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Bernanke is killing my Mom

November 6, 2010

Does printing money help people get jobs?

Does buying treasuries help the poor?

Fuck no.

In his own words Bernanke claims the idea behind quantitative easing (buying treasuries with printed money) is to lower interest rates (get fuckers to borrow more or refinance their existing debt at lower rates at the expense of savers) and to bolster the stock market – which will have a “wealth effect” and get people feeling more “confident” and buying cars and fur coats and such… on credit of course.

But who enjoys this wealth effect?  90% of equities are owned by 10% of the population.  This year has witnessed RECORD outflows from ma&pa investors (mutual funds) out of equities and into bonds which on account of the FED are yielding NOTHING.

Really whats happening is Corporations, which are able to tap the capital markets, are doing so in a feeding frenzy.  Some companies are issuing debt at rates lower than the Govt.  Shit is distorted.  But whats worse is what these corporations are doing with the proceeds of these debt offerings.  Some buy back their own shares (while insiders dump their shares Insider Selling To Buying: 2,341 To 1 zero hedge)  Or they are borrowing to pay dividends (the definition of a ponzi) or they are doing nothing at all with it…  Which is for the best because there already exists overcapacity so no matter how cheap the money is – in he absence of demand it will be unwise to expand business – I forgot where I read this “I dont need CREDIT – I need CUSTOMERS”

Only way to get customers is to get them to borrow cheap and buy something glitzy.  Notice all those 0% financing deals for cars and such lately.  Its not debt if its 0% right ???

Saving is for suckers.

This brings us to the plight of my dear old Mom who recently provided me $100k (via a reverse mortgage) to invest and provide income in order for her to live out the remainder of her life.  (her house was appraised at $400k+ in 06 so NO she did not benefit from the feds attempt to reflate the housing mkt – so dont even go there)

So, as a sage investor (with my moms cash that is) I naturally looked to the safest investments – T-bills

I found the 2yr treasury paying 75 bips (thats is less than 1%).  Ma cant live off $2.50 a day) So looked for longer dated debt (which is risky but I need YIELD!) and found the 5 year paying 1%… hmmmm so I went all the way out 30 years and found a 4% yield….  No stinking way am I going out 30 years for 4%.  If Bernanke gets his wet dream of 2% inflation (min of  2%) that makes my real return only 2% – and what if he overshoots to even 4% inflation (very likely – and many see inflation much higher) then my real return becomes NOTHING! ZERO! Ma sorry, but your $11 a day will no longer be able to afford you a $12 gallon of milk.

So who the fuck in their right mind would lend somebody out 30 years at 4%?  if in 30 years from now, or even 5 years from now rates may go up to 5 or even 10%.  sheet, they were 25% in the late 80’s!!!!!!

But folks are forced to to bend over and invest at close to zero return.   This is what happens when the Fed buys 3 trillion in bonds..

Somebody is going to lose money and the Fed is trying not to be the one holding the hot pile of dog shit when the music stops.  See, big Ben knows that if the economy actually gets going and banks start lending and folks start spending inflation is going to take off!  (banks have $1 trillion in reserves – and are about to get another $600bl) The Fed has been quoted as saying they have the “tools” to contain inflation – that is, they will sell treasuries and raise the Fed funds rate.  When this happens the poor slob holding the 30 year bag of dog shit paying 4%?  will be in jumping out of a window – but it aint gonna be the Fed cause Ben is buying all the short-term / safest debt while everybody else is forced to buy the 30yr or even corporate or even JUNK bonds!!!  To even see any smidgen of a return.   (There has been a HUGE junk bond rally..)

Now – Proof that the population have gone full retard

I present to you the 50 year bond compliments of non other than Goldman Sachs.   And get this – the rate is a whopping 6%.

Yes, I said 6% (not 60%)  Yes folks, this is indeed the same Gold man Sachs on the brink of failure – on its hands and knees begging the fairy treasury mother to turn them into a “bank” in order to borrow free tax payer Cash 2 LONG years ago.   And now people are willing to lend them billions for 50 fucking years at 6 fucking percent???? WTF WTF?  Quantitative squeezing I say as in the Fed squeezing investors into risk assets.

WHAT THE FUCK

Ok, so PERHAPS fixed income may not be the place to go.  How about stocks?  But wait, didnt the stock market just crash and burn 2 years ago ?  would I want to risk blowing ma’s survival money on some GOOG shares ?  No, but thats what the FED is telling me I should / need to do.  (heck, even my 401k model tells me I should be at least 90% invested in equities)

Well, I gotta go because the baby is crying. – but please dont let Ben Bernanke kill my mom.

Also – Dont believe in the “core”  inflation numbers – Costs are already rising on account of this cheap money (ad I aint even talking about GAS).  I picked up a 6 pack and a bag of chips and it cost me nearly a $18 bucks.

From JPM:

When the Fed considers the possible consequences of a falling dollar resulting from printing money, it should perhaps focus on food and energy prices as much as on traditionally computed core inflation.  First, the food/energy exposures of the lower 2 income quintiles are quite high.  Second, the core  CPI has a massive weight to “owner’s equivalent rent”, which suggests that the imputed cost of home occupancy has gone down.  Unfortunately, this is not true for families living in homes that are underwater, and cannot move to take advantage of it (unless they choose to default and bear the consequences of doing so).   Due to the housing mess, there has perhaps never been a time when traditionally computed core inflation as a way of measuring changes in the cost of things means less than it does right now.


And read this –  I didnt write it but its good and I GOTTA GO!

Much of the world emerged from the Great Depression and World War II with a combination of institutions, regulations, financial practices, and memories that together encouraged relatively rapid economic growth, high employment, growing incomes, and growing confidence in our future. Private debt was low (mostly wiped out in the bankruptcies of the 1930s), government debt was high (war finance), and the financial system had been “simplified” (in Minsky’s terminology). Big Corporations mostly used retained profits to finance expenditures; Big Unions kept wages growing so that workers could spend out of income rather than relying on debt; Big Government had filled portfolios of banks and savers with safe government bonds. Finance was kept small, constrained, and relatively irrelevant. Besides, memories of the Great Depression discouraged lending as well as borrowing. Strict regulation—especially in the US—kept risky financial practices segregated outside commercial banking.

Over time a complex combination of factors changed all that—memories faded, regulations were relaxed or financial institutions defeated them with innovations (including new types of instruments and institutions that took market share away from highly regulated banks). Private debt grew. Risky practices emerged. Financial crises resumed. However, the crises were contained by swift intervention of Big Government and the Big Bank (central bank)—that bailed-out institutions and prevented recessions from becoming sufficiently severe to eliminate the risky behavior. Relatively robust growth combined with stronger labor led to growth of pension funds and other private saving—money that needed to be invested to get high returns to support a private retirement system. Clever managers of that money developed increasingly esoteric and complex ways to make—and to lose—money.

The age of what Minsky called “money manager capitalism” had arrived—a form that put finance first. And, importantly, this new capitalism took a global form—a new globalization of finance developed. Again for complex reasons, the interests of money managers did not coincide with those of Big Corporations and Big Unions—the “leveraged buy-out” was used to strip firms of assets, load them with debt, and bust their unions. Wages stopped growing; consumers relied on debt to maintain living standards. Globalized finance also helped to globalize production—with low wage workers in developing nations helping to depress incomes in developed nations. Thus, “financialization” of the economies concurrently meant both “globalization” as well as rising inequality.

The weight of finance moved away from institutions—that were guided by a culture of developing relations with customers—toward “markets” (the “originate to distribute” model of securitizing pools of mortgages is a good example). This virtually eliminated underwriting (assessing credit worthiness of customers) and also favored the “short view” (immediate profits) of traders (you are only as good as your last trade) over the long view of financial institutions that hold loans. In addition, the philosophy of “maximization of total shareholder returns” as well as the transition away from partnerships in investment banking toward public holdings promoted pump and dump schemes to increase the value of stock options that rewarded CEOs and traders. A “trader mentality” triumphed, that encouraged practices based on the “zero sum” approach: in every trade there is a winner and a loser. As practiced, the bank would be the winner and the customer would be duped.

This transformation helps to explain why fraud became rampant as normal business practice. Competition among traders and top management to beat average returns led to ever lower underwriting standards to increase the volume of trades—with fees booked on each one—and with strong incentives to “cook the books” (record false accounting profits). Once accounting fraud is underway, there is a strong incentive to engage in ever more audacious fraud to cover the previous crimes. In the end, the US financial system (and perhaps many others) became nothing but a massive criminal conspiracy to defraud borrowers (through such instruments as “liar’s loans”, NINJAS—no income, no job, no assets, no problem!—and “no doc” loans) as well as investors in securitized products (mortgage backed securities, collateralized debt obligations that were securities of the worst MBSs, and on to CDOs squared and cubed). All of this led to layering and leveraging of debt on debt and debt on income. At the peak, US indebtedness was five times national income—meaning each dollar of income was pre-committed to service five dollars of debt! This was, of course, impossible. The pyramid of debt collapsed like a house of cards.

Where are we now? Many governments reacted with fiscal stimulus packages as well as bail-outs of financial systems. While many have proclaimed that the worst is behind, by all objective measures, nearing the end of 2010 the financial system is probably in worse shape than it was at the end of 2007 when it collapsed. Debt ratios have not come down appreciably. Defaults and delinquencies are up by huge amounts. In the US foreclosures have come to a virtual standstill as it has been recognized that many or perhaps most foreclosures that have taken place were almost certainly illegal. Holders of securitized products like MBSs and CDOs have begun to sue banks for fraud, demanding they take them back. While banks have reported strong earnings, almost all of these have been in trading activity or have resulted from reducing loss reserves (ironically, as defaults rise). In other words, none of the normal bank activity is generating revenue—all profits are accounting profits where it is easy to “cook the books”. Where it will all end is unknown but a complete collapse of the financial system is not out of the question.

This time around, it is not clear that governments will save the banks–having been burned last time around, voters are not sympathetic. Especially in the US the feeling is that Main Street’s needs have been ignored while Wall Street has been favored. And in most nations, government has adopted austerity policies to reduce spending and where possible to raise taxes. In some countries this appears to be necessary—such as the so-called “PIIGS” (Portugal, Ireland, Italy, Greece, Spain) that are heavily indebted with hands tied due to constraints imposed by the currency union. In others, such as the UK and the US it is mostly political—a reaction against the bail-outs of financial institutions. How this will all turn-out I do not know, but another crash and even deeper downturn seems likely.

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