David Roskoph

David Roskoph
Contributor since: 2007
Company: Total Asset Performance
Brilliant article. Assuming the best of intentions - the Fed is trying to support a system fundamentally unsustainable. The credit bubbles have moved from the riskiest hands (Internet B) to the ostensibly least risky hand of the Fed in this colossal and desperate Treasury B.
Ben's hoary twist remands interest back to the Treasury and smacks of outright desperation in a failing Republic. The Fed can't support the perpetual deficits with make-believe prosperity because there is a debit on the ledger that must be repaid. Sadly, only pure Treasury Dept fiat will resolve the impossible deficit by monetizing the entitlement-driven debt. When everyone realizes the Fed is not a solvent third-party - the game is over for the west.
Respectfully Thomas,
The Fed has been bankrupt for decades. Greenspan targeted equities' as the impetus for calm in the late 90's. Since then, it has simply been a game of shooting up monetary steroids to pretend we could actually afford LBJ's redistribution legacy.
Hilariously, the world pretends they're solvent and a third-party to the US economy. If word leaks out they're insolvent and an intimate part, the king will be naked and his shame will embarrass all western economies.
We know that the numbers don't add up. It is simply a matter of how they will be reconciled; abruptly in public shame or slowly with a less public retraction of the glutenous social net.
Nathaniel,
Brilliant article! What exacerbates a now predatory system that replaces a once bona-fide marketplace are "regulatory agencies" who condone every new mechanism to destabilize markets and allow them to be pulled and sustained in an artificial price range. Why call it investing? It is much closer to theft.
Isn't this the ruse, making it look as if the market was trading on real news and not a ping pong ball, dashed about to crush the greatest number?.
There is only ONE (1) uno way out to keep this Republic functioning - inflation. The "entntled" now outnumber the rest of us. Either inflate their benefits or watch them break rich folk's toys.
How's about this - the fewer sheep investing, the more tumultuous the extremes? So the Fed targets markets with increasing ferocity over the past 15 years and they become the biggest factor. The managers know how the wheels should turn but without sheep, who's to fleece? Each other. Nasdaq at 5k driven by wolves and sheep slaughtered. Dow at 6,000 driven by wolves and sheep slaughtered. Bonds at 1.4% driven by wolves - working now with misguided Fed - sheep slaughtered?
Hipno, there was no logical tipping point. We are in an environment of near chaos with interest rates portending a depression while monetary inflation is screaming. Anything could "logically" happen and so many things will.
If inflation wins, and it must, the economic recovery is just starting but the potential for illogical volatility will remain until the Fed quits it's control of the long-end maturities.
Bravo
James,
An excellent, excellent article. As you state, we are in an extraordinary time and I pose the question of why? Do you really believe with stated inflation at 3.6%, credit downgrades and gold screaming inflation (or chaos) that bonds are there as a function of normal market action? I submit that we are in a manufactured chaos. Few retail sheep remain and thus the fishbowl is now full of sharks, some much, much bigger than the rest. As this scenario make no logical sense, who but those who compelled it could profit?
I too have no clue as to how rates have descended to 60+ year lows under the present state of affairs other than being unintentionally forced there by QE2. Holding down the long -end with more fiat, only contracts credit and compels a deflation. This is the opposite of inflation - previously the only button on the Fed's control panel.
Erik,
The Fed has the sole role of last adult standing in the playground, even though abdicated by the little gnome Greenspan. Once rates hit zero the Fed became a monetary eunuch but reaffirmed its LASITP position through what I thought were inspired means (TALP & TARP) simply to slow down the deflation.
Ben has been emulating Jimmy Carter's transparency and it's a bad policy. I believe he is well intended but wrong. The deflation followed by axiomatic inflation question is, will he see that he has made a terrible mistake? Sadly, probably not.
Central banks have a 100% success rate of failure. All learned men trying to preserve their republics, all inflate their currency into oblivion. Our debts are intractable and this president hasn't the hutspa to do what is necessary - stop the madness LBJ doomed our country with!
Erik,
Absolutely! Ben has inadvertently cajoled the banks into near zombie status by guaranteeing them free money (deposits at 0%) and allowing them unlimited participation in Treasuries to make their income. I have long believed that QE2 is the EXACT OPPOSITE of what is needed now, if for no other reason than to reassert the illusion that there is at least on adult left in the playground.
Ben Shalom Bernanke is actually driving us precariously close to a real depression. Driving long-term rates down, to cover the inflation meter may have rung the death knell as it forces a new round of deflation. That will only trigger the hyper-inflationary fix that erases the middle class forever.
Isn't it a shell game? Sanitize a colossal fiat that immediately inflates equities and commodities in proportion to the expanded float, while claiming no iinflation. All our toys are worth more, but the currency they're denominated in is worth less, exactly the same proportion. Funny how that worked out but then again any other monetary inflation would rattle our creditors, who magically hold the subsidized, sanitized instrument - bonds.
It may work but if interest rates are "allowed" to reach their inflation adjusted parity, the depreciated bonds will bankrupt a grossly overleveraged Fed and we will re-live Carter's misbegotten economy, at best. Hey, at least Volker's still around take over.
Gold,
Inflation, from the Saturn-V powered presses, will not be denied and neither will be glossed over while hiding the inflation-meter, bonds. Ben says "inflation, what inflation?"
Banks now have deposits but too little incentive to loan, under the present circumstances. They're still being wet-nursed by the Fed who is feeding them free deposits and Treasury backed returns.
I can't deny the virtue of QEI but it, like every other fiat is a buyers tax. The issuer gets a dollar's' value but each successive holder gets less until the dilution is complete and the buying power diminished.
Of course we all pay for each and every bailout, where else could the lost buying power come from?
Er, Richard Millhouse's ghost - circa 1973.
Robert,
Unfortunately the Fed hasn't the hutspa to put any pressure on banks to lend after the thrashing they gave them over the real estate debacle. Raising the FF rate would (in my humble opinion) go a long way to restoring a more reasonable flow of credit. The banks have gotten a protracted lending holiday and it continues.
My point is that absent pressure from the back, they'll need a carrot in the front. My guess is that they're at a critical juncture now and denying that carrot risks all that monetary inflation's lost buying power amidst stagnant growth. Thus Ronald Millhouse's ghost/ circa 1973.
Larry,
Ever more, one has to define market conditions by what they're not to have any chance of figuring out what they are. I see it as almost a do or die situation for the Fed. They've decided that we shall not return to any form of bubble-like recovery this time. Truly we've been bouncing along on financial shenanigans since Greenspan spiked the punch in late 1998 for the geniuses at LTC.
Money is always available - but not at a reasonable cost. I have initiated two accounts recently to capitalize on new-credit discounts and found each one to be absurdly usury at 25% interest!
Banks will lend again, now that they're out of the best credit, but their margins must be juicy enough to offset the pain they think is still baked into the default-rich economy.
Either the Fed Funds rate goes up, to force the banks back into the lending business, or the curve steepens and sweetens the offer. Admittedly what I do is at least as much art as science and now I believe that "higher rates control our (economic) fates.
353752,
As I see it, the "social net" was manageable until horribly corrupted by LB Johnson. The word entitlement should undergo a 1984-esque change as it is at the root of most, post LBJ inflation.
I do not believe Medicare was ever on solid financial footing, due to the progressively lower replacement rates after WWII. Ergo, we've been digging an ever deeper hole just to pretend we can afford it, and 15 golden years of retirement. As mercenary as it may seem, resources MUST be allocated to one's society's producers in deference to a plainly unaffordable golden twilight. I know, I know. . .
The hope now is that the smell of "entitlement" reform is in the air and some measure of meaningful adjustment will be made. Now that Goldman's wings have been clipped, until and unless China outgrows us, the bloated debt will not sink the country because the world cannot live without us.
Pancho V,
The Deux Ex Machina Fed is trying to shepherd a new, "creditless" recovery. It's only jobless due to the absence of the credit expansion the preceeds the jobs. The stakes are that this bond market baloney (QEII) will collapse and the inflation genie will do the damage the deflation genie (they brilliantly bottled up with QEI) threatened. We have entered an entirely new chapter of US economics which depends on the Fed and not the population.
Karl, the Fed is the exogenous (Deus Ex Machina) that comes down when we human's bollox things up, using their "pretend money" to mollify the masses back into their comfort zone. By the way, I applaud the QEI molification as a very necessary means to justify the cessation of a protracted deflation.
But they just couldn't stop there. Still fighting the spectre of deflation they're supporting a long-term bond market under the pretense of keeping money cheap for the masses. Balderdash, it's to keep the banks' profit margin, and thus their willingness to extend credit down.
They have gone from a desperate experiment to bring us back from a deflationary precipice only to threaten a fall from the opposite, hyperinflation precipice, if the limits of their "pretend bankroll" are ever seen in the light of a rational day. QEII is absurd and the longer interest rates defy gravity, the harsher the reality.
The Fed gets it right less than 50% of the time.
The sun is setting on Japan as a major global power. They have unreproduced themselves out of existence, making their economy mathematically impossible before this disaster. They will recover to be sure but their placement on the world's economic role will only continue to slide.
Sell Winthorp,sell! I can use the shares.
Michael I have read and agreed with you through the early stages of the Modern Depression and into the trough. Now, however, you are reminding me of the knoble knight of Monty Python fame; "it's only a flesh wound". Logical or not, the sea has changed.
Please buy bonds - I need to sell, sell, sell!
Driftwood2,
My motto is: even a blind nut occasionally finds a squirrel.
Hipno,
The cruel mistress of the market demands that confusion reign, whenever possible. The correlation twixt equities and interest rates is like a fraction. Equities' intrinsic value (numerator) is controlled by the denominator of interest rates. That relationship works until a deflationary reset - like we just experienced.
When zero % interest has no effect on equities, the Fed is out of the equation. Now, however, it has the opportunity to regain control while the recovery is cementing. Now an interest rate increase would be positively stimulative for the above-mentioned reason to motivate banks and because the crowd is still catatonic.
So, the Fed is not really wedged between the rock and the hard place the headlines suggest. Indeed, this is unchartered territory but the American drive to recover is hard to extinguish; it needs only pruently supplied credit to rebuild. That won't happen until the Fed raises the Fed Funds and Discount rates. It will only be hampered by lowering long-term interest rates.
Thank you
Don,
Thank you for saving your vitriol for others.
Don, In fact I make it a point to discuss the economy with virtually everyone I transact business with. I'm not saying it's pretty but we are demonstrably past the crevass.
A deflation has occurred to realign our means with our adjusted standard of living. Unemployment insurance is overpaying people in relation to the deflation which is why they are reticent to accept a lower paying position.
If you read a few of my previous articles you may find that I get it. It's my vocation to anticipate and I write when the blocks line up.
Ben is bluffing and knows he'll let the inflation genie out of the bottle with such nonsense. Didn't you hear him equivocate? Do you really think there's "free money" from frontrunning the Fed.
QE2 is NOT going to happen in any meaningful size. It's a ploy to sell government debt as cheap as possible. As usual, the great unwashed lap up anything.
It's a Duke & Duke world only we're all dressed in the gorilla suits. I wonder what would happen if any adults entered the playground. All we have is the SEC and CFTC.
Without retail sheep, the pond is now packed full of sharks. The unchecked and unrestrained growth of high frequency traders is only making the markets into a veritable casino. "Risk on - risk off" are euphamisms for red and black.
Were that the SEC had any foresight let alone enough to realize that retail investors built this country, not traders or brokerages. Place a small tax per share on transactions that will have virtually no effect on anyone other than those destabilizing the markets by trading millions of shares to scalp dozens of dollars.
That was no accident although the Keystone Cops will never get around to proving it.