The word "con" comes from confidence, as in a con man first gains your confidence and then proceeds to rob you blind. That first step is crucial, because peoples' natural suspicion prevents them from doing truly stupid things until someone gains their trust. The Fed under Bernanke is no different. Their inaction on interest rates Tuesday is a simple confidence trick, a head game: "See", they said, "the economy is just fine. No need to worry about credit risk at all - in fact we are worried about inflation. Trust us". Now, the Fed is not intent on robbing anyone directly, so I have to believe their intentions are good, even if their choices are limited by current circumstances. Ever since the Great Depression the Federal Reserve's biggest nightmare has been a deflationary spiral - hence the cash helicopter that Mr. Bernanke is so famous for.
Given what is happening out there in the economy and financial markets, a bit of confidence trickery is all they could do. Imagine if they had come out and said this, instead: "We are very worried about the zooming cost of credit risk and what it is doing to the economy, so we are lowering interest rates starting immediately". The damage this would have done to the market's morale would have been much greater than any benefit from a 25 or 50 bp cut in rates. So, the party line is now firmly set from Wall Street, to the Treasury Dept., the Fed and on up to the White House: "The US and global economy are sound, all that's happening is some very risky debt and related assets are being re-priced. The situation is well contained and poses no threat whatsoever to the rest of us. Now, go shopping."
I honestly hope they don't believe their own b.s. and that they have a Plan B all worked out and waiting, just in case the con game approach doesn't pan out. Because in the Great Depression the Hoover administration (1929-1933) kept thinking it would all be sorted out quickly - just as soon as the bad debts and their associated assets could be dealt with. Andrew Mellon, the Treasury Secretary at the time, wanted to "liquidate everything" and believed that a panic was not altogether a bad thing, because "it would purge the rottenness out of the system". Easy for him to proclaim "leissez faire": being one of the richest people in the world, he didn't have to sell apples, eat in soup kitchens or sleep in flop houses, like the millions of unemployed who were let go in the liquidation process.
Therefore, I hope that Plan B isn't of the dogmatic "do nothing and the free economy will sort things out" type, because 98% of the US population has not participated meaningfully in the prior asset price rally and is just going to get anihilated, crushed between high debt and job losses. Keep in mind that the kind of economy we are running these days can shed jobs at the blink of an eye. All it takes is to throw the desks in a van, turn off the lights and tell the landlord to find another tenant. No factories, no heavy machinery, no unions, no long-term capital to recoup and no stake in the community, either.
I think we need way out-of-the-box thinking for Plan B, because the same old, same old (and this includes Keynes) is just not going to cut it in a planet of nearly 7 billion souls running out of cheap food, fuel and usable water, but full of WMD's mostly owned and operated by the 5% of the population that consumes 25% of those resources and on the hook for 80% of all debt outstanding in the entire world (and that's before counting the immense unfunded liabilities to Medicare and Social Security).
P.S. Isn't it curious how in the past few days markets rally in the last half hour before the close? Pure coincidence, of course... must be all those traders coming back to the office after a long, lazy summer lunch at Fraunce's and suddenly realizing they had forgotten to buy all day long. So they panic and rush to place huge buy orders in the time remaining - "at market", of course. Or even higher, if at all possible, please :) Just look at yesterday's hilarious intraday chart for GS. From 190 to 197 in 3 minutes. Those must have been really good oysters...
Given what is happening out there in the economy and financial markets, a bit of confidence trickery is all they could do. Imagine if they had come out and said this, instead: "We are very worried about the zooming cost of credit risk and what it is doing to the economy, so we are lowering interest rates starting immediately". The damage this would have done to the market's morale would have been much greater than any benefit from a 25 or 50 bp cut in rates. So, the party line is now firmly set from Wall Street, to the Treasury Dept., the Fed and on up to the White House: "The US and global economy are sound, all that's happening is some very risky debt and related assets are being re-priced. The situation is well contained and poses no threat whatsoever to the rest of us. Now, go shopping."
I honestly hope they don't believe their own b.s. and that they have a Plan B all worked out and waiting, just in case the con game approach doesn't pan out. Because in the Great Depression the Hoover administration (1929-1933) kept thinking it would all be sorted out quickly - just as soon as the bad debts and their associated assets could be dealt with. Andrew Mellon, the Treasury Secretary at the time, wanted to "liquidate everything" and believed that a panic was not altogether a bad thing, because "it would purge the rottenness out of the system". Easy for him to proclaim "leissez faire": being one of the richest people in the world, he didn't have to sell apples, eat in soup kitchens or sleep in flop houses, like the millions of unemployed who were let go in the liquidation process.
Therefore, I hope that Plan B isn't of the dogmatic "do nothing and the free economy will sort things out" type, because 98% of the US population has not participated meaningfully in the prior asset price rally and is just going to get anihilated, crushed between high debt and job losses. Keep in mind that the kind of economy we are running these days can shed jobs at the blink of an eye. All it takes is to throw the desks in a van, turn off the lights and tell the landlord to find another tenant. No factories, no heavy machinery, no unions, no long-term capital to recoup and no stake in the community, either.
I think we need way out-of-the-box thinking for Plan B, because the same old, same old (and this includes Keynes) is just not going to cut it in a planet of nearly 7 billion souls running out of cheap food, fuel and usable water, but full of WMD's mostly owned and operated by the 5% of the population that consumes 25% of those resources and on the hook for 80% of all debt outstanding in the entire world (and that's before counting the immense unfunded liabilities to Medicare and Social Security).
P.S. Isn't it curious how in the past few days markets rally in the last half hour before the close? Pure coincidence, of course... must be all those traders coming back to the office after a long, lazy summer lunch at Fraunce's and suddenly realizing they had forgotten to buy all day long. So they panic and rush to place huge buy orders in the time remaining - "at market", of course. Or even higher, if at all possible, please :) Just look at yesterday's hilarious intraday chart for GS. From 190 to 197 in 3 minutes. Those must have been really good oysters...
Are you suggesting the PPT is to blame for the late day rallies?
ReplyDeleteYou can also bring in the little guy with shorts...
Speaking of cons,
ReplyDeletehttp://www.dealbreaker.com/images/pdf/HaymanJuly07.pdf
I forgot to add that the PPT is part of "Plan B", as in there will be more PPT action then before until it is exposed, and then the market will implode like never before as confidence is utterly removed from markets.
ReplyDeleteI very much doubt that here is a "Plan B" other than,
you may want to sit down for this, a terrorist attack or two to justify what is happening in the world of criminal high finance.
There is no way out this time.
Dear Jason,
ReplyDeleteI am most certainly not a conspiracy theorist. But having seen market manipulation up close and personal, I can recognise it when I see it. It does not have to come from any PPT or such super-organized cadre. All it takes is collusion amongst 2-3 major players and the willingness to do what is essentially illegal, with the knowledge that regulators have been told to look the other way.
Edwardo,
I fervently hope not.