Tuesday, May 11, 2010

Bits and Pieces for Tuesday

Somehow I have run out of time this evening though I have no idea what took so long to do. Puzzling. That said plenty going on so I will post some snippets and thoughts for the night.

One Time FED Audit Passes 96-0
After every other attempt to get any kind of look into the FED was shot down this microscopic win was had. I am going to try and be positive about this, but I feel that when both the White House and the FED were willing to go along with this small audit it means nothing will come out of it. You never know. I can see this note being left for the Congress and the press on the day of the audit by the FED:
Dearest All,
We gave out all the money and saved the entire financial system. Some were banks, some maybe were not, but that's all you need to know. Go back to debating Health Care now.
Ben Bernanke and company
Goldman Sachs

Still, I found a peculiar outlier in the following Yahoo Finance story on the bill:
Senate votes to examine Federal Reserve lending
WASHINGTON (AP) -- The Senate voted unanimously to peer into Federal Reserve decision-making Tuesday, authorizing an examination of the central bank's emergency lending to financial institutions in the months surrounding the 2008 financial crisis.
Separately, Democrats rejected a Republican plan to end the government's support of mortgage giants Fannie Mae and Freddie Mac -- a financial rescue that now stands at $145 billion. Instead, the Senate voted to instruct the Treasury to study and recommend how the government can end its relationship with the two housing finance companies.
The two measures that passed were amendments to a comprehensive financial regulation bill that the Senate intends to wrap up sometime next week.
Passed 96-0, the Fed measure requires a one-time audit of the central bank's more than $2 trillion in lending and the disclosure of all recipients of that assistance. A proposal for a broader review of the Fed failed.
Bla bla, same old kind of writing. Here is what caught my attention; a defeated proposal to put some kind of limits on Fannie and Freddie:
But Realtors and home builders lobbied against the GOP plan, arguing it would insert too much uncertainty into the housing industry. Government-related institutions -- mainly Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration -- backed nearly 97 percent of home loans in the first quarter of 2010, according to trade publication Inside Mortgage Finance
Still think there is a housing market in existence? You would be wrong.

"Fat City"
Kevin Depew of Minyanville hits a home run with today's missive:
Five Things You Need to Know: EU Announces "Shock and Awe" Campaign for Fat City
The whole thing is well worth a look, but this jumped out at me:
It's not important, nor is it even possible, to understand what specifically occurred that day to cause the market's drop. Better to understand the conditions that caused it to happen. If you peel back the layers of market activity from March 2009, you'll find that the majority of the market's surge occurred in overnight trading on virtually no volume. Similarly, away from the market, in the economy, virtually all real economic activity was replaced by government programs with incomes replaced by transfer payments. This had the effect of supplanting economic activity that had been sharply dampened by the deflationary force of too much debt.

The lesson from last Thursday is that there's no real market based on anything remotely resembling real value anymore. CNBC commentator Jim Cramer on Thursday afternoon looked at the stock of Procter & Gamble (PG), down more than 20%, and observed "that's not a real price." Well, neither was the price 24% higher any more real, it was just higher. Is Procter & Gamble at $65 truly reflective of investor expectations of future production? I don't think so. Today, almost all asset prices are functions of government intervention in markets and the consequences of currency debasement.
A key insight.

The Law of Diminishing Returns
Jesse has yet another strong entry with:
Here is Why the FED Cannot Simply Continue to Inflate Its Way Out of Every Financial Crisis That It Creates
Key snippet:
The return on each new dollar of US debt is plummeting to new lows according to figures from the Federal Reserve.
The chart below is from the essay, Not Just Another Greek Tragedy by Cornerstone:

I have been watching this chart for the past ten years, as part of the dynamic of the sustainability of the bond and the dollar as the limiting factor on the Fed's ability to expand the money supply.
The ability to expand debt is contingent on the ability to service debt. If the cost of the debt rises over the net income of the country's capital investment, or even gets close to it, the currency issuing entity is trapped in a debt spiral to default without a radical reform.

It takes more and more to do less and less. A trillion today, 10 trillion tomorrow?

Metals Gone Wild
Today the metals gold and silver ran higher. I hope you did not think I missed that! Silver crossing $19 per ounce was a big breakout by my way of looking at things. On a day when the 3 Year Treasury Auction saw huge interest it seems off that gold and silver were also on a tear. As Tyler Durden at Zero Hedge observed:
And so liquidity overflows once more, with investors stampeding to get first into stocks and now into bonds, with the 3 year $38 billion auction closing at 1.414% and an all time high BTC of 3.27. But no, there is no bubble. It is just that investors are diversifying by buying bonds, stocks, commodities and gold all at the same time.
Too funny!

My macro view has not changed and the metals should continue to do well. I would expect a nasty pullback, maybe as soon as tomorrow, but these sell offs have not been scaring people away like they used to at all.

The Housing Time Bomb offers a take I liked very much:
The reason gold is ignoring the huge rise in the dollar appears pretty clear: One currency that rises versus another currency isn't all that impressive if BOTH are essentially worthless as a result of the massive debts that back both of them.

This has created what I call "The Value Crisis" where investors are beginning to realize that there is nowhere to hide in this market.

In the comments I chimed in:
I think if China's bubbles bust then US treasuries are in for a bad time. Of course the FED will just issue money to the banks to buy the bonds, but then gold and silver will really run. It's all coming together.
If you are watching the China Stock indices they are really looking bad. If China runs into trouble the monster US treasury sales will be in trouble. Now understand the sales will always go off very well on the surface, but as I wrote above they may be bought using our own printed cash. This possibility (inevitability?) is another longer term metals plus.

Things are a mess out there and now the whole picture is a jumble of opposing forces:
-All the new money has not been able to add jobs because it is not making into the real economy (for various reasons)
-No jobs = no wage growth = no metric based inflation which allows.....
-More new money to be printed the world over
-Should jobs appear and spending grow then all that hot money will find a way into something causing metric inflation....
-Which would prompt (one can dream) rate hikes and stimulus withdrawal which would...
-Kill off any recovery

It is a mix/mash of moral hazard and conflicting goals. An economy the size of the United States cannot be managed by a table of academics and a bunch of bankers with their own goals in mind. Still they are going to keep trying. And we all lose more and more every day they do it.

Have a good night.


Anonymous said...

Just checking in.


getyourselfconnected said...

Hello G, I mean Lt Sir!

I hope things are going well for you. Always a pleasure to know you are stopping in.

GawainsGhost said...

Hmmm. Sounds like the 72-year rule to me.


It's an old saying. The father builds, the son sells, the grandson begs.

Dave in Denver said...

Good catch on Senate rejection of limiting FNM/FRE limits. That's $7 trillion of guaranteed debt that needs to be included in the near-$13 trillion of Treasury debt.

No one adds that in, but it's wrong not to.

getyourselfconnected said...

Meant to put this one up. By Tom Friedman at the NY Times:
Root Canal Politics

Very sharp. I would not agree with all of what he writes but I think this is an important article.

Anonymous said...

Took a few ounces off the table today and I am going to try my hand in the USAA precious metals fund....