Biderman's Daily Edge: The Bernanke Put Is Dying

Includes: CSJ, SHY
by: TrimTabs

Late last week I turned 100% bearish, which is not the most bearish I could be. For the record, if I really thought the market was going to hell in a hand basket in a hurry, I could become leveraged bearish, which would be 200% short.

Today, a reporter asked what could happen that would alter my bearish stance? My answer was that I do believe in miracles. But miracles only happen rarely, or else it would not be a miracle. Other than a miracle, I do not see anything that could alter the inevitable-- the inevitable being a major stock market sell off.

What's more, I would expect the sell off eventually could approach or even drop below the March 2009 market bottom. Remember, in March 2009 the Fed announced a new round of quantitative prices whose purpose was to rig the market. The law of karma being what it is, when all the rigging becomes undone, I would not be surprised if stock prices ended up below the Fed created March 2009 bottom.

The most damage is caused by those who are not as smart as they think they are. Let me repeat, the most damage is caused by those who are not as smart as they think they are. Bernanke, Geithner and Obama think they are smart enough to fix all our financial problems by building a bridge over the recession. First in October 2008 they decided to buy all the big banks bad loans, thereby saving their buddies from going broke. And then they decided to lower interest rates as much as necessary. Why interest rates? Everything else being equal, lower interest rates mean higher asset prices.

Bernanke, Geithner and Obama apparently hoped that building a bridge over the problems of bad loans by dropping interest rates to almost zero would enable the economy to safely get to a recovery. The only problem is that we have run out of bridge and are nowhere near a recovery.

If I had been smart enough in September 2008 to figure out how to buy $10,000 of perpetual 2 year Treasury bonds yielding 2.5%; after four easings that $10,000 bond would be up 11 times to $110,000 because the 2 year is now yielding all of 0.21%. That is an 11 times drop in interest rates from 2.5% in September 2008 to 0.21% today.

That means that Bernanke, Geithner and Obama have given trillions in wealth to bond holders. Ever wonder where the money has come from to buy all the Treasury offerings? One source of cash is the trillions in bond profits resulting from Fed actions. In other words it is a ponzi scheme. The Fed gives profits to bond holders who then buy more bonds at ever higher prices.

Which brings us back to the fact that interest rates are about as low as they can go. How much below 21 basis points could a 2 year Treasury yield? As I said yesterday, short rates cannot go to zero or below because that would bankrupt the entire money market industry creating huge short term chaos. Could the 2 year go down to .10 basis points? Yes, and if it did so what? The 10 year is already down to 1.4%. If the 10 year went to 1%, so what?

The Bernanke put is dying. When the Fed demonstrates that the next easing will not work even to boost stock prices, then the stock market will collapse and the Black Swan will enjoy its meal.