The Game - Part I: Queen of Hearts - Eric Janszen

[vinoveri]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

VV,

It isn't too hard - consider it this way: if all the toxic assets are bought by the Fed and 'disappeared', who benefits?

All those who bought up said toxic assets cheap and sold them less cheap.

Thus the bankers who originally made the 'securitized asset' make money (supply), and those connected vultures like Pimco also make money (supply).

What is unusual about this activity is that it restricts the 'inflation' (via disappearing deflation) to the bankers. Normal money printing works across the board and similarly is bad for banks across the board as banks borrow long and lend short.

Rising inflation is bad for this model since the long borrowings get deflated in purchased power while the short lending loses relative interest rate earnings (i.e. successive loans have higher interest, but interest rates always lag increasing inflation).

c1ue, thanks for the explanation, but I'm obviously not bright enough to understand your last 2 paragaphs (or their implications). Are you saying that everything, with respect to the toxic debt, is solved?

OK, so the Fed buys the toxic debt, but doesn't that show up as assets on the Fed balance sheet (not that this has any meaning as far as I can tell, but at least we know those "assets" have not vanished)?

[Mega]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Thank Eric
Enjoyed that, made sense..........
Mike

[charliebrown]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

really good article, makes sense, but two questions?

In Alice in Wonderlan parlance ...

Why isn't the bond market confirming this? I know the tin-foil-hatters (as opposed to the mad hatter) will tell us that there is some central bank, fed -> comercial bank propping up of treas. prices. But if dollar devaluation is the game who doesn't know it?? Look at any long term $USD chart and it's as plain as day. And who is going to hold a ten year t-bond yielding 3.2% with inflation and currency devaluation a sure thing? Also if the t-bond market is make-believe, corp bond yields are believing the myth too.

Now the fed's game has been buying up MBS. Who is selling it, the banks? If so what is the price the fed is paying? Is there a nudge-nudge wink-wink going on here, that if fed buys your crappy MBS, you are obliged use the cash to buy treasuries? I'm sure the holder of the MBS would do this trade. Is the fed peeking into the MBS to see the quality of the loans inside?? Or are they just taking the AAA rating that was bestowed upon this junk in the past? If the fed has to do open market operations to withdrawl money, selling the MBS what price will this it fetch?

Second question, if the U.S. does the currency devaluation, how long will it be before every country is doing the same thing? Does the U.S. have a competive advantage in running the printing press? so we can debase our currency faster than anyone else?

[Mashuri]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

As usual, great piece EJ. I like Peter Schiff's analogy on deflationists. He said that if you actually measure the cost of all assets, products, etc, in sound money (gold) then guys like Prechter are right on. We have been experiencing long-term (price) deflation since the tech bubble pop -- in sound-money terms:

http://stockcharts.com/h-sc/ui?s=$SP...36&a=180447066

I still believe we have at least one more deflationary event in our near future but, in the long run, the dollar is doomed to inflation.

[c1ue]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

c1ue, thanks for the explanation, but I'm obviously not bright enough to understand your last 2 paragaphs (or their implications). Are you saying that everything, with respect to the toxic debt, is solved?

OK, so the Fed buys the toxic debt, but doesn't that show up as assets on the Fed balance sheet (not that this has any meaning as far as I can tell, but at least we know those "assets" have not vanished)?

The present Fed+government action is solving the problem for bankers, but is not solving the problem for anyone else.

Again referring back to iTulip theory: the P/C (production/consumption) economy has dependence on credit. As the banks were taking on monster assets (which became liabilities due to both default rates and major falls in underlying collateral value) in the form of MBS', CRE loans, etc etc, the individuals and businesses who were on the other end of this transaction were taking up liabilities (the loans themselves).

What has happened now is that the banks have been made good on the bad assets, but the individuals and businesses are still stuck with their loans with the exceptions of GM and AIG.

So the Fed's absorption of the toxic assets is great for the banks, but doesn't help the economy nor the population in any way. In fact, it makes things worse because the present policy is encouraging banks to lend even less than they might normally - normally banks lend because they need to give out loans in order to make money. Between the Fed buying crap assets for high prices and paying banks 0.25% for reserves, why risk extending loans in a bad economic environment?

The point of this is that a toxic asset isn't a single point item like say, a radioactive potato. If a person lent a potato to another person, but then both discovered the potato was radioactive, then the potato could be thrown away.

But lending creates 2 counterparties: he who extended the loan and he who accepted it. With the magic if securitization, even more counterparties were created - adding the securitized loan buyer to the mix.

The Fed and federal government have been making the loaners good (bank bailout, Fed MBS buying, etc) as well as some of the securitized buyers. But the loanees are still out of luck.

Do you think the Fed will cancel out all the mortgages packaged into the toxic MBS's which the Fed is now holding? It might write some of them down partially, but ultimately those idiots still holding onto the loans are going to be paying as much as they are able for the rest of the next generation (30 years give or take).

Those homes which are walked away from, what then will the Fed do with them? Sell them? Rent them? Pay property taxes on them? Maintain them?

I think not.

[metalman]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

As usual, great piece EJ. I like Peter Schiff's analogy on deflationists. He said that if you actually measure the cost of all assets, products, etc, in sound money (gold) then guys like Prechter are right on. We have been experiencing long-term (price) deflation since the tech bubble pop -- in sound-money terms:

http://stockcharts.com/h-sc/ui?s=$SP...36&a=180447066

I still believe we have at least one more deflationary event in our near future but, in the long run, the dollar is doomed to inflation.

do you know anyone who isn't waiting for one more crash in our near future? for a 2nd chance to buy gold at 2006 prices before a merciless rise to $2000 or $3000?



2nd chance? they missed 2001, 2002, 2003, 2004...



what are they waiting for? 2008 prices? 2002 prices? how about june 2009 prices? what's the 'right' place to get in when gold prices correct? do they know?

nah... if the correction comes they'll read 'gold prices plummet! deflation!' in the wsj for the 2354th time in 8 yrs and not buy... again... same as every time gold prices corrected.

what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!

then all those good folks waiting in line are out of chances to buy at 2009 prices... forget 2008.

[Mashuri]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Since gold has an almost 90% bullish sentiment, I know most people are NOT waiting for a pullback. You can't pick exact price bottom's but you can do pretty well getting in on the lower end of gold's dips. A little technical analysis (even just trend lines and/or moving averages) can really help.

do you know anyone who isn't waiting for one more crash in our near future? for a 2nd chance to buy gold at 2006 prices before a merciless rise to $2000 or $3000?



2nd chance? they missed 2001, 2002, 2003, 2004...



what are they waiting for? 2008 prices? 2002 prices? how about june 2009 prices? what's the 'right' place to get in when gold prices correct? do they know?

nah... if the correction comes they'll read 'gold prices plummet! deflation!' in the wsj for the 2354th time in 8 yrs and not buy... again... same as every time gold prices corrected.

what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!

then all those good folks waiting in line are out of chances to buy at 2009 prices... forget 2008.

[Chris Coles]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

The reason for the new story pages seeming to arrive late is simply that, with a now major site like iTulip, it takes some time for the new pages to migrate around the world. Servers need someone to "hit" the page to upgrade the "local" page to the new version. I have known it to take six days to reach me here but this time I have been able to get it within hours.

Turning to the matter of a sneaky inflation of currency; China will be happy to allow its own currency to appreciate only so long as the US continues to buy their goods. That in turn will make a very interesting dance, the two locked together, each clasping the other's problems.

But once again, a fine article EJ. Makes very compelling reading.

[Jesse]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Brilliant in the incisiveness and compactness of argument.

Devastatingly logical.

[goadam1]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

do you know anyone who isn't waiting for one more crash in our near future? for a 2nd chance to buy gold at 2006 prices before a merciless rise to $2000 or $3000?



2nd chance? they missed 2001, 2002, 2003, 2004...



what are they waiting for? 2008 prices? 2002 prices? how about june 2009 prices? what's the 'right' place to get in when gold prices correct? do they know?

nah... if the correction comes they'll read 'gold prices plummet! deflation!' in the wsj for the 2354th time in 8 yrs and not buy... again... same as every time gold prices corrected.

what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!

then all those good folks waiting in line are out of chances to buy at 2009 prices... forget 2008.

My friend says to me today, "but I shouldn't buy it at 1050?" I say,"You said the same thing when it went to 850 and I told you to buy it at 740."

[metalman]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

My friend says to me today, "but I shouldn't buy it at 1050?" I say,"You said the same thing when it went to 850 and I told you to buy it at 740."

start in 2001...

'i dunno. gold at $300? i'm waiting for a pullback to $250'.

'i dunno. gold at $400? i'm waiting for a pullback to $350'.

'i dunno. gold at $500? i'm waiting for a pullback to $450'.

'i dunno. gold at $600? i'm waiting for a pullback to $550'.

'i dunno. gold at $700? i'm waiting for a pullback to $650'.

'i dunno. gold at $800? i'm waiting for a pullback to $750'.

'i dunno. gold at $900? i'm waiting for a pullback to $850'.

2009...

'i dunno. gold at $1000? holy shit! $1000!!??? wow! $1000!!??? :eek: i'm waiting for a pullback to $950'.

2010...

'i dunno. gold at $1100? i'm waiting for a pullback to $1050'.

'i dunno. gold at $1200? i'm waiting for a pullback to $1150'.

'i dunno. gold at $1300? i'm waiting for a pullback to $1250'.

'i dunno. gold at $1400? i'm waiting for a pullback to $1350'.

etc.

drip... drip... drip...

Iconic Hummer brand sold to Chinese manufacturer- APHummer, the off-road vehicle that once epitomized America's love for hulking trucks, is now in the hands of a Chinese heavy equipment maker.


Latest Air-Safety Idea: Naps in the Cockpit


Is Volatile Income the New Normal?- Laura Rowley








get over it. move on. deal with it. grow up. etc.

[goadam1]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

start in 2001...

'i dunno. gold at $300? i'm waiting for a pullback to $250'.

'i dunno. gold at $400? i'm waiting for a pullback to $350'.

'i dunno. gold at $500? i'm waiting for a pullback to $450'.

'i dunno. gold at $600? i'm waiting for a pullback to $550'.

'i dunno. gold at $700? i'm waiting for a pullback to $650'.

'i dunno. gold at $800? i'm waiting for a pullback to $750'.

'i dunno. gold at $900? i'm waiting for a pullback to $850'.

2009...

'i dunno. gold at $1000? holy shit! $1000!!??? wow! $1000!!??? :eek: i'm waiting for a pullback to $950'.

2010...

'i dunno. gold at $1100? i'm waiting for a pullback to $1050'.

'i dunno. gold at $1200? i'm waiting for a pullback to $1150'.

'i dunno. gold at $1300? i'm waiting for a pullback to $1250'.

'i dunno. gold at $1400? i'm waiting for a pullback to $1350'.

etc.

drip... drip... drip...

Iconic Hummer brand sold to Chinese manufacturer- APHummer, the off-road vehicle that once epitomized America's love for hulking trucks, is now in the hands of a Chinese heavy equipment maker.


Latest Air-Safety Idea: Naps in the Cockpit


Is Volatile Income the New Normal?- Laura Rowley








get over it. move on. deal with it. grow up. etc.

The consequences and problems will not be pleasant. But people will adjust and the propaganda will go 24/7. So we will sound like crazy people talking about America becoming a Banana Republic.

Of course it was cool to say that stuff during Bush

b
but under Noble prize winning Obama, if you say talk about the line from GS to Rubin to Geitner. Or the Tarp Coup. Or people lining up for money in Detroit. Or how many are on food stamps. Well then, you are a racist.

[metalman]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

one of my faves from 2007...

The United Banana Republic of Americas!

Today we roll out our United Banana Republic of America (UBRA) flag as we dig into the Labor Department's numbers to see where all these jobs came from, but the fact is that our projection yesterday of today's payroll numbers was wrong.

The good news: unemployment is only slightly up. The bad news: the banana republicization of America is proceeding apace.

Payrolls Pick Up by 110,000 but Not Enough to Stop Jobless Rate From Rising to 4.7 Percent

The new job market snapshot released by the Labor Department on Friday showed that employers boosted payrolls by 110,000, the most in one month since last May. In an encouraging note, the economy actually added 89,000 jobs in August. That marked an improvement from the net loss of 4,000 that the government first estimated.

To be sure, the ill effects of these problems are showing up at some companies. Construction firms cut 14,000 jobs in September, Factories slashed 18,000. Retailers got rid of just over 5,000 jobs. Financial services companies eliminated 14,000 slots.

However, gains in education and health services, professional services, leisure and hospitality, and in government work more than offset those losses, leading to a net gain in new jobs in September.

The magic of a depreciating currency is working. Foreign investors are buying UBRA stocks and other assets at fire sale prices. Tourism is up as visitors from Asia, Europe, Canada and all other countries whose currencies have appreciated against the bonar flock to visit the US for a cheap UBRA vacation, driving leisure and hospitality jobs within the service sector where most of the job growth occurred.

Like any banana republic that depreciates its currency to give the economy a temporary boost, as the private sector–especially the goods producing sector–of the economy shrinks the UBRA government employs more of its citizens directly and through companies that contract to the government, especially as elections approach.

The payroll numbers today extend a trend that started with post 2000 stock market crash re-inflation policies. Of 140 million jobs in the US economy, approximately 50 million, or 36%, are in the goods producing, construction, and manufacturing sectors. The rest are in finance, retail, services, or government. At 22 million, total government employment is now at parity with the goods producing sector.

There is little reason to believe that the banana republicization of America will not continue. As long as it does, the UBRA may be able to avoid recession. We will look into other employment data before considering a delay in our forecast of a Q4 2007 recession.

There is one fly in the tropical rum drink. Today's labor department report also showed: "Wages, meanwhile, rose solidly."

Suppression of wage increases has been the centerpiece of monetary and government policy to manage inflation in the Production/Consumption Economy since 1980. Given the difficulty in acquiring legitimate measures of actual inflation rates in the US economy, there is no way of telling whether these wage increases translate into increased purchasing power. Given the rise of oil and other commodity prices, it seems doubtful. In fact, it looks like the UBRA is going full-bore banana republic, including wage and price inflation to maintain employment going into an election year.

[metalman]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

don't know about anyone else, but one of the names listed by Svensson stands out...

Even if the nominal interest rate is zero, a depreciation of the currency provides a powerful way to stimulate the economy out of the liquidity trap (for instance, Bernanke (2000); McCallum (2000); Meltzer (2001); Orphanides and Wieland (2000)).

[Down Under]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

don't know about anyone else, but one of the names listed by Svensson stands out...

Obviously, got the right man for the job