vaughn

China Hits a Speed Bump and America Feels the Pain

You forgot to mention one 6000 pound player in the field: No, it is not China, Japan or Euro combined. It is Ben Bailout Bubble Bernanke.

BBBB will monetize long dated treasury bonds and keep the rate low until he cannot hold it anymore. Look what BBBB did in the agency MBS market.

Wonder how soon the Fed balance sheet will exceed 4 trillion mark.

President Obama: From Hope to Desperation

Obama's stimulus plan of circa 825 billion is DOA. It won't jump start the economy. I am now of the opinion that it won't even soft the blow of the great recession.

The 700 billion TARP is already almost gone. The first half 350 billion was already gone and was overdrafted. The second half of 350 billion was already committed 150 billion, leaving circa 200 billion to "save" the financial system which is expected to absord another trillion loss in 2009.

After the stimulus package is approved sometime in spring,then comes the all important question: Now, What?

Yes, Obama can, fail, that is, if all he can do is offering the stimulus plan and dreaming a miracle of creating 3 million jobs.

Here is another thought which shall cost Us nothing. Sponsoring a special investment-based immigrant program which grants 5 million new quota with the condition precedent that each applicant must invest US$500,000 into an account in the Treasury department bearing no interest. Upon the approval of the immigrant visa, then the applicant must use the fund in the account to buy a house anywhere in the united states and hold the house for a period of 5 years. If the purchase price of the house is less than $500,000, any remaining fund must sit in the treasury account for a period of 5 years earning no interest.

This special program will immediately create a potential investment in the usa up to 2.5 trillion dollars and create a demand of 5 million housing market. This mere announcement of this program may be enough to put a floor in the housing market.

Us must act fast. If the situation continues deteriorating at the current speed, it will be hard sale to attract qualified applicants.

Bernanke Speaks Out on the Great Recession

The plain English of what Ben Bailout Bubble Bernanke said in his speech:

I don't know what happened. I thought by driving interest rate down to zero would solve the problem or at least prolong the music, but the bubble burst any way. Now, damned, I have to create another bubble by printing the money via so called unorthodox balance sheet manipulation and by helping my buddies in bank system to loot american public one last time.


American public are stupid. They thought the debt as credit and they were led to believe that they could escape the debt problem by borrowing more debt. So, The fed would fulfill their wish by creating debt as money. Anyway, a new bubble will be created to restart the music or else a total collapse of the debt-as-money system. Hopefully, I can get myself out of this mess before my term expires.

Is the Financial Bailout Working?

Neither the 700 billion TARP (or financial bailout) or the circa 825 billion fiscal stimulus will work. The reason is simple:

Consumers have debt up to their eyeballs. For those saver-consumers, they have managed their financial prudently and they will not incur debts at this turmoil time. For those spenders-consumers, they won't be able to incur debts due to the tightening of the banks. You see, for those who can borrow don't and for those who want to borrow, can't. That is the key reason why banks can't expand lending. The TARP money cannot increase lending and cannot create new credit.

For the circa 825 billion fiscal stimulus, the true spending is around 500 billion and the majority of which is used to support the spending of states. The really new spending coming out of stimulus plan is rather limited. Given the fact that consumers can cut spending easily in 2009 in the tune of 1 trillion dollars, the fiscal stimulus cannot jump start the economy and can only soft the blow of the recession.

In short, both TARP and fiscal stimulus plan are only tools to prolong the pain to the general public. Or more precisely, certain individuals and businesses can gain at the expense of the general public. If we don't have TARP and stimulus plan, then the general public can gain at the expense of certain individuals and businesses who were imprudently taking risks.

It seems Ben Bailout Bubble Bernanke intends to gamble it all. The outcome is clear: Either he succeeds by creating another bubble to prolong the music or by pushing US into final collapse.

Obama's Public Spending Program: A Very Expensive Farce

It is a fact that the monetary measures promoted by the FEd had all failed, as evidenced by the ZIRP and the swelling Fed balance sheet of trillion dollars in a matter of weeks. The monetary base explodes while the multiplier falls below 1.

Can Obama's pittance $775 billion fiscal policy succeed (less than 500 billion actual spending by fed government) to stop the falling of the housing price, unlock the credit markets and create or save 3 millions jobs? Man, who are you kidding? Bernanke?

Consumers were forced into deleverage en masse starting in September 2007 and there is no end in sight. The savings rate in 2009 may reach 6%, though low compared to those of Japan or china, the effect of which is devastating to the commerce. To reach a 6% savings rate, it could mean consumers will reduce 10% consumption, that could easily overwhelme the 500 billion fiscal stimulus Obama is proposing.

Bottom Line: Obama's stimulus plan cannot succeed. Yes, we can, fail.

Is the U.S. Solvent?

Poor Obama is in a no-win situation. Obama won't be the savior. Obama will make himself as a scapegoat for his own stimulus plan.

If, for the sake of argument, Obama's stimulus plan is successful, that will trigger the burst of the treasury bubble and cause huge spike of interest rate of all kinds, thus tanking the economy back to recession.

If, Obama's stimulus plan is not sucessful, then he will waste all those trillions and put the US deeper in the hole.

Either way, Obama will lose under his stimulus plan and take the blame. He will serve his first and last term, thanks to his stimulus plan.

If Obama is any way smart, he should immediately denounce the stimulus plan and let the painful deleverage process begin, i.e., force the excessive debts into open and be defaulted. Bankrupticies here and everywhere.

After 2-3 years painful adjustment, sometime in late 2011, then Obama can implement the stimulus plan to jump start the economy. without the excessive debts acting as the dead weight, the economy will have a decent chance to bounce back.

Unfortunately, Obama is doomed to fail, thanks to his campaign promise of change (actually, no change, but a slogan) and his choice of not facing and handling the truth( truth is excessive debts and painful adjustment while stimulus plan is kind of like oxycondone)

Bond Expert: Friday Wrap

Remember what happened to the Muni market? There was a buyers' strike on that one given the bad economic, lousy labor market, etc.

The other day the German government failed to attract enough buyers for its $6 billion (euro) auction. Might call it a mini buyers' strike.

what will prevent a buyers' strike against treasury? It could happen given the fact both China and Japan (two consecutive months of negative trade surplus) could no longer buy the treasury en masse.

How Will the Stimulus Package Affect the U.S. Economy?

Obama's circa 800 billion stimulus plan will not jump start the economy. At best, it may soft the blow, at worst, it may push the US further into depression.

Consumers, in 2009, are likely to reduce spending and raise savings in the neighborhood of $1 trillion, which will dwarf whatever Obama's stimuls plan ( 500 billion spending in 2 years excluding tax cut).

Unless Obama can bring in a new 5 million immigrants each investing half a million as the condition precedent for obtaining immigration visa and buying a house using the fund (that will be 2.5 trillion new investment and a 5 million new housing demand), there is no way housing price can find the bottom in 2009. With all the bailouts going on, the real bottom of housing price may not find until sometime in 2010 or even in 2011.

I do not expect the government is capable to do the right thing. And, hence, folks, expect the unemployment hovering at 10% at the end of 2010.

Time To Short Treasuries?

A bubble can be kept going for long time without burst. Though, eventually, all bubble must burst.

When will the treasury bubble burst? Given the fact that the FEd is starting to buy agency debt and agency MBS in its effort to drive down long term mortgage interest rate, the treasury bubble may be kept going until the FEd cannot keep expanding its own balance sheet, or the triple A treasury rating is doubted by foreigh buyers, or a dislocation occurred in the currency market, then the treasury bubble burst in such a way that will awe and shock helicopter B.

I give it another 6 months.

Shorting The Bond Bubble? Hold On

The government's solution to solve current financial and economic crisis is creating more debt, both a coming circa $1 trillion fiscal and a done circa $2 trillion so far Fed Reserve alphabetical facility program.

Japan tried that, but did not succeed. Some pundits argue that Japan did it late or not did it large enough. This time it will be different here in the USA. Well, that might be the case given that Japan did not need foreign finance given its high saving rate while the USA heavily depends on foreigh investments with pitiful savings rate.

If using more debt can cure the problem created by debt, then it seems we don't need ecomomists, politicians, etc., Obama's $1 trillion stimulus package must fail, by defition, because it is financed by debt.

The current economic crisis can only be solved through painful recession or even depression. There is no other way out, just like when nature calls one has to go, eventually. All debts must be repaid with interest or an outright default.

Credit Crisis Watch: Signs of Progress?

Dude, why would banks lend out money when they can use the money to buy back their own debts at a huge discount, say 70 c on the dollar, which will produce instant profit of 30c, much much better than loan the money out, take the default risk and only earn a pittance spread of, say, 2.7%?

The more banks deleverage via redemption of their own debts, the better the capital ratio in their balance sheet, more profits shown on their income statement, and easier life for their CEOs.

Housing Gets Even Worse

Pushing long term interest rate down to 4.5% level might help mortgage borrowers who can actually borrow from banks, but in the same time it also squeezes banks hard. Look, banks already paid zero for its deposits. With long term interest down, the spread enjoyed by banks is also down.

Worse, the money market fund can no longer exist given zero rate return. I think there is a term describing this phenomenon, liquidity trap.Now, the fed will have to purchase all the cp outstanding. The money money fund invested solely in government bond must also fold due to zero rate return. why invested in the money market fund when the return is zero (negative if charged with management fee)?

The qe must fail no matter what. For those who have money do not want to spend now, waiting for a better price in the future. For those who don't have money can not spend unless they can somehow borrow it from banks (they will be lucky if banks don't call their previous loans under the so called universal default clause)

In short, all the money printed by FED via QE will remain in the banking system. The deflation trap will see to it unless and until consumers can afford to consume again. Painful adjustment aheads. No way out of it. not QE. not 1 trillion(?) fiscal stimulus plan proposed by the Obama.

How Risky Is Quantitative Easing?

Action creates reaction. Extreme measure always create anothe extreme result to counter balance.

The QE ( or press printing without paper) and ZIRP can and will flood the banking system with liquidity. Unfortunately, little of that liquiditiy flew into the hands of the final users, namely consumers.

The negative return or 0 return can and will kill the money market fund, the major source of short term commercial paper buyer. It also kills the spread that banks can earn (though the ZIRP lowers the cost of the money it also squeeze the long term rate banks can charge). It seems the only thing the FEd can do is keeping the system alive. Unless the patients (consumers) somehow miraculously recover, which we'll find out soon, the Ben Helicopter is doomed to crash.

Here Come the ZIRP

ZIRP and QE (printing money) only help banks to screw up savers. For anyone else who can borrow money from banks, they still need to pay interest. If the expected income is not enough to pay for the interest and profit, no one will borrow even if banks are willing to lend.

Bottom line: unless excessive debt is purged from the system, ZIRP/QE will only buy up more time to avoid the default of debts, keeping banks alive via zero rate loan from the FED.

Some Lessons on Beating the Deflation Trap

Excessive credit creation in the past created the problem we are in.

The solution implemented by the Fed Reserve to pull out of this excessive is creating more excess by printing the press to pursue the nada/nil/zero interest policy.

Obviously, more excessive credit cannot solve the problem of liquidity trap, deflation trap, and the negative feedback trap. The excessive credit by 0 rate policy via the treasury bubble can and will only create the next shop to drop. If the treasury bubble is burst, then ..........

Only time can work the excess out. Only default and deflation can work out excessive debts over time.