dlaw

What Will Banks Do with Bernanke's Money?

Sorry to comment again here, but Mr. ConceptWizard has hit some nails very squarely.

I put it to readers that although there will be a bump - even a big one, as some pent-up demand busts out - lower mortgage rates will not increase net home home sales much and and I'm not sure they've even meant to. They help banks generate near-term refinancing fee income and reduce out-year interest load on the most-stable borrowers.

The stressed buyers are going to get crushed or the losses on their houses will become an enormous burden for the taxpayer if the "bad bank", banker welfare plan goes through - the GSE for banks.

New home starts tell me the story of developers who have lots on their hands trying to get rid of them and, in the process, loading the housing market with more supply.

Find me bankers who are looking to put securitizable volume of any size through the system - and then re-loan - and I'll believe Bernanke's tale of a housing recovery.

What Will Banks Do with Bernanke's Money?

Matt,

Thanks so much for the comment.

Very concisely and coherently describing Chairman Bernanke's strategy you write:

"[Bernanke] is forcing a bottom in home prices, forcing mortgage-backed securities to reprice upward on the open market, forcing mortgage rates down to 4% for at least a month or two, and unfreezing the market in mortgage backed securities allowing banks to originate more mortgages by cycling cash,"

I can only respond this way:

Well, he *think* that's what he's doing, but it has essentially no hope of success, in my view.

The End of Money

Mad Hedge, I think this has very much a "toppy" feel.

If you look at the arguments for gold, there is no reason it should be going down. No reason it should go down in the foreseeable future. That is the stuff bubbles are made of - certainty.

Gold is going down. The federal government is doing all it can to inflate, but gold is going down. Down too much, the logic is destroyed and there may be panic selling. People paying $1000/oz for coins and certainty are not going to be happy at $700/oz.


On Feb 28 10:14 PM The Mad Hedge Fund Trader wrote:

> OP tf Panic buying of gold coins continues to overwhelm coins dealers
> around the world. According to the Financial Times, the US Mint sold
> 193,500 American eagles in the first seven weeks of this year, more
> than it sold in all of 2007 at prices 40% lower. Retail investors
> fleeing paper assets, like plummeting stocks and bonds, are paying
> 5% premiums over face values. The same phenomena is appearing in
> other countries were gold coins are available to the public. Does
> this have a toppy feel to it?

The End of Money

Mad Hedge, I think this has very much a "toppy" feel.

If you look at the arguments for gold, there is no reason it should be going down. No reason it should go down in the foreseeable future. That is the stuff bubbles are made of - certainty.

Gold is going down. The federal government is doing all it can to inflate, but gold is going down. Down too much, the logic is destroyed and there may be panic selling. People paying $1000/oz for coins and certainty are not going to be happy at $700/oz.


On Feb 28 10:14 PM The Mad Hedge Fund Trader wrote:

> OP tf Panic buying of gold coins continues to overwhelm coins dealers
> around the world. According to the Financial Times, the US Mint sold
> 193,500 American eagles in the first seven weeks of this year, more
> than it sold in all of 2007 at prices 40% lower. Retail investors
> fleeing paper assets, like plummeting stocks and bonds, are paying
> 5% premiums over face values. The same phenomena is appearing in
> other countries were gold coins are available to the public. Does
> this have a toppy feel to it?

The End of Money

Thanks for the comment - and all the capital letters.

Gold: The Long-Run Value

If the "cumulative average" line on the chart is what it seems to be, it's very misleading.

The End of Gold, Part Three

Thanks once more for your comments.

My view is that downturns come in four varieties - slight deflation we never notice, stagflation, deflation and hyperinflation (which invariably leads to or includes severe stagnation). Certainly for the U.S. and the world, a dollar hyperinflation would be the worst and - I think - the most unlikely. So naturally I am extremely reluctant to go with the "gold or die" thesis. By the same token, I certainly recognize the validity of it in the most extreme scenario.

I think we have a lot of deflation to go through before we get to a hyperinflation but I've written before that once rates went to zero, hyperinflation was "on the table" at least in theory. And as I've written several times, even without hyperinflation, the gold market could go back into bubble mode of its own volition and there is no question that bubbles make people LOTS of money. The only thing I have trouble imagining is stable gold prices for the rest of the year. So, place your bets, I guess.

I just feel that it's no accident someone as smart as Peter Schiff has been wrong about the dollar, bonds, etc.. I think people are really underestimating the deflationary threat. The narrative for gold buyers is totally locked in at the same time the fundamentals have crumbled, in my view. It reminds me for all the world of this summer and the Chinese oil demand narrative, but that's for next time.

Finally, several people have asked when I would get in. My view is that if gold breaks out above $1200, there will be plenty of room for it to go. I'm in no hurry.

U.S. Debt Default, Dollar Collapse Altogether Likely

The five-year auction was anything but tragic. A 1.98 bid-to-cover only barely connotes poor demand.

Global Sovereign Bond Watch: Overstuffed Supply

The Treasury option found two bids for every sale.

The demand for Treasuries has been extraordinary and shows essentially no sign of diminishing.

The End of Gold, Part Two

Forgot to mention: inflation in the money supply is meaningless unless it moves the demand curve. If the public sector is pushing out money and credit but the private sector is contracting at a faster rate, deflation will obtain.

In my view, fiat money is *always* inflationary - and for a very good, sound, economic reason. More on that my next post.

Again, good luck.

The End of Gold, Part Two

Thank you all for your comments.

The point of my missive was to emphasize the fact that while inflationary monetary and fiscal policies are being pursued with amazing, record-breaking vigor, a deflationary mindset has nonetheless taken hold.

We are in a battle. Strangely, the usually anti-government goldbugs are betting that the government will succeed in its quest to create inflation. I am not so hopeful. The private sector is a LOT bigger than the public sector and in the private sector, deflationary behavior and tendencies are now the rule.

But in the gold market, this is crunch time. I wrote this exactly because gold is pushing against those "breakout" price levels - exactly because the market is deciding whether these spikes in the gold price are a top or a breakout. The shorts are filled with fear. The longs have all the popular arguments on their side (if not the actual fundamentals). A bubble in gold is a distinct possibility, I just don't think the liquidity is out there to make it happen. All you hear about the gold market comes from perma-bulls, so I think it's important for people to hear another view.

While I would agree that zero interest rates and the massive government spending, lending and huge slush funds for the banks crippled by their own fraudulent lending have put dollar hyperinflation "on the table" as a real-but-extremely-rem... possibility, the idea that gold will somehow replace legal/accounting "fiat" money is, I think, so wrong that it's hard to deal with as a serious idea.

Nevertheless, I will deal with it in my final posting.

Good luck, short and long.

The End of Gold

Thanks for all your comments, as always.

Mr. "Socrateazz"'s suggested to me that it might be useful to explore the deflationary attitude that has taken hold in America. I will do so in a follow-up to this piece.

Clearly, there are many people who think that deflation is unlikely or unlikely to be of any duration. I would simply suggest that whether or not he believes there will be significant deflation, a wise investor would nevertheless have a deflation game plan, given the present economic circumstances. So far I have not read of a better deflation play than going short gold, although I'm sure they exist. If you think of one, make it. Oh, and then please write about it.

Thanks again.

Dollar Down, Gold Up: Great News?

Thank you all for the comments.

SWRichmond, I think the central misunderstanding of this crisis - that the Fed suffers from, that everyone suffers from - is the belief that there is simply a lack of demand for assets. In fact, the behavior of the fixed-income markets is far more consistent with a "no-trade equillibrium". That makes a lot more sense in that the private American financial system essentially filled the world market with trillions in counterfeit securities - thus counterfeit money. When the counterfeit was discovered - instantaneous asset deflation.

But you ask the important question: can the Fed re-inflate faster than the private system can deflate. If I saw the banks lending, I would say the Fed might succeed with. I don't see them lending.

DC McHattie, I'm sure you are completely right and gold absolutely IS a "flight-to-safety" trade. The difference between treasuries and gold is simple. I am absolutely certain that treasury bonds will keep making their payments. I am also certain that gold's future value will be a function of beta. I just think that the temptation to sell gold and buy assets which pay cash will become too great.

OldLimey, here's how I see it: We can put these auto workers on what is effectively "unemployment" *with* the help of some revenue from their dying companies or we can put these workers on unemployment **without** the help of some revenue from their dying companies.

As for your question "What data?" that's exactly my question. What data is there that supports the de-leveraging thesis? What are the numbers? How could they possibly be enough to explain the credit market behavior?

Axelrod, I'm sure we still own our $300 billion in gold, but that's all it is - $300 billion. Double it and it still doesn't add up to much.

And I could not possibly agree more with your comment about unemployment figures and accounting standards. Basically, every aspect of our financial system is so completely dishonest that we are all guessing as to what is really happening. I - like you - suspect that the quality of bank assets is actually so bad that the destruction of money is far bigger than we understand.

Own Gold? Time to Fold

Very reasonable, but as for the comments I predict:

"Apres moi, le deluge."

The Coming Dollar Deflation

Thank you all for the comments.

First, I would remind folks that the private banking system creates a LOT more dollars than the government - or it used to.

Second, I would refer you to yesterday's limit-down in CNY/USD.

Third, I would refer you to Meredith Whitney's chilling and insightful article about the coming. planned destruction of what could be trillions more dollars in credit.

Fourth, I would refer you to your local state and county treasurers (or international equivalent). I think you'll find that "the government" has a lot less money to spend than you think.

Worldwide, we've seen - notional - what might be tens of trillions of dollars in wealth lost. Even if it that only has a probabilistic relationship with the supply of money, it still has to come from somewhere.