Switching Horses
As a result of the “surprise” Fed announcement that it will buy up to $300 billion of longer dated U.S. Treasuries in the next 6 months, the markets have swung from a deflationary sentiment to an inflationary one. I personally think this is premature as little has changed fundamentally. The Fed is still inflating its balance sheet but there is no indication that its latest move is going to have a different outcome than “muddle along until the next crisis”. In fact, I’d personally rather see the Fed buying U.S. Treasuries and government-backed agency securities than some of the junk(ier) credit it has proposed acquiring.
From a technical perspective the U.S. dollar appears to have cracked and the monetary metals have regained a positive posture. The rally on Wednesday afternoon was a sight to behold and it was a strong reminder why being short in gold and silver can be a very bad idea. It was also a reminder why trading gold and silver can be so difficult. Earlier on Wednesday both gold and silver looked intent on violating key support levels and the result was some technical selling right up to the moment when the Fed made its announcement. Indeed, many of those technical sellers under $890 gold and $12 silver probably became the panicked buyers who got back in at much higher prices. Of course you also felt the pain of a trade going horribly against you if you were short U.S. Treasuries or equities this week.
My guess is that the recent moves in most markets including gold and silver were reflexive and it will take some time to consolidate the gains and ingrain the losses (in the case of the U.S. dollar). This is because market sentiment is unlikely to fully switch to an inflationary/reflationary consensus any time soon although it should eventually move in that direction as the year progresses. This week’s developments are clearly positive for gold and silver but it remains to be seen how the “crisis” buyers responsible for recent bullion demand will react to a semblance of normalcy. Will they smoothly switch horses from deflationary collapse to inflationary spiral? Whatever the buyers do, the odds of a substantial decrease in gold and silver prices that would test last October’s low has become more remote as of Wednesday afternoon. This doesn’t mean it is advisable to pile into gold and silver but certain opportunities have likely become less risky — I’ll be covering some of these here and at Metal Augmentor in the days ahead.
Crude oil and the rest of the commodities are seeing some renewed speculative interest as well and for now it looks like the possibility of oil making a low in the $20’s has been precluded as the contango has increased to a level where it should be possible to continue carrying the gooey stuff in storage for a while longer. A final capitulation bottom cannot be ruled out but it sure does appear at this point that the odds are very long. Spot prices continue to push up against a fairly important level in the low $50’s and a move moderately higher could signal the re-emergence of the commodity speculator. If so, crude oil may theoretically rally to the $70-80 level in the short term especially if the U.S. dollar continues to weaken. Ironically, this is a price level at which some strategic and industrial stockpiling could actually commence. Such a development may even end up resolving the storage issue. In any case, both the contango and price should be closely watched for early indication of which alternative will play out.
I laughed out aloud when I read “rather see the Fed buying U.S. Treasuries and government-backed agency securities than some of the junk(ier) credit it has proposed acquiring”.
There’s almost no difference between government debt and toxic debt. The government swapped Treasuries and government-backed securities for toxic debt and now they are buying even more government debt for ‘ink hasn’t dried yet’ paper money (not much different from monopoly money, other than it is legal tender).
As though the toxic debt isn’t bad enough. State government debt in states like California which will inevitably have to be bailed out at some point does not inspire confidence in any government IOUs. Central government through the Fed has absolutely no hope of repaying the current debt of the United States, never mind the interest that’s being accumulated on it.
The real problem with printing more US dollars is that the value of the US dollar compared to other currencies can only go down (unless all other countries do the same).
In the UK they started printing pounds to cover debt last week (probably pre-empting the Fed move). Yesterday, the US Dollar lost 3 per cent of its value versus the British pound. To be honest, both bankrupt currencies should be sinking like stones hand-in-hand. The only thing that’s keeping these currencies afloat is public ignorance.
Silver shot up yesterday and it is highly likely to do more of the same next week hand-in-hand with gold and I suspect the Euro will too which so far has not been impacted anywhere near as badly by all the useless expert government macro-economists (who clearly have no clue what they are doing) or by the blatant anti-Euro propaganda that has been widely published.
There is still a vast difference between government backed and private credit and I’d rather have the private sector holding its own toxic version while the public sector holds the public toxic debt. In any case, interest paid on the Treasury debt held by the Fed essentially goes back to the Treasury so I’d rather see the Fed holding it than let’s say the Chinese.
I think the latest move is watershed date in this crisis, and I think it is being seen as such by those who ‘know’. While the general public is distracted and bamboozled by a hundred million dollar rounding error caused by excessive (they were excessive, but apparently sanctioned by Clowngress) AIG bonuses, the FED slips this whopper right under the noses of the sleeping media watchdogs (i.e., NBC, CBS) and the undereducated American people.
The previous FED balance sheet leverage operations were made as financial bailouts. In these, the FED takes the poison off the commerical bank’s back and puts it into its own. The object here is to leverage the FED’s balance sheet for the time being because it’s back is stronger. However, these very recent moves are money printing operations, and are political in nature.
First, they lower long term interest rates. These are stubborn things that have been under the control of the free market - no longer says the FED.
Second, the FED now becomes the buyer of last resort for the Treasury’s paper. This will allow Obama and his minions to keep the spending game going a little longer - perhaps indefinitely?
Third, just as prof Fekete has stated, this stuff is a wonderful tonic for the bond speculator. Just trade with the FED as it pushes long term rates from 4% to 1/4%.
Agree with most of what you say but the true watershed will not take place until the Fed is monetizing the vast majority of new Treasuries. As for long term rates going to 1/4%, that will not happen but the yield curve is likely to flatten out somewhat. Indeed, there is a case to be made that within 6 months the 30 year bond could be trading closer to 4%. It all depends on whether or not there is some sign of recovery, or at least some market expectation for it.
Anyone who is still in the deflation camp should read the book “The Economics of Inflation” by Constantino Bresciani-Turroni.
When you have read the book you will finally understand that the FED is copying the Reichbank by buying treasuries (discounting Schatz). We all know how that ended…
Direct monetization by the Fed has been a theme of mine for a while here — but it is still too premature to declare a Weimar ending. I do believe, however, that prices (including gold and silver) could have a zero tacked on their end before it is said and done.
My 2 CENTS worth:
I tend to agree with GERALD CELENTE, DMITRY ORLOV, and KARL DENNINGER. It’s just a matter of time before the HOUSE OF PAPER CARDS comes crashing down…..disintegrating the USA along the way.
Tom….I like your THEORY of tacking a ZERO on GOLD and SILVER. If SPARKY THE CLOWN GEITHNER and HOWDIE DOODY BERNANKE keep on doing the same wonderful WORK …..those ZERO’s tacked on GOLD and SILVER might come sooner than LATER.
The MORONS calling for a RECOVERY at the end of 2009 should check and see if their CEREBRAL FLUID needs changing.
I don’t know what the strict definition of deflation is, but this contraction or whatever is happening.
Did the $billions$ people lost in their 401ks go to stronger hands?
Did the 30% loss in the value of their homes go to stronger hands?
Did the income they lost when they lost their job go to stronger hands?
No, it DISAPPEARED forever.
At some future time, I was planning on spending the lost money I worked so hard to save/earn on lots of STUFF. People have seriously slowed spending and stopped taking on debt! NOW its feeding on itself!
Anything like hyperinflation will happen AFTER people lose ALL of their savings, pensions, annuities, etc. Gold may have to sit at $680 a couple years while folks lose their financial asses.
Perhaps, what has “disappeared” was a PROMISE of wealth and income. It is the unrealized promise of wealth that’s gone. Now it’s a promise of wealth/2
or worse.
The cash money paid for these assets is still out there. It’s the leverage and debt that is being destroyed. Expectations were too high.
A stalled economy and reduced consumption does not mean we must have deflation of consumer prices or gold. Falling production, supply chain disruptions, shortages can tighten supply while fundamental baseline demand remains - with plenty of monetary inflation to fuel generally higher consumer prices.
Some assets can rise to soak up money while others tank.
Good points
I do strongly believe that, as holders of PMs, we will be some of the stongest hands left at the bottom of whatever this is. We just need to be ready for a very rocky ride.
What I should have said is, when the tax base disappears from all the real people losing nearly everything, the government will have no choice but to print like crazy to “fund” its debt.
It seems like I have traded against the fed for such a long time. Now we are on the same team.
I don’t think there is much risk in shorting PM’s when you
lnow the government is there to bail you out if things
“get out of hand” Indeed, if your bank takes a bath on
commodity shorts it merely lines up at the treasury window for
a bailout…the key players would likely be in line
for hefty bonuses.
The banks, being patriotic blokes that they are, can well
justify such bonuses. They could argue “you wouldn’t want such “talent”
leaving our toxic infected deathbed firm and go and infect some
healthy going concern, now would youi?” These guys are the
Typhoid Annies of Finance. The bankers, being the highly ethical sorts
that they are, have self imposed (an albiet expensive)
quarantine of these “highly talented” financial geniuses (themselves
in most cases) Rather than “retention bonuses”, those in the know realize
they are really”detention” bonuses. Any money the government
extends to keep these where they are; to keep them off the
streets, is well spent.
As to Weimar comparisons. Well the Germans after WW1 and
the Versaille Treaty simultaneously had a gargantuan internal
war debt, a gargantuan “repairations” bill, and most of their
industrial capacity physically stripped away by the Allies. The
Allies actually went from farm to farm and took the milk cows!
The Germans were stripped of their means to “pay” their debts.
The French occupied the Ruhr coal region and took all the coal
production to boot.
Now, the United States has not had its Industries stripped away
by force of arms….greed took care of that. No war necessary,
it was just shipped to China voluntarily in order to exploit
25cent/hour labor while enjoying the wide open US markets
to sell the cheaply made goods at prices comparable to
prices had they been produced domestically. The displaced
American workers went into debt to buy the stuff; now they
are broke..game over!
So, like the Germans, we are in a sort of national debters
prison. The big difference is the U.S. has bigger guns than
the bill collectors…there is no international sheriff able to
foreclose on us, to come and take physical posession of our “Ruhr Valleys”….at least not yet.
Paper shorts can indeed be bailed-out by handouts from the FED, as long as the longs are satisfied with cash settlements.
However when longs insist on delivery and the shorts only have paper money, the game is over.
Sentiment is difficult to judge, but i think that the predominant deflationary expectations are beginning to shift towards inflation.
Could be, but there could also be a period of shifting back and forth for a while longer.
Just read Prof. Fekete’s latest article.
Seems he thinks the USD will stay alive a while yet. I must admit I have a hard time reconciling this view with his earlier statements on PM backwardation.
To now state that hyperinflation may still be years away is a little confusing. I’m not saying it can’t be years away, but I was under the impression that backwardation in silver was the ‘canary in the gold mine’?
Has he changed his mind on backwardation? Maybe I just don’t fully understand the theory?
Justin,
It has been difficult to follow Fekete’s line of reasoning over the past few months. One week he is talking about hyperinflation and gold fever and the next he is predicting deflation.
Personally I don’t see how printing money to buy our own debt can be anything but inflationary. I mean its pretty simple, you have more pieces of paper chasing the same amount of real goods. I don’t have my doctorate in mathematics, but I don’t see how that equates to falling prices.
In Fekete’s most recent article he doesn’t really explain why falling bond yields will lead to deflation. I can see how it would be deflationary if private money was going into bonds and crowding out investment in the private sector, but the government is using brand new printing press money to drive yields down. I guess Fekete thinks that bond speculators are going to continue to try to front-run the feds purchases, but I think its more likely that our creditors are going to use this opportunity to dump their treasuries at artificially high prices.
I also think that the fed’s announcement has caused a real shift in public sentiment. Basically Bernanke has said he will do whatever is necessary to prevent deflation, including debasing our currency into oblivion. I think over the next year we see a reverse of the safe-haven rush into dollars, as people realize that in real terms they are making a negative return on their cash and treasuries. Like Marc Faber has stated, the Fed will probably never be able to raise rates to a level that provides a real return. When you can’t even come close to breaking even on your dollar investments, that provides a pretty good incentive to put your money into something tangible.
Another factor that I see turning sentiment from deflation to inflation is the end of dishoarding by businesses. As Tom has talked about over the past few months, businesses have been drawing down stockpiles of raw materials and putting off purchases. At some point business are going to need to re-stock their inventory, and this is going to happen at the same time as producers have cut back production due to low prices.
I can’t see how the combination of increased money supply, resumption of demand, and supply cut-backs will be deflationary. Sorry Fekete, I am going to have to side with Peter Schiff, Jim Rogers, and Marc Faber on this issue.
Let’s discuss Fekete’s latest article further as I think it is very important for the short term. It also coincides with Tom’s current title.
I think I comprehend it though I have been wrong before:
Fekete states that as long as a meaningful FED action is expected deflation will prevail. The basis of this is that the debt level is so huge, measured in the hundreds of trillions, that the ever growing liquidation value of it will suck away all freshly created liquidity, measured at most at the single digit trillions. This is the reason we will not have immediate inflation even with this seemingly huge amount. Meanwhile, the FED believes that since this money never enters circulation it will have no effect on inflation. That is where the bond traders come to picture. Their profit does enter the system. He also says that during this period, private funds stay on the sideline so economy has no chance to recover. He reasons further that when the public recognizes the futility of these operations and its effects on the dollar the tide will turn and even these single digit trillions of fresh liquidity together with the sidelined funds will cause hyperinflation. Of course, here a subjective factor is introduced of which he can not predict but can estimate: the intelligence of the public. That is why he prolongs his forecast of the collapse to years. But who knows? Cumulative effects, lost in faith in government and sheer panic can change everything.
Andras,
I don’t really understand your statement that the growing liquidation value of debt will suck away all freshly created liquidity. If the Fed goes onto the open market and buys treasuries, that puts new money directly into circulation. Am I missing something?
I agree with Fekete that cutting interest rates destroys capital and will cause the economy to contract, but I don’t think that is the same thing as deflation. If there is more money in circulation and companies are making fewer investments and producing fewer goods, that seems highly inflationary to me.
The Fed printing money is not inflationary until it actually gets spent into the economy in excess of current spending levels. If the U.S. issues Treasuries primarily to make up for a shortfall in tax receipts (ignore stimulus spending for now) then it is simply replacing lost revenues. At some point when the economy has recovered this should become inflationary but until then the fact that it represents “new money” is not very relevant considering that it is replacing frozen “old money”. It is only when both the old and new money start being spent at historic rates that the inflationary pressures will build, and it is difficult to predict when exactly this will happen at a greater resolution than decades.
Government borrowing/printing is not only making up for lost tax revenues but it is also making up for lost consumption and demand in an environment of reduced production. This has an inflationary effect yes.
If perhaps government reduced its expenditures (demand on and damage to the productive sector) in synch with the drop in production we might not see inflation - but that is not happening.
If the government continues funding same-level expenditures (even without typical annual budget increases or present exponential increases) in an economy of reduced output then you will have an inflationary effect. Government spending is ALWAYS inflationary as it not only leverages assets but it destroys capital and hinders production.
Said a bit differently, for every dollar spent by government that is one less dollar that can be invested by the productive sector. It is a fundamental shift from production to consumption.
I do not believe “simply replacing lost revenues” while maintaining spending levels is not inflationary.
Barbarian, The Japanese government spent 200% of GDP over the course of a few years and did not create inflation. Also, up to a point government spending is actually crowding out bad or marginal investment. One of the main problems with government spending is that it is not a permanent solution.
Tom, I hate arguing numbers because the devil is in the details and statistics can have dual loyalties. So I prefer to make sweeping generalizations based on simple principles. If I overcomplicate I’ll muck things up.
Japan is a poor example.
The deflation in Japan was in overpriced assets. NOT consumer prices.
There was and is consumer price inflation – not deflation. Yes, it has been subdued, but one could argue that it would have been much higher were it not for a few extenuating circumstances. Circumstances that helped to obscure the effects on consumer prices from monetary inflation and government spending. I would call it “suppressed” Japanese consumer price inflation.
Of course there was the global interest rate differential trade that exported much of Japan’s monetary inflation while rebuilding Japanese bank balance sheets.
Another big aid to consumers has been the beneficial effect of rising supply of low-priced imported consumer goods over the years – big impact from China.
Another factor was the imposition of and subsequent increase of a national consumption tax and other rising social benefit taxes that have helped moderate consumer demand side upward price pressure on consumer goods.
And a significant suppressant on consumer prices has been the long-term strength in the Yen. For an import-dependent country, the currency’s relative value has to be factored in. You can see the inverse correlation between the Yen and Japanese CPI up to 2002 - a stronger Yen with a lower CPI. You can see the spike in CPI when the Yen dived between 1995 and 1997. Long-term, the Yen is higher today than it was in 1990 with some serious rallies in the 90’s. That has had a real moderating effect on domestic consumer prices.
An interesting change is that since 2002, DESPITE a rising Yen, the CPI has also been rising.
Lastly, government spending can be measured in many ways. It seems to me that the US and Japan report these numbers differently. As you know, the US is a leader in creative bookkeeping. I believe it plays more off-balance sheet games than Japan.
Anyway, it is incorrect I think to use Japan as a poster boy for non-inflationary government spending. I still stand by my assertion that government spending is fundamentally inflationary. Japanese CPI had help. Will the US?
Barbarian, I don’t disagree with the idea that Japan and U.S. will have different experience but I stand by my statement that an increase in government spending will not be immediately inflationary, only when the new spending is no longer supplanting but rather also supplementing spending in the private sector.
@Jeff S.
You are right. The question is the ratio between market manipulation and check kiting.
It is true that the money spent on open market operations enter the system that is why was it so important an announcement. However, that is a prolonged process, both on the side of execution and its trickling down. More important is its effect on interest rates thus on the liquidation value of debt as Treasuries still have AAA ratings. I think, still the majority of the transactions will happen in the triangle of the FED, the Treasury and the major banks which is short circuited (apart from the bonuses) so it stay outside of the system.
When money is debt, liquidation of debt is deflationary. Liquidation of derivatives as long as they had money character is also deflationary. Again the ratio is important, the ratio of liquidity entering and exiting the system. However the most important thing is the trust in the system because, under fractional reserve banking with or without redeemability, the system is already primed for hyperinflation. The public’s perception can change any day. E.g., when the intention to restock inventories meets the realization of the range of the supply destruction happened in the last year.
Andras,
I understand some of what you are saying, but I disagree on a few points. You say that the new money will stay in the triangle of the Fed, the Treasury, and the banks. But if the Fed is going to keep long term yields low, they will need to purchase treasuries from whoever tenders them. I personally think that the Fed has just set off a doomsday device for the dollar that cannot be reversed. As our creditors sell treasuries (or even reduce the amount they buy) the Fed is forced to print even more money to buy them, making the real rate of return on our debt even more negative. This will create a nasty feedback loop whereby the Fed purchasing treasuries gives an incentive to our creditors to sell, which forces the Fed print more money, which makes holding treasuries even less attractive, etc. etc.
I suppose Fekete could be right that our creditors are more interested in bond speculation than making strategic long-term investments, but I doubt it. The Chinese are already looking to make long-term investments in other countries to secure raw materials. They have also switched from buying long-term treasuries, to short term treasuries. This should be a major red flag.
The bottom line is NOBODY is investing in treasuries because they think it is a good long-term investment and the fundamentals of our economy are sound. Who in their right mind would take a 2.5% pre-tax return on a ten-year treasury when the FED has just increased the monetary base by 100% in the past few months? The dollar’s recent strength has been a function of unwinding of different carry trades and panic buying. I personally think this trend is going to reverse much faster than people expect.
Jeff,
Don’t you tender the treasuries to the Treasury? When they mature they are usually rolled over. When you tender them you get dollars, so papers for papers. Why would you do that when you have a mad dash for them. You do this on large scale only when you need large amounts of cash for purchases but there is not many things to buy at this level right now when still dropping prices are expected. I agree when it is realized the rush for the exits happen. Frankly, I can not figure out the FED, how far are they going and has been gone to fool themselves? Can they be that stupid or they know that they still have a few rounds to shoot before the collapse. I think it is safer to assume the latter though their stupidity is also a given.
About the carry trade. Bonds are clearly just for speculations. Noone is waiting for their maturity. The Yen carry trade could go on for a decade. The dollar is about to assume the role of the yen as the short end (again). It’s carry trade will go along as long as there is any economy to accept dollars and to promise higher interest rate than the dollar’s. It is all about spreads. This is the mother of all bubbles and the speculators can book the most profits at the exponential phase. However, they know it cannot go long so they shift to the short term issues. (It is to be seen if they are safer than the long term ones as if any treasury pops the US pops with it). One measure of how far we are to the end is the deficit. That is why so dangerous what Obama is planning to do. Anyway, it is basically what was happening in the last fifty years. Alternatively, the long ends figure that it will be the plunder of their economies by importing the US inflation and the race to undercut the dollar will be at earnest. In that case, they will invent a new world currency and the dollar is doomed due to less circulation/acceptance while ever growing quantity. We will see how close we are to this scenario at the next G20. Anyway, if we stay on this track we are doomed both ways. If the next congressional election stops Obama like Clinton was in ‘94 it can change. However, do we have that much time?
Good discussion, some points to also consider:
The liquidity of the U.S. dollar itself is pretty important and this is actually the major reason why it would be so difficult to replace it as ugly as it might look. Simply put, the U.S. dollar is the only monetary unit that can be exchanged in hundreds of billions or even trillions and not cause a market default or collapse. Anybody who would seriously suggest that any G20 or other country would or could accumulate or liquidate hundreds of billions dollars worth of alternative reserves (and that includes gold) without huge risk simply does not understand global finance and economics. The death of the dollar will be marked by declining liquidity and there is simply no sign of that yet.
With respect to U.S. Treasuries, the key is not the yield but the yield SPREAD against “risk-based” credits and vs. expected inflation. In terms of “risk”, if the Treasury market fails that would bring down every private and foreign credit market as well. As such, Treasuries would remain a reference “risk free” credit until the very end and for that reason they should continue to attract a bid even as the monetary system races toward the cliff’s edge. As such, higher Treasury rates would push up all other rates and that would put the brakes on any economic recovery and reduce inflationary pressures. This is one reason it is not possible to accurately predict inflation or deflation. In any case, it is not confirmed inflation that really matters (especially when we talk about gold and silver) but rather inflation expectations. Widespread inflation expectations, not flailing demand for Treasuries, are probably the only way Treasury rates would rise substantially (say above 4%) and such expectations should precede any actual inflation by months (if not years). In the best case scenario, upcoming moves in Treasuries could telegraph subsequent moves in gold (one reason for this is bond speculators are generally a bit smarter than gold traders).
The fly in the ointment, as I see it, is the price of gold.
Central banks can buy as much debt as they like, but ultimately only at the expense of the value of the dollar i.e. the inverse of the gold price, the dollar is after all just a broken promise to pay in gold.
From reading Prof. Fekete’s articles I was under the impression that permanent backwardation in PM’s was the point where confidence in the dollar was kaput. In other words, when the dollar will not buy gold it will not buy anything else, and that’s hyperinflation. Can the price of gold just continue to rise indefinitely (inflation), without pushing gold into permanent backwardation (hyperinflation)?
Silver, and gold (according to Fekete) have touched backwardation. For him to now state that hyperinflation may be years away (does he mean 1,2 or 10years?), would seem to be ‘discounting’ his own theory.
But as I said, maybe I just don’t understand it.
I think you’ve got the gist — although the point of backwardation is that the dollar will not be able to buy gold before it can no longer buy anything else and that is what makes backwardation an early warning sign. With respect to timing of monetary events, it is impossible to be accurate and the Professor is merely acknowledging this.
I’d like to see a more or less steady devaluation of the currency…like it’s been going for decades.(hateful sarcasm) Steal the peoples productivity a little at a time..constantly growing the influence of government…after all, the elites know whats best for us. We are like young children; too inexperienced and uneducated to make the “right” choices in life. “Trust me” they say, “we have your best interests at heart”.”We have to help the elderly, the disabled and don’t forget the KIDS”.”The goverment is the most efficient answer to all that ails men”.
Why have people accepted this crap for so long? Because easy credit in a boom cycle creates the illusion of wealth unending. Who knew it would ever end? Anybody who can read SHOULD HAVE KNOWN at least four years ago the end was near.
In today’s upside down world of paper promises, debtors are being released from their debt or even rewarded for their excesses while the creditors are seriously harmed or outright annihilated. At the WORST possible time in history, the American individual has turned into a “saver”. Unwittingly becoming a creditor by loading up on unbacked paper promises in the bond markets. They will lose the game just like so many have lost in the past. By one or both of two methods their savings will be lifted from their pockets. Default and /or currency devaluation.
I think its a mistake to think we are going to get rich holding bullion, but we definately won’t be permanently harmed by either default or currency devaluation if we don’t let the whims of the markets shake us out.
First of all, the FED clearly stated that they will buy Treasuries on the open market. Then, the Chinese have an excellent opportunity to offload their US bills and bonds at high prices. But then, do you think that the Chinese will just sit on the newly acquired dollars? Of course not!
They will use them to buy commodities, put their own bail-out plan into action, and invest for the future. Therefore, the freshly printed FRNs will enter the global money supply and prices will rise.
Secondly. we must remember there is a difference between the nominal value of the T-bond market and the real value of the T-bond market.
Yes, the price of US bonds may rise in dollar terms, but as you can see by comparing the price of the 30-Y treasury to gold, bonds ARE in a “REAL-TERM bear market” since 2000.
I think the timing and the way of the announcement shows the FED’s real intentions. If they really wanted to buy they would not have announce. Also it was during a relative calm just after a mini panic had been evaded and before the G20 meeting They just wanted to manipulate the market the biggest bang for the littlest buck almost like a bluff.
The Fed is trying to work on the market’s psychology primarily. Don’t expect the Chinese to dump Treasuries although they might move to the shorter maturities.
China ready to discuss new reserve currency at G20 summit
“China is ready to discuss Russia’s proposal of a new global reserve currency as an alternative to the US dollar at the G20 summit in London, a vice governor of the country’s Central Bank said on Monday. ”
http://bbjonline.hu/?col=1001&id=47708
This is a done deal IMO. Many G20 leaders have come out with a similar line over the last fortnight. SDR’s are the new saviour of the financial world (snigger). They will not be used as local currencies though. Unbacked by gold they risk debasement through over issuance, as a Dollar Index proxy currency.
This is all bluster, I’ll bet the G20 meeting is not going to accomplish anything productive. It’s a joke that Russia would propose a new world currency given that the ruble is in serious trouble. As for China, when they have more than a couple of days of experience NOT manipulating the Yuan, perhaps then they will have a bit of credibility.
Looks like the PPT is at it again. Printing FRN to buy futures. Unfortunately, every point the S&P is going higher will just add to its bloated P/E ratio.
Here is the new Geithner plan:
“Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan provided in many cases by the Federal Deposit Insurance Corp.” (Yahoo Finance)
JP Morgan, the nation’s garbage can, has over $100T, it would mean more than $1Q liability for the US at full “privatization”. Interesting! Am I missing something or they ignore math? Can the US print that much?
Will the banks drag the US into the black hole?
One thing is for sure. The auctions will be a great success, with bids at over 95% of the mark to model value.
This would not be attempted if there was any doubt about success. Bids of around 75% would lead to huge write downs overnight and a run on the banks. Not going to happen!
I believe this assumes that mortgage credit remains at present level and does not grow. As such it is mostly just switching seats in a huge cluster-f*ck game of musical chairs.
This would ALSO not be attempted if there were any doubt that;
· Alchemy was possible through fraud.
· Holders of these “assets” will be overpaid for their garbage.
· The public will be the ultimate bag holder after having overpaid.
· The “solution” provides for or allows a means for sellers to make this happen.
I agree the plan is not fundamentally sound but the idea that investors are putting money at risk is at least from the free market play book. It may or may not work but I would rather have investors price these assets than having the government buy them at face value. The alternative is nationalizing banks with the government either dumping their assets on the market in a fire sale that guarantees proceeds will be pennies on the dollar if not fractions of pennies or selling the assets over a long period of time a la Resolution Trust Corp which will place pressure on asset prices for years if not decades.
Looks like the sheaple are guided into selling their gold and buying exuberant stock. I bet the targets will be Gold @ 880 and S&P @ 850. After that, the powers will crush S&P and Gold up to $1500.
I am really getting EUPHORIC now!! STUPID SHEEPLE!!! LOL!
YEAH BABY, DUMP GOLD!!! LOL!
I love the spirit here. Hey at least Amark did not bone me on my Pt purchase. Looking lovingly at SRS here.
Here is the daily article from Kitco’s Nadler about the Chinese:
http://www.kitco.com/ind/nadler/mar242009A.html
It is amazing how Hungarians think similarly, (though Soros is Hungarian, too).