Thursday, August 16, 2012

Rising Rates

Rates will rise.  This is a given.  Rates could fall further in the near future (the long bond, if not already negative, could be negative in real terms even by the Fed's guage if rates continue down), but Bernanke says they will rise sometime in 2014 (how about that for telegraphing?).  So what happens when rates rise?

First let's address who owns the debt.  Central banks own most of it, and then investors own the rest.  The investors are everyone from millionaires to 401k holders.  They have been passed the debt from institutions, who also own some debt for their own purposes (JPM's prop desk, for example).  So this debt has traveled the financial world to encompus many owners.

Where finance is concerned there are two distinct scenarios which can engulf the landscape and they are inflation and deflation.  So far we have seen inflation in such hard assets as gold and oil.  Deflation has been unrelenting concerning housing and wage increases.  Debt finds an interesting place between the two because in this environment (and we could debate if we are currently in an inflationary or deflationary one) rates have fallen while the bond prices have increased.  This should be signaling deflation, but prices of goods continue to rise, confusing the issue.

When rates rise the value of bonds will drop.  This will crush the bond trade.  Sure, many people hold bonds until their maturity, but bond traders don't.  These traders will be passing hot potatoes as they fall in value, and the value will be dropping quickly.  For every 1% that the rate of the ten year goes up, the value will drop 14%.  This is a huge loss for bond holders.

That is what will happen to the bonds, but what will happen to the holders?  Pensions and 401ks will drop in value and people will lose the value of their savings.  For the Central Banks their balance sheets will be blown out.  These banks are holding these bonds and will need a counter balance for the banks to stay at par.  So an asset will rise in the bonds place.  What will it be?

The banks could fractionally reserve their assets.  This means they would loan them.  They could loan dollars and other currencie, or they could rehypothecate gold, and other reserves.  Any of these options would be highly inflationary.

Finally, if rates rise investment will run from bonds which will force the Central Banks and their proxie holders to buy more and this will force them to compound loans to make up for the losses.  We can conclude that when rates rise we will enter a very inflationary environment until rates rise to a point higher than the inflation rate.  Bernanke says it will wait until 2014 to start the rise in rates.  How far they will have to rise to cap inflation from getting out of hand has not been discussed.  Let's see if deflation is strong enough to keep the inflation damn from breaking until then.

Monday, August 13, 2012

The Furnace

There is a basement in hell which keeps the status quo going.  It is comprised of dorito eating demons who are in charge of such various things as maintaining as many eyeballs on televisions sets as possible, shoveling as much fiat currency in hell's main furnace as possible, and there is a special room for the Artist (Formally Known as Prince) to write as many pop songs as possible.  It is by making sure the masses ignore the "monie" printing that the demons fulfill their objectives of continuing the paradigm of hell across the land.

State of mind is as important as IQ, and so the culture washes the brains of the masses with garbage repeatedly.  This is the ultimate distraction.  All the while it has created "sciences", equally justifiable to the brainless masses, to exhibet the "truths".  These truths consist of such filth as the "rational consumer theory" and "fiat monie principle".  So while all eyes are on pop culture, the demons use their lies to set up the biggest con known to history.

Lies create lies, for he who gets away with a lie will live to tell another.  There is no stopping the system of lies now, for the lies have come this far, and there has always been a timetable for an end of the Fiat Ponzi (devised near the furnace in hell by JP Morgan and JD Rockefeller).  When was it originally thought to end?  2012?  2020?  We have numbers now to determine such a time, and considering every resource from iron to oil appears to have peaked we can conclude that it will be a short order until prices of real goods sky rocket.  This while people are told they will act rationally in good times, and do the same in bad.  This while the masses base the wealth aggregate on how much debt is accumulated.  This while people turn their brains to mush for an average of eight hours per day.

So while the world turns the demons shovel fiat currencie into the furnace in hell to power the system, and we are told this is what will keep the earth turning, not knowing that it is not earth that is propped up by the demons efforts, but hell itself.

Wednesday, August 1, 2012

The Insiders

The FOMC minutes came and went and surprise surprise, they read with no new measures.  The committee sees the recovery on track, albeit it taking hold slowly.  They have the tools ready if needed.  But now is not the time.  So was it surprising when, with 3 minutes to go in yesterday's trading, a contract of ES futures sold for $4.2B?  Was it surprising that Bill Gross said "stocks were dead".  Was it surprising that algos went haywire with selling this morning?  Not when insider trading is the norm, and anyone on the inside uses their connections to the Fed to trade according to plan.

I have long said the Fed's dual mandate is actually i) to confuse the "rational" consumer and ii) to maintain the status quo.  Sure, I also say that the system is based on a metric, the dollar, with no value, and that it will ultimately collapse in the face of truth, facts, and reality, but that does not mean that the status quo can be maintained for awhile longer.  Remember, the system can stay irrational longer than you can stay solvent.

One of the main reasons that is the case is because if you have a financial adviser then that person is likely not on the inside, or if you are a do-it-yourselfer, you are not on the inside.  Even the inside boys struggle.  Sure they can make a glove save and trade ahead of the Fed, but that won't mean great returns when there really is no investment in the "lost decade" (this is what financiers are calling it) that is making people well off (except for PMs).  So Buffet and Gross, with their stocks and bonds, yield 3% annually and their clients maintain a semblence of their lifestyle.

Years from now it will be seen that inflation persisted, and that the real rate of return on must investments was negative, maybe flat at best.  It will be realized that holding fiat in a bank lost 5-7% yearly.  It will be known that the trends of higher prices continued even though every financial blogger hung on the Fed's words and thought deflation was underway.   The reason for this is that even though QE 3 hasn't happened, ZIRP stays, the UST issues unreal debt loads, and the Fed continues to clear through POMO while they flip USTs from PDs T+1.  This is all inflationary, and more than anything, not issuing QE 3, by allowing the rumor before the news, is holding back a tidal wave of inflationary pressure.

Like the tides of the oceans, the Fed let's finance wash in and out of QE expectations.  I think if the Fed just came out and said no QE ever again it would be more inflationary than waiting for QE 3.  The reason is, if people did not think the Fed would ease, they would chase yield, and assets would be leveraged.  Instead financiers sit on their hands and then when nothing happens, well, it is expected soon.  This holding pattern keeps the status quo in line by keeping expectations fixated on QE like a deer in the headlights and it freezes the inflation that is constantly building in the system because of the debt that is doing the same.

The Insiders know this and they also know when to make a trade and how to make a trade.  They trade the rumor and then trade the news, and thus wash enough of a return to keep the system from falling apart.  By working with the Fed they maintain their system of power.  This system won't last indefinately, but it will go on as long as it has to.