Talk Elections

We are so ****ed now (not particularly at this moment, I should note).  Which bad scenario should I place on the table now...  (ugh)

http://www.marketwatch.com/news/story/Fed-buy-Treasurys-latest-bid/story.aspx?guid={8C08C8DB-1945-4A8A-A047-C3782DE43911}

Dollar just collapsed.  10yr/30yr treasuries skyrocketed through the roof and so did the stock market, even though the stock market is pulling back.

EDIT:  Missed one - gold skyrocketed too (not surprisingly).

So are there any upsides to the dollar collapsing? Maybe more manufacturing?

There are no positives results to this scenario.  Period.

More complete article...

http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14680377.html

The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion.

PERFECT!  Good move by the Fed.  I would have liked it to have been larger than $1.25T...but can't really complain.

Next step needs to be changes to uptick rule and MTM.

We have to stablize the banks.

Full disclosure: I own 25k shares of Citi at a cost of $2.30

Well, except for complete economic recovery through reflation.

Oh and btw, I told you so.  My economic views are apparently shared by those in control of the Fed.

Oh and btw, if the dollar falls much (it won't), everyone else will just have to quantitatively ease (print) to equalize - they have no choice.

the UK is already quantitatively easing.  And, you're right, the dollar won't fall much, the EU economy is twice as bad as the U.S.

Opebo and Jmfcst agreeing on economics, cats and dogs living together...MASS HYSTERIA

yep, sure sign that the 2nd Coming is near!

After a long hiatus, I finally got back into the stock market.  My first buy, CAT, was a stimulus play, but Obama stimulus sucked and I hit my stop loss limit.  My second buy, PBR, which I sold today, almost recovered all my loses in CAT. 

Now, I am in Citigroup (C) at $2.30. The U.S. is NOT going to let Citi fail.  They claimed to be profitable in Jan and Feb.  And the reinstatement of the uptick rule and the changes to MTM will make help stabilize Citi.  It is either a $10 stock or a $0 stock.  I'm betting that it is a $10.

For the rest of the overall market...there is no reason to be long right now given the risks.  Better to play stocks that are receiving Federal protectsion, like C and BAC and F.

April will be a very crucial month.  Obama's team better have all their cards on the table by the end of April.  IMO.

One thing is for sure:  Fed chairman Ben does not want to deal with a depression on his watch.  He failed us miserably in 2007 and most of 2008, but he's had his game face on since taking rates to near zero.

The dude may be mad as a march hare in many ways, but certain aspects of his economic views are sensible.

I even agree that this quantitative easing should have been much larger in size...

Actually, it tells me something as well...

EDIT:  Well, it tells me that ( ;) to myself), but it tells me something more important - wait patiently and prepare.

look...though you and opebo have totally different economic viewpoints, both of your viewpoints never change, regardless of market conditions.  Both of you are willing to play chicken with icebergs.  I, on the other hand, am willing to temporarily change course in order to save the ship.

This ain't saving the ship, jmcfst.  This is purposely driving a hole in the ship and every lifeboat, along with throwing all the life jackets overboard.  It won't sink overnight of course, and right now it looks like you're saving the ship (or something like that - I don't have a good analogy at the moment).

If you view me as being stubborn or unchangeable, so be it.  History has shown time and time again that the only way out of a debt-deflation is to default the bad debt.  Opebo's solution gives us Weimar, Argentina and Zimbabwe (as examples); continued borrowing of debt (no monetization) with no end gives us Iceland; I don't think we're lucky enough to get Japan for a whole host of reasons.  If I am wrong, long-term, I'll take my lumps.  Anyway, we disagree on the solution, not the problem.

There's a good reason why symbolically, if you read Bernanke's thesis, this is presented as his last option to stopping a debt-deflation.  Of course, that also tells me that we're much, much worse off than TPTB are letting on.

I have a few working theories as to why it was done - 1) the need for buyers of the massive amounts of debt that's going to be done this year; 2) the need to keep interest rates lowered when that debt is being issued (as the 10-year bond was at 3% yesterday, and technically would have bounced much higher soon); 3) the need to keep interest rates lowered when certain commercial paper obligations roll over (otherwise they would have blown up); 4) some other general problem that was going to blow up if we didn't do anything.

Look - with today's announcement the Fed will own, according to my count, about 40% of the MBS out there.  When will the Fed own that much in Treasuries?

I said that there would be one last flight to safety in bonds.  I thought it would because of some failure in the EU and UK.  This is it - the final bubble is being created - the "government finance" bubble.  The only way the Fed will have to keep this bubble going now is to keep buying Treasuries.  Otherwise, it pops or it ends when the Fed owns all.

Oh, and the EU and UK still have it worse than we do (for now).

I don't consider the Great Depression of the 1930's as a "way out".

In any case, check out this video about the short squeeze on Citi's stock conversion:

http://online.wsj.com/article/SB123739700104873325.html#articleTabs%3Dvideo (http://online.wsj.com/article/SB123739700104873325.html#articleTabs%3Dvideo)

I noticed this morning that they were calling in shares used to short financials today.  Perfect timing really - to coincide with this big FOMC announcement.  Congrats on the hold (through today at least)

In the GD, we used the same mechanisms that we're using today, just not in such great amount.  In fact, the 1931 bond market dislocation occurred in part because people thought we were going to monetize our debt. 

Of course, every scenario is not the same, but to me the idea that doing more of the same, just in larger amounts, will work, is well, just, you know...

We shall see.  I hope I'm wrong, but I've been saying that for a while now. 

Anyway, I wish you luck, nonetheless, even though I know we'll disagree.  I haven't played around in the stock market since June 2007 (I don't like playing in bear markets) and I don't play day trader.  My curiosity in and study of the markets is mainly intellectual (personal disclosure)

huh?!  How can you say that?   The Hoover administration did next to nothing from Oct 1929 to early 1933 - Hoover believed the market would sort it all out.  The market did sort it all out - and the vast majority of Americans were huge losers.

Feb Chairman Ben is a huge student of the GD and he is doing everything the Fed didn't do from 29-33.  By the time FDR came into office, the patient was already dead. Chairman Ben, though MIA in 2007 and most of 2008, is trying to keep the patient alive.

I bought into C at $2.29 and into BAC at $4.15.... so I'll ride this as long as I can before the bottom falls out again. If BAC releases earnings in April and they have a profit, it's going to shoot through the roof. I'm out my memorial day, though.

What bond market dislocation in 1931? There were brief spikes in bond yields that year, but mostly in the corporate and municipal markets. The Fed responded to this mostly by raising the rediscount rate to staunch the export of gold. This was an exercise in defense of the gold standard, which was ultimately abandoned, resulting in an effective monetization of debt. Arguably the government should have abandoned the gold standard sooner, rather than raising interest rates. Bond yields fell throughout the 1930s.

Yes! That is now clearly so true and also so reassuring!

Basically, what happened today is that Bernanke did not like Obama's stimulus (that's why Ben warned on 60Minutes about the lack of political will)...so Ben cranked up the printing presses and created his own stimulus.

Actually while my economic ideology doesn't change, my policy prescriptions do change quite often.

For example massive printing is the obvious action in a deflation, and always works very well.  Bernanke is good.  It is absurd to compare this to the Weimar or Zimbabwe cases as the situation is entirely different.

I don't recommend this sort of printing in normal times, though obviously a continuance of some milder Keynesian redistribution is always necessary.  During 'normal' 'market' operation, it is better to tax said monies from the privileged to provide for redistribution (along with several other ways).  The printing aspect is the medicine for deflation/depression, not the daily tonic in normal times.

That said, one aspect of this Bernanky printing I don't like is that the money goes to holders of securities - the very class which will not spend/cannot spend.  We need to print a trillion or two and get it directly into my hands and the hands of people like me.

YES!  I meant to point that out to you yesterday.  Obviously you get the picture: the Ben-stimulus is geared toward those liquid enough to able to take advantage of a good deal.

Spot on!

Sam,

Were you in agreement of the original $700B "bailout" last Sept-Oct?  Because, the way I see it, we were headed for an instant depression last fall, and the government intervention has bought some time for us to deleverage in an orderly manner so that, hopefully, we only end up with an severe recession.

If you don't agree with attempting to intervene in the markets last fall in some fashion, you and I will certainly never agree on current policy.

LOL, this situation gets more awesome by the day! Huzzah.

gold way up again today

()

You believe that?  Seriously?  Well, it's no wonder we disagree on the solution when we don't agree on the history.

I'd advise you to go and read up some books on GD1 and then we can talk.


So how come everything that's been done so far in his "thesis" has failed?  I don't see things getting better, rather I see things slightly less bad than they would have been otherwise BUT with none of the underlying problems fixed. 

At some point, I submit that the underlying problems will be fixed through the "flush" that would have happened before.  Moreover, the "flush" will be much worse than it would have been in the past.  Anyway, I believe our question here is "when", not "whether".  I do think that the "flush" can be mitigated *a bit* through government regulation and re-regulation (it's a question of *what* not *how much*) and punishment of the fraudsters.

I would also submit that BB's thesis "fails" because you can't solve a "debt-deflation" with more "debt".  QE is just the last step in the game.

As before, I hope not to be right, but I'm not going to bet against myself.  :)

No - once I realized who the beneficiaries were going to be.


Instant depression then, worse and longer one now...  Perhaps even complete economic collapse.


Government could have intervened to deleverage in much more useful ways than just pumping money into banks and now deadbeat homeowners, lenders and loan servicers.


Government has its place in the markets.  Fundamentally, that role is to regulate the markets so that fraudsters cannot function and if they do function, that they are punished when found out.  (in other words, provide the rules and punish those who flaunt them).

When private entities make bad bets, government's role is not to paper over the losses.  Rather, it is to ensure the pieces are broken up properly (that's why we have a Bankruptcy Code) and sold to the highest bidder. 

More importantly, it should ensure that those entities who have made good bets are protected from the destruction AND that those who depend on the private market for the livelihood (i.e. the masses) are protected, no matter how bad things get.

Tell me exactly, how any actions made in the past two years of this mess have been made according to the principles above?  Seems like to me that the past two years have been devoted to doing everything exactly the opposite of this.  In fact, one may argue legitimately that everything has been done wrong in this sense since the Mexico debt crisis of 1995.

Food for thought.

As of right now (short term) we are MUCH better off than if the Fed had done nothing last fall.  That's a certainty.

In the long run, we may still go into a depression and maybe even a worse one.

When the next war comes, we may be better off surrendering than fighting, but I rather go down fighting.  At least then we have a chance to "win" even though victory will come at a high price.

Same thing in this economic situation.

---


That's just it - government can NOT do that, it's not that powerful.  The economy is too big and too intertwined to isolate pain.

Our economy is based upon debt.  Debt requires confidence.  We allowed too much leverage.  We allowed insurance in the form of credit default swaps to be sold without regulation, now they total $55T (fifty-five trillion USD).  That kind of leverage creates an unstopable domino effect.  We can NOT sit on our hands and let it unwind on its own, doing so would put us in a >99% chance of another great depression.

And I'm not sure, with the current structure of our society (very few living on farms), that we could survive that as a nation.

---

And I am not pleased that with the crisis we are facing, Congress is persuing AIG bonuses that were paid under legal and binding contracts.  It may very well be an outrage, but we have bigger fish to fry.

Printing cancells the debt, Sam Spade.

They are playing w/ fire. I hope they know what they are doing (I don't know), but it is still fire. Oy-vey.

The purchase starts tomorrow. 

http://www.newyorkfed.org/newsevents/news/markets/2009/ma090324.html

Yields on the 10-year note had already regained half of what they had lost since the QE announcement and 30-year bonds were all the way back to where they were.

So, well put two and two together....

Yields did fall again after this announcement but nowhere near as much as before.

Yields don't matter much.  In a depression, people's borrowing or lending/investing behaviour will not be effected by a difference of a couple percentage points.  Their behaviour is entirely controlled by fear.

The purpose of quantitative easing, it seems to me, is to create large amounts of new demand out of nothing (in other words replace the demand that is lost by depression psychology), thus putting idle capacity to work.  Interest rates have little to do with this.

Changes in yields reflect people's willingness to save, rather than cause them. So I think Sam's point is rather the old monetarist interpretation of Lincoln: you can fool all of the people some of the time and some of the people all of the time but not all of the people all of the time.

Yes, there is certainly no shortage of savings in a depression.

I like that old Keynesian chestnut 'pushing on a string' myself.

Regardless, Bernanke's stated goal is keeping long term interest rates low in order to stimulate things such as the housing market, and the quantitative easing effect had a much more lasting impact on the dollar than it seems to be having on interest rates.

Corporate yields are way higher than they were earlier in the year, too, although they're still falling. I expect that to end soon.

Interest rates are always a tough nut to crack. It's not like stocks, where the higher the price the better it means expectations are. Nor is it like commodities, where you know higher price reflects higher economic activity, because short and medium term demand is more elastic than supply.

With bonds, there are really three components: the risk premium (of default) of the bond itself, the inflation expectation, and the opportunity cost (or the risk premium on alternative investments.) Any one of these factors may be driving any movement in bonds, but almost never is any one factor totally determinant.

One imagines 19th century physicists trying to break down an element into its protons, neutrons, or electrons, or Renaissance astronomists trying to break down the movement of the planets into gravitational pull, velocity, rate of change of velocity, and mass. You really need to look at things other than the rate itself to find out what is going on.