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Monetary Policy

€2 Trillion To Go

Get your rally hats on, boys.

My long standing prediction was that the EU would require €3 trillion in funding in order to get them to 2014. You may refresh yourself on this postulate, here.

We got the first trillion in LTRO’s 1 and 2 as direct funding to Europe’s banks.

Today, the seeds for the next two trillion – minus whatever pittance is sitting in the EFSF\ESM joke-of-a-failure – have been planted by Mario Draghi.

We will run higher on this news, as men and women with intellectual deficiencies run with the false assumption “printing = higher prices”. However, although it is flawed, do not doubt the ability of this false premise to ramp us another 10% higher.

In the real world, this news will crush the euro, sending the EURUSD below 1.2. At the same time, America’s exports will be taken for a short trip down river – never to be seen again.

Meanwhile, this monetary easing will not do anything for Europe’s economy, in a seeming-contradiction that will make the ECB’s amateur statistician’s heads explode.

The reason is because all of this money is slated to be consumed by the entitlement machine that is “European stagnation”. It was already promised to the people, and its effect is passively witnessed on the EU civilizations every single day. Giving someone what they already expect to receive does not change behavior.

Europe will continue to contract, as demand will not be stimulated and prices throughout the EU will ramp higher – strangling the people.

Here in the US, dollar strength is slowly setting the stage for the next bleed out. China is in a similar boat.

These purchases by the ECB will in time be shown to have actually made things worse for Europe. They are giving themselves 3 years’ worth of funding, conveniently getting them to 2015. However, the activity itself undermines confidence in the euro and any reason for long term investors to step in (not that they were going to anyway).

Thus this is a bastardized tradeoff: 3 years of short term funding in exchange for 30 years of long term funding. Imagine it like a wave…a tsunami…rolling through the short term paper, pulling the tide out on the long end, and crashing through anything that comes in its path – all budgets will be swallowed whole by this destructive force.

I will conclude by saying, prepare for a ferocious rally that will last through the holidays…probably. But have lots of spare cash on hand. Because as soon as the first round effects of this pump are exhausted, we will have to face that the state of affairs have been worsened from Draghi’s intervention.

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Targeting GDP Is A Stupid Endeavor

Let’s try an intellectual exercise.

Suppose I charged you with task of monitoring one individual, and reporting to me their activities at any given moment.

This, you might be able to do, provided you had the freedom from personal needs (such as food and shelter) to spend your every waking moment watching this individual. And even then, in your non-waking hours, you would have to surrender that the individual could slip away from you.

However, your chance of success is arguably high.

Now, let us up the ante, and say I charge you with the task of watching 2, 3, or even 4 such individuals. Could you possibly monitor their every activity?

For those of you with children, I daresay you will happily respond “Hell no. They’re everywhere.”

And finally, suppose I asked you to monitor the activities of somewhere between 133 to 200 individuals, of whom anywhere between 30-60 we have no inclination of how to find at any given moment? In fact, as many as 20 people are actively trying not to be found.

That’s the best case situation.

The worst case situation is more like you being asked to track 400 such persons. Or 1,000. In fact, since many people in the government are charged with equivalent tasks, you could very well be asked to keep tabs on the activities of 100,000 people.

Far from ever being able to organize or direct such a crowd with much control, you probably don’t even stand a chance of keeping tabs on what these groups of disperse individuals are doing.

This is about how much of a chance Bernanke and the Federal Reserve have at “targeting GDP”.

The Federal Reserve had almost no chance whatsoever of targeting inflation, which can at least be directly affected by money printing.

Now, they are saying they’re going to target economic activity itself.

This is the equivalent of the farmer saying “My sheepdog sucks at herding sheep. So I’m going to see how he does herding feral hogs.”

This guy’s dog is going to get ripped to shreds. And the farmer is going to be so sad. And left looking like an idiot.

But as I don’t care about his dog, I’m more than too happy to watch him try.

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I Love Zero Percent Interest Rates

Have you ever questioned why exactly it is that once every 8-10 months, we get a market flush that wipes out a quarter of the market and creates such a wonderful buying opportunity?

It’s all thanks and praise to zero percent interest rates on government bonds.

You see, treasury bonds are the training wheels of finance. They are the crutch that untalented personal finance consultants lean on to keep their mundane products afloat.

Take a look under the hood of a big mutual fund some time – every single product they offer is the same thing.

Mutual funds are the Baskin Robbins of investing; there’s a core of original flavors, hundreds of “unusual tastes”, and it’s all just sugar and milk.

Once you cut through the bullshit prospectus for the “foreign” fund and the “domestic” fund and the “short/yield” fund and the “growth” fund and the “aggressive” fund…you realize pretty quickly that they’re all just holding Apple, Abbot Laboratories, Bank of America, etc.

It’s all the same shit.

And the glue that holds this comical assortment of unsatisfactory services together is the US Treasury.

Now, the government is very interested in keeping yields suppressed, mostly because of answers being spit out by some deranged equations a handful of socially reclusive economics majors assembled deep within their dark offices over the last fifty years. The various branches of the US government are naturally very desperate to keep distressed paper for toppling over, for fear it would force a hard bankruptcy of about 15% of the country.

But the unintended consequence of this has been to leave half of the finance industry without their knee pads. And they’re getting pretty roughed up.

Look at the layoffs at the big banks. Look at the funding gaps on pensions. And look at the volatility of investment funds. The signs are all there – so long as the government pampers debtors, the core “vanilla” finance sectors are going to suffer…badly.

Any group that usually finances itself and its liabilities with yield, either wholly or partially, is in the uncomfortable position of needing to offset a large loss of revenue. There are only a handful of places they can go that have the volume needed to handle the presence of such large demand. The end result is equity runs.

And, as is to be expected from anything that’s profitability comes from making .7% on all assets under management, these groups are very large, very slow, and very stupid.

Once a year, when they all need to gather the cash they’ll require to meet claims for that year, they are faced with the unfortunate non-choice of going to market with securities – the potential buyers of which are simply too smart to purchase at anything less than a steep bargain.

When such large entities have to meet their enormous budget needs by the random fluctuations of stock prices, those fluctuations will be anything but random. They’ll miss every single time.

The effect of this is that, if you are reading my work, you are a member of a gentleman’s hunting club; most distinguished that it is. Once every 8-10 months, the hounds Fate, Folly, and Impatience flush out the game from the tall brush, into the waiting aim of our party.

We are making a killing of retirees.

I personally don’t have any qualms with this. The system will get what it has coming to it. In many ways, the demands of these same retirees have helped craft themselves as the game.

I simply wanted you to know where your meals have been coming from.

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No One Important Expects QE From Jackson Hole

Let me play the devil’s advocate and say that, after the Fed disappointed earlier this year, no one is left expecting any further easing before the end of 2012.

The election is simply too close at hand. Bernanke moving here is not feasible. There is no such thing as “autonomy”. Fed independence is a myth.

I thought we might actually get some action back in July – if only for a second, the possibility seemed plausible to me.

But here, just two months away from the presidential elections, taking action would result in making the Fed the single target of Republican’s ire. They would launch an endless assault on the institution. Any other time, the fiscal conservatives would complain, but the social conservatives would turn a def ear (social conservative absolutely love fraudulent money to spend – on their terms…).

If Ben moves now, the entire GOP establishment would feel threatened. They would act in unision to take him down. Bernanke cannot risk the central bank’s freedom to determine monetary policy.

And I think we all pretty much agree on that point here and now. Despite the rabble rousing murmurs starting to usher from “the media”, most sensible people who actually have skin in the game aren’t expecting anything from Ben. When he doesn’t act, news personalities will begin doomsaying and dark prophesizing, only to watch the market action shrug off the event. Financial journalists will look stupid, again, and life will go on.

This is not a catalyst for a big reversal. I think that if a selloff materializes this year, it will come in October as the “election year stats trade” falls apart; that’s not scientific, it is simply the outcome that leaves the most people looking dumb caught with thumbs up their asses.

But generally, I am prepared to hold fast, with a big cash position. I don’t want to bet on downside until 2013.

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Surprise! Room To Ease Is Gone Now

Good morning, and welcome back to my cozy abode.

I’m afraid that that theme which I’ve been harping on for so long now has again reared its ugly head; and once more, Ben Bernanke has no room to make loose policy announcements.

For a moment, I thought it might be possible, with oil in the high $70’s. But in just a matter of weeks, that lull was completely erased, and oil this morning is pushing $90 a barrel.

Now, it is possible that this is an insider response of some kind to a yet-to-be-official announcement that QE3 is under way.

However, in any fashion, what we are seeing continues to be a commodity market ready and willing to hold the world hostage at the slightest hint of news it doesn’t want to hear.

“Buy commodities to escape inflation” has been programmed into the head of every citizen within reach of a brokerage account. I know that gold bugs like to pretend that, somehow, their argument is still this novel revelation which has yet to go mainstream.

“Just wait until the average citizen learns about what the government is up to.”

Look here. The average citizen is the guy who tells ME to buy PMs when I chance upon a random conversation in the street. Everyone knows how this works. It’s not a secret. There won’t be a sudden surge in PMs and other commodities as the “average retail investor” gets in on the trade, because he’s already there.

The commodity trade is probably still overcrowded – and worse, by dumb money.

So maybe now we don’t get a QE3 announcement again. I was about ready to hear one, even if I thought it was a quarter off. Will Bernanke juggle hand grenades with $90 oil about? I don’t think so. But I could be wrong.

For the moment, I continue to hold lots of cash, and a small ERY position. AEC, CLP, CCJ, APC, and physical silver continue to be a standard part of my repertoire.

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