Tuesday, August 9, 2011


The only thing that I can remember that came close to this is when Nixon took us off the gold standard back in the seventies for sheer excitement and market movement.  Bernanke's Fed, with a very split vote, announced today at 2:15 that not only were they making no change to the target for the dicount rate but were planning not to do so for two years.  Punto.  Unheard of.  Incredible.  Now of course that could change as conditions change but for now, there is an effective flattening of the short mturities, perhaps a steeper yield curve albeit at lower levels and all things being equal gold and stocks are the only game in town...except for one small problem.

What the Fed is telling us without using the dreaded "R" word is that we are probably in a recession or near to one for the forseeable future and as far as the economy is concerned it's over to you, Barak, or John or whoever the hell else is going to be running things up until the next election.  Maybe that's not a bad thing because with this election coming up if these guys--especially The Leader--can't focus on the fact that there's a problem out there that they have to solve because there's no one else prepared or capable to do so, there's going to be a lot of moving vans in D.C. come January, 2013.

The effects of the Fed announcement were stunning.  At first the DOW moved from about up 90 to up 200 and then when it became clear that QE III was out of the question, crashed to down 200--all in the blink of an eye.  There had been a very successful auction of a three-year note at 1;00 pm that went off at 50 bps and within the blink of another eye the outstanding three-year was trading to yield 31 bps!  The one-year was at the money and the two-year traded to 16bps before moving up to 20bps.  The five-year is at 1.00%.  Insane.  The 1 month T-Bill is at 0.01 as I look, but the real action was in the Swissy; spot AND futures as both went through the roof.

The stock boys got it figured out at the end of the day that money is going to be free for a while and the DOW closed up 430 points!  Downgrade?  Don't give a damn about no (*&#^& downgrade.  Profits are good and dividends taxed at 15% are the place to be.  Of course there's talk of gold going to 2300 but we'll just own some of that as well.  We're going to have unemployment up around 9% (or higher) for a while but as long as the rest of the world doesn't collapse....

...which brings me to Euroland again.  The Greeks have to come up with a BIG number by the end of this month and where that money is coming from still isn't clear.  I think it's no better than 50-50 they handle it in some way but if they don't...well, all bets everywhere are off.  This is going to be the focus for the coming weeks as the downgrade is now a thing of the past but I have a suggestion to the Pols in D.C.:  whoever first comes up with the idea to get Congress back in session early and form this joint committee is going to get a big boost from the American public in the approval ratings.  Not only that, if Greece goes badly there is going to be a hell of a mess out there that will undoubtably interfere with our political processes because it's going to be all hands on deck to deal with that one.  Jamie the Genius notwithstanding, our banks are going to get looked at in conjunction with exposures to the Euroland guys.  I think we're fine but for once I hope we can get out in front of the curve--yeah I know, it's a lousy medaphor.  So sue me.


  1. Puleease.

    Masssive over-sold bounce and nothing more. Tomorrow we wake up and say "is that all they got?"


    A Big Mac now costs $17.19 in Zurich - talk about misaligned exchange rates.

    Rogoff writes in the FT that "the question of whether the largest advanced economy regions are going to experience a double-dip recession is almost moot. For all intents and purposes, most European and US economies have never fully exited the downturn, with output per capita still below its pre-crisis peak. ... If policymakers can at least get the diagnosis right, it would be a major step on the road to recovery. After a long series of half-steps and mis-steps, policymakers’ options are narrowing, but they are not out of bullets."

    According to the FT "Merkel faces a revolt in the Eurozone - Ms Merkel insists that she will deliver her majority in favour of the deal. If more than 21 supporters refused to back the deal, she would be forced to rely on the opposition SPD and Greens, both of whom are in favour. That would ensure German approval for the eurozone reform package, but it would be politically devastating for the chancellor not to be able to count on majority support from her own ranks, and could cause the government to fall."

    And the E*Trade baby loses everything!

  2. No Carter. The cat is alive and well. This is QE III in drag

  3. QE is irrelevent at this point. There is more cash in the system than the banks want. Cash earns a negative return. Aggregate supply exceed aggregate demand, and further QE has a diminishing ability to increase demand. Plus fiscal consolidation across countries - the air is coming out of the baloon fast.

    Deleveraging that can't be done in an orderly manner will be disorderly and violent. Just watch.