The Answer is Nobody Knows

The "Nut Wizard" is going to com in real handy because the acorns have escalated their fall from the trees if that is possible! There must be a metric ton of acorns in my front and back yard.

Everyone Sees Something Different
I always love a chart like this one from dshort.com because everyone sees something different:

Some may say that the move to fiat smoothed things out and that effective management of the monetary supply made recessions less frequent. I of course see something else entirely.

As is the norm in human business history, things tend to get too hot. The red/green sections under the gold standard almost balance perfect as things tended to get corrected at some point. All this chart shows me is that inflation has been standard operating procedure for 50 years and thus no malinvestment has ever really been accounted for, just papered over. It took the biggest credit bust in history just to print a small red blip recently. You can make what you want of that view point, but that is what the chart says to me. Maybe you think economists and the government have become much smarter over time, hee hee.

The Answer is Nobody Knows
I wanted to try and tackle a key item over the weekend after I had some more time to think about what I wanted to say. Instead I have been struck by what I have been reading regarding Quantitative Easing and figured as I am sure I have no idea what the deal is, I may as well throw my thoughts out there to be ridiculed.

It all started with EconomPics's question from last week:

With that said... I completely understand why Japan is intervening in the currency markets for economic purposes (a strong yen is hurting exports), BUT isn't the ability to literally print an overvalued piece of paper the ultimate prize?
For years, counter-fitters have printed worthless paper in the hopes of using it to buy things of value, but with Japan they can do this legally! Why not open up the printing presses and use that new currency to buy goods of value from abroad (I'm not talking other currencies, I'm talking REAL assets)?
To me this will result in at least one of the following (though, I'm sure there are 1000 more):
A weaker Yen (i.e. the goal)
Inflation (i.e. the best thing that could happen to Japan so that monetary policy would actually work)
Nothing to the Yen or to inflation, which means you got a bunch of real assets... for free.
What am I missing?

I had an answer on tap for this, but wanted to see what smarter folks than I had to say first. The comments section was pretty bare.

Kid Dynamite hit upon a similar theme yesterday:

So, here's the question: Gross acknowledged "printing money" for quantitative easing, and advocates it heartily. We already know from our prior discussions of Modern Monetary Theory (MMT) the government need not tax in order to spend - they can just spend - they can just print money (of course, there may be consequences if they do this). Why then, is it a problem to cut taxes by $2T, but not a problem to just print $2T for QE? Said differently, we don't need taxes to "pay" for the budget - we can just print money for that too/instead. Said a third way, why not get rid of QE, and use the $2 Trillion for tax cuts instead?

I guess it's possible that what Bill Gross really meant is that we can print $2T for QE, but we can't print another $2T in the form of tax cuts, because THAT would be too much for the dollar to handle...

Again, I was looking forward to some real meat, but the comments got bogged down with terms and pointing out how one example of something in a broad sense was "not right" or whatever. The answers were again a bit lacking.

In the comments KD asked simply:

When the Fed buys treasuries, the effect is temporary - more bucks are freed up in the financial world to chase less assets. Since we all think that the Treasury will be able to pay back their debts, this is TEMPORARY - and will be reversed if/when the Fed's holdings of Treasuries mature, and the reverse happens - the money goes back in to the Fed (that's what I meant earlier when i said used the terms "unleashed" and "Reigned in)

I'll give you guys another example: what if the Fed took everyone's MSFT shares tomorrow and paid them current price - that's an "Asset swap" right? investors used to have MSFT, now they have cash.. guess what - they'll go use that cash to buy, who knows - IBM. AAPL... the point is - it's "inflationary" in the real world sense - it drives prices higher

Fed buying Treasuries does the same thing.

Again, no real answer.

Here at EconomicDisconnect I like to help! I will supply my answer and while it may be wrong, at least it is a no baloney answer.

Up front you should know that I was a long term inflationista bordering on hyperinflationist. I correctly figured on the policy moves the FED and others would make and correctly estimated the amounts. A funny thing happened though, nothing I figured to occur because of this ever did! The money supply never expanded really (as measured by velocity or money in the actual economy). While I would argue that preventing massive deflation in the stock market and property markets (and yes these two items would be FAR lower now) this is not really super duper inflation.

Faced with this real world observation, I had to review what I was thinking. Beers help this process immensely.

To start, this discussion only pertains to treasuries and cash swaps. I am of the firm belief that the MBS paper bought by the FED is a swap that will never balance out, hence the FED has printed some amount of the 1 trillion plus of that paper it swapped out. The losses are not 100%, but neither are they small losses. This is cash that will remain in the system.

At the very heart is that the money the FED is supplying the banks with is not going anyplace. No one can really argue this. I do believe that small potion of this cash has made its way into the stock markets, supported by Algos and computer driven trading to take the market higher, but surely not anywhere near the amounts available. If not for the flash crash induced scare in the markets a while back, you would be hard pressed to find a chart as bullet proof as the S&P since March 2009.

Now back to the questions. Why can't Japan "print" money and buy real assets? Because this is an unacceptable practice. I know that sounds stupid and amateur, but is is true! It is true that the US has spent over a trillion dollars in deficit, but had Bernanke really dropped a trillion from the proverbial helicopter at malls across the US to regular people we would be discussing dollar support lines at 40 rather than 80 right now. Again, what's the difference?

It is my belief that these games of book keeping legerdemain are nothing more than crude tools with which to look like a not so credible threat to really do something stupid. The banks have reserves now that if used in classic fractional reserve lending would cause the very hyperinflation many seem to think is going to happen any day now. What do I mean?

I have to admit, I just deleted about 5 paragraphs of writing after I re-read it all and I was not getting to what I wanted to say. It is weird that I have a way off looking at this in my head, but I cannot write it out so that it sounds correct to me. Maybe this makes my whole post a waste as I am probably really dumb, but I will simplify.

We know that banks are flush with cash and we also know they are not going crazy with it, even buying up even more treasuries with cash they were swapped by the FED! This means one of two things:
-There is no desire to use this money (poor loan prospects, etc)
-This money was never meant to circulate

Now I like to think banks have learned something about loan quality, but I think it a stretch to say they cannot find anything at all worth a shot. Either their losses are so severe they cannot loan out the cash at low rates and still make good with the FED later. Is that macro observation priced into the markets? Wow, that is huge if true.

Or maybe all this intervention was just for show. Make the banks flush with cash so they will "loan to each other" (another debunked falsehood) and extend credit to the economy. As I have said, leveraged up via fractional reserve banking we should be running at 8% inflation right now easy.

None of this is happening.

I am left with the only idea that stays with me. This money was never meant to be circulated and was a ploy by the FED to target interest rates and take them to forever lows. This has happened. This was supposed to get the US consumer so jazzed about being able to go into even more debt at better rates they would go nuts and buy houses again. All the bought were Ipads, with cash savings instead. Small business was supposed to jump at the chance to expand by utilizing all time low rates, but these rates have been here for a while and are not going anywhere so why expand into a weak economy? Again, this all is happening and makes sense.

So it was all a bluff? A psychological ploy? I think it was and is. I think there was a clear agreement between parties (FED/Treasury/Banks) about this before it all happened. Don't bother with the tin foil hat comments, it is more likely than unlikely.

The danger here is that the FED will go over some line at some point and become a credible threat to do something stupid. Maybe issuing cash and taking the reins off of the banks. Use your imagination on what that could include.

I still am not happy with how this post turned out and would welcome any ideas. Maybe the answer is nobody knows what QE is or does!

Have a good night.

Rewind Then Press Play

And...... I am back! Thanks so so so so much to reader Edward and his suggestions for cleaning out the computer! I had full faith in my Norton Antivirus software, and repeated scans turned up only 2 items that were flagged as "issues". After trying out the recommended malware site offered by Edward, there were over 50 items found that were constantly running!!!!! I was shocked.

I am very disappointed with the Norton product, and will not renew. Thanks to Edward for getting me back online! Thanks to all for the computer suggestions as well, I will be looking to upgrade anyways pretty soon.

Suffice to say, a ton has transpired over the past 4 days. There is no way to get all caught up. I will go through some items from earlier in the week that I flagged and cover the days current issues as well.

GM's "Scorched Earth" Possibility?
Note: This story was started on Tuesday and updated on Yahoo all week.
I was confused that GM would roll out a plan offering to pay for a car buyers payments for up to one year in spite of their current probable bankruptcy possibilities. If GM is hemorrhaging cash at such a rate that not even the bailout brigade can help them, it seems beyond all common sense that they would initiate this program. From Yahoo Finance:

GM to make payments for customers who lose jobs
New GM CEO says automaker to take over car payments for some customers who lose their jobs
DETROIT (AP) -- General Motors says it will make car payments for some customers who lose their jobs.
The automaker's new CEO Fritz Henderson says under GM's new "Total Confidence" program, the company will make up to nine car payments of $500 each for customers who have lost their jobs through no fault of their own.
Customers must qualify for state unemployment to be eligible for the program. The program starts April 1 and runs until April 30.
The news comes hours after rival Ford Motor Co. said it would take over customers' payments of up $700 for a year in the event of job loss.
Henderson, formerly chief operating officer of General Motors Corp., replaced Rick Wagoner who stepped down Monday at the government's request as the Detroit automaker seeks more federal aid.

Ford is in on this too but as of now is not in the bailout game too deep.

After considering this program on Tuesday, there was more disclosures that GM had their "best day in over 7 months" on March 31st or thereabouts. Then things finally clicked.

GM is flailing away in an effort to stay alive. They are desperate. The boasting of one day sales numbers and offering non-recourse car loans to buyers is a last ditch effort.

Let me ask this: Faced with a unwind and feeling they were not helped enough, what would happen if GM extended car loans to any and all under the protection of this new program? How much damage could they do? As a final parting shot they could leave some thousands (tens of thousands?) of soon to be sour car loans on the books. I think you can guess who is going to pay for all that defaulted debt can't you?

Bond Avalanche
The US is looking to sell some debt, and the amount is a show stopper. England has plenty to sell, as well as many other countries. It seems the state of California is getting set to unleash their own bond avalanche on the debt markets as funding for the fiscally strained state seems to have to end.

Now California is no dummy. Why go out and try to compete in the markets when you have the US Government to back you up:

California may tap U.S. Treasury, Europe for credit
Lockyer: Trouble getting bank credit may prompt need for federal bond aid
SAN FRANCISCO (MarketWatch) -- California's "liquidity problems" may force the state to seek federal backstops for sales of its short-term notes this summer, even though it received heavy demand from retail buyers in a recent bond sale, its state treasurer said Tuesday.
California Treasurer Bill Lockyer said in an interview that the state is talking with Treasury Department staff, including Secretary Timothy Geithner, about getting federally issued letters of credit to back upcoming issues of short-term securities known as revenue anticipation notes.
Lockyer also said the state will probably issue about $12 billion to $16 billion revenue anticipation notes this summer.
But it may have trouble getting private banks to issue letters of credit to secure the notes, a possibility that's prompted it to seek government backup.
"What we're starting to talk to them about is ... short-term liquidity problems" at the state and its municipalities, he said.
Like many municipal bond issuers, California has seen its access to credit severely hampered in the last year as financial shocks have turned away institutional investors from parts of the bond markets.
Lockyer said that while rates on some commercial paper have come down after spiking to 9.5% in October, after the collapse of Lehman Brothers, it can only borrow a sliver of what it had in the past. It's now able to tap $100 million to $200 million a day in this ultra short-term debt, down from about $1 billion to $2 billion before the credit crunch.
To widen its investor base, the state is also planning to tap European investors in an April bond sale that utilizes a new federal subsidy program for municipal issuers.
Lockyer said the state could issue $3 billion to $4 billion in bonds under what's known as the Build America program, which is part of the February economic-stimulus package signed by President Barack Obama in February.
There are huge banks and insurance pools. We're hoping it will be a door to European investors," Lockyer said in a MarketWatch interview. "Maybe some day we'll need to figure out how to access Middle Eastern and Asian investors."

Long excerpt, but very important.

California is a future glimpse of the US as a nation. Credit dependant, fiscally insane, and totally dependant on outside help to survive. California would like to tap the Europeans for debt sales? They already have when all those mortgage backed securities that went to zero had a huge base on California. I think Europe may take a pass.

Not to worry, California has another option for funding. Can you guess who that is?

Japan's Quantitative Easing: Total Failure or Spectacular Success?
I was just barely awake this morning at around 5am and I switched from the local weather news to CNBC to see what was shaking. (I apologise in advance that I cannot remember the analysts name nor could I find a transcript on CNBC. For the record the interview was on April 2nd, 2009 at 5:10am-5:20am eastern standard time.)

The analyst I saw had an interesting take on Japan's quantitative easing strategy. It was the first time I had heard it and it struck me as a great insight.

It is accepted dogma that Japan used quantitative easing to no real avail to help their economy in the early 2000's. Progress, as measured by GDP, was flat to slightly negative for most of this decade.

What was a new wrinkle to me at least was the idea that the ultra low interest rates of the Bank of Japan, topped by quantitative easing, provided a rich reserve of "free" cash through the process known as a carry trade. Through this mechanism banks, brokerages, and other investment vehicles had access to a vast pool of liquidity. This liquidity was sent around the world, though a large part of it was used to buy up mortgage backed assets during the housing boom.

So why do I bring all this up? As the US embarks on their own path of quantitative easing I think I might have missed a key cautionary tale. While Japan was aiming to help their struggling economy by QE, the results were a ransacking of cash from the Japanese banks that was plowed into other areas over which they had no control. the US may want to keep that little tidbit in mind. Or maybe that is the plan after all.

Rewind Then Press Play
The almost unreal rocket ship that is the stock market keeps going up no matter what the news or data. 2 weeks ago we were in the midst of Great Depression 2.0, and today we are well on the way to total recovery. Quite the whirlwind. Your humble author was not able to escape the wild market gyrations without change.

I was stopped out of my two most recent gold miner positions in Goldcorp (GG) and Kinross Gold Corp (KGC) today. I had set sell stops to preserve about a 13% gain on the two holdings and both a lack of computer access and a gold price pounding today resulted in my positions being sold (Total disclosure: I was stopped out of those two positions but I still hold a position in Gold and Silver (physical, miners,ETF's) that was put in place from 2002-2006. This is my core metals holding and have not changed). There was a great piece over at Seeking Alpha about some very fishy ECB gold sales related to COMEX that you can view here. Also, the IMF is selling gold to raise cash to lend out "countries in need". What a waste of bullion. While my long term view on the precious metals is not changed, I was short term bumped due to the market action.

The long awaited change to "mark to market" came to pass today. What this will mean to the Treasury's PPIP idea will be interesting. Why sell assets that are bad if you can just hold them and remark them?

The G20 meeting, long a total non event for the markets, was greeted with glee and happiness that the foreign representatives will "do something" to help the world's economy. The "We are the World" moment for some reason had markets giddy that the same folks that had no idea and no control over the economies world wide now j=know just what to do.

The big news was this item from Housing Wire which cover PMI insurance company Triad Guaranty Inc (TGIC) and their basic temporary default policies to the tune of 40%. Of course PMI insurance policy holders must still pay 100% of the policy for 60% coverage and Triad will pay later if you default. Promise.

The early unemployment numbers were obscene again, but that is a lagging indicator, so no worries.

As of writing I see nothing standing in the way of DOW 10,000 and S&P 500 1000 over the next 2 months. Interested parties may want to try SSO, a double S&P 500 ETF to capture gains. I may do that next week but I had no time to trade, I wanted to write now that I am online again!

We are at a strange market juncture. There is little resistance to stocks going up, but if they fall again there is nothing underneath them either. Treacherous indeed.

In a macro sense I think the worst result of the last weeks market action is that we are now a good distance form the area where real change might happen. My market targets of 10,000 and 1000 stand and I think we get there by the end of May.

In a movie you may have seen before, this summer will bring revelations that the structural issues are still bad and getting worse. This will start another leg down. Rewind and press play indeed. It may stretch into the fall before another "crisis" unfolds. And all the same questions and all the same issues will be waiting for us.

Glad to be back.

Have a good night.