QE2: Savior or Suicide

Posted by Ray on November 3, 2010 under Main | Be the First to Comment

The long awaited decision was announced today by the Fed, $600B in fresh money printing followed by continued reinvestment of proceeds from its first round of easing. This equals about $900B in total QE by our monetary masters. Speculation is rampant in the media about its success or how it will be an epic failure. The funny thing is, no one really knows what will actually happen. Personally, I am still perplexed as to why they are doing it at all, it is stupid.

The Fed is also completely out of ammo which many have stated, myself included, and all they have is the printing press. I want to stress something here and you should pay attention, this whole QE thing is experimental and no country that has ever tried has succeeded. Therefore, I have a predetermined outcome, but at the end of the day you or I have zero idea if it will work. I will lay out a case for its failure based on what I know. I am sure many will disagree and that is fine, but in time one of us will be right.

The economy has a demand problem, not a liquidity problem. Over 2 years ago we had a massive liquidity problem which is why Lehman failed, but now the Fed has dumped trillions into the system along with the federal government. All of that money dumping ended the liquidity crisis and now banks, supposedly, have excess reserves just sitting at the Fed waiting to be loaned out to that sucker who wants to pay 15% interest on money the bank got for free in order to buy that new LED flat screen TV that is just calling his or her name. The problem is the sucker doesn’t want to buy that TV because he doesn’t know if he will have a job next week or is worried about retirement, etc.

We have a demand problem, not a money shortage. I say that with a grain of salt because money velocity is dropping which technically means there are dollar shortages. However, I contend that that dollar shortage is because people are paying off debt to simply saving their money somewhere 9under the mattress??). Regardless of the reason no one wants to buy big ticket items and I do not blame them. After all we got here because of excess debt and no one wants to leverage up to buy senseless items. No amount of QE will change this, sorry, but it won’t. Job security and rising wages will create demand, but that is not happening either. Demand is stuck where it is, weak.

The Fed knows this and they know QE will not change this so why did they do it? I really do not know. Sure, everyone has their own reasons for it, but at the end of the day it is all speculation. I know what they are trying to do, create wage inflation and inflation in general, which they will do eventually, but by their chosen path, QE, they are creating the worst possible outcome, inflation without wage inflation. Stop laughing, it can happen. How you may ask, simple dollar devaluation is inflation, but dollar devaluation does not guarantee wage growth. The only way to get wage growth is through demand with inflation, what the Fed did will not do this. Frankly, everyone should be terrified of Mr. Bernanke and he should be punished for lying to Congress when he said he would not monetize the debt, he is.

I can rattle off all sorts of conspiracy theories as to why the Fed is doing QE, but they are too laughable to mention. I do think one thing makes sense, it is a back door bailout of the banking system, again. There is a little issue I am sure you are familiar with, the foreclosure crisis, and this crisis is a huge, enormous, problem. If you are a bondholder it is one thing to have a borrower default on the debt, the cash flow ends and you get to take the collateral, a home in this case, to recover your capital. However, this whole chain of custody issue, there is no legal remedy for it and all those pundits who claim that this is no big deal are either stupid or scared to admit the truth, means that there is no collateral to collect now. Essentially the borrower can keep the house and screw the lender if the paperwork is messed up, how would you like to own a MBS now? Your bonds are worthless… or are they?

If there was fraud in the loan, as we are now seeing, the bondholder can put back the bond and be repaid their original capital. This is the problem that is starting to rear its ugly head, the put back, and it could be huge. Think about all the paper the banks would have to buy back and now think of all the synthetic derivatives that were written against that bond. What a mess. A big costly web of a mess. I do not know how big the problem can be, but I think part of the QE might help these banks by either allowing the bank to front run the bonds the Fed is buying or by infusing the bank with capital.

It doesn’t matter really, but I think that was one of the reasons for QE2. We have been told for over a year now how great things are now and we are in a recovery so why do QE at all? We have inflation, it is not sky high, but it is there in the PPI and the CPI is still positive. If the CPI were negative I would say we have deflation, but it isn’t and at best we had disinflation which does not justify such a crazy move as monetizing almost a trillion dollars in paper. The Fed sees that no real recovery has happened and maybe that is the reason for the latest round of easing. Regardless, the banks are going to benefit from this, remember the Fed asked them how much they should buy from them.

I stated about a year ago that we can have inflation without wage inflation. We are about to see if that once crazy theory of mine is right. The Fed has now monetized trillion’s in debt and I can say, with history on my side, this has never ended well for any country who has ventured down this path. America is a special place because of our freedoms, but we are not so special that math and history doesn’t pertain to us. All of the people warning about the Fed’s insane moves might be right and the sky very well might be falling. Heck, if things were as great as we have been told over the past few months by the talking heads and our politicians, who no one believes, why are we even having this conversation? Things are not well and I fear we may be in the calm before a very bad storm like we have never seen before.

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If you just got worried…

Posted by Ray on July 21, 2010 under Main | Be the First to Comment

If you are just getting worried now about the economy over what Ben Bernanke said about the economy in today’s testimony I have to ask, where have you been? Did you not read the Fed minutes when they came out? Have you not read any of the economic indicators that have been showing we are heading for a slowdown? How about IBM’s cautious warning or other firms who are being cautious about the immediate future?

My point is simple, the data is fairly clear, a slowdown is coming, period. Double dip? Probably, but we will not know for some time now. However, it is likely we are facing severe challenges moving forward and Ben is scared, he is out of ammo and he knows it. Everyone is speculating and asking what he is going to do to spur the economy ‘if’ it weakens which is an absurd question because it is weakening and what is Ben doing? Nothing, why? Because he can’t.

Sure, he can stop paying interest on bank reserves, but banks will not lend because they are impaired still, he admitted that today. Plus, banks will just turn around and buy treasuries because lending is just too risky right now which is why banks are not lending, on top of their balance sheets being loaded with debts marked to make believe. Everyone also believes quantitative easing is on the way, but it is not. I have said this many times before and will say it again, QE accomplished its goal, lowered mortgage rates, treasury rates and the dollar. I ask, what direction are mortgage rates, treasuries and the dollar headed? We are out of the “liquidity” crisis part of our issues and are into the nobody wants to buy anything part of the problem, QE will not solve that problem.

Earnings season is a dud, period. I know, Apple, Apple, big deal they have the hottest products out right now and you expected them to fail or something? The question you have to ask yourself id this, what can Apple do next? They clearly had to push the iPhone 4 out and the iPad is something they really did not want to do, they were forced into it because they were told to by the geek squads. What product do they have next up their sleeve? Nothing so you better hope a whole lot of people want to keep buying an iPhone that doesn’t really work as the title implies. Outside of Apple we had a couple of other standouts in the earnings department, but more misses than anyone wants to admit. There were lots of revenue misses which means cost cutting worked, but poor sales are still poor sales. The Fed cannot stop that people.

If you were not nervous before you should be nervous now, but I have no idea why you were not nervous before. All the speeches or all the rigged stress tests in the world will not change the facts, the economy on a global scale, is slowing down. Even China says that Europe’s problems are creating big problems, like I forecasted previously, for their exports. How much do you want to bet that the Yuan strengthens further? I do not believe China is slowing down as much on purpose as much as China is just slowing down, but time will tell there. The real question is, if China does slow significantly more than forecasted what happens to the rest of the world? Answer, it isn’t good.

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