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Presenting The Fundamental Flaw In The Fed's Thinking
This one simple chart below shows what is possibly the biggest and most fundamental flaw in Bernanke's approach to spurring the economy, which to him, of course, means rising prices of risky assets, aka the stock market.
The chart above shows the return of two simple things: the return of 4.25% 30 Year Bond issued November 2010... and the S&P.
As is vividly shown on the chart, the return of the long-bond is nearly three times greater than that of the broader equity market in 18 short months!
And therein, ladies and gentlemen, lies the rub.
Recall that Bernanke said something substantively as follows:
"When our policy response lowers interest rates on govt bonds, it induces market participants to take more risk. Someone selling their govt bond to us may go out and buy a corp bond, thereby lowering spreads. A bank selling their govt bond to us may go out and make a loan..."
There is one problem with this logic: it is dead wrong. Because instead of forcing investors to rush out of the bond market, which potentially has much more upside embedded (the 30 Year is yielding 2.7% right now: this means the actual price of the 30 Year can continue going up and up and up), investors, even those "sophisticated" ones at banks, hedge funds, and prop desks who can trade CDS, IR Swaps, variance swaps, swaptions, and things the retail investor has never heard of, are doing something else, and something much simpler, entirely.
They are simply front-running the Fed!
The Fed's entire policy of boosting the economy is a failure for many reasons, but the primary purpose embedded therein - to lift stock markets, will forever be subordinated (to use the parlance of our times) to just frontrunning the Fed, which simply means buy whatever the Fed is buy, and sell whatever (if anything) it is selling.
In simpler format:
- Frontrun what the Fed has publicly telegraphed to be doing
- ...
- Profit
And as long as the Fed continues on the course of LSAP, either unsterilized or sterilized ala Twist, this will continue, and the Fed will continue failing upward.
Sadly, this also means that at the end the Fed has only one option: to go Japanese and start buying not only REITs and ETFs, but ultimately individual stocks.
At that point the best purchase, however will not be the stock market, but wheelbarrows.
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It is simple and has not changed for 200 years: during a recession trade debt and use it to squeeze the (upper) middle classes out of the market during a deflationary downturn. As a by-product destroy your weaker co-banks. At the end of the downturn, gear towards equities and capital investment in the broader sense and make a killing from leveraged productivity gains. This is capitalism. The rest is conversation.
as my last live-in usta say: i'm flawed!
rather than taking a staement and saying it is the policy for economic growth and equating peppermintTwisting with LSAP, just let the FED kick the can... why not?
the FED is just doing its job, imo
people who are usta LSAP coming their zombie way may be a little stressed
top predators may find less food in the water for some reason... personal problems are tough, sometimes...
everything is screwed down tight again today; the checks are in the mail Total Eclipse
I've been banging the front-running drum for a while now.
Professor Antal Fekete has been writing about this for years, predicting the exact route the sophisticated investors would take: risk free front-running of the Fed. (See: http://www.professorfekete.com/articles.asp)
This is why we are going to see Treasury yields continue to drop.
It is also why the Fed policy is a snake eating it's own tail. Falling yields generates medium and long term deflation and not inflation (only in the short term). Bernanke's cure is going to cause more of what he is trying to stop.
No business is going to invest knowing that interest rates will continue to fall. And those that are paying higher rates on earlier loans are seeing their competitive advantages wiped out bu the difference in financing costs.
Cannibalizing the economy--it's all the Fed's got, and it's going to end with a lot of shrunken heads.
paying higher rates on earlier loans?
...one shrinky-dinky...
THE FUNDAMENTAL FLAW IS THAT THE FED ALONG WITH CONGRESS IS STAFFED BY A BUNCH OF TOTAL MORONS. OOPS, FORGOT TO MENTION THE EXECUTIVE OFFICE OF COURSE.
Why are there no questions from the AARP regarding the retired people who can't get any reasonable return on their savings without playing the casino stock market?
I thought seniors were a big block of votes and were supposed to be represented by these type of organizations. What happened?
It's really sad to say this but I think they know that the senior citizens can do nothing about it...it's sad day when a culture devours both it's young and old!
For the young, hit the math and sciences hard. Art, literature, and history can wait until after you are making money and have leisure time.
If you test a 5 on AP calc, you can get away with spelling errors on your resume. Knowing what Prometheus gave humans that got him in trouble is worth about $0 in the real world.
In the private sector, you'll only be paid for your utility to generate income for someone, even if you own your own business. The other perennial need is to do things other people don't want to do like cleaning, food prep, landscaping, and child care. Good, honest work, but you'll probably be paying cash for health care and driving a Cobalt. Aim higher.
From my observations, AARP has long been a pr/insurance scam operation run mostly by and for the benefit of the vastly overpaid, overreaching sr. management. They do not at all serve the best interests of the senior public they purport to serve-- but of tptb and themselves..
Newegg has a sweet deal on 64GB flash drives right now - just in time! Gonna need lotz of GB to store all that new digital scrip GutenBen will be shootin' my way.
I say we
http://www.slimbeleggen.net/wp-content/uploads/2012/06/bernanke-bid.jpg !
( http://wbponline.com/content/Attachments/1884-Mario%20Draghi%20as%20if%2... )
Bernanke should issue targets. The S&P will be at X by date Y or the FED will begin program ABC.
What do my fellow Comrades think?
I agree with the criticism of the Fed here except for the wheelbarrow part. It will not lead to consumer inflation. It will just lead to further disruptive income inequality.
and capital destruction through mal-investment and mis-allocation. Nothing short of a debt jubilee or a massive decrease in the human population will return the world to a traditional "growth" economy. Blame it on physics and thermodynamics.
Would someone please answer this question: When the Fed takes a position in equities, how do they vote their shares and how is that determined? Wouldn't large and growing positions essentially end in fascism with central, coordinated control of and anti-competitive advantages to the business so controlled? It reminds me of the situation in the later chapters of "Atlas Shrugged".
Just waking up are we? naked fascism really took over after president kennedy, when the last link to any sort of gold standard (and real consequences for bad behavior) was severed.
best post i have seen here in a while....
the old saw is that "Wall Street hates uncertainty" - but "uncertainty" is the only thing preventing a melt-down. the fed has to keep the market guessing - always off balance - so that it remains in a state of confusion as to whether or not we're going to have a deflationary game-over implosion or hyper-inflationary depression. so long as the market is confused and bewildered, it will stay there in limbo - balanced on the knife's edge. Wall Street may hate uncertainty. But "Certainty" - would destroy the markets. The central bankers and regulatory apparatus has no choice but to commit to a future of endless confusion, cognitive dissonance and misdirection.
Hey, "Madcow"...You're confusing "confused and bewildered", with MANIPULATED!
Remove that leash, watch that dog run!...Been yearning to go south for a long time!!
Remember one of the core, original goals of the Fed was to prop up real estate? Well, on the low end of the market it appears either a bottom (or a short-term plateau) is forming.
Part of the reason is that, with rental occupancy rates above 93% nationwide, the numbers indicate an immediate positive cash flow. This is especially true for all-cash transactions which are surprisingly common despite the large drop in average net worth.
In my midwest area:
$120K cash sales price. $860 rent. $2,100 taxes. $500 insurance. $10,320-$2,100-$500 nets $7,720 or 6.4%.
$200K cash sales. $1,200 rental, $3,600 prop tax. $575 ins. $14,400-$3,600-$575 = 5.1% positive cash flow.
These aren't great returns, but if the RE market bounces, and with rents outpacing inflation, and converting fiat to something real, it's probably not a bad choice.
As far as giving the Fed credit, the market would have found a bottom anyway, and probably sooner, and while reducing debt rather than growing it exponentially, and without the destructive wealth distrubution that came with the Fed's top-down policies.
It is what it is, and if the Fed is printing and spending, we all need to be frontrunners because if you just sit in cash or in something not getting a Fed boost, it'll be left behind. Like a moving company, if it doesn't hit the ramp, it doesn't get the ride.
OT But important...
<O><0> Rare Earth's are back baby!.... China was up till today the supplier of nearly 90% of ALL rare earths production... super expensive to process in western countries to deal with potential radioactive waste tailings etc....China just told everyone today that they have shit loads LESS Rare Earth "Stuff" than everyone thinks!
Lead times to bring new production to market are enormous.
Prices of the physical products and those of the producers must happen and be Xylarge!
Better than 50bps in government paper!
Money's looking for a home and it just found one!
The supply needs of the REE's become a sovereign issue highly supported at all costs
Techs are attractive and values attractive
So bitchez... Got Rare Earths?
"Ministry official Jia Yinsong, said excessive extraction was leading to a depletion of China's rare earth reserves. He said China held 23 percent of known reserves, not the 36 percent that the United States has cited for China."REITS have been being bought for 3 fucking years now. Perhaps by proxy perhaps not but definitely kept in stratosphere valuations every fucking day. Yea, today included.
How else could you possibly explain the valuations?
as FED extends Operation Twist to year end, today i present Operation-X for the potential roadmap.
FED considers Operation Twist as successful as $spx rose from 1074 to 1422 while Operation Twist is performing, so they continue to extend the Operation Twist.
$vix down more than 6% on the day, near 2 months low.
http://humblestudent777.blogspot.com/
I think this post could be much longer and even a book based on the title.
Now, I also don't think there is anything wrong wth the feds thinking. I think they think one thing, say another. it's rather clear the bernank is a sociopath and chronic liar.
So what happens if the Fed buys all this paper from the Feds and we collectively say "fuck it...."?
Does the private bank known as the Federal Reserve go bankrupt?
That may be the fastest way to end the Fed.
Surely the FED can induce everyone to invest in the "fair" and "well-regulated" and "manipulation-free" stock markets, can't they?
I mean, people won't actually accept 2% return on Treasuries, stuffing cash in the mattress, and buying Gold and Silver, will they?
Why, the public just HAS to invest in the markets and spend again, don't they?
(/sarc - It is as if Ben and his FED and Treasury cronies all did a Rip Van Winkle and slept through the 2001 dot.com bubble, the 2008 debacle, and CORZINE).
"Isn't Bill Clinton still President?"
No Ben, no Timmy - wrong decade.
The flaw in the FEDs thinking is that banks and wall street are the economy.
Main street needs a break:
Lost jobs and falling real wages.
Housing equity piggy bank is no longer there.
Real inflation over 5%.
credit card interest rates are 20 times that which is available to the big boys.
Main street is dying while oceans of "money" is divied up amonst the few.
Real wages will continue to fall until it is worthwhile for someone to put the unemployed to work. No one will be hiring and taking a loss on the salaries that they must pay.
Well, no one but the government.
...the biggest and most fundamental flaw in Bernanke's approach to spurring the economy, which to him, of course, means rising prices of risky assets, aka the stock market.
I thought Bernanke's primary objective was to finance unfinancable ever expanding government debt? Spurring the economy, containing inflation and maintaining high levels of employment takes a back seat to financing government expansion.
Bernank is doing a fine job of helping governments stay healthy, aka the status quo.
what is really sad, is at the end of this will be war. A bunch of naive kids fighting a war for reasons the cant even begin to understand, but reasons never the less outlined on sites like this. Its a sad state of affairs.
Bernanke may be buying up all the corporations with taxpayer money so the elite will have greater ownership after the collapse. Might be to late for anything else.
"buy whatever the Fed is buy, and sell whatever (if anything) it is selling"
So buy political influence backed by " academic research"
while selling FRNs.
This about says it all...
hey, don't give them any ideas
Forcing me to put more money in my mattress. Fuck You Bernanke
by my chart I can say, and will put it in print, if tommis up, uyg goes to about 57.49.
it think it goes there no matter what, the question is how, adn what will heppen when it does if we don't cme back to neat the weekly low trned line before going back up, then when it haits this all hell will hit the fan because tehr hasn't been a good base. the fucking algo's fuin the capitial markets and notbodyu except ze wants to talk aboit it.
it alway hate these last few days by chart is it abuit 10, until things beak loose. I hate this and if aai pay enough attention I can make a lot, but it's soo stupid.
my suggestion is to trace one inverse the double long and sho the nest 10 days and 9if tommis up< and just program the comptuer in advance.