Before I begin a long weekend to traverse the country, with friends, the 9th floor has but one final word to utter until our next meeting.

Doubt the power of the Federal Reserve at your own peril.

This is exactly what happened before. The Fed announced QE3 and the market lifted off, then sold into the last weeks of September. Men and women tore through the streets to speak the gospel according to Deflation.

And how did that end for them?

QE3 is a program in PERPETUITY. Surrender your mind to the word and allow it to spread over your thoughts like water on the surface of a table. It must soak into all the crevices and cracks, filling your head.

PERPETUITY.

Each year that QE3 is not reigned in is another ~$500 billion on the markets. In that sense, not announcing the end of QE3 is no less spectacular an event than announcing it was.

The market may have its little selloff. And the circle jerkers may jerk in circles. But bet against equities and you will die, in the end.

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I have a smaller cash position than the 50% I was holding this summer. My current cash level stand around 20%, with purchases of HCLP, NRP, DRI, RMCF, SCO and a handful of dips in my current assets eating up the 30% cash position.

I sold EUO weeks ago.

I’m not sure if I chose exactly the moment to lever up into the firestorm but I’d say we’re about to find out.

What I do believe, though, is that feminism has seized Ben Bernanke’s chair, and Janet Yellen can smoke blunts with the best of them.

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For the moment, the Fed remains leading the charge to hold interest rates low, based on what I would say is a faulty premise that the US economy just needs more expensive homes and homeowner tax income to get out of the hole it finds itself in.

The primary advantages of low interest rates are:
1) Cheap borrowing/refinancing, taking pressure off consumers
2) Allegedly easier to acquire homes, raising tax receipts (except for banking restrictions on lending)
3) Increased home sales enable retirees to downsize without collapsing pricing/bankrupting themselves
4) Support prices of goods and services, avoiding debt spiral

Each of these virtues, however, comes at the assumption that the consumer had the leeway to borrow more, and would take the pause to put themselves on solid footing, paying down debt and restructuring. Cheap credit was (and is always) supposed to be a momentary stepping stone to a better tomorrow.

In reality, it always becomes a game a chicken.

Consumers haven’t repaired their savings accounts at all. Debt levels should be something like three quarters of what they are – we’ve had near zero interest rates for five years and banks have so many programs running to help consumers pay off loans, it’s ridiculous. But it hasn’t happened. Consumer finances remain horrible, the money has largely been spent in ways that haven’t strategically benefited the recipients, and the low interest rates have seeded a newer, more dangerous problem.

The nation’s retirement system is on the rocks.

Looking at the state of public pensions and private 401k’s, the baby boomer’s retirement is in peril. Misallocations into housing and malinvestment have taken their toll. This isn’t exactly breaking news.

However, heretofore the assumption has been that the Fed’s knee jerk reaction to keep rates low was the only pathway and that there would be no push to counter this until unemployment levels and economic prosperity returned.

I would suggest that within the next few years, as baby boomer retirement heats up and the ability to create a virtuous cycle built on higher home prices and cheap credit slips away, the pressure on the Fed to maintain low rates will actually begin to cave to a growing murmur from the crowd demanding higher rates to maintain retirement obligations.

While this move will be a death knell for economic growth, from the point of view of aging boomers (the reigning political powerhouse and largest voting segment) economic growth would be a hollow victory as their own retirement obligations come under pressure and we increasingly see benefit cuts, such as are being witnessed in Detroit or California. Maintaining the status quo at the expense of economic growth puts them ahead, as they have a larger share of current goods and services, whereas permitting growth would ultimately lead them personally to greater poverty.

High interest rates takes pressure off of pension systems, and enables savings accounts to grow rapidly (such as those of boomers who have taken the final steps of downsizing homesteads and transferred much of their wealth into fixed income investments). It also improves quality of life for those savers by putting pressure on pricing.

Within three to five years, I expect interest rates get pushed up above 6% annually, for the purpose of refinancing retirement accounts for the benefit of boomers, at the expense of the rest of the country (planet?). When this occurs, I don’t think it will be because the Fed has lost control of the bond market. I actually believe it will be done intentionally, driven from political expediency.

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Sure I could sit here and gloat, now that oil inventories have ticked higher at twice expectations and global demand forecasts have been torn up. I could, because I told you this wasn’t over, and because I mentioned explicitly that a one off inventory drawdown was more likely noise than anything substantive. Seems that oil actually didn’t have anywhere important to go, so it went back to storage.

I could do that; but I’m not going to.

I’m not going to gloat because that’s what the market wants. It wants to see me give off hearty guffaws so it can reverse higher in my face and make me look like a jackass. It wants to crush my reputation before it does what I know it will inevitably do, because that would hurt me the most. The market is a cruel mistress, like that.

So instead, let’s chat about the global demise of hedge funds.

It’s been riveting, watching the hedge fund structure almost totally impale itself over the last five years. On the face of it, hedge funds should be uncontestably preferable to other financial structures. They have more options at their disposal, and they’re comprised of money from wealthier, (allegedly) savvier investors. There should be no reason for the near total demise of the industry. Yet, here we are.

Why did this happen? Well, the fees are obvious; it’s difficult to outperform when you’re nabbing 2% of all assets under management, then scalping your clients for 20% of any gains in any year. That’s just ridiculous anyway, without your “sage” advice coming attached.

But I think the biggest single problem hedge funds have faced is a saturation of the field with morons.

The hedge fund structure on its own is solid. It’s ideal, even; you have a core group of successful men and women who come together to gain access to expanded options for their money. Under reputable oversight, that should always come out ahead. And the earlier pioneers of the approach did do very well. But like anything that’s popular, it eventually draws out the two bit hucksters and spectacularly untalented self-promoters, who work hand in hand to drive the reputation of the entire sector into the ground.

The 2/20 payment method needs to be looked at to clean the space up. As it stands, an adept marketing major with no special understanding of investing can sell themselves as life extending snake oil and, even if he or she does a God awful job, make a killing. 2% of assets is twice the pay you’d get heading a mutual fund, and these strumpets would never stand a chance of launching past the regulations and oversight that come with one of those. Who cares that the clients are losing their shirts? Sultry words and a nice smile can get them to bunker down for a few years at least, which is still a fat payoff.

The hedgies are in need of a good rain of fire to raise their Sodom and Gomorrah to the ground. Turn those cheap frauds to pillars of salt, and all of that. When the smoke clears, the real deals can set about restoring the reputation of what should be the preeminent investment platform in modern finance.

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