28 replies to this topic

[OEXCHAOS]

A bit I just put together. The Fed's Secret Plan It is no secret that the Fed is essentially printing money. Liquidity is being created by the tens of billions daily. This has more than a few folks more than a little bit worried about inflation. It is axiomatic that the Fed governors are also greatly concerned. Yet they continue to pump. Why? The answer is that they are more worried about economic collapse than they are about inflation. Fine. The thing is, inflation will be a problem sooner or later as a function of this massive and on-going liquidity injection. So, what is "The Plan"? What is the Fed up to? Any casual observer knows that the stock market has been grinding higher for months with the most recent decline the first since November. More and more Bullishness is being generated and more and more trust in the market's trend is being manufactured. The Fed has actually said that they want higher stock prices. Of course they do... Since the melt-down of '08-'09 most of the big Wall St. players have been in the hip pocket of the Government, which means that the Fed has no mere modest influence over some very big players. These players are more than able to create and maintain a trend. Here is my speculation: I believe that the Fed knows that excess liquidity will not go into speculative real estate nor will it go into bonds, as rates are too low, plus there is a healthy respect for credit risk these days. This leaves essentially two places (at the moment) for that cash to go; Commodity speculation and the Stock Market. The Fed does not want the former (inflationary) but they DO want the latter. I suspect that the Fed is using every tool at their disposal to lure as much money as possible into the stock market. I am speculating that the Fed is trying to create a sense of security that sucks excess liquidity from "risky commodities" to "low risk" stocks. This will help to keep inflation from exploding out of control. So far, it would appear that this is meeting with some success. It probably needs to meet with more until the economy firms and unemployment wanes. It is important to remember that if inflation really accelerates, the Dollar will collapse and foreign investors will flee US bonds, driving rates higher. This would be DISASTROUS for the nascent recovery. Additionally, the Fed doesn't want to raise rates much themselves (on the short end) because they also don't want to be responsible for killing what little recovery there is. The thing is, they won't need to if they keep excess cash going into stocks. Further, the ever rising stock market creates foreign demand, which will tend to support the dollar as well and keeps the bond market reasonably firm. So, assuming my speculation is correct, how long does this "stock market support" continue? My guess is that until un-employment falls to 7% or 8% give or take. The economy has to have improved enough so that there is demand for money to buy/build physical capital. When rates start to rise based upon this demand, the Fed will remove some support from the market. If prices continue to hold up, or rise, they will advise their "partners" to liquidate. Falling stock prices will likely drop rates as money flows from stocks to bonds again, lowering borrowing costs and keeping the economy humming. Prices will fluctuate more normally at that juncture. At some point in time, the economy is going to be very healthy looking, and growth may be almost too hot and an inflation threat. This will bring the surprise. The Fed will then orchestrate a more serious decline. How will this help? Prices are set at the margin and there are times when stocks can decline precipitously on relatively little volume. I'm thinking that the Fed plans to nip inflation in the bud by sending hundreds of billions of liquidity $'s to "money heaven" by engineering a precipitous decline. If it's fast enough, it won't fee much money at all from stocks (which could then go into more inflationary assets), but rather trap that excess liquidity in stocks for the foreseeable future. This may be cynical, but I think it very likely that an academic with that much power will try to outsmart the market. It may work, too, despite the ethically questionable aspects of the plan. Again, this is merely a speculative hypothesis, but it resonates with me. My read is that if I'm right, we're going to want to be thinking long as much as possible until the economy heats up and unemployment drops.

[andiron]

this imply that FED can manipulate not just US but global financial market....while it may halt market forces temporarily, they will overwhelm at the end...see Japanese QEs did not do anything for its assets// if only FED's wishes come true, every one will be rich!!!!

[BWTrader]

Regarding unemployment I've noticed recently that virtually anyone who has taken the time to develop skills has more work than they want. Truthfully, any skilled person willing to work can just about name their price - and they do. Construction is in terrible shape, right? Try and hire some skilled renovators to work some projects at your home and see what their hourly rate is. Same is true for almost every other trade. We don't have a shortage of work or opportunity in this country. What we have is 43 million people on food stamps and millions more who have been conditioned to believe that it is completely honorable to sponge off of their neighbors. How pathetic! BW

[arbman]

The Fed will then orchestrate a more serious decline

Thanks Mark, the only part I disagree is that Fed cannot orchestrate anything but inflation. Almost all of their inflation and monetary control mechanisms caused severe recessions and stock market crashes including last May's. It is not possible to deleverage naturally out of the current situation and it is badly needed in the long term. This simply means we will continue to add more and more unproductive debt and collapse the economy under its own weight. Fed will be unsuccessful, if this happens.

The only way out of the current situation is they delay the inevitable long enough and a REAL growth emerges to take the stock market and optimism to a new bubble. But unfortunately, that's about it [I mean the debt or at least its interest will have to be still paid]. Without a new growth wave out of the American economy, Fed and bankers are toast, it will all come around a full circle back to them as a forceful deleveraging at that point. Hope that the real growth returns by a real growth sector, I don't see it yet, maybe nano-machines, maybe bio-tech, maybe some other means that can benefit the consumer and make the businesses more productive to defeat the weight of the unproductive debt, otherwise the bankers cannot print THEIR way to prosperity, certainly NOTHING for the productive labor...

Andiron, actually Fed is printing the reserve currency AND manipulating the world economy to some extent, actually to a great extent. It simply means, if the American economy cannot come ahead, it is likely to fall back and loose that reserve currency status. US being the most militarily strong country cannot still though handle fighting the entire world, but nuke them. As this is not possible, it is likely that US will be forced to fizzle and suck more pain up and default [or Treasuries will be treated as if a default] in that case. If the American economy can grow again, then she will remain as the king of the world, but always more and more weight of the unproductive debt on its back...

The world business people will eventually recognize the true value and move beyond the bankers, if the bankers let them. Until then, the bankers are looking to continue to remain as the tick sucking the world resources behind their backs into their accounts ANY WAY they can. Their game is not about fair and efficient resource allocation, their game is about survival after the mess they got themselves into by layers and layers of exotic debt and leveraging that they cannot get out of...

Edited by arbman, 20 January 2011 - 08:47 PM.

[nimblebear]

I like the hypothesis. my only problem with it, is what exactly is going to create the jobs, where do tax revenues come from as jobs continue to not only not be created, but shifted to lower wage economies, and then lastly, what does the economy do with all of the coming foreclosures and the current 3 million plus in shadow inventory ? I guess, I've never known an increase in stock prices to create new jobs. It does however overstate the value of the underlying company, and it may allow said company to "borrow" more or really strike out to acquire others, but again, where does the job creation come from ? Most company's don't borrow unless they are going to re-invest, and if they dont see the growth prospects, it wont matter how high the price will go. The high price will however allow insiders to continue to dump their stock, seeing the free money from the Fed, but no growth prospects, as a tremendous reason to continue to unload shares. at premium prices. I think we've witnessed this for the better part of the 90 % rally. Additonally, earnings have to come up to support the price, and if earnings dont follow....well then hot money surely wont flow here from other sources outside the country. What I like best about this theory is its totally that of how an "academic" would think. Which means the likelihood of it playing out exactly how Ben would want it, has about the same odds of succeeding, as I do of becoming the President of the US. Greed being greed, once enough players know this, then all it takes is one to turn tail, and sell like crazy while also shorting the heck out of it, and get enough of a decline going such that no matter who the players are, they will be too scared to get in front of the descending freight train that has no brakes. bribery and/or the intoxication of easy money from the Fed, can easily be overcome by the wealth of money that could otherwise be made in a declining market, when you know the stock markets gains are built on nothing but Fed Vapors. A crapload of money can be made if you can instigate then ride the market back down to Dow 5000. and in a very very short period of time. So it took us 18 months to get here, at Dow 11,800. Can we do the hat-trick, and take it back down to 5000 in half the time or less ? Watch the dollar. and other currencies. This year will be interesting, and a lot less boring than the half hearted rally that was 2010. The fed has very little control over the dollar, and if its targeting the market than its basically lost the war, and the battle.

[SemiBizz]

You alluded to this a few weeks back. Frankly... I think you give these guys too much er uh "credit" I think it's a continuation of their academic-oriented stupidity and lack of real World business experience. Starting with underestimating subprime. Their naive handling of Bear Stearns and Lehman. Presenting the notion that the banks should be bailed out and indemnifying the parties and counterparties to the credit default swaps that resulted in the TARP program. They have it all WRONG. I think they are big on THEORY and light on REALITY. And only understand running scared. Burning Man should be FIRED. He's NOT too big to fail.

[dcengr]

The big assumption you make is that the Fed is competent and knows what it thinks it wants. I've read their papers. They're a bunch of genius' in their own mind. 1. Let me tell you what they did with QE1. They wrote a paper and realized that when they bought the toxic assets, when payments were being made, they retired said assets to take it off their books. Well when Fed retires assets, they DESTROY MONEY. So in essence they wanted to put money into the world, but the world was paying them interest rates and they were destroying that interest payment. In essence, they were sucking money out of the world. They wrote a paper about this in august when they finally realized it. That is why you see them putting the interest payments back into buying in QE2. 2. Did you ever read the paper written by Benny and that kid from MIT on the plan for QE2 back in 2004? I did. You know what their main thesis is? Japan didn't work because people didn't believe what the Fed said it wanted to do. That's right, that's their entire thesis for why they thought QE failed in Japan. Ben is so big on what the market thinks and how he can lead it with statements so the participants go in the direction the Fed wants it to go. The entire paper is based on how they would tell the public what the Fed wants to happen, then the Fed would monitor to see if the participants worked in that direction. It is absolutely childish for these guys to throw trillions on a simple stupid concept like these. Is this the best that my country has to offer? I'm a big believer in predestiny. This is not happening because of Ben or Geithner or any individual. They are all self-reinforcing and their choices are limited. They made those choices because THEY HAD TO. Anyone in their place would've made the same choice or they wouldn't be in their position. History wants a name and a face, but in reality, it is the entire nation/generation or whatever that's driving things.. and in my theory of grand super organism, we as humans are in the winter stage.. but out of it will come spring eventually. Assets must change hands to people with new ideas, attuned to the new realities and technologies.. get rid of the old farts with rotting ideas.. they were good when they were young, but get their finger nails off the power switch and let young guys buy up the assets at a discount and we will revive.

[viccarter]

Regarding unemployment I've noticed recently that virtually anyone who has taken the time to develop skills has more work than they want. Truthfully, any skilled person willing to work can just about name their price - and they do. Construction is in terrible shape, right? Try and hire some skilled renovators to work some projects at your home and see what their hourly rate is. Same is true for almost every other trade.

We don't have a shortage of work or opportunity in this country. What we have is 43 million people on food stamps and millions more who have been conditioned to believe that it is completely honorable to sponge off of their neighbors. How pathetic!

BW

I think you hit it one the nose about "skills". But right now what has happened is that a lot of younger people in my generation have been suckered to believe that education = a skill. That a college degree sets you on the path to a higher quality of lifestyle/earning power/options. I think that was true 20 or 30 years ago, but I do not now. For those who are 35-60 years old and have a college degree and some sort of specialized skill set and credited "work history" doing those skills, I think are still doing well. This fact trickles down to their children and grandchildren so they can buy them I-PHONES, etc. The other group, the group you referenced, are those who possess a specialized skills or trade. Yes they are doing well. A directional driller on a gas rig, a skilled mechanic, etc. But we have told a generation of the best and brightest that that wasn't good enough and typically those who entered these professions at a young age were those who didn't necessarily have the aptitude or other options to continue higher education.

Yes, we do have millions and millions who are lazy and unwilling to work. I have said this before -- you cannot be at the margin anymore. A guy came in the office the other day and was talking about a wielder -- apparently not even a very good one -- who was busy making cattle guards for an oil field services company here in the Eagle Ford. They have to have them b/c they cut the fences to get the rigs, equipment into the well site. Guess what he's making per guard? $2500 a cattle guard, takes him a couple days to do one, and the funny part is that they come over and pick them right up without him having to do the install! Crazy, OTOH, I know young lawyers waiting tables, others that can't get jobs, crushing debt. These kids are smart kids, good schools, did things right or so they thought, they would break their neck for you for 50K a year, 10 hour days, a lot of these kids are smarter and more talented than tons of people lost in these bureaucratic organizations making a living wage -- but they have "no skills" or so it is perceived.

I was at dinner alone the other night and talking to this guy 45-50, said he managed a number of "Love's" brand travel stops, said that he always wanted to be a lawyer, wasn't smart enough, couldn't get in anywhere, etc. But he told me he broke $200K last year, that was America, you were willing to work and hustle and you could make a come up, things would fall into place for you. This aspect of America is declining rapidly. It is sad but true.

[viccarter]

The big assumption you make is that the Fed is competent and knows what it thinks it wants.

I've read their papers. They're a bunch of genius' in their own mind.

1. Let me tell you what they did with QE1. They wrote a paper and realized that when they bought the toxic assets, when payments were being made, they retired said assets to take it off their books. Well when Fed retires assets, they DESTROY MONEY. So in essence they wanted to put money into the world, but the world was paying them interest rates and they were destroying that interest payment. In essence, they were sucking money out of the world. They wrote a paper about this in august when they finally realized it. That is why you see them putting the interest payments back into buying in QE2.

2. Did you ever read the paper written by Benny and that kid from MIT on the plan for QE2 back in 2004? I did. You know what their main thesis is? Japan didn't work because people didn't believe what the Fed said it wanted to do. That's right, that's their entire thesis for why they thought QE failed in Japan. Ben is so big on what the market thinks and how he can lead it with statements so the participants go in the direction the Fed wants it to go. The entire paper is based on how they would tell the public what the Fed wants to happen, then the Fed would monitor to see if the participants worked in that direction. It is absolutely childish for these guys to throw trillions on a simple stupid concept like these. Is this the best that my country has to offer?

I'm a big believer in predestiny. This is not happening because of Ben or Geithner or any individual. They are all self-reinforcing and their choices are limited. They made those choices because THEY HAD TO. Anyone in their place would've made the same choice or they wouldn't be in their position. History wants a name and a face, but in reality, it is the entire nation/generation or whatever that's driving things.. and in my theory of grand super organism, we as humans are in the winter stage.. but out of it will come spring eventually. Assets must change hands to people with new ideas, attuned to the new realities and technologies.. get rid of the old farts with rotting ideas.. they were good when they were young, but get their finger nails off the power switch and let young guys buy up the assets at a discount and we will revive.

awesome post.

[thespookyone]

Great thoughts, BUT, I firmly doubt the Fed can stop rates from rising-and in fairly short order.