this charade.
Organize and revolt, your great grand fathers did.
Blogs are the modern pub.
If you don't remember, pubs are where the Revolution was planned and took root.
Further, protecting and increasing one's personal wealth is what will fund the next Revolution.
A mulled wine, heavy on the cinnamon, and light on the cloves. There we go, off with you lad and look lively!
agreed with you on this one.
Blogs are the modern Pubs.
a family affair. i like that.
How ready we are to condemn.
"fight club is in his mind." ever done the real thing, Durden? or are you a bitch like the rest of 'em.
i doubt if he is a bitch, might be a serious bastard, though†
Thanks for the sight TD. You are the last man standing.
The pensions and savings you refer to never really existed, only on paper and in your mind. If they don't continue to inflate this thing, it will collapse anyway in a crushing deflation, which will wipe out savings and pensions, bankrupt the Government, and force a default on treasuries, which will end all confidence in the US dollar and economy. The end of fiat as we know it approaches, either path, deflation or inflation ends in the hyper-inflationary loss of confidence. The IOUs our economy is built on cannot be sustained.
And there you have it. It's not necessary to get emotionally worked up over the fact the Fed has declared war on the USA - their time is up and they know it. Just because we don't currently see any (overt) action by citizens right now doesn't mean it's not dunk shot guaranteed to occur.
The entire points FOFOA, and now Tyler, are making, is that the issue isn't really deflation, inflation or hyper-inflation in all asset classes, but rather, the end of the 97 year old $USD reserve system. Think about that for a moment. Seriously - think about what that actually means.
The Federal reserve system that underpins the entire global system of credit, trade & exchange is going to end. And with it, our entire known way of life, including the overseas global empire, domestic social safety net, and our existing security & justice system is going to either disappear or be radically altered/reduced.
I tend to focus not on what people/institutions do, but WHY they do it. And in this case, Ben is positively blaring on a loudspeaker that it's all over except for the crying. As others clue into WHY Ben is doing what he is doing, there will be a mad rush to hit the exits.
The only thing for certain is our world sure as hell ain't gonna look like what we have today. We're going to look back on the entire post-WWII period up until around 2011 (including the fraud, corruption & lies) and marvel at the relative peace & serenity. Believe it not, right here and now, these are the good old days.
+1
Everybody re-read that post. Nice job, B9K9.
Then, everybody should read it again.
I like the post too, except for the conclusion that the best days are behind us.
Life is too important to be wasted in the pursuit of stuff. Piles and piles of stuff. Garages and rent-a-sheds full of stuff.
As a Luddite I remain optimistic. All our gadgets and entertainments divert our attention from the world around us. If it's too boring or whatever with out the layer of razz-a-mataz, maybe we're not looking at it the right way.
Our real long-term worry is not the coming Recession or Depression, it's the coming "Oppression".
Question B9K9
"I tend to focus not on what people/institutions do, but WHY they do it. And in this case, Ben is positively blaring on a loudspeaker that it's all over except for the crying. As others clue into WHY Ben is doing what he is doing, there will be a mad rush to hit the exits."
I think Bernanke is doing it because he thinks the whole system will last longer this way. Is there another reason that I am missing?
What b9k9 is saying, is that if you understand WHY bukakke ben is giving our currency an extreme douching, the only conclusion is because if he doesn't debase the dollar it would collapse. And pepetuating the good times for even a few years seems preferable to immediate collapse, no?
Be thankful. At least Ben has given the next generation of survivors the ability to prepare.
Some people seem to think that this was all avoidable, but what if bush, obama, ben, etc. have been debasing the dollar because there is no other choice?
Appologist.
The Fed is a one trick pony. It is doing what it is doing to stay alive; it has always done this. It will always need to debase the dollar to stay alive so that is what it is doing. In order to debase the dollar it needs to increase the monetary base at an exponential rate. The fed has no interest in discontinuing its existence.
Hopefully what you say about the end of the fed is true. It probably isn't. Both scenarios require extreme hedges. It will collapse eventually given the extreme amount of instability that builds up over the expansion of the credit based system but it continue for as long as they have at least one foot on the tightrope.
Reven—I totally agree. This is how I always explain to people who are struggling to understand that concept:
Act 1 “The Prosperous Years”: Let's say you grow strawberries and I make baskets. Every year, we trade. One year, something happens and I can't make the usual number of baskets, so I give you an IOU. Suddenly, I realize something wonderful (for me). You are just as happy to get IOUs as you are to get baskets. This is fantastic! So I stop making baskets altogether, and just give you IOUs every year. You expand your strawberry fields and work harder, and every year I eat all your strawberries and give you even more IOUs. You are happy. You feel wealthy. You plan to retire someday and cash in all those IOUs for my baskets, so you can trade them for the goods you need.
Act 2 “Facing Reality”: You have almost reached retirement. You bring some IOUs to my house expecting to get lots of baskets. I only have two baskets on hand. You suddenly realize I have not been making and storing baskets all these years to give you as I've promised. Our credit system freezes up (that is, you refuse to take anymore IOUs from me).
Act 3 “The Government Tries to Save You”: You complain to the government that I have tricked you with empty promises. The federal reserve agrees to replace all the IOUs I gave you with their IOUs (federal reserve notes they have just printed). You are momentarily happy with this plan until you realize that the federal reserve doesn't make baskets either, and you won't be getting many baskets no matter who gives you the IOUs.
By the time we get to Act 3 (we are there), the bad debt (worthless IOUs) is already out there. The recognition that it will never be repaid is already in progress. There is nothing the Fed or the government can do to change this. Their only power is to determine how widely the pain gets spread (by replacing bad private debt with freshly printed currency).
Deflation = the IOUs held by private parties become worth less through default.
Inflation = the IOUs of these private parties are replaced with FRNs printed by the Fed, which then become worth less through loss of purchasing power.
The good news is that the USA still has lots of capacity to make baskets and grow strawberries, once we accept the fact that getting back to productive work is the only way out of this mess.
Well said, and thanks for pointing out there is an 'endgame' that doesn't involve Armageddon.
I completely agree. Patty cake Paper and skimming do not a country make.
The good news is that the USA still has lots of capacity to make baskets and grow strawberries, once we accept the fact that getting back to productive work is the only way out of this mess.
I agree. Strawberries are great. People around me can bust out some pretty mean baskets and the do it in a social setting. Maybe they have some tunes on. People are laughing and joking. Friends come by to visit.
or not. trust me...you're going about to have an "or not" moment. It's a New York City. You wouldn't understand.
He said "the Sheriff is NEAR!" What? "HE SAID THE SHERRIF IS A"
The pensions and savings you refer to never really existed, only on paper and in your mind. If they don't continue to inflate this thing, it will collapse anyway in a crushing deflation, which will wipe out savings and pensions, bankrupt the Government, and force a default on treasuries, which will end all confidence in the US dollar and economy. The end of fiat as we know it approaches, either path, deflation or inflation ends in the hyper-inflationary loss of confidence. The IOUs our economy is built on cannot be sustained by any means. We are beyond the point of no return.
ohh the tangled Web we weave when we practice to deceive.
there was a Durden here and the next thing i knew i was everywhere.
Oop - some threading weirdness appertainin'.
.
the most bullish post from zerohedge ever?
You are spot on. Just flip the word "bullish"
'Hsillub'. Means 'we're all fucked' in Sanskrit.
MichaelG, thanks for my first ROTGLOL episode for the day!
HSILLUB. Ancient Sanskirt from what I've been told. Very FOREBODING.
I just bought in to 4 gold stocks last week, time to increase that.
Don't bother with the paper, buy the real thing. What people don't understand is the paper trade of gold is roughly 80% under the street price of the real physical gold price right now.
It's a bad sign when the the etn's and etf's can't even match the required capitalization of the goods it builds the massive derivatives engines around. It goes with my theory most ETF/ETN's are built from unicorn shit and pixie wings then blessed by a comptroller.
exactly,
Gold is not for me and my family!
AU is purely apocalypse hedge in this head over heels world of today where loans are assets and savings banks are for losers
But people holding gold will be the first ones to be attacked in a SHTF scenario and hooligans are on the street
So why bother; go for food water books and a panic room perhaps
I recently bought a solar mobile/laptop charger on ebay- totally worth it I believe, any day[ made in china ,sic]
It will be easier to see who has stores of food and water than to see who has stores of gold. Better to be well-rounded in all of your preps, including that which will provide a foundation for your family on the other side of the crisis.
Panic Room, Ma'am,
Jodie foster, ring -a-bell?
A panic room implies belief that outside assistance will arrive at some point. I don't think that's the best foundation with which to start.
Panic house, maybe. Better yet, panic 100 acres...
nice
"Panic house, maybe. Better yet, panic 100 acres..."
Yes, with an unassuming gated entrance and no view of the house.
With ill tempered dogs & neighbors with same.
I'm surrounded by mountain folk with plenty of firearms, my job being to make sure they keep them pointed in the right direction.
LOL...same here, just lowlanders like me though.
They, yours and mine, are excellent shots so I don't worry about it at all. Around this time of year it picks up quite a bit...dove shoots, deer & hog hunting instead of the occasional target shooter blowing through a clip or two.
They hit what they aim at ;-)
Presently, they're as dumbed-down, docile, and dependent as the rest of their flag-waving brethren. But once their SS and related checks stop coming, they will finally realize that the jig is up. And that is when I'll be glad they're there.
Yup! That's how I've been figuring it. I hate the flag waving...
panic planet
panic planet
A panic room will help how? If determined attackers are after your gold or other supplies your done, unless you have a well armed team practiced or at least cognizant of small unit coordination your toast..
Oh, my! I guess I'd better remove that sign from my yard that says, "I have lots of gold and silver stored here at my house, in the false wall in the basement."
Thank you for the warning.
And heeere's his sign Rocky...
http://www.mydoorsign.com/Window-Decals/No-Firearms-Allowed-Sign/SAF-SKU...
Where do these people come from...rhetorical.
Sorry to have to be so blunt, but you leave me no choice: You are an utter fool.
First, if you tell people you have gold, you deserve to be burgled. That's just monumentally stupid.
Second, all paper will burn. Paper claims on physical goods will not be honored, except by those with the violence to enforce them.
THAT is the reason to own gold (and to a lesser extent, silver, brass, lead, food, TP, etc.).
maddy - like many, you lack imagination. Hey do you own a TV?
so many bankers. all lonely no less.
The time to buy mining stocks was 10 years ago. You need to get the real thing.
A $1 dollar bill of worthless paper is just a valuble as a $100 dollar bill of worthless paper.
In the end a new currency will have to emerge. They will pay all our bills in a single pen stroke.
They will then hit the reset button.
Seems in a lot? of countries there are groups buying up junk/scrap/jewellry gold.
Hmm maybe I could do the same for silver, give $10oz.
just 10? its' worth so much more
About twice what I paid.....yeah I KNOW it doesn't pay interest.
http://i55.tinypic.com/i3t9w3.jpg
The ECB is already pissed about the dollar...
BTW anybody else notice that large sucking sound?
that"s Greece sucking in euros. Whodathunk it?
sorry. Meant to say "greece."
Just to play Devil's advocate, what if this is bullshit?
Every week Tyler reports on the outflow from US equities and laughs about how it's not reflected in stock prices. This has got to be annoying to the casino operators. I think this might be an attempt to scare people back to stocks.
CNBS is once again, trotting out the muppets (aka Warren Buffet and Jack Welch), just like they did in early 2008, and quite frankly, this Tepper guy has gotten way too much air play.
Understand, I'm not trying to disparage Tyler's work at all. But does anyone else get the feeling that there's a, "C'mon guys! you better by stocks before it's too late!" narrative being pushed just a little too hard?
Keep that in mind before you go "all in."
I'll trade stocks again when GE files for bankruptcy, not before.
As you recall, our response to Tepper was "Japan"
The problem, after realizing what Bernanke is planning, is that Japan never had a madman in charge. Bernanke is that man. Reread the post: as we said, all fiat denominated assets will expire once the world is forced to return to a non-dilutable standard (whether it is gold, or condoms, is irrelevant). For those who believe they can time inflection points, more power to them, as their next and last challenge will be pulling out 0.001 seconds before Mish's "Shazam" moment strikes.
If indeed there is $3 trillion of UST monetization on the horizon, it is game over. Shazam has come and gone. It is all just a question of how long before the critical mass of decision makers NPVs that realization.
We do, as we always have, believe that as the credit system regresses to the "restore" point before Keynesian voodoo, that gold will retain its value. However, unlike FOFOA or others, we do not believe the value of gold at that point will be expressable in any fiat equivalents, since for the eureka moment of "gold as currency" realization to occur, it requires a necessary and sufficient condition of fiat termination. Plain and simple. As such, anyone who says at equilibirium gold will be worth XXXX dollars, has no idea what they are talking about.
Which is why this post is 180 degrees the opposite of the "most bullish post on zero hedge ever." This post is the realization that anything evaluated in linen and ink equivalents is now without value. Whether that comes via hyperinflation, hyperstagflation, deflation, or other fancy terms, doesn't matter.
Bernanke has won his pyrrhic victory. As stated before, everything is about to go supernova...or, we should add, white dwarf. Unfortunately, the Chandrasekhar limit on failed economic theories is zero.
As much as I revere your insights I find it hard to believe that all common contracts will be declared null & void if that's what the final scene dictates.
There needn't be any formal declaration, just a general lack of consequence. Or concern.
so far there is no 'game over' stuff from anyone holding their monies in fiat
They love the game they are in and we are asssuming they will fold
I don't think we are there yet? as long as the players keep getting free money from the house the players can just keep it on & on
Hope there is some form of integrity left in this system coz-' Failure is a sign of systemic integrity'- if somebody has gained someone else should lose
But everybody on wallstreet has a genie in a bottle now!!!
shit's stinking -where's the fan???????????
I've always agreed with Martin Armstrong that you can't have deflation without discipline. It seems that oil and food prices spiraling out of control will eventually be that discipline.
...making possession nine points of the law, as in the post-soviet collapse....interesting concept.
@Michelle Yes, the pattern so far is to ignore laws and regulations that get in the way. Their response to the Flash Crash showed us how they plan to deal with wayward market moves.
As for the earlier comments by others concerning the value of gold, I ask this simple question, why would financiers and their government allies allow others to store wealth in a vehicle outside their direct control? The proud nail will be hammered flush. Yes I know, goldbugs tell us we can deal gold outside "the system", but the black market has its own set of fees and dangers, so I'm not sure one is necessarily superior to the other when it comes time to buy a chicken for dinner.
We're engaged in a battle between sacred ideals and those who prefer a profane existence. Remember Maslow's hierarchy of needs -- a hot bowl of soup trumps the First Amendment every time when stomachs are empty.
So did the GM bondholders.
Between now and ultimate currency devaluation there will probably be a number of events that could cause an inflection point.
Have you been looking into the latest foreclosure title/deed affadavit mess, and/or the whole MERS debacle. The lawsuits will be flying, and the banks will lose a lot of money.
I enjoy your work, and I would love to see some thoughts on the potential for the foeclosure issues to cause significantly more future problems. Real estate is such a Ponzi prop job.
so what Uncle benny has 3 trillion in the kitty for them[3T shit is floating in the media already]
who is gonna get that money?
straight into balance sheet of banks
I donno how they can lose money now,
I think they are throwing away money into Hudson river just to show that they didn't have 100% days in black
"the latest foreclosure title/deed affadavit mess, and/or the whole MERS debacle. The lawsuits will be flying, and the banks will lose a lot of money." Congress will change the laws before the banks lose too much money.
Yes, I find it interesting that there's discussion of making "90% of mortgages refinancible"...and I'm sure that the MERS clauses in all of these refis will be reinforced, so as to remove any doubt of their enforceability and to cure all of the known existing ills with the MERS system and its standing to bring foreclosures. This action to get everyone to refi is designed to kill several birds with just the one stone.
The fraud is of such epic proportions, I don't think it is going to go away as easu as many here imply. It is a 60 t problem that will not be resovwed by 3.8 t.
http://foreclosureblues.wordpress.com/2010/09/23/no-there%E2%80%99s-no-life-at-mers
They just need to work out the final details of the numbering scheme for future major / minor releases of QE.
Why think that 3T or 3.8T is ALL there is? I think infinity is still on the table...
I still maintain that the fact that the paperwork is shorty is going to throw a knuckle ball at the banks and the fed.
The defense attorneys will have legitimate claims by the CDO investors and the homeowners against the banks. This will undoubtedly tie up the system with legal manuverings for some time.
The CDO tranches were not given the due dilligence at the time they were delivered to investors. Therefore, wealthy investors will have constitutionally rightful claims against the banks, and so will those being foreclosed upon. The fed. the banks and the gov. will not be able to just push this aside easily.
This is not new, but it is finally gaining steam. In addition, Fannie and Freddie are throwing back these bad paperwork loans to the servicing banks. The gov. as owners of the GSEs do not want the bad loans.
There are many layers of corruption and deceit here. In many non-recourse states like Florida, protection only extends to the original, purchase money loan. If you refi, the bank has you by the short hairs. There are reasons for this slow motion train wreck in foreclosures. There will be some catch-all banksters own everything legislation passed late on a friday night, after the massacre of the dems, by the lame ducks. Count on it.
Then repealed; let's think this thing out logically. We don't need a lot of impassioned, dime-store novel dramatics. Life doesn't work out that way - no miracles, no heroics, no nothing. Here's how it really plays, where no one is the "winner":
Keep going with this rinse, wash & repeat cycle until the scenario above is realized. (Or a military coup occurs beforehand.) As Mises stated so eloquently, there is no staving off the final collapse born of a credit boom. Contrary to what Mish seems to faithfully believe, the USA and their precious Ts and $USD are not going to last much longer in their current form (ie the "Japan scenario").
All laws made by man are merely conveniences (actually, vanities) of a current paradigm. In the present case, our paradigm is based on exponential credit growth driven by exponential economic growth. However, when the paradigm changes or ceases to exist, then laws are changed or cease to exist as well to reflect the new reality.
B9K9 - if you used the words "to wit" in your posts, I would think you were Marla under a snappy name masquerading as a reader rather than founder. Or you are Marla and you're making the effort not to use "to wit". Or really there is no Marla and it's just one of the other Tyler Durden's. May there be 100,000 Tyler's and a 100 million Marla's, until some day when everyone can take off their guy fawkes masks.
"gold will retain its value .....anything evaluated in linen and ink equivalents is now without value"
This raises the question of what will happen to gold mining shares. Perhaps the majors should pay dividends in gold ounzes instead of $, then they can be valued in gold PE ratios?
Of course, if the markets shut for an extended holiday for weeks or months, awaiting Bretton Woods 111, then it wont make much difference either way, but when makets eventually reopen gold in the ground, ie the proven ounzes of the seniors and juniors will be reavlued at xxxx in whatever the new system is defined in. Presumably the world economy post BW3 will initially be very weak, so energy and other mining costs will be lower, making the gold miners even more profitable than before the shut downs.Customers are likely to be sovereign nations trying to purchase to have gold reserves for the new world monetary system, so taxpayers will be financing the gold mines.
Since there are no roadmaps or GPS navigators to show us what post BW3 will be like, certified analysts will have a thousand scenarios to choose from alongside this one above, assuming of course there are any jobs still going or even any Banks to work for ?
Other scenarios are welcomed?
Apropos gold as currency"...
A black-market tale: Once upon a time, in Poland, everything was in short supply.
I needed some vacuum tubes for my radio. With plenty of zlotys, I visited the local "electronics" suppler. He sadly explained "no more vacuum tubes".
Very clever me. I returned with 2 pocketfulls of zlotys to destroy his resistance. He stretched his arms out, palms-up, shoulders painfully hunched. "I'm very sorry. Have no more tubes".
I smiled "Wait for me". Went home to my cellar, dug with a small shovel, put 2 bottles of vodka in my cyclebasket covered with a shawl and returned forthwith.
"Oh! Let me look again!". 1 minute later I had the tubes.
No amount of zlotys would substitute for real money. Those tubes were precious.
annonn:
true story: 1979-1980, bend oregon,usa. shah is gone; hostages held in teheran embassy; gold is at $800+oz; fed fund rates 13%, money market funds pay 14%; construction loans are at 21%.
i'm a GC building houses so for me the world has ended.
suddenly there are ads in the bend bulletin: prices for goods are cut in half, and if you can pay in a hard currency, prices are cut in half again.
moral of the story: when this kind of shit happens rational, linear expectations go out of the window in a hurry and assymetrical expectations take on a life of their own.
it's impossible to predict what will happen but certain assets can/do provide a much surer store of value than others. what matters most in terms of value is what is needed most.....(vodka!)
Just like to an american. A temperature expressed in celsius only makes any sense once it's converted to farenheit. The value of gold only makes sense once it's converted to dollars. At some point the mind snaps and people start believing they weigh 100kg and know what that means.
It means that it's time to get your nose out of the feed bag.
I'm 6' 6". I don't do small and light.
Shouldn't that be 1.98 meters?
You know what burns my ass?
A flame about a meter tall.
About 600 C?
1987A supernova ...
http://imgsrc.hubblesite.org/hu/db/images/hs-2010-30-a-full_jpg.jpg
"Everything is about to go supernova" T.D.
Escathology bitchez!
Just couldn't resist..even though there is mounting pressure contra bitchez....
There is so much f****** data about things left and right hyperbolically going out of whack it just boggles the mind....
Chandos
"However, unlike FOFOA or others, we do not believe the value of gold at that point will be expressable in any fiat equivalents, since for the eureka moment of "gold as currency" realization to occur, it requires a necessary and sufficient condition of fiat termination."
Fofoa I believe has stated he means in today's dollars, and is using it as a value reference point. He tried to express it in oil also (Of course he doesn't understand peak oil fully and that causes some issues) His story about county fairs in the past using script on the fair ground and then converting to gold on the exit was very prescient. With the simultaneous onset of peak oil and the collapse of industrial society, I see endless local currencies being created after the hyperinflation with inter-region trade and saving done in PMs.
Hyperinflation and a rush to safety may drive gold to 50k in today's purchasing power, but it will collapse back to the several thousand year historic norms once local trade is done through barter and local script, and international trade is significantly reduced.
Peak oil LMFAO!
That's like believing in anthropogenic global warming.
Who promotes the Peak Oil meme? Who benefits by the Peak Oil meme? Who benefits from the AGW meme? Think! (smacks Blindweb in the forehead, hard) I said THINK, goddamnit!!!
America has always had an unstated policy of consuming all other nation's natural resources before it consumes it's own. There's plenty of oil. They just want control over it!
If you doubt that, you should ask yourself why green energy can't survive w/o government subsidies. Peak oil my pasty white pimply ass.
+XXXX
well said Tyler. Things may well be exchanged in expressions that are anything but fiat. If for nothing more than the utter disdain and painfull memory of the scam
OK, I got you. I must admit, the post read bullish to me at 2:30 AM.
There's still enough trader left in me that, from time to time, I am tempted to head back into the casino to try to front run the Fed. I apologize for being one of the numbskulls who misses the point.
In my opinion, the most positive development of 2010 is Main Street's growing apathy toward Wall Street. Wall Street has become Pro wrestling to us. Fewer and fewer people care what the Dow Jones Happiness Index says and I think that's a good thing.
Which brings me to this final point - Are you sure Bernanke's really that crazy? Or is this just a "steel cage death match" flyer to revive interest?
You are far from being a 'numbskull', Mark, but that doesn't mean we're not fucked up flatter than hammered shit. BB really is that crazy, for one.
Assuming the constitution is still and will remain the supreme law of the land, however obfuscated by the plethora of laws currently chaining it down, I would wager the "value" of gold (or silver) coin will be the amount printed upon it's face. Of course I am not sure what happens to all FRN denominated debt and related instruments.
"Assuming the constitution is still and will remain the supreme law of the land..."
What constitution and who's land are you talking about? Certainly not ours.
WOW
Tyler,
The end of fiat currency as you discuss it is a singularity. Gold then is the black hole. If you own it at that point there will be no way to measure what it is worth. The value function has collapsed.
The next stage in the analysis seems destined to move into the terrain of negative theology which of course is extremely interesting but rather difficult to entertain.
I do not think the readership is there yet. The bifurcation of future paths in a self reflexive system where the lizard brain whispers to the prefrontal cortex is difficult to map at any rate. Perhaps yarrow sticks would help.
LOL on the yarrow, $bill. about 5 sticks shy of having a full homegrown set with which to throw the ching of i. almost time to let synchronicity take over the drivers seat for awhile?
Synchronicity's been driving for a while. Ever since I went someplace I've never been before. I like it.
http://www.youtube.com/watch?v=MTsmDeXVmrE
talk about sync: i just listened to this song early this morn. ha! bring it bub, i'm happy to sit in the back of the cab and watch the blue sky go by.
Thanks for reminding me, I wanted to take a look at this ...
http://www.amazon.com/Red-Book-C-G-Jung/dp/0393065677/ref=sr_1_1?s=gateway&ie=UTF8&qid=1285526519&sr=8-1
Quite an investment, maybe I'll need to skimp on my ammo purchases for a while ...
Thats why non goldbugs (or paper) like myself who own pm's will be selling into the rush for the fiat exit... Prime cropping/grazing land $1250/acre in my area of the world... Real CAPITAL!!!... Plus down here in oz, we will have the added benefit of an imploding realestate bubble so some great housing potential too... Trade that gold for fiat whilst its has purchasing power... Pick your price target early into the rush and stick too it;-)...
Roach - don't get hung up on the lack of a fiat pricing mechanism. You can always barter while waiting for a new system to emerge.
I have an issue with land in the Homeland - Taxes. I remember old ranching families being driven out to make way for sprawl. Sprawl was considered an important goal so taxes were juiced until the state took the land.
Public entities starved of funds will maybe try to tax every and any thing.
Are you concerned about crushing taxes being levied against your Ponderosa?
Roach - don't get hung up on the lack of a fiat pricing mechanism. You can always barter while waiting for a new system to emerge.
I have an issue with land in the Homeland - Taxes. I remember old ranching families being driven out to make way for sprawl. Sprawl was considered an important goal so taxes were juiced until the state took the land.
Public entities starved of funds will maybe try to tax every and any thing.
Are you concerned about crushing taxes being levied against your Ponderosa?
Tyler
All the more reason Ben is not going to publicly announce a formal $x Trillion QE2.
It will simply be QE 1 forever and ever and ever....
If Ben started his job as a true Monetarist disciple, even he must now have private moments of doubt when praying before his false idol.
"the world is not enough" fight clubber. if you want however I can arrange it for you....
TD beat me to it MM.
The only "all in" I see is physical gold, maybe some silver for day to day interest in the outcome, and expenses.
Everything else leaves me with counterparty risk, which in most cases is USD, when I sell...which leads me to:
Hyperinflation is not an extension of inflation, where I count my profits in dollars when it all calms down because Tall Paul rode in again after Ben Bernanke launched QE E+(insert big number)... it is currency revulsion...in this case revulsion for all fiat currencies, nobody wants them.
For that reason I don't even like gold stocks too much, I can see difficulty in the process of converting the gold in the ground to gold in shareholders hands....and as too tempting for governments everywhere.
So, I am all in. Physical. If I am wrong then I can just earn a living, live simply, no real harm. If I am right then I get to see the greatest show on earth, and my kids do too, from a safe distance.
I'll check in from time to time, great site.
Good luck to all.
i agree but i don't make the mistake of thinking the Government aren't using digital footprints of the likes these sites leave in order to target your personal holdings sometime down the line.
Mordor sees all but the Nazgul can sometimes be knocked down from their mounts.
Elendil!
... to come back and take another physical form. Against the power that has risen in the East, there can be no victory.
The white tree will bloom and the Shire shall be scoured. Depend on it!
i like your thinking...along with that theme you have to be getting concerned with all the MSM exposure Zerohedge has been getting recently...once endorsed by the establishment you know it's being controlled (directly or indirectly).
It's a bombshell, to be sure, but not sure if it's BS. If perception is reality, and it's just BS, it wouldn't matter because the effect would be the same. People will shun the dollar on the rumor and buy gold and make it so anyway.
I think the Fed's default position has always been inflation. Too hard to tax deflation, and I don't see how 600 Trillion in the total derivatives markets can be unwound and deleveraged in deflation. Too many bad promises.
Agreed
Why unwind derivatives? That would be like the hostage holder calling for a time out and removing the bullets from his gun before returning it to the hostage's head and barking his demands for ransom!
Anybody seen much action in the unwinding derivatives arena to date?
Eggactly !!! I AINT BUYING NUTTIN !!! They can run stock to Pluto and some sucker will buy 1 or two but it aint gunna be me. If I want somethang I'll steal it.
"I'll trade stocks again when GE files for bankruptcy, not before."
If there's such a thing as posting a grand slam home run, this line IS IT.
Hat tip to you, sir.
So mid-November, then?
Buffet and Welch as muppets? i don't recall being posted here. i guess i'm "the head of class" today! Hmmmm. I know i've called Buffet a few names...muppet wasn't one of them. i was disappointed by his testimony in front of Congress. when Morgan got called he became a legend.
Colbert just testified and probably managed to become a bigger legend as a result. Is it different this time?
How will the central bank of Freedonia respond to this?
Freedonia's livelihood depends on exporting useless trinkets to the USA. If the value of the dollar declines then Americans will buy fewer foreign trinkets. So the first impulse of Mr Firefly, the Freedonian central bank head, will be to buy USD with Freedonia Reserve Notes and maintain the present USD/FRN valuation.
But it is clear that "fighting the Fed" is pointless. Why buy UST when they currently provide negative nominal interest <i>before</i> factoring in 8-10% currency depreciation? Why not sell them back before they loose even more value? And use the proceeds to buy AU instead? So everbody and their dog sells USD and UST and reinvests the proceeds in AU.
Why does not Bernanke just go out and buy 5 gallons of gasoline, pour it over himself and then have a nice cigar? The result will be the same and this second outcome would save a great many people a world of suffering.
Nice story but central bank heads know only one language Let me translate it for them
$$$$$ $$$$$$ $$$$$$$$$ $$$$$$ $$ $$$$$$$$$$$$$ $$$$$$ $$$$$$$$$$
$$$$$ $$$$$$$$$$$$$ $$$$$$$ $$$$$$ $$$$$$ $$$$$$
$$$$$$ $$$$$$ $$$$$ $$$$$$ $$$$$$ $$$$$$$ $$$$$$$$$ $$$$$$$$$$$$$
$$$$$$$$ $$$$$$$$ $$ $$$ $$$$ $$$$$$$
done
You have ' $$$$$$' in your third paragraph there where you must have meant ' $$$$$$$$'. Otherwise, spot on! $$$$, $$$$ & $$. $$$$$?
There, fixed it for you.
rr let's please ask orly to comment
that would be informative
spelling natzi [sic]
Humpty Dumpty sat on a wall (of debt)
Humpty Dumpty had a great fall (eventually Stocks, bonds, everything)
All the kings horses (Bernake, et al.) and all the king's men (military)
couldn't put Humpty (USA) back together again
Who is the king?
Evelyn
I guess I'm an economics noob, but why wouldn't they just call the bonds (call the bonds that need to be called) as the 35% limit is reached?
Simple. Treasuries are all non callable.
I'll try again,in case it was overlooked,would appreciate a reply Tyler
He answered you, albeit a bit cryptically, the first time. When the Fed's alternative to doing something is not doing something, and the outcome of this is as bad as it is, then whats to condemn?
You're obviously looking for someone to tell you what to do. So..
Shut up.
The new normal takes hold, the shock and awe of QE 1 thru infinity now gone... just another day, just another Government Bailout.
The masses long desensitized, it is not $700b it is only $50b… never mind the fact that all of these QE 2 smaller amounts Will! Surpass the $700b, but not all at once so as not to raise the ire of the sheepeople.
The Dumbing down of America as well the handling / management of the People so as not to cause a ruckus… We all will suffer for allowing the majority to suffer in ignorance. That’s not an easy thing to stomach, but true none the less.
The Dumbing down of America as well the handling of the People.
boy, i never heard this phrase until i started ZHing. i was 90% dumbed, but you know, i got faith in that you can teach an old dog new tricks. i swear i must live in the most dumb downed american college town. it tough to look and feel this cancerous disease. it is so real and scary.
Tyler you're underestimating the time this will take to play out. At least an election cycle or two. There's still plenty of money to be made in paper assets before the cutoff for conversion to physical. The American on the street has no idea what the green stuff in his wallet is worth. In Europe it's a bit different as they still remember having multiple currencies.
"underestimating the time" . If i thought we had more time i would have stayed in business,not sold my truck and equipment.
i cant live on hope. Anyway all hope is gone from me.