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.

No comments:

Post a Comment