One Hundred And Eighteen Million Dollars An Hour -

One Hundred And Eighteen Million Dollars An Hour - 


That is how much money the Federal Reserve Bank of the United States is creating as you wake, work or sleep. That is $85 billion a month and the stuff must go somewhere. It pours out like sugar upon the markets, each market, every market and it is no wonder that the American stock markets are hitting new highs. The spice must flow.

In the bond markets it is low interest rates and compression, a vice closing in progress, as each sector of the Fixed Income markets grinds closer and closer to Treasuries. It is real, it is not an avarice, but it is also the most manipulated market in the history of our country and something that could not be accomplished in other responses to Recessions because the world’s central banks had never worked in this kind of collective action before. It is not earnings and it is not technicals; it is just money and vast quantities of it that come pouring out of Washington each day. The United States found manna from Heaven.

The initial call had been for Inflation, even Hyper-Inflation from some well-known thinkers. It has not happened and the reason, I postulate, is because the underlying economy is in far worse shape than the numbers indicate or most think. The earnings at corporations also rely upon this injection of capital and so the whole boats floats but the underpinnings are shaky, risky and fraught with danger. Any hint of curtailment by the Fed throws out tremors as everyone wonders for how long this will go on and will the rising tide turn to a flood and upset the American boat. It is a very good question. The other possibility is an “Event;” some shattering moment that punctures the hull and sends the whole enterprise into a waterspout where the boat is sucked up into a vortex that will certainly not be Oz.  

I play the game. The Rule is to win and not to be eventually right and lose your capital during the process. The compression in bonds has been an absolutely winning hand and in many cases a better bet than equities have been. One of the interesting reasons for this has been the structure of bonds as compared with equities or preferred stocks. Bonds accrue interest every day while dividends are paid quarterly with no accrual. Consequently if you are trading bonds and taking advantage of what you can the accrual part of the equation can add to your winnings in a substantial fashion when interest rates are this low.

There are two maxims in operation now. The first is that euphoria continues on right up until the day when it does not. In the last go-round the “Event” was Lehman and the music stopped. The second maxim is that there is not strategy that wins forever. Frequently the winning bet of last year is the losing bet of the next and I always bear this in mind. In this light one also looks at the Fed; will this outpouring of money go on forever? Fairy godmothers are children’s tales and when someone offers you the glass slippers; let me know.

I have been asked numerous times why the Fed’s balance sheet can’t be thirty trillion dollars and so the game continues. The answer is that it can be but, and a very big but, is that the debt of the United States would also be ten times the size it is now and it would have to be serviced by an economy that only has so many resources as the debt to GDP ratio of the country would be out of sight. Perhaps if Europe and Asia expanded their balance sheets by ten times as well so that on a relative basis everything remained in tandem it could happen but the amount of debt issued by our Treasury would be at levels that would portend some kind of nightmare scenario.

The catch here is the amount of debt that would be created along with the creation of money and that is where the game halts or reverses the course. I suppose it is theoretically possible that the Fed bought all of every new issue, bought 100% of each new Treasury or Agency offering but there are consequences for that kind of behavior that, while unknown, would disrupt private capital in some very significant ways. It would no longer be, and we are close to it now in my opinion, that the Fed is “the lender of last resort” but the only important lender in town. What would it be; JP Morgan at Treasuries +1, Bank of America at Treasuries +2 and Morgan Stanley at Treasuries +3? The boys are driving the train in that direction as risk becomes quite secondary to the money in the system that must be utilized.

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