Friday, June 21, 2013


...but it is what it is.  The funny thing is Ben and the clucks that surround him were actually surprised at the reaction to the comments of Wednesday.  The reason for that is what I have been trying to get across for over a year: these are academic economists who have absolutely no understanding of the mentality of markets and, apparently, little desire to learn.  What they have discovered in the past few days is that for years, the entire economic framework of the WORLD revolved around easy money.  Any hint at a change in policy--a policy that has been ingrained in three generations of Fed leadership--is likely to cause panic which is exactly what happened.  Amazingly, this guys mob agonizes over every word in a press release while at the same time attempting to remain "transparent."  Memo to the Fed:  Sometimes...indeed, most times when the subject is so explosive, forget transparency AND JUST SHUT UP!  You don't understand your audience.  A lot of people lost a lot of money over the past couple of days.  If you think that is good for the economy...well, what can I say.

In my view Bernanke actually didn't intend to signal any real change in policy, and when this becomes better understood, I suspect the equity markets will recover somewhat.  But the 10 year closed today at a 2.51% yield and that is not going to come screaming down very soon.  Why do I care about that?  After all, we are still at historically low rates.  But consider this for a moment; interest rates have moved with extreme rapidity over the past two months.  Because of the low rates, a huge portion of the financial activity over the past few years has focused on the accumulation of debt and a goodly portion of that debt is secured in some way or hedged with financial instruments. Every one of those instruments are presently undergoing a repricing which can have unknown consequences in specific areas of economic activity or across a broad spectrum.  Now the whole world hates banks but if we are all to bow at the altar of transparency, banks are among the most transparent of institutions; there are regulators who have yet to be born that will spend their entire lives looking at banks.  The problem is the banks aren't the ones doing the lending.  These days it is what we call the "shadow banking system," every thing from hedge funds to pension funds that are the players.  And if one of these animals gets caught on the wrong end of a trade or winds up short of collateral or discovers a hedge they thought secure is hedging nothing, you will have no warning, it will go toes up   l i k e   r i g h t    n o w.   Not to mention the fact that the repricing of assets is kinda what happened in 2007?  Think any of the 12 year olds trading interest rate futures at a financial institution near you has any institutional memory of that period in history?

Which brings us to China.  The Chinese have figured this out and are going to stop it.  That is what 20% (reported) overnight rates are about.  They are prepared to kill some people in order to bring the explosion of credit back in line and it is their "shadow system" that is going to suffer.  The central government holds immense stores of financial ammunition and I am constantly told by He Who Is In The Know that they can handle it.  HWIITK is not often wrong and I can't remember the last time I was brave enough to voice even the slightest of questioning of His assessment.  This time I'm not certain.  They had better get this right but there may be things out in their neighborhood that not even the Chinese do not see.  The Black Crane(or is that Japanese)may be lurking.  The next week is going to be very dicey.  I'm resting up this weekend for Monday when the battle begins anew.

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