Sunday 16 September 2012

Hail Mary Pass.

We now have an open ended money pumping mechanism in USA. Is that a good news or bad? This program was initiated in the name of job creation, but will it? Remember that Democratic hack Chuck Schumer, who is in bed with TBTF banks telling Bernanke in one of the Senate hearing that the fed is the only game in the town? I think everyone knows and understands that the Fed QE has nothing got to do with job creation. It is all about the 1st and 3rd mandate of the Fed, i.e. to give free money to its member banks and to blow another wealth bubble to create an illusion of wealth and implement the trickledown theory.

So from now till Nov. US markets will have about $ 85 billion per month of flow and now they will target the MBS not treasuries. Did any of the reporters attending JH or any of Ben’s press conferences ask him what happened to the $2 trillion that he had already dumped in the market since 2009? Why it did not create any jobs to reduce the unemployment?  The fact is jobs are not created by Central Bankers. Yes they can help. If the interest rate is too high, the central bank can help reduce the rate of interest. When there is liquidity crisis, they can pump liquidity and help the small business get loans. But today in America, the interest rate is near zero and banks are sitting on huge reserves. Banks have no interest in giving loans to the small business which creates the jobs. Simply because, the banks can get free money from the Fed, purchase the US treasuries which give them risk free 3% and use the same treasuries as collateral for further loan. The giant Ponzi scheme and debt monetization that I wrote few months back. So the only way this more free money will be used in speculation and derivatives trading by the TBTF banks. It might push up the equities prices but won’t achieve anything else. And now they have given themselves a mandate to go on printing and pumping till infinity. It is un precedent for any central bank to take this step unless there is desperation and their back is on the wall. There is nothing else they can do, if this also fails, which it will.

So what is the unintended consequence? While the massive deleveraging is on with no growth whatsoever anywhere and the geopolitical situation is so bad that there is talks of possible war between Israel and Iran, or is it China and Japan or some other countries in far east, how long before inflation takes hold in USA?

As and when it does, what it will do to the wealth effect that Bernanke is desperately trying to create.

The long bond yield has started to rise and inflation expectation and it very much matches with my view that the 30 year period of the bull market in bonds is coming to an end. I think one can safely bet for the rise in the interest rates in USA. The bond market is many times bigger than equities market. When the bond market bubble burst there would be no place to hide. Don’t expect the money to flow in equities because the S&P earnings ratios are already high and the companies are not going to be able to generate any higher income going forward. There is only so much IPads you can sell or dump so many new cars on dealers and book sell, or build so much empty homes. Don’t expect China to bail out the world because there is trouble in heaven. For e.g. the low cost manufacturers of Christmas decoration manufacturers in Yiwu province are seeing their order dropped 20% to 40% for this year. They are the bell weather for Chinese exports sector.

So I am wondering where the job growths are going to come from? If US companies are unable to sell abroad because the BRICs have no money, if Chinese companies cannot export because Europe has no money, if Middle East is going to blow up anytime, what will happen to all those freshly minted dollars? The worst nightmare situation that can happen is: Dollar goes up, interest rates go up and asset prices go down. Along with it comes the social unrest. What we are seeing in MENA region, in southern Europe and Greece, reaches USA. By the way, while there is no demand for the business to hire more people, another reason is the huge bureaucracy that makes the life of small businessmen hell. Few years back one of our business tried to expand it the US market. We used to think that doing business in Canada is tough. But what we saw in the state of New York, with their labour laws and 1000s of forms and regulations, made us realize that Canada is much more business friendly than USA. They talk of NAFTA making business easier between US and Canada but that’s absolutely incorrect. You can import poisonous toothpaste from China and sell it in USA with much less hassle than importing a container of maple chocolate truffle. The FDA would make life living hell and yet businessmen make an effort. Hats off to those who continue to do business in this hostile environment. But what else you can expect when your president says that the businessmen did not develop their own business. The alternative on the other side is not any better either.

Yesterday John Mauldin sent his news letter “Thoughts from Frontline” and he makes a top ten list of most important issues facing America. They are:
1.       Deficit.
2.       Deficit
3.       Deficit
4.       Deficit
5.       Deficit
6-10.Everything else.
And I could not agree with him more. With a deficit of well past $16 trillion and the printing press at full speed, the future does not look very promising. How we will use this knowledge in our investment world is another story.

That’s it for this sunny Sunday. Enjoy the weekend and please join me in Twitter( @ BBFinanceblog) and share with your friends.


  1. When would it be a good time to short US treasuries?

    1. Possibly sometimes in Nov. Will call out when I go long TBT.

  2. The US really needs job creation and need it urgently. There’s no time for coversations left, people (especially jobless) need finally to see some actions and get a chance to get a job. The whole picture of today’s American economy isn’t positive at all – people try to live through loans and payday loans online no faxing, then try to eliminate their debts and look for jobs where they can make enough cash. American job market is very weak now and all we can do is hope that government will set job creation mechanisms wich really can work. It’s very important to change the economy into the better and I am sure that more of working people will help to do that.