Financial topics

[Higgenbotham]

Vince and Higgie, I don't understand.

Isn't it true that QE2 targeted 10 year bonds, leaving
30 year bonds on their own?

And isn't QE2 keeping 10 year bond yields down?

John

QE2 mostly targeted the area around 10 years. The NY Fed has a list of POMO operations with dates and the amounts purchased.

10 year bond yields are spiking and I think Bernanke's meeting with the press may be a signal that he will try to reverse course and break the stock market bubble in order to drive even more money into the bond market. It seems that the market has become bigger than the Fed and the Fed will need the market's help to get rates under control.

I have March puts too. It may be a bit late for March, but we'll see what happens. This situation is quite extreme.

[Higgenbotham]

When $100 billion per month is pushed into the market, it is not necessarily just $100 billion per month. Well, like I had said before, at time t=0 it is nothing more than a swap. However, if those receiving this cash decide to lever up, for example in the cotton futures market or something like that, then that $100 billion can effectively become $1 trillion per month or perhaps even more. If people are levering up, they are borrowing dollars to do it. So if Bernanke puts out $100 billion to buy bonds, but speculators lever that $100 billion up many fold, borrowing money to do so, that will pressure rates. Watching Bernanke reminds me that a tragedy is also a comedy. It's my belief that he will go down as one of history's most tragic figures. He is indeed incredibly funny to watch, at least for me. Will anything be learned from this? I doubt it.

[John]

Dear Vince,

> On the very short term the Fed is able to set the market rate. But
> on longer term, like 5 year, 10 year, 30 year, they are just
> another bidder in the market.

That's not what Bernanke thinks.

** Bernanke / The Fed congratulates itself - again - on its jawboning policy
** http://www.generationaldynamics.com/cgi ... b#e041010b

John

[vincecate]

That's not what Bernanke thinks.

I am with Higgie on Bernanke. He is so tragic it is funny to watch him. He knows that if he admits things have gotten out of control then everything will go to hell that very day. But in his heart he knows it is wrong to lie so he is very bad at it. He is very nervous when he has to lie, which is most of the time now.

[John]

Dear Vince,

> That's not what Bernanke thinks.

> I am with higgie on bernanke. He is so tragic it is funny to
> watch him.
> He knows that if he admits things have gotten out of control then
> everything will go to hell that very day.
> But in his heart he knows it is wrong to lie so he is very bad at
> it. He is a very nervous when he has to lie, which is most of the
> time now.

I agree that Bernanke is tragic, in the true Greek tragedy sense.

He came to Washington from Princeton with a set of beliefs that won
him the position of Fed Chairman that he yearned for and was sure he
deserved. But now, everything he's believed since he was a child and
throughout his career has been proven wrong. ("Green shoots.") Today,
he has no choice but to play out his preordained script, which he's
helpless to change.

Euripides would have been fascinated.

John

[jdcpapa]

On the very short term the Fed is able to set the market rate. But on longer term, like 5 year, 10 year, 30 year, they are just another bidder in the market. When they bid up the price of bonds they are lowering the effective interest rate, not increasing it. But since they are buying with newly printed money, and people know that, it is not really like when other people buy bonds. New money devalues existing money, so you don't want to lock your money up for 10 years when the Fed is doing much of this, so it can drive rates up.

Note that lower interest rates means pension funds make less money and so go bankrupt faster. When pension funds go bankrupt the government will have to support more people, which will be more money printing.

So the "market" (including the fed) is "building up" a discount rate to account for the hypothetical devaluation of the dollar, essentially.

It seems to me that the penion fund guru's painted too much of a rosey picture in the form of forecasted rates of return. Reminds me of the nonsense in the stock market and the former "real estate market" (continued annual growth at 6%+? yeah right!).

I have no respect for Bernanke.

[vincecate]

So the "market" (including the fed) is "building up" a discount rate to account for the hypothetical devaluation of the dollar, essentially.

The Fed has spent trillions building up a bubble in bonds and it will pop. When it does it will take out the dollar too.

[vincecate]

He came to Washington from Princeton with a set of beliefs that won him the position of Fed Chairman that he yearned for and was sure he deserved. But now, everything he's believed since he was a child and throughout his career has been proven wrong.

The government wants to print money and so only hires economists that say it is good to print money.

http://www.huffingtonpost.com/2009/09/0 ... 78805.html

[John]

> The government wants to print money and so only hires economists
> that say it is good to print money.

> http://www.huffingtonpost.com/2009/09/0 ... 78805.html

Sigh. No, Vince, that's not what I meant. What I meant was that
Bernanke came to Washington believing that the Great Depression could
have been avoided if the Fed had lowered interest rates only a little,
and that deflation was impossible with any fiat currency since the
central bank could "print money" to defeat deflation. What's he's now
learning is that no amount of quantitative easing can prevent
deflation. That's the tragic script that has trapped him.

John

[Higgenbotham]

Tonight seems like a good time to talk about the big picture. This forum was rabidly bearish in the first half of 2009. The discussions were about inverse ETFs, shorting, lack of earnings, insolvent banks, Dow 1000, etc. Most of the original posters have vacated the forum or at least this topic, and the discussions are very different. The few remaining original posters are not talking much about shorting the market anymore, or the fact that people who own stocks will lose money.

Now I need to say Happy Anniversary to a famous bubble. I calculated a "last wall" of cycle and anniversary dates that the stock market should not run past, but the dates themselves have exceeded the cycles that go along with them. Anyway, the anniversary dates are: February 3, 1637 was the top of the Tulip Mania 374 years ago and February 9, 1966 was the top of the 1932 to 1966 bull market 45 years ago. 374 and 45 are somewhat significant from a cyclical standpoint. In addition, I calculated a "last wall" of prices that the market should not exceed by historical standards and they are: 11,918 on the Dow and 1307 on the S&P futures. The 1307 number was mentioned a few months ago. The Dow closed over 12,000 this week and the S&P futures traded 1308.50 on Friday morning. Given the poor fundamental nature of the economy, I doubted these numbers could be challenged, but they were (at a cost of trillions to the taxpayers, in theory).

For awhile, I was posting some "Maximum Ruin Updates" to talk about how much money I had lost shorting the stock market. At one point last Summer, I had turned those losses into a gain and decided to no longer post on that topic, as it wouldn't seem believable or realistic. Anyway, last June I covered all my shorts for a gain of 7%, then went short again in September. I am now happy to report that I have lost 12% of my money being short. That's kind of a joke, but actually I feel quite good about that at this point, given the extremity of this bubble. On the other hand, when I had lost 10% of my money shorting back in September 2009 and pulled out, I felt quite bad, as it seemed like the bubble could get even stronger and was nowhere near completion. I had figured back at that time that I really could ruin myself by staying short and not pulling out. Now I believe the bubble is running on fumes and feel OK being short and may even add more soon (very carefully).

Like most anyone who is trading the market, I do a lot of technical studies. Just tonight, I looked at the percentage of stocks above their 20 day moving average smoothed with a 20 day moving average. This study is a typical example of how extreme this bubble is and I'll just paste it in. I drew the red lines and dots. To me, they indicate the stock market is sort of defying gravity at this point.

http://oi51.tinypic.com/f0vktt.jpg



So that's about all I have to say tonight. Reading the stock market news, these are once again heady days in America. Unemployment is down, wages are up, the service economy is improving and the Dow has closed over 12,000 this week. Is this April 1930 all over again? My guess is yes, it is. "We have arrived."

http://www.cnbc.com/id/41439800