edifish

The Baffling Triumvirate of Stock, Treasury, and Gold ETFs

In 2002 BB posited that he could control the long end of the curve with QE and it appears that he is proving his theory correct. The huge risk is what happens if/when his rapidly enlarging balance sheet monster get beyond his control.

Prophet Bernanke Plans for Inflation

Well stated explantion and defense of the Fed's actions. As you pointed out though, crisis intervention is sloppy work and the difficult task will be to remove the excess liquidity once their actions take hold, and there is a LOT of liquidity being pumped out right now. The way I see it, Bernanke is very determined to reverse deflation to the point of being willing to risk the consequences of having to fight another battle against inflation some time in the future. That being said, do you not see a wonderful opportunity to speculate against the long bond using ETF's such as TBT? In time, it either works as intended and 30 year rates return to the 4-5% range, or it they have difficulty on the back end and rates go much higher.


On Dec 28 02:04 PM BS Detector wrote:

> This article seems either to be simplistic so that it can be frightening,
> or else frighteningly simplistic. The author seems to ignore the
> linkage between deflation and inflation; namely, that there is a
> point in between where there is neither inflation nor deflation.
> If a central bank is taking action to avoid deflation, it must risk
> overshooting its mark to be effective. Clearly, the Fed is more concerned
> with preventing a deflationary spiral than it is with causing higher
> than desirable inflation in the future.
>
> However, this does not mean that high inflation is certain. To understand
> this, one must have a little basic knowledge about the money supply,
> and more than a cursory look at Bernanke's quotes above.
>
> First off, there are basically two major economic actors when it
> comes to the money supply. There are the banks (collectively) and
> the central bank (the Fed). The former is far more powerful than
> the latter. The creation of money in the economy primarily occurs
> through banking activity; then a bank takes a deposited dollar and
> lends it, that loan is are subsequently deposited in another account,
> and where there was one dollar in deposits there are now two. When
> the banks stopped lending, this primary driver of money creation
> also stopped. Worse, as banks have collectively moved to shore up
> their capital positions, they have been reducing the money supply,
> which will tend to make money more valuable - deflation.
>
> The Fed (backed by Treasury) is a much smaller player than the collective
> banking sector, and so to counteract the deflationary actions of
> the banks has had to move in unprecedentedly large ways. But these
> actions are not necessarily inflationary.
>
> In a normal time, in fact, in any other time since 1933, recent Fed
> actions would have had huge inflationary impacts. But because of
> the shrinking the money supply resulting from the credit contraction,
> these actions are not currently inflationary. The question is what
> impact these actions will have in six months or a year or two years,
> as the credit markets heal and begin expanding again. The author,
> and lots of others, are quite sure that the answer is that we are
> certain to see very high levels of inflation.
>
> But a more careful look at these carefully considered actions is
> warranted. After all, Bernanke's been studying the Great Depression,
> or more specifically the monetary aspects of the Depression, for
> virtually his entire academic career. Those who would assume he doesn't
> know what he's doing, or has not thought this through, or doesn't
> care about future inflation, don't really understand the problems
> and solutions.
>
> The trick here is not in flooding the markets with Fed-derrived money
> to replace that lost through the credit collapse. The trick is on
> the other end, in removing the additional money as the banking industry
> moves back to a more normal money-creating paradigm. The combination
> of Fed actions to date and Bernanke's quote above show that the Fed
> is well aware of the upcoming problem.
>
> The TARP preferred investments in the banks are a good example of
> thoughtful government action (even if it wasn't what they originally
> said, and even if the idea came from overseas). The banks will take
> the money and it will help them improve their capital positions,
> enabling them to get to normal lending faster (that it hasn't happened
> yet doesn't mean that it won't). As banks become more comfortable
> with their position, and more importantly with the economy as a whole,
> they have a strong incentive (high dividend payments) to pay back
> the government equity, which will take money out of circulation,
> which will be anti-inflationary.
>
> Bernanke's discussion above about buying 2-year Treasuries to manage
> interest rates is also very thoughtful. The idea here is that a two-year
> period is long enough for the economy to recover from vitually any
> deflationary shock (if managed well on the front end through massively
> expansionary monetary policy). The Fed buys the 2-year-ish notes,
> injecting money into the economy, which then goes elsewhere. In two
> years, when the credit markets are recovering, the federal government
> pays off those notes, but instead of the cash re-entering the markets,
> it goes to the Fed instead.
>
> Basically, the Fed puts money into the market now that would normally
> not re-enter the market for two years. The net result in the money
> supply in two years is zero, so that beyond the two-year period the
> action has no impact on inflation. In the short term, however, it
> is inflationary -- or anti-deflationary, which is exactly what is
> needed.
>
> Basically, the Fed isn't run by a bunch of morons. Give them some
> credit for being thoughtful and being studied, and take some time
> to try to understand the forces at work. What they're doing may not
> work exactly, as crisis intervention is sloppy work. But it is NOT
> sure to fail.

Buffett Serving Free Lunch? (Part II)

dlaw,

Thank you for your response. Now if I might...I'll logically refute it.

>>>Some people bought some things (the puts) that have appreciated enormously in value<<<

I totally agree with that statement.

>>>If these people are risk averse, as you suggest, then it's even more likely they will act to put the money in their pockets and invest it in safe instruments. <<<

You are missing an important point here. Buying the puts was a hedge for the counterparties....so why in the world would someone who is risk averse want to remove the hedge to "invest it in safe instruments"? They put the hedge on because they had large investments that they (or their regulators) didn't feel were all that safe, so by removing the hedge they would then be fully exposed to the risk of those investments....that doesn't sound very risk averse to me.

>>>These are private transactions, so there is no direct evidence, but somebody has been buying a lot of Berkshire CDS. <<<

Now we get down to the root of this delusional conspiracy theory that you've been brewing....the Berkshire CDS spike. You want another more plausible answer, look at the 11/23 WSJ article about the attack on Morgan Stanley and the effect on their default swaps.

The truth is that you have provided absolutely no facts or rational logic to support your far-fetched theories....as is usually the case with conspiracy theorists.

Buffett Serving Free Lunch? (Part II)

dlaw,

Noticed you ignored my question, so I'll state it again for you. What proof do you or anyone else have that the risk averse counterparties in this transaction are deciding to close their hedge and roll the dice going long...and on the long-shot that were true.....do you think that it might be a sign that the market had become grossly undervalued ....along with the puts.

Dudelaw....you are no different than the conspiracy theorists that run around wearing aluminum foil on their head. You are so convinced of some complicated master plan out there that you forget to look at the simplistic answer that is staring you right in the face.


On Dec 01 02:50 PM dlaw wrote:

> TomR - I'll leave it to experts to fill in the amounts, but I would
> say:
>
> Sell puts very similar to the ones Berkshire sold but at the much-higher-price
> they would command in the market today, thus netting out the position.
> Their cash profit would be what they take in versus what they paid
> Berkshire.
>
> They could use some of the money to buy calls or go long futures
> as well, thus profiting from the upside as well as the downside.
>
>
> And they could buy CDS to hedge the risk that Berkshire won't be
> able to make good on the promised payment.
>

Buffett Serving Free Lunch? (Part II)

Your thesis revolves around the differences between these equity index derivatives and super cat insurance in that with the former, the action of the trade itself can profoundly affect its outcome and that Buffett did not account for that possibility. In making this argument you assume that the counterparties in this trade were speculators, or at least willing to become speculators if the trade turned profitable. I have not read anywhere a disclosure regarding exactly who the counterparties are, but I have seen it surmised that they were likely other insurance companies writing variable annuity contracts which guaranteed market loss protection. I’m not sure why you would assume that such a counterparty would be so willing to jump at the chance to lock-in and/or monetize their gains since there would have been a real reason for them to take this hedge and that reason would prevent them from removing the hedge by monetizing it, yet you have stated that it is a given fact that they have done exactly that without providing a scintilla of proof to back it up. If you are wrong about the profit taking actions of the counterparties, then the only real money exchange that will take place will be the premium that BRK banked in the initial transaction and the settlement required on expiry if the indexes are below the strike in which case there is no “butterfly” effect and your argument turns to mush.