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Helicopter Ben's Co-Pilot John Succo May 21, 2007 10:21 am |
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I remember laughing when Ben said he would "drop dollars from helicopters" to stave off any deflationary threat. I remember thinking that unless he finds some big fools to take more debt than they should, he can't do that. I am no longer laughing.
What Ben really meant was that he would "drop debt from helicopters." He wouldn't give people "free money," he would give them "free debt." That is also how the federal reserve system works. People today do not distinguish between debt and money. Nevertheless, it is much different spending "savings" than spending the proceeds of cheap debt. They look and feel very much the same until the day when the debt becomes due. Then the difference between the two becomes obvious, very quickly. Some borrowers are seeing this difference now.
However, Ben found China, or I should say he found the communist government of China, to buy US debt. They now own almost $1 trillion of that debt. That responsibility is too much for them. So now they have decided to "invest" in the US stock market with that debt. Heck, they even think private equity (levered equity) is OK. Don't blame speculative lending on "mortgage fraud." Thanks to governments, it all starts with cheap debt.
If Ben tried to "drop dollars from helicopters" without such a "partner" it would cause hyper-inflation. Of course some of us see hyper-inflation in some asset categories (oil and stocks for example), but that doesn't matter unless the "market" sees it too.
I said long ago that nothing really bad would happen until rates go up. This is where we will see the first cracks in the debt game (the final part of the super-cycle of debt creation that has been driving economic growth) that our governments are playing. However, I was not referring to treasury rates specifically (although they are flirting with 5% again): corporate and mortgage rates are more important to economic growth. I spoke a little on Friday about what seems to be holding those down: denial in the CDO/CDS market.
With the consumer squeezed on all sides and retail sales unmistakeably slowing; the "game" the governments are playing is getting more and more dangerous. The governments think that playing the music in slow motion will create a different effect, if consumers' will is boiled slowly enough they won't take notice. But Lowes (LOW) just reported weaker sales. The only reason they made earnings anywhere near in line is the same old story: lower tax rate, lower cap ex, and reduced shares outstanding due to stock buybacks. More of the same.
This can only continue as long as governments have the ability to issue more and more debt; it can't go on forever. This is all very unstable.
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John Succo is the Chief Investment Officer and co-founder of a New York-based hedge fund concentrating in derivative strategies with approximately $300 million under management (the "Fund"). Prior to his current role, Mr. Succo was head of risk and a member of the investment allocation committee at Alpha Investment Management, a New York-based fund-of-funds. Prior to that, Mr. Succo was an options trader and head of derivatives at various Wall Street firms.
John Succo welcomes your comments and feedback at Succo@minyanville.com and invites you to check out his explanatory series on the basics of derivatives by clicking here.
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