“Overall, the minutes showed that further [quantitative easing] is not yet a consensus view among FOMC members and would only likely be triggered if the economic recovery were to lose momentum,” said Jim Reid, strategist at Deutsche Bank in London. “So last week’s slightly [disappointing U.S.] payrolls number isn’t probably enough evidence yet.”

Ironically, the market is more likely to gain ground in the near term if economic data deteriorates, he said, in a note, because that would be more likely to prompt more action.

I wouldn’t be surprised by this either. What happened to fair value markets? They went away five years ago and have yet to return. How can anyone apply a long term strategy in this mess? I wish the FED would take a step back and let the markets value correctly. Constant interventionism is doing more damage than good.

Interesting ZH article

On The Verge Of A Historic Inversion In Shadow Banking

This is an interesting article which details something I’ve been curious about – a correlation between what I’d term the shadow money supply and FED action. I’m wondering if this analysis is correct – the FED buys up what I’d term a hard asset, say for example a mortgage backed security (a mortgage basically) from a bank or investment firm. Now normally if this type of transaction were occurring entirely in the private sector, when a bank purchases an asset like this, they would then go out and buy an insurance policy on the asset (a CDS?). The company (say AIG?) that sells the policy doesn’t need collateral (deposits) to cover a loss on the policy. So in effect, money is printed – the bank owns an asset with little risk of loss, meaning they can continue to invest (risk) the value of the asset in other areas, and AIG simply sits back and preys nothing goes wrong.

Looking back at the FED scenario, if the FED buys the asset no insurance policy will be issued so the value of the asset will not be reinvested back into the markets. Within the private sector this set of transactions creates money, but when the FED gets involved net new money creation is ~zero.

If this is all basically correct, then for every dollar the FED prints to buy assets like MBS, an equal amount of money is removed from the money supply – resulting in a net zero change. Hence, no inflation.

One thing in the article isn’t clear to me –

Said inflation buffer, however, is getting smaller and smaller every quarter, and at this rate, shadow banking as a transformational conduit will completely disappear in a few short years, at which point everything will be in the hands of fickle depositors.

Why is this assumption made? Once things begin to calm down, wouldn’t the investment banks of the world, and the AIGs, go risk-on again? Has something changed that prevents them from doing so? The SBN graph in the ZH article appears to reflect a bottoming process is taking place, so at some point an increase in money printing through non-deposit backed credit will resume. But maybe I’m missing something that will prevent that.

Overall what this seems to indicate is that the FED’s QE initiatives were doomed to fail from the start.

One other thought, due to the inherent money printing in these types of transaction isn’t there an inflationary risk tied to the FED unwinding its portfolio by selling assets back into the private sector? If the FED really wants to create inflation, shouldn’t it start selling assets now while we are still experiencing deflationary headwinds, or does the FED want to keep all that money printing potential out of the markets? Also, wouldn’t waiting to unwind ultimately exacerbate future inflationary forces? Overall current FED policy seems rather flawed to me.

addendum: In thinking about this a bit more, if the bank sells the asset to the FED, it receives newly minted money in return, which it can then invest. So maybe the insurance portion isn’t needed to print and the net creation of money is still positive?


“My investing model is ABCD: Anything Bernanke Cannot Destroy: flashlight batteries, canned beans, bottled water, gold, a cabin in the mountains.”

David Stockman interview

The whole interview is rather interesting. I’ve been reading a lot of these doom and gloom stories, I don’t know if I buy into them 100%, but I do get the sense that we are currently in a suspension phase and that more trouble is on the horizon.


Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That’s a nice sentiment, but it does overlook one minor detail. QE2 didn’t work.

Actually, that’s not quite fair. The Federal Reserve was indeed successful at provoking a speculative frenzy in the financial markets, which has now been completely wiped out. The Fed was also successful in leveraging its balance sheet by more than 55-to-1 (more than Bear Stearns, Lehman, Fannie Mae, Freddie Mac, or even Long-Term Capital Management ever achieved), and driving the monetary base to more than 18 cents for every dollar of GDP – a level that requires short-term interest rates to remain below about 3 basis points in order to maintain price stability. The Fed was indeed successful in provoking a wave of commodity hoarding that affected global supplies and injured the poorest of the poor – particularly in developing countries. The Fed was successful in setting off a very predictable decline in the value of the U.S. dollar. The Fed was successful in punishing savers and the risk averse, and driving investors to reach for yield in risky investments that they would normally avoid were it not for the absence of yield. The Fed was successful in provoking those with strong balance sheets to pay down existing higher interest-rate debt, and in creating an incentive for those with weak balance sheets to issue more of it at low rates, resulting in a simultaneous deterioration of credit quality and compensation for risk in the financial system. The Fed was successful at boosting the trading profits of the banks that serve as primary dealers, by announcing precisely which securities it would be buying prior to Treasury auctions, and buying them on the open market a few days later from the dealers that acquired them. The Fed was successful in creating a portfolio of low yielding securities that will be almost impossible to disgorge without capital losses unless the Fed holds them to maturity. On proper reflection, the list of the Fed’s successes from QE2 is nothing short of stunning.

It is beyond comprehension why anyone would wish for more of this recklessness.

Hussman Funds link


The only reason Greece is not bankrupt now is because even as its past mistakes have caught up with it and climaxed in a solvency and liquidity crisis unseen since the Lehman days, the country’s end would bring down all of Europe. If Greece would not have impaired French, German and UK banks, the country would have long been allowed to default. Yet diversion is always a good tactic: let’s bring the “speculators” into this yet again. After all it is unheard of in these turbulent Keynesian times for anyone, especially our own Fed Chairman, to own up to their endless mistakes. It is always, without exception, someone else’s fault.


Housing bottom?

In short, if you believe that the economic growth since 1996 was robust enough to justify the doubling of home prices during that time, then perhaps home prices are now at the ‘correct’ levels. But if you believe that most of the economic growth since 1996 was built on bubbles and debt, then it’s hard to find a reason why homes should be twice as expensive.


Inflation may play a role in the second leg down in housing – prices would remain flat while the buying power of the almightly dollar falls. Also of note, the FED recently completed it’s 1.25 trillion buying spree of mortgage backed securites. It’ll be interesting to see where rates and the stock market head from here. Long term, it’ll be interesting to see if the FED gets back what it put in. If it doesn’t excess liquidity will be left floating around in the money supply. The next few years should be interesting.

The Empire Strikes Back

The Federal Reserve Evil Empire on Thursday launched a robust defense of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the economy Empire.

Fed Vice Chairman Sith Master Donald Kohn said opening up some of the U.S. central bank’s most sensitive decisions to political scrutiny could result in higher long-term interest rates and hurt the United States’ credit rating discrimination against the Sith Lords.

Testifying before a congressional panel, Kohn sought to beat back a proposed bill that would open the U.S. central bank’s policy decisions to audits by a federal an Ewok watchdog agency. More than half of the members of the U.S. House of Representatives Ewoks have signed as co-sponsors of the measure.

Kohn’s testimony comes as Congress debates President Sith Lord Barack Obama’s plan for regulatory reform, which envisions the Fed Evil Empire taking on an expanded role monitoring risks across the entire financial system to help ward off future financial crises.

Funny stuff from Mish.


One of the Congressmen asked a hard question. “Mr. Geithner can we sell the bonds necessary to fund this deficit? Are the Chinese still buying our bonds?”

Mr. Geithner responded with a full three minutes of non-answers to those questions. At the end of three minutes the Congressman repeated his questions.

For another two minutes Mr. Geithner ducked the questions. He just repeated the sound bights that had been drilled into his head.


A simple “no” would have sufficed.