John Hussman On Our Fed-Inspired Bubble,

by ilene - November 8th, 2010 9:11 am

John Hussman On Our Fed-Inspired Bubble, Crash, Bubble, Crash, Bubble (etc) Reality

Courtesy of Tyler Durden

Written by John Hussman of Hussman Funds

Bubble, Crash, Bubble, Crash, Bubble…

"Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

Federal Reserve Chairman Ben Bernanke, Washington Post 11/4/2010

Last week, the Federal Reserve confirmed its intention to engage in a second round of "quantitative easing" – purchasing about $600 billion of U.S. Treasury debt over the coming months, in addition to about $250 billion that it already planned to purchase to replace various Fannie Mae and Freddie Mac securities as they mature.

While the announcement of QE2 itself was met with a rather mixed market reaction on Wednesday, the markets launched into a speculative rampage in response to an Op-Ed piece by Bernanke that was published Thursday morning in the Washington Post. In it, Bernanke suggested that QE2 would help the economy essentially by propping up the stock market, corporate bonds, and other types of risky securities, resulting in a "virtuous circle" of economic activity. Conspicuously absent was any suggestion that the banking system was even an object of the Fed’s policy at all. Indeed, Bernanke observed "Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits."

Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke’s case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant…

Tags: asset prices, Banking System, Banks, Ben Bernanke, Employment, Financial bubbles, government, inflation, liquidity, Stock Market, the Federal Reserve, Treasury, unemployment, Wall Street

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QE2 Won’t Save Our Sinking Ship

by ilene - October 18th, 2010 4:03 pm

Randall’s portrayal of Ben Bernanke’s thinking reminds me of a professor I knew who was trying to prove his own version of the Krebs Cycle.  He designed experiments that would theoretically prove he was correct, but – strangely – the students in his lab kept failing to achieve the proper results.  Rather than changing his theory, he realized that something must have gone wrong in the experiment, and he would have the students do it over, and over, until the right results were obtained.  A lot of rats were killed in the process, but no matter--no one really cared about the rats. – Ilene 

QE2 Won’t Save Our Sinking Ship

By L. Randall Wray, courtesy of New Deal 2.0

The Fed is between a rock and a hard economic outlook.

Fed Chairman Bernanke is signaling that a second round of quantitative easing will soon begin. In the first round, the Fed’s balance sheet nearly tripled to nearly $2.3 trillion as it bought $1.7 trillion in Treasury securities and mortgage-related securities. Since the Fed appears to want to unwind its position in mortgages, QE2 will probably target federal government debt.

During Japan’s long stagnation, Bernanke was famous for arguing that the Bank of Japan could have done far more to fight deflation. Since the BOJ’s overnight interest rate target was effectively at zero, the conventional policy of lowering its interest rate target was not an option. Hence, Bernanke advocated quantitative, rather than price, activity — the BOJ would purchase assets from banks, driving up their excess reserves, until they would finally make loans to stimulate spending that would reverse the trend of prices.

So when he had the opportunity, he put theory into practice in the US, driving short-term interest rates effectively to zero and filling bank balance sheets with excess reserves by purchasing their assets. So far, the impact has not been significantly different than Japan’s experience. Indeed, Bernanke has been publicly warning of the dangers of a Japanese-style deflation, as US inflation has dropped nearly to zero, well below the Fed’s informal target of two percent.

And so we are now set for round two of QE — more of the same old, same old.

In truth, the Fed has done only two helpful things. First, during the liquidity crisis of 2007 and 2008, it lent reserves to financial institutions that faced a liquidity crisis.…

Tags: autoindustry bailout, bailouts, Banks, Ben Bernanke, deflation, Dollar, foreclosuregate, inflations, junk assets, loans, Obama, Politics, printing money, QE, QE2, quantitative easing, Stress Test, the Federal Reserve, toxic assets, Treasury

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Ben’s Cohiba

by ilene - October 9th, 2010 11:04 pm

Ben’s Cohiba

Courtesy of Bruce Krasting

Last Sunday night I wrote about the coming week:

If next Friday the Buck is lower across the board and the BoJ is a bit bloodied Ben Bernanke will light a cigar.

Okay, so our boy Ben is smoking a big fat cigar tonight. He could not be happier. Everything is going his way.

-On the week the dollar got crushed against the majors.

-The Japanese central bank did get its nose bloodied. As of the close in NY they are down about $700mm on the 9/15 intervention of $25b. It’s not just the money (actually it is the money). They lost a battle. The USD/JPY has to go lower. The BOJ has tipped their hand. They are playing defense. And that is losing strategy. Their internal effort at QE just got trumped by Ben’s weak dollar policy. They must be pissed.

-Euro group chairman Junker (ZH article) said the weak dollar will hurt EU growth. Sure it will. That is what Ben wants. He wants to export our deflation to our “friends”. They also must be pissed that Ben is dishing this out to them.

-The gold moves were impressive. If I were at the Fed and watching this near daily slap in the face I would be unsettled. I wonder if they even care. At one time they did, but not in the last few years. Ben is probably pleased with the ratchet up in gold. He not only wants to boost inflation he wants to increase expectations on inflation. High marks on that score for the week.

-Stocks keep going up. Why shouldn’t they? A weak dollar makes top line numbers of a big chunk of the S&P look better. Also, you have to look at what money is competing with. The five-year closed at 1.1%. After-tax that comes to 0.7%. Against a very low rate of inflation the tax adjusted yield guarantees the investor a negative 8% return. Not hard to beat, one would think. So stock multiples have to widen. Right? If so, can we do this forever? If not, how long can we continue?

-The commodity numbers are blowouts. Sugar, wheat, corn, copper, every

…

Tags: Ben Bernanke, Dollar, Financial System, Propaganda, public opinion, Tim Geithner, Treasury, unemployment

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How Pimco Is Holding American Homeowners Hostage

by ilene - August 21st, 2010 3:56 pm

How Pimco Is Holding American Homeowners Hostage

Courtesy of DAVID STOCKMAN, courtesy of Minyanville

Some raids on the US Treasury by America’s crony capitalists are so egregious as to provoke a rant — even if you aren’t Rick Santelli. One such rant-worthy provocation is Pimco’s latest scheme to loot Uncle Sam’s depleted exchequer.

According to Bill Gross, who heads what appears to be the firm’s squad of public policy front runners, the American economy can be saved only through “full nationalization” of the mortgage finance system and a massive “jubilee” of debt forgiveness for millions of underwater homeowners. If nothing else, these blatantly self-serving recommendations demonstrate that Matt Taibbi was slightly off the mark in his famed Rolling Stone diatribe. It turns out that the real vampire squid wrapped around the face of the American taxpayer isn’t Goldman Sachs (GS) after all. Instead, it’s surely the Pacific Investment Management Co.

As overlord of the fixed-income finance market, the latter generates billions annually in effort-free profits from its trove of essentially riskless US Treasury securities and federally guaranteed housing paper. Now Pimco wants to swell Uncle Sam’s supply of this no-brainer paper even further — adding upward of $2 trillion per year of what would be “government-issue” mortgages on top of the existing $1.5 trillion in general fund deficits.

This final transformation of American taxpayers into indentured servants of HIDC (the Housing Investment & Debt Complex) has been underway for a long time, and is now unstoppable because all principled political opposition to Pimco-style crony capitalism has been extinguished. Indeed, the magnitude of the burden already created is staggering. Before Richard Nixon initiated the era of Republican “me-too” Big Government in the early 1970s — including his massive expansion of subsidized housing programs — there was about $475 billion of real estate mortgage debt outstanding, representing a little more than 47% of GDP.

Had sound risk management and financial rectitude, as it had come to be defined under the relatively relaxed standards of post-war America, remained in tact, mortgage debt today would be about $7 trillion at the pre-Nixon GDP ratio. In fact, at $14 trillion or 100% of GDP the current figure is double that, implying that American real estate owners have been induced to shoulder an incremental mortgage burden that amounts to nearly half the nation’s current economic output.

There’s no mystery as to how America got hooked on this…

Tags: Bill Gross, crony capitalists, David Stockman, Economy, fixed-income finance market, Goldman Sachs, Housing Investment & Debt Complex, Matt Taibbi, mortgage finance system, nationalization, Pacific Investment Management Co., PIMCO, taxpayers, Treasury, vampire squid

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Turn Up Tuesday – POT Gets Really High

by Phil - August 17th, 2010 8:29 am

BHP offered to pay $38.4Bn for POT this morning.

Is BHP high or is this market seriously undervalued?  Well, for one thing, POT turned them down saying the offer ($130/share – CASH) "substantially undervalues PotashCorp and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects."  CEO Dallas Howe continues: "We believe it is critical for our shareholders to be aware of this aggressive attempt to acquire their company for significantly less than its intrinsic value. The fertilizer industry is emerging from the recent global economic downturn, and we feel strongly that PotashCorp shareholders should benefit from the current and potential value of the Company. We believe the BHP Billiton proposal is an opportunistic effort to transfer that value to its own shareholders."

Considering POT closed at $112 yesterday, so a 16% pop in the offer but POT was at $85 at the beginning of July and hasn’t been over $130 since the 2008 crash, although they did top out at $239.35 so I suppose a very patient investor could imagine that within 5 years, $200 is not an unreasonable goal.  Still, is that enough reason to turn down $130 of cash now, with the proverbial 1.3 birds in the hand being worth 2 in the bush? 

Back on July 12th (when POT was trading at $92.81 and the Dow was at 10,200) my premise for looking for S&P 1,100 and Dow 10,700 was that Corporate America’s Non-Financial companies were sitting on a $2Tn pile of cash and, as an old M&A consultant, it seemed pretty obvious to me what was going to happen to that money. 

We’ve had plenty of M&A activity recently.  In fact, M&A activity in the first half of 2010 saw 5,345 deals (up 49% from last year), the highest level since 2007, indicating that companies are INCREASING their confidence in the economy despite the BS spin you are getting from politicos who NEED you to believe things are worse than they seem and the MSM, who push fear like heroin to create a NEED for their product.

POT’s board of directors is very confident that they don’t NEED BHP’s money and BHP may NEED POT badly enough to want to sweeten the deal – frankly I’m surprised at the timing because I would have waited for another dip and the fact that BHP (one of the World’s largest resource companies with $50Bn in annual sales)…

Tags: BHP, Geithner, HD, POT, Treasury, WMT

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Innovation, Risk and the Forest Fire Analogy

by ilene - July 4th, 2010 3:20 am

Innovation, Risk and the Forest Fire Analogy  

Courtesy of Charles Hugh Smith Of Two Minds 

To clear open space for innovation to take root, sometimes you need a forest fire to destroy all the deadwood. Instead, we are frantically piling up more deadwood.

What was once an inflammatory outlier--that our brand of "capitalism" incentivizes exploitation, fraud, complicity, corruption and plunder--is now commonplace. Even the most mainstream financial media websites now sport commentaries which excoriate our systemic fraud, and books galore gleefully sport titles containing "hot" words like plunder.

That is a remarkable turn of events: that a radical critique of our entire financial system has gone mainstream, and in many circles has been accepted as "obvious." (For more on the tricky nature of what’s "obvious," please see the chapters on the politics of experience in Survival+.)

In Innovation: Financial, Technical and Institutional (June 30, 2010), I attempted to connect the dots between risk and innovation. I believe that the two concepts are intrinsically bound like oxygen and hydrogen in the water molecule, but this deep structural connection between the two is generally ignored or not even recognized.

In essence, innovations which remain inherently unstable and unsafe regardless of hedges, controls and safety features--that is, they embody intrinsic risk-- cannot be placed in the same category as innovations with inherently low risk.

One of the keystones of the Survival+ critique is the realization that the risks of our systemic "financial innovations" are ontological and cannot be massaged away to zero. Indeed, the idea that this was possible underpinned the entire credit bubble and its inevitable implosion.

Mathematician Benoit Mandelbrot discredited this notion in depth in his book (highly recommended) The Misbehavior of Markets.

I addressed this last year in The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009):

For decades, the operative theory of forestry management was that limited controlled burns-- mild reductions of dead underbrush and debris--would essentially reduce the possibility of a major fire to near-zero.

But the practice actually allowed a buildup of dead wood which then fueled the devastating forest fire which swept Yellowstone National Park in 1988. Various revisionist views sprouted up later, claiming the fire was not the result of misguided attempts to limit natural forces (Vast Yellowstone Fire Now Seen as Unstoppable Natural Cataclysm (NT Times, 1989)).

Now we’re in a financial conflagration which is widely considered the result of

…

Tags: bailouts, capitalism fraud, Congress, corruption, Crony capitalism, Federal Reserve, financial complex, Financial System, innovation, oil industry, risk, sickcare complex, taxpayers, Treasury, Wall Street

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The Perversity Of Bank-Driven Policy Response

by ilene - May 12th, 2010 7:15 pm

The Perversity Of Bank-Driven Policy Response

Courtesy of Karl Denninger, The Market Ticker 

If you’re wondering why the big banks have "captured" the political environment in every nation of the world, you need only look at the Goldman results through a somewhat-different lens.

See, it wasn’t just Goldman - it was also Bank of America, Citibank and JP Morgan who scored "perfect quarters."

Now if Goldman’s record was predicated on the outcome of a game of chance set of odds and had an 8.67 x 10^-19 probability of occurring, for four of these institutions to do so would be that to the 4th power, or something approaching 5.65 x 10^-73.

As pointed out in the forum by Tsberts, there are fewer than this many particles (atoms, etc) in the known universe.

Now it is certainly true that trading activities are not a pure game of chance, and that most of the trading profits are generated from "market making" (that is, earning a spread.)

But that makes the performance even more outrageous, because these "market making" activities are claimed to be something that provides net benefit to market participants and thus the economy as a whole.

That claim looks awfully hard to sustain when the book-maker never loses – not even once on a daily aggregate basis.

Indeed, this puts into stark relief the nature of "banking" these days in the Wall Street context, which is increasingly nothing more than an activity intended and executed to skim off profits for the banksters at the expense of literally everyone else in the economy.

They seem to be doing a good job of it too, if these results are any indication.

Here’s the problem with this, assuming you’re not a bank executive:…

Tags: asset valuations, bankers, Banking System, Banks, borrow, Economy, Housing Market, infinite leverage, MBS, Ponzi, tax, Treasury, zero interest

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Are Traders Demanding US Credit Default Swaps Payable in Gold?

by ilene - March 8th, 2010 5:00 pm

Are Traders Demanding US Credit Default Swaps Payable in Gold?

Courtesy of JESSE’S CAFÉ AMÉRICAIN

If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.

But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some other data I have seen from other sources, and desire to continue to put the puzzle pieces together without traveling false trails.

It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.

If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.

Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of…

Tags: CDS, Credit Default Swaps, Gold, IMF, Janet Tavakoli, Treasury, US Fed

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30 Year Auction: A Solid “F

by ilene - February 11th, 2010 2:22 pm

30 Year Auction: A Solid "F"

Courtesy of Karl Denninger at The Market Ticker

Tags: 30 Year Auction, Dollar, Equities, Rick Santelli, Treasury

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Dubya, Hank Paulson’s Surrogate Mother, Urged The Bald To Exercise, Sleep

by ilene - February 9th, 2010 2:24 pm

Dubya, Hank Paulson’s Surrogate Mother, Urged The Bald To Exercise, Sleep

Courtesy of Tyler Durden

Welcome to 1984, where outright propaganda and lies bombard you from current and prior administration officials each and every day. Here is the latest:

And here is our translation:

• Bush has good, fundamental understanding of markets – Interpretation: see here.
• Chinese save too much – Interpretation: Come to America and buy your plasma screens in this country
• Americans borrow too much – Interpretation: Americans LTV is about 10E^TARP
• US will get back every penny put into banks – Interpretation: US will lose every penny put into banks
• Buffet was a "pillar of strength for Paulson." – Interpretation: Buffett’s multi-billion bet on the S&P never declining was a future pillar of destruction for BRK
• He couldn’t say no to his country on Treasury job – Interpretation: he couldn’t say no to the opportunity to cash out of his $700 million Goldman stock stash
• A faltering Chinese economy would be bad for U.S. – Interpretation: see here.
• Without TARP US would have had 25% unemployment – Interpretation: With TARP Lloyd Blankfein will be a trillionaire, as companies cut SG&A to 0, unemployment hits 100% and Net Income becomes Revenue.
• Chinese need to reform currency – Interpretation: We need to kill the dollar, those bastards over there are making it impossible.

Tags: Chinese economy, George Bush, Goldman Sachs, Paulson, Treasury

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