November 2009

The Federal Reserve said Monday that it would begin testing its strategy to shrink its trillion-dollar portfolio of mortgage-backed securities and eventually unwind its biggest program to prop up financial markets, The New York Times’s Edmund L. Andrews reports from Washington.

The central bank emphasized that the move was strictly an exercise in operational preparedness and did not signal a tightening of monetary policy or an effort to begin raising interest rates.

Indeed, Fed officials announced in October that they were exploring the use of so-called “reverse repo” agreements as a tool for carrying out their “exit strategy” from emergency measures adopted during the financial crisis.

But the move did demonstrate that the Federal Reserve’s preparations were becoming more concrete, and it highlighted the delicate challenge of bringing monetary policy back to normal without disrupting financial markets.

The Federal Reserve slashed its benchmark overnight interest rate virtually to zero in December. But because that was not enough to revive credit markets, it also announced plans to drive down long-term interest rates buy purchasing almost $1.5 trillion worth of government-guaranteed mortgage-related securities and Treasury bonds.

Buying up mortgage-backed securities helps push up their price and drives down the effective interest rate, or yield. The purchases have already helped double the size of the Fed’s balance sheet, to more than $2 trillion, since September 2008. Fed officials expect to complete its purchases by March but at some point they will need to reverse the purchases in order to prevent inflationary pressures.

Reverse-repurchase agreements, or repo agreements, are one way to tackle that job. Instead of actually selling the huge portfolio of mortgage securities, which some Fed officials fear would cause an abrupt spike in long-term interest rates, the central bank would essentially lend them out and promise to buy them back later.

The Federal Reserve Bank of New York, which carries out the Fed’s trading activities, said it would begin small-scale testing now that it has discussed the plan with market participants.

“Like the earlier rounds of testing, this work is a matter of prudent advance planning,” the New York Fed said in a statement. It “represents no change in policy stance and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.”

The New York Fed said its goal was to “ensure the readiness” of the central bank, the primary dealers on Wall Street and the tri-party clearing system for handling such transactions.

This is as far as the stockmarket is concerned, very bad news. As Bond yields rise, stock values [nominal money prices] fall. This I suppose is why mark-to-market accounting was discontinued. The Fed can hold at Par value, but the banks couldn’t until now. If market prices somehow are displayed, yields will almost certainly rise. Thus essentially, the Fed just shrinks it’s Balance Sheet, but not really – nudge, nudge, wink.

If/when the Fed. starts to unwind in earnest, watch out below. Nothing save Fed liquidity is pushing the market higher. Once the Fed really pulls the liquidity, the market goes down, unless there really is an improvement in the economy.

I would imagine, those in the know, might well be exiting surreptiously as we speak. Numerous breadth measures have been indicating narrowing leadership.

What I am seeing and hearing on the news — the reappointment of Bernanke — is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn’t even know he doesn’t understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible — as if we promoted every doctor who caused malpractice. The world has never, never been as fragile. Economics make homeopath and alternative healers look empirical and scientific.

No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic quiet of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan.


While I echo his disgust that the Federal Reserve won’t be held accountable, I would argue that withdrawing is not the right response. Rather, redouble efforts to use his prominent position to force change.

I really hate to keep throwing acid in your face, but some of the comments left on this site are downright ridiculous. Do you people think “The Fly” is stupid, like your fucking local plumber, or something? You throw out comments, like “OMG, FTK is so fucked if Fly sells.” What do you know?

Answer: Nothing.

No position constitutes more than 10% of my assets, so shut the fuck up.

Of course, too bad if the initial position constituted 30% and through market losses now accounts for 10%

I’ll tell you another thing. I am a HUGE CNBC fan, with all of its bells, whistles, Kneales and Cramers. Over the weekend, for a brief second, I thought about how hated CNBC has become, particularly on the internet. Then it dawned on me: I fucking hate bloggers. If bloggers hate CNBC, “The Fly” likes it, or vice versa. Wherever the wind blows, Senor Tropicana is going the other way, into the storm. To be honest with you, as opposed to outrght lying, CNBC bears the brunt for a lot of bullshit. Think about how difficult it must be to sit there, under the bright lights with make-up all over your face, entertaining a bunch of malcontent bloggers/misfit investors.

flippe-floppe doing his I’m so contrarian flamingo dance, while he prepares to flippe-floppe again.

Fuck that.

That’s why “The Fly” will never do radio or make special guest appearances on the teevee.

Could he possibly do it any worse than ChartAddict?

As for the markets:

It appears the Dubai crap is behind us, regardless of how big the debt is. The rich fuckers from UAE will absorb all losses. Take that to the bank, jackass.

Hmmmm. We’ll see.

Nonetheless, the market is behaving weird, as if people are scared to allocate funds. Just know, should retail sales come in better than expected, this market will go nuts, like a hungry monkey in a fucking banana tree. Despite the lies being disseminated by certain Green Mountain Coffee Roasters Inc. (GMCR: 62.13 -1.30%) haters,

That’s because GMCR are filtering the books. Why does the fabled ppt fundamental filter not pick this up?

I like the shares and will continue to add to my position, into the $50’s. Also, I like Mechel OAO (ADR) (MTL: 20.07 +3.35%) , ICICI Bank Limited (ADR) (IBN: 36.805 +1.08%), SandRidge Energy Inc. (SD: 9.59 +0.42%) and U.S. Global Investors, Inc. (GROW: 12.75 -2.45%) . For the most part, any new funds invested on my behalf will be allocated into foreign related stocks and selective niche plays.

Talk about coming late to the party. The only ones left are those puking-up in your bathroom.

I am very done with the whole US of A thing. It’s fucking played out.


The full article

History strongly supports the proposition that major financial crises are followed by major fiscal crises. “On average,” write Carmen Reinhart and Kenneth Rogoff in their new book, This Time Is Different, “government debt rises by 86 percent during the three years following a banking crisis.” In the wake of these debt explosions, one of two things can happen: either a default, usually when the debt is in a foreign currency, or a bout of high inflation that catches the creditors out. The history of all the great European empires is replete with such episodes. Indeed, serial default and high inflation have tended to be the surest symptoms of imperial decline

Why should we fear rising real interest rates ahead of inflation? The answer is that for a heavily indebted government and an even more heavily indebted public, they mean an increasingly heavy debt-service burden. The relatively short duration (maturity) of most of these debts means that a large share has to be rolled over each year. That means any rise in rates would feed through the system scarily fast.

Already, the federal government’s interest payments are forecast by the CBO to rise from 8 percent of revenues in 2009 to 17 percent by 2019, even if rates stay low and growth resumes. If rates rise even slightly and the economy flatlines, we’ll get to 20 percent much sooner. And history suggests that once you are spending as much as a fifth of your revenues on debt service, you have a problem. It’s all too easy to find yourself in a vicious circle of diminishing credibility. The investors don’t believe you can afford your debts, so they charge higher interest, which makes your position even worse.

This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon’s present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

The precedents are certainly there. Habsburg Spain defaulted on all or part of its debt 14 times between 1557 and 1696 and also succumbed to inflation due to a surfeit of New World silver. Prerevolutionary France was spending 62 percent of royal revenue on debt service by 1788. The Ottoman Empire went the same way: interest payments and amortization rose from 15 percent of the budget in 1860 to 50 percent in 1875. And don’t forget the last great English-speaking empire. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.

It’s official. Before 2009 ends, “Santa Fly’s” biggest position will be Green Mountain Coffee Roasters Inc. (GMCR: 62.95 -0.65%) . The trend is undeniable and the technology is second to none: America loves “The K-Cup,” despite what you blue collar fuckers say inside of filthy Dunkin’ Donut hell holes.

The eps estimates are wayyyy too low, considering they (GMCR) make the hottest electronic device in America, aside from the Apple Inc. (AAPL: 200.59 -1.76%) line of products, and control the supply of coffee, via Tulley’s, Green Mountain brands and now (DDRX: 33.50 +0.84%) —all owned or soon to be owned by the makers of the Keurig.

Retail sales are on the mend, people; America wants their fucking coffee served fresh—fuckface. It’s the perfect gift, aside from The PPT (naturally).

flippe-floppe-flye feels that the earnings will surprise. Surprise they might, but I doubt it will be to the upside, there is some serious filtering taking place, but it’s not the coffee, rather the books.

As usual, flippe-floppe is a sucker for some lame story. If he actually looked at the financials, he would have noticed the message in the tea leaves so-to-speak. The Income Statement and Balance Sheet are tasting of acrid burnt beans.

What do you think of them apples?

War, historically has always been highly inflationary. Mish has a post that puts the cost of the Iraq conflict at $3 Trillion. So this money came from where?

Afghanistan is the next war on the agenda to be stepped up. This will add or subtract to the inflationary/deflationary thesis in which way? It will be paid for how?

Choose from:

*By increased taxes from increased productivity/profits
*By printing money
*By issuing debt

From the Washington Post

By Ben Bernanke
Sunday, November 29, 2009

For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is “too big to fail” — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the “stress tests” of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

This expertise is essential for supervising highly complex financial firms and for analyzing the interactions among key firms and markets. Our supervision is also informed by the grass-roots perspective derived from the Fed’s unique regional structure and our experience in supervising community banks. At the same time, our ability to make effective monetary policy and to promote financial stability depends vitally on the information, expertise and authorities we gain as bank supervisors, as demonstrated in episodes such as the 1987 stock market crash and the financial disruptions of Sept. 11, 2001, as well as by the crisis of the past two years.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs. Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.

We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

Commodity inflation is evident through the metals markets. The excess liquidity that has been pumped into markets worldwide is driving this inflation.

China in particular, as previously asserted, is one of the largest inflationists. China is also stockpiling commodities and through government stimulus spending driving a massive infrastructure build out.

Price has risen significantly off of the lows from the liquidity crisis forced selling from last year. Now look at the supply of these two commodities.

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