Wednesday, January 28, 2009

FED to Buy Long Dated Treasuries with Cash from the Treasury

About 8 inches of snow then some icing, and then rain. The winter trifecta! I should have bet it. I spent the day off shoveling, reading, and writing down some ideas. Should make for an interesting post.

Things Are Either Not So Bad or Nobody Has Any Clue How Bad Things Are
I read well over a hundred posts/articles from the mainstream media and bloggers during the day. I would put about 80% of everything I read as themed "NOW might be the bottom; the government will fix everything, and play this upside rally". About 20% of things were either cautionary, negative, or insightful. That is a bunch of reading for a 20% return!

My main take home point here is that there are too many shortsighted players out there trying to play a 20% pop in Bank of America of Citigroup to have any clue what is going on on a macro level. Sadly it seems many more sites that I frequent are getting into the "daytrading" kind of information that is useless to any normal person. This means to me that we are either nowhere near something like a "Great Depression 2.0" or many are whistling past the graveyard unaware how bad things are.

On a related note, check out this section from Clusterstock on the Bank of America plan to defer bonuses until 2010:
Bank Of America Postpones Bonuses, Employees Seethe
Henry Blodget | Jan 28, 09 12:36 PM
Bank of America (BAC) has decided to defer all bonuses bigger than $50,000 until 2010 and beyond, says Greg Farrell of the FT. Employees are reportedly furious, especially as this news comes less than a month after Merrrill Lynch staff ran off with $4 billion.

When we get to a point where upon learning that a banking employee, whose very firm was instrumental in causing the crisis in place, is not only fine with their bonus being deferred but just happy they still have a job then I would agree we are in a tough spot. If you are more pissed about no bonus than relieved you have a job you are not really worried at all. Another case of "are things really that bad?". It's hard to be sure.

If Bernanke and crew fail, it may be time to prepare for the worst. I had an acronym in mind today for what I would need to have;
Food: Obviously. Dry goods, canned goods, and water. Powdered water is great if you have the water to add to it.
Information: Printed information on all kinds of needs like shelter, medicine, maps, etc.
Guns: Sadly if things go to hell in a hand basket you are going to need something more than harsh language to repel thugs.
Gold: The ultimate store of value. Money will always be money if it's gold.
Silver: Gold is great, but laying your hands on any in quantity could prove hard financially. Get some good old money stand by number two.

I know there are probably a million acronyms like this out there, but I came up with this one.

Banks Thought Nationalization Was Out of the Question
The saga of Long Term Capital Management can best be summed up as this: A huge hedge fund used insane leverage to make money. It did not work out but the fund was so big it posed a "systemic risk" and thus was quietly bailed out behind closed doors. That was 1998.

Fast forward to today and we see that all the big banks went much the same way using lending as their vehicle to riches. That has not worked out so well either. The banks are in serious trouble and pose a "systemic risk" on a magnitude many orders above LTCM. The banks were fully expecting a bailout, and even were openly asking for it. The banks figured the government would never, ever nationalize them. That is purely Unamerican! A free market cannot be relegated to history. The banks bet that public abhorrence of such socialism would keep them from being taken over.

They are wrong again.

Today Ben Bernanke gave his usual "I am going to buy longer dated treasuries...bla bla bla.." statement. It was nothing of interest. The FED is out of ponies and assorted tricks. The "bad bank" idea also got plenty of press, but that will do nothing for the structural issues going forward for the "good banks." The massive overhang of debt combined with a public a bit more ready to default results in banks that are too impaired to go it alone. The only answer is nationalization.

As is common to all bad bets, when you assume something is absolute that is not, it will bite you in the end. The FED and Treasury have "chucked aside their free market principles" in order to save the free markets. I think they will settle for centrally planned and politically controlled banking instead of the wild west free markets we have had. Should be wonderful.

FED to Buy Long Dated Treasuries with Cash from the Treasury
In the next step taken directly from the playbook of Japan, Bernanke signalled today that the FED is going to buy longer dated treasuries in an effort to depress longer term interest rates. This action is supposedly going to make banks and investors scurry into risky assets to make a return. It worked out well for the Japanese.

In a shell game played with your future on the line, the FED will get cash from the Treasury (which came from selling debt) and use that cash to buy more debt, though this debt will be of the longer dated sort. I did not mistype that last sentence. In a textbook this will cause banks and business to say "Wow, our risk models going forward are now overly cautious because the FED rates came down a whopping 0.3% over 10 years and a huge 0.8% over 30 years! We need to lend for mortgages and credit cards and auto loans! Shovel out that money boys!"

Of course this assumes that 1.)banks and businesses had NO IDEA THE FED MIGHT TRY THIS and are surprised; and 2.) It will make ONE BIT OF DIFFERENCE. With rates of all kinds at all time historic lows one has to wonder just how effective any of this is going to be.

I keep coming back to the same question that nobody in authority can answer. To whom and for what is all this lending going to be for? The only bubble I see getting big is the bailout bubble.

On a day like today when I had a good long time to read and think I figured I would have some great insight to offer. Things are such a mess I cannot offer much, other than thoughts posted tonight. I still am of the position that all the bad debt will have to be exposed and defaulted on. Banks that are insolvent will have to ride into the sunset. The FDIC and other government agencies will have to manage the best they can. Americans will have to get by on a lot less and pay more for everything. Things are going to suck. The longer we put off the final stage of what MUST happen, the longer we will have to wait for things to improve. When I say "things will improve" my timeline (if the above was done) must be measured in years (like more than 5; maybe 10 or more) and not in quarters or "second half recovery" type crap the FED is still pushing even in today's statement!.

Sound off in the comments. Let me know what you are all thinking about.

Have a good night.


Anonymous said...


The way I look at it it's gold, guns, and groceries. I just bought a 1/4 of a cow to put in my 4th freezer in the basement because the other 3 were getting full.


Lisa said...

The real problem is that we haven't had free markets in years, decades really, and our government is out of control. Of course, the government has been on a reckless path for a long time, but now has reached a point of chaos. Everyone is coming to realize that our governmental system is cracking, but so far still acting like deer caught in the headlights. The real action/protests are coming. The shape those protests will take? I do not know yet.

Anonymous said...


"The real action/protests are coming. The shape those protests will take? I do not know yet."

A new bill has been introduced in the U.S. House of Representatives called the National Emergency Centers Act or HR 645. This bill if passed into law will direct the Secretary of Homeland Security to establish national emergency centers otherwise known as FEMA camp facilities on military installations.

Our goverment is well aware of that also.


Anonymous said...


Sounds like we are on the same page on what this all means.

Just ordered the Leatherman multitool setup online. $113 get you the three tools for one price with carriers.

I have also just completed my day carry first aid kits. Small and portable. Just need to find a place that sells quickclot.


PS: Hope your staying warm up there fearless leader!

david said...

Your thoughts sum up the situation perfectly.

No one has a clue, and everyone continues to believe that the party can be started up once again, after all the guests have left!!