The Mint: 2010-10-31

Friday, November 5, 2010

FED QE Aftermath, are there any Bonds left to buy? Canada Keeps Potash Local

11/5/2010 Portland, Oregon – Pop in your mints…

Today it appears that word is spreading throughout the stock, bond, and commodity markets that indeed the FED will support them (and sacrifice the dollar) at all costs. Have any extra bonds laying around? The FED will buy them. In fact, according to one estimate, the FED may now be buying too many of them and "forcing" cash into the stock and commodity markets. From the Wall Street Journal:

"At RBS, Mr. Briggs noted that the Fed's $600 billion in expected purchases, on top of an expected $250 billion to $300 billion reinvested from maturing existing bond holdings, will absorb a large percentage of expected net new bond issuance in 2011. RBS estimates that in 2011, the net new issuance of "high quality" bonds issued by the U.S. Treasury, government agencies and corporations, will total $1.352 trillion.

With the Fed potentially buying $900 billion of that, "it leaves very little for the rest of us," Mr. Briggs said. That scenario would result in downward pressure on yields across nearly the entire bond market, he added."

Mr. Briggs, by recognizing that the FED buying "leaves very little for the rest of us" is simply stating the obvious strategy of the FED. You see, the recent flood of capital into Bonds is the equivalent of the lifeguard screaming "Everybody! Get out of the pool!" Yesterday, the FED announced that it will now begin to run around the pool and push all of the market participants back in, whether they want in or not! Does this seem insane? That is because it is insane!

Ben puts $600 Billion on Black and What would You do with $1 Trillion? If You are Just Printing Money, Why Spend it on Bonds?

11/4/2010 Portland, Oregon – Pop in your mints…

Today Ben Bernanke and his band completed their encore, they effectively placed the fate of the US Dollar on a roulette wheel, betting $600 Billion that bond markets will trump the currency markets for the time being. Ben and Co. believe that the bet is simple, red or black, and it has landed on red for over two years, so black seems like a reasonable choice. What Ben doesn't realize is that regardless of where he places his bet, the casino of the US dollar system is falling down all around him. As for the piddly sum of $600 billion, don't worry bond market participants, we'll get much more than $1 Trillion before this fiasco known as QE2 is finished. But really, who is counting?

That is the point. Why count something that doesn't really exist anyway? Does the FED really have $600 billion sitting in a vault somewhere in the same way the US carries a strategic oil reserve in caverns in Texas and Louisiana? Don't be silly, dear reader, we are giving them too much credit, as if they had planned for this sort of contingency. A study of Zimbabwe's recent currency debacle informs us of the ultimate results of this sort of "unconventional monetary policy", the kind you don't find in textbooks. At a certain point counting dollars will become as meaningless as counting raindrops in the air. It is only meaningful if it hits the ground. Right now, most of the FEDs stimulus is evaporating before it gets down to us. But the air is getting thick and the pressure increasing. Rain is on the way.

Candidates Begging at the MAX, Bloated Pension Promises, and More of the Same from the FED…

11/3/2010 Portland, Oregon – Pop in your mints…

Today Ben Bernanke and his band are completing their sound checks and preparing to sing the tune that the markets are waiting to hear. It is a classic tune (debauching the currency is as old as the concept of currency itself) that the FED is simply performing a modern version of to the tune of $1 Trillion dollars . As we wait for Ben to sing and for the election results to roll in, the markets are calm so we will satisfy ourselves today with a personal anecdote, the significance of which we are still pondering.

As you may or may not know, Portland has a public transit system that is the envy of much of the US. Due to a little old fashioned foresight and out of the box thinking and "redirection" of federal highway dollars (which took place long before we pitched our tent here), we enjoy transit amenities on the scale of much larger cities with technology that may rival any city in the world. Whether or not the public can afford it is another story. Trimet, the organization in charge of the system, allows employees to retire after 10 years with full health benefits for the employee and their family. At last count, benefit costs were higher than the wages paid to existing employees. Something has to give.

If I Had a Trillion Dollars, A Ballad From Ben Bernanke to the Banks (With Apologies to the Bare Naked Ladies)

11/2/2010 Portland, Oregon – Pop in your mints…

Today and tomorrow the entire world, that is, the investment world, will be watching what the Federal Reserve and its poster boy, Ben Bernanke. What will he do? Most money managers and bond traders are operating under the assumption that he will proceed to create approximately $1 Trillion US dollars out of thin air through a process known as Quantitative Easing (QE), which is nothing more than indirectly confiscating at least $1 Trillion worth of goods and services from those who produce them in good faith and are compelled to accept US dollars in exchange for them.

You see, Mr. Bernanke and his cohorts are presented with an impossible dilemma. If they do nothing, bondholders get absolutely annihilated in short order and the dollar continues as a viable currency. If they proceed with the $1 Trillion QE game, the currency is the sacrificial lamb and the bondholders get a lifeline, but will get annihilated in the end anyway. Essentially it is the choice of when to feel the pain of massive default on dollar denominate paper.

But what must Mr. Bernanke be thinking at this very hour with so much at stake? The world presumably expects $1 Trillion dollars. Logic would follow that, at a minimum, what he must provide to avoid "disruption" in the markets. You see, the markets have long since baked in these $1 Trillion dollars and if they do not appear will adjust prices accordingly. Guessing which prices will change and when is what keeps things interesting.

Our guess here at The Mint is that Mr. Bernanke is not thinking at all. He has his orders; the markets will wait and see if he follows them. What he is likely doing is strumming his guitar and warming up his academic tenor voice with a song that goes something like this:

"If I Had a Trillion Dollars" a Ballad from Ben Bernanke to the Banks (with Apologies to the Bare Naked Ladies):

To the tune of "If I Had a Million Dollars":

If I had a trillion dollars
(If I had a trillion dollars)
I'd buy the US a house
(I would buy the US a house)
If I had a trillion dollars
(If I had a trillion dollars)
I'd buy the US furniture for its house
(No interest or payments for a year)
And if I had a trillion dollars
(If I had a trillion dollars)
Well, I'd buy the US a Ford
(And get everyone's clunker off the road)
If I had a trillion dollars I'd buy your bonds!

If I had a trillion dollars
I'd buy some junk paper from your books
If I had trillion dollars
They could help, it'd be less you'd have to cook
If I had trillion dollars
Maybe we could put like a little collateral in there somewhere
You know, we could just act like everything's cool
Like show off the CUSIPs and stuff
Then there would still be liquidity available to us
As if we never bought subprime CDOs and other things

They have endless liquidity but they don't have asset quality anymore
Thanks to me, of course,
Uh, yeah

If I had a trillion dollars
(If I had a trillion dollars)
I'd buy up asset backed securities
(But not with real money I'd be a fool!)
And if I had a trillion dollars
(If I had a trillion dollars)
Well, I'd buy up Synthetic CDOs
(Yep, like a Hybrid or non-performing SIV)
And if I had a trillion dollars
(If I had a trillion dollars)
Well, I'd buy up Lehman Brother's remains
(Ooh, all them crazy Hudson Castle assets!)
And If I had a trillion dollars I'd buy your bonds!

If I had a trillion dollars
We wouldn't have to tax the people more
If I had a trillion dollars
Now, we'd stick to the foreign creditors
If I had a trillion dollars
We wouldn't have to eat our bad debts
But we would eat our bad debts
Of course we would, we'd just eat more
And pad our tier 1 ratios with new cash
That's right, all the free cash... FED credit!
Mmmmmm, Mmmm-Hmmm

If I had a trillion dollars
(If I had a trillion dollars)
Well, I'd get us out of this mortgage mess
(But not the homeowners, I'm no fool!)
And if I had a trillion dollars
(If I had a trillion dollars)
Well, I'd buy financial reform
(Ala Dodd-Frank and Obama)
If I had a trillion dollars
(If I had a trillion dollars)
Well, I'd make you solvent
(Haven't you always wanted to be solvent?)

If I had a trillion dollars
I'd buy your bonds!

If I had a trillion dollars, If I had a trillion dollars
If I had a trillion dollars, If I had a trillion dollars
If I had a trillion dollars…
You'd be rich!

Seriously, to enjoy some real entertainment (and to get the tune in your head to sing along with Ben and the banks), check out the Bare Naked Ladies performing their 1996 hit "If I Had a Million Dollars" below. As for tomorrow's FED announcement, rest easy and wait along with the rest of the investment world to see if Ben & Co. really have the $1 Trillion dollars expected of them. Of course they don't really have it but at least it will be fun to see how they explain it this time, that is until those $1 trillion show up in commodity prices!

Stay Fresh!

David Mint

Key Indicators for Tuesday, November 2, 2010

Copper Price per Lb: $3.77
Oil Price per Barrel: $83.40
10 Yr US Treasury Bond: 2.63%
FED Target Rate : 0.19%
Gold Price per Oz: $1,356
Unemployment Rate: 9.6%
Inflation Rate (CPI): 0.1%
Dow Jones Industrial Average: 11,125
M1 Monetary Base: $1,460,900,000,000
M2 Monetary Base: $7,960,300,000,000

Monday, November 1, 2010

Upcoming FED Action, WAAAAYYYY TOO Much, and Three Years Too Late

11/1/2010 Portland, Oregon – Pop in your mints…

During Halloween, Portland definitely lives up to the mantra "Keep Portland Weird". Having managed to avoid much of the direct impact of the weirdness by taking refuge over the mighty Columbia on the Washington side, your author, along with anyone managing a large money market or bond fund, now turn their weary eyes to the upcoming FED meeting. While we watch and wait, we can't shake this sinking feeling that the FED is fighting an enemy (deflation) that no longer exists with a weapon that is so powerful that it will cause a large amount of collateral damage. If this sounds familiar (America's war on terror comes to mind) it is probably because both operations are run top down by a large government bureaucracy.

For those of you unfamiliar with the dynamic, you must know from the start that there are two imperatives. One, that, presented with a problem, the government will do something, the complaints of the people leave them no choice. Two, and more importantly, the government CANNOT react in a coherent manner in time to solve the problem. Largely because it is impossible for a government to gather the proper information and act quickly and coherently. You see, contradictory as it sounds, the government's role is not to solve large scale problems. It is to give its constituents an environment where the constituents themselves can act within reliable limits.

Now that we understand this, please look at this chart. This chart is The Mint's "Crystal Ball" if you will. We are smart enough to know that you can't know what will happen in the future, so please take our predictions for what they are worth. You see, in August of 2007, the FED began to lower its Federal Funds rate towards 0%. It currently stands at or around that point. However, the premise of The Mint's chart is that it takes roughly 3 years for this cheap money to make it too the market, hence the stagger between the peaks and valleys in the chart.

According to The Mint's calculations, the FED theoretically should have solved its current "problem", known as the Credit Crisis in January of 2008 when it lowered its rate to around 2%. However, the FED forgot to bring a fire extinguisher to the inflationary bonfire it was creating (it kept lowering rates) and now finds itself watching what it thinks is a smoldering economy. Its reaction, at least its supposed reaction this coming Wednesday, will be to throw bucket after bucket of lighter fluid on this fire until it regains its warm glow.

Our prediction at The Mint is that the FED, which hopes to eventually bring the fire up to a healthy roar, will catch the whole forest on fire. In other words, we believe that high levels of inflation are on the horizon, possibly hyperinflation.

Why? The same reason we are still taking our shoes and belts off at airports and fighting invisible enemies halfway across the world. The government, as a rule, always comes in with the wrong solution way too late and end up causing problems much larger than the ones they are trying to solve in the first place! You see, the FED was done "saving" its friends in the financial world in January of 2008 . But they couldn't let well enough alone. Instead, they set in motion a seemingly endless stream of bailouts and boondoggles, entitlements and "liquidity facilities" which now threaten to blow to smithereens they very economy they are supposedly charged with managing. Of course you and I know that this business of managing an economy is a fatal conceit, but someone needs to get the memo to Bernanke and Co before the forest goes up in smoke!