The Fix Is In ... Peter Schiff

Here is a very goodcomment made by one of my favorites, Peter Schiff, about the Fed's policy to hold rates at 0% for the next two year ( of how low interest rates really just destroys the economy):

Many economists have short-sightedly concluded that ultra low interest rates are a sure fire way to spur economic growth. The easier and cheaper it is to borrow, they argue, the more likely business and consumers are to spend. And because spending spurs growth, in their calculation, low rates are always good. But, as is typical, they have it backwards.

I believe that ultra-low interest rates are among the biggest impediments currently preventing genuine economic growth in the US economy. By committing to keep them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Low rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little...............

It was bad enough that the Fed held rates far too low, but at least a fig leaf of uncertainty kept the most brazen speculators in partial paralysis. But by specifically telegraphing policy, the Fed has now given cover to the most parasitic elements of the financial sector to undertake transactions that offer no economic benefit to the nation. Specifically, it will simply encourage banks to borrow money at zero percent from the Fed, and then use significant leverage to buy low yielding treasuries at 2 to 4 percent. The result is a banker's dream: guaranteed low risk profit. In other words it will encourage banks to lend to the government, which already borrows too much, and not lend to private borrowers, whose activity could actually benefit the economy.

This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments. American investment capital will continue to flow abroad, denying local business the means to expand and hire. It also destroys interest rates paid to holders of bank savings deposits which traditionally had been a financial pillar of retirees. In addition, such an inflationary policy drives real wages lower, robbing Americans of their purchasing power. The consequence is a dollar in free-fall, dragging down with it the standard of living of average Americans.

Here is a pretty cool chart....

A Look At How $58 Billion In USD Purchases Buys You 4 Days Of FX Intervention

From zerohedge, It was just 4 days ago that the BOJ purchased Y4.5 trillion (or $58 billion) worth of dollars in the open market to lower the Yen against the dollar. Well, that intervention last not even a full 4 days. As the chart below shows it is time for Shirakawa and Noda to start watching... watching... watching... the yen as it once again approaches all time highs against the dollar. But at least the equity market is confused enough to believe that 2 years of projected deflation is good for risk. Ben wins.... if only for a few hours. The irony is that everyone expected that a fixed inflation (or in this deflation) calendar language is the weakest of the Fed's options. Now that this is precisely what has been utilized, a soft form of Operation Twist 2 which locks in the rates on the 2 Years as explained previously, the market is cheering it deliriously. Once the market has slept on it, it will likely realize why it was so skeptical as recently as 2 hours ago on the viability of this approach.

Are you serious? Look at the 3 year auction today...

Wow, 32$ billion with high yield of 0.5%? Say goodbye to your equity market. I'm telling you, when the bond market reverses, it will be a horrible scene....

While we are at it, as my boss Joe mentioned, take a look at the CAD interest rate curve, rate cutes from 1%, really? Should someone put a trade before this thing flattens out?



Market crash 2011... Don't say I didn't tell you so...

Well since the markets has recently confirmed my view in June and is heading to the Dow 10000 level that I predicted, Im going to post on this blog a part of my QE3 publication that I wrote at the end of June. Even though I was wrong on the treasury call, I was definitly good on the equity trade. Here it is:

So as we approach the end of June in a couple of days, the Fed’s QE2 600$ Billion purchase program is coming to the end but we just had the 10 year yields breaking below 3% again today with the help of a 1 trillion $ US equity market correction in the first 2 week of June. This begs the question, is Bill Gross right with his call to underweight US treasury?

Well for those of you that are unfamiliar with the bond market (which you really should be since the bond market basically tells you if the equity markets will head up or down), the king of PIMCO is arguing that US treasuries are overpriced, it is the wrong bet and that he is underweight in US sovereign for a few reasons (FYI, I completely agree with him even though the bet is wrong at the moment). First, we focus so much on the nation’s 14.3$USD trillion public debt that most of us are forgetting about the American Ponzi Scheme with Medicare, Medicaid and Social Security that is putting America on the tab for close to 100$USD Trillion in unfunded liability. Second, with the Fed’s expansion of balance sheet ending, who is going to continue with the treasury buying? This again leads us to the question of the extension of the debt limit and the possibility of QE3.

We all know QE2 completely bombed, everything the program was supposed to accomplish failed, money are moved from the FED into risky asset, equity markets gets inflated and huge pile of cash goes into speculation that leads to commodity inflation which in turns adds pressure and slows down the economy. While all the cash is getting piled in to give LinkedIn a ridiculous valuation of 10$ billion at the first day of trading (which sales is only at 250$M), none of the money moved into the economy and nothing work! Just look at all the economic numbers! By the way, and its not that banks are unwilling to lend out their reserve from QE2 to small businesses, far importantly, the problem is that they are unable to. You know why? Because all of the actual QE2’s liquidity went to the rescue of foreign banks! Ask big Ben Bernanke and he will explain that to you.

So, is Bill Gross right? I think so. And if we do see QE3, what will happen in my point of view? Stagflation. Let me remind you of the Japanese Economy after their failure of their QE in early 2000. Decades of deflation, 13$USD Trillion in debt, debt to GBP of 200%, 2 year yields at 0.1% and here is a Nikkei 225 historical chart to better paint your memory (chart below). You can't cover a huge wound with a band aid, all it does is it delays the problem. One band aid (QE) after another, eventually, if you don't stitch the wound ( increase taxes, increase saving, balancing budget) it will just get worst and infected as you keep covering it up with more band aid. Stiching the wound will be painful for the whole country, but its the right thing to do, or else, eventually, you will bleed to death. So US equity market and economy? Say goodbye to that…Remember, the lowest the Dow hit in the recent crisis was around the 7000 level, we have a long way down to go...

Im back....Since S&P is doing the useless downgrading anways...

Here, since I am currently preparing to write about how the power of the world is about to shift from a single dominant power back to a system of balance of power (like in Europe for the past centuries), here are two interesting charts, one on global arms exports and the other comparing the military power of China and the US.

By the way, like I called it, we should see the US market dip ( I called Dow 12000 the shorting point and those of you that listened, you are well in the money with shorting the YM futures, but please, keep riding this trend and slam the whole thing down, we don't get much of these opportunities) and there will be no QE3 package in the US as it is a suicide pill that will take the country into stagflation if it doesn't work. Uncle Ben is a student of the great depression and he understands the consequences of failure. He knows how painful the lost decade was for the Japanese and he won't risk the US economy into the same black hole. ECB is the only one that can push though a QE1 for them and we are seeing it as they are starting to pick up all the EU bonds in the secondary markets these days.

And the S&P downgrade, what kind of BS is this anyways? Its not like we don't know the US's balance sheet is crap, we know this for decades. There is 14Trilion of debt and like 70 Trillion of unfunded liabilities, we all know that, its not a secret. Why a downgrade all of a sudden? Its so useless! They have the currency reserve, as long as they keep it, it doesn't matter what your downgrade is, even at BBB, the 10 years still trade below 2.7%, so what a bunch of non sense...