JasonC

Prepare Yourself for the Inflation Invasion

Um, default is a ridiculous concern. TIPS are a better bet long term than nominal notes at 3.5% certainly, that just isn't saying much. I can get intermediate and long corporates at 7% and change - first tier names.

On TIPS and any difficulty paying them, again not a serious concern, there simply aren't enough of them outstanding to be material. The Fed would frankly like a larger and more liquid demand for them to assess inflation expectations more reliably, but they are complex enough that demand for them has been punk since inception.

When they are over 3% real yield they are good long term value though...

Prepare Yourself for the Inflation Invasion

Sethbru is the only one so far to get his facts straight.

The size of the Fed's sheet peaked on April 23rd. It has contracted 10% since then, $200 billion. This has coincided with stocked bottoming and the rally. Everyone pretending that the Fed is still inflating is simply not doing their homework by reading the actual balance sheet.

I see pundit after pundit predicting that as soon as the Fed stops expanding the market will tank, when it stopped over 4 months ago and the market took off like a rocket.

$700 billion in the short term loans, 90 days and under, that the Fed made at the peak of the crisis, have run off into cash, repaid to the Fed. If the Fed had just extinguished all of it immediately, it would have been the most rapid deflation in history. As it is, the run-down rate is as fast as the early 30s.

The Fed lent $500 billion to US banks in term auction credit and through the discount window. 45% of that has been repaid already. The Fed lent $250 billion directly to US corporations in its commercial paper and asset backed facilities. 65% of that has been repaid. The Fed lent $250 billion to foreign central banks via swap lines, indirectly supporting the dollar business of European banks especially. 70% of that has been repaid.

The Fed has extinguished a third of the money as it flowed back to them, invested a third in mortgage backed securities, and the remaining third in treasuries (plus actually about 40%, with 10% in agency debt).

In doing so, the Fed has rebuilt the treasury position it had back in 2007, but no more than that. It sold off the bulk of that position between Bear Stearns and Lehman, while it was running up its loans to the banking system. Those loans did not grow the sheet before Lehman, because they were offset dollar for dollar by feeding treasuries into the market. After Lehman they doubled the sheet size. Now they are running off all the extraordinary short term stuff and rebuilding the treasury position they had at the outset.

The only large new item on the sheet is the big position in mortgage backed securities. In case nobody noticed, Fannie and Freddie went broke in the meantime. The home loan banks have run off $250 billion in their sheet while the Fed has expanded. Overall, the Fed has taken over the busted role of the agencies in supplying marginal new mortgage financing, while the agencies concentrate on workout stuff and controlling their credit losses.

It is completely unsurprising that the result has been a decline not an increase in average prices, 2% at the consumer level and 5% at the producer level. The biggest being energy - the swing in the terms of trade there alone comes to several percent of GDP.

Also in case everyone just forgot, the inflationary brainstorm that any real asset would go to infinity in money terms, *was* the bubble and it comprehensively busted. Those so predicting were wrong to the tune of $15 trillion in asset price losses.

But the same crowd are still chirping away their sacred hymnal that inflation must be right around the corner. If they think so, hey, buy up all the mansions and all the half empty new suburbs and all the half occupied strip malls. Oh wait, they tried that already.

Sometimes a debt denominated in nominal dollars is simply worth more than a real asset you can hit with a stick. Value isn't a material thing. And no, central banks that put their economies through the wringer we just went through when necessary to maintain the purchasing power of their currency, do not see that currency repudiated by the people, which is what hyperinflation is. All of the hyperinflation predictions are utter nonsense.

Next to those who think the public debt is so ruinous it must bankrupt everything. They continually confuse debt with negative net worth. Take TARP, which is always presented as "costing" $700 billion. Um, where do they think that money went, to the great money-pit in the sky? Every dollar of it was someone's receipt, so yeah I think it will be available to the private sector. And oh yeah, the government got $700 billion in bank preferred stock for it, at depression prices and terms. All of it entirely profitable already, let alone longer term.

Anybody here think you can go broke borrowing at 2 to lend at 5 with a nice double on the capital after converting? Anyone think if the amount so deployed is really big, it means you are that much moer broke? It was merely a good trade, better than half the people here can boast of recently.

In the last 2 years and a quarter, the treasury has placed over $3 trillion in net new debt at rates under 4%, with a blended cost more like 2%. How have you done, in comparison? Oh and the Fed took a net zero of that, while US private investors took 65%. The vaunted Chinese buyer mentioned in every single breathless news report took 11%. The rise in the US savings rate since last summer replaces everything the Chinese invest here 3 times over and to spare.

Why does no one do their homework on this stuff, even here?

On Aug 24 12:53 AM lance sjogren wrote:

> Inthemoney: I agree the stock market rise the last several months
> is probably largely due to monetary expansion.
>
> In my view, stocks have become severely overvalued due to too much
> money sloshing around looking for a home.
>
> What I wonder is when will that stop. Stocks represent companies
> that operate in the REAL economy (aside from fiancials, of course).
> The REAL economy sucks.
>
> Stocks are way overvalued considering the horrendous state of the
> real economy.
>
> But still, the money printing goes on, and all that new money has
> to go somewhere.
>
> The smart investor is one that can figure out where people are going
> to shift all that money once they realize that stocks are overvalued
> and due for a major correction.
>
> I wish I knew.
>
> I think at some point it will be commodities, especially precious
> metals, but that may still be 2-3 years down the road.

Looks Like the Commodity Trade Is Ba(ra)ck!

Put down the crack pipe.

All the bubbles went smash and they go right on going smash. It isn't all going to instantly reverse and fly to the moon to save your sorry backside.

Should You Own Gold, Silver or Commodity Stocks?

The answer to the headline question is a flat "no", you shouldn't own any of the three. Gold is just another bubble taking slightly longer to go splat.