The World According to TARP!
“We'll take the house. Honey, the chances of another plane hitting this house are astronomical. It's been pre-disastered. We're going to be safe here."
- The World According to Garp
Bill Gross said in his December investment outlook last week that the“systemic risk”of new asset bubbles are rising with the Federal Reserve keeping interest rates at record lows.
Under what PIMCO has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the US economy.
That’s what I touched on last week when I wrote that the current course of fiscal and monetary policy was absolutely insane. 
Does that pave a path for this gentleman to assume the role of Treasury Secretary?
Yesterday’s Groundhog Day lower-dollar-induced-higher-everything-else catalyst was St. Louis Fed President James“Raging”Bullard’s views that he would like to extend the Asset Purchase program beyond the scheduled March sunset.
“I would just like to keep them active at a very low level instead of saying we’re shutting down, shutting down permanently. Initially, it would do nothing for the economy, but it would give the Fed the option to react to future news as it comes in.”
In other news, I’ve immediately suspended my no-alcohol, no-bread, no-sweets diet—and while I’m at it, I’ll start smoking again—such that one day in the future, should I so desire, I’ll have the option to again choose to be healthy.
Bank of Hysteria
The Federal Reserve has asked nine of the US banks that were part of this year’s stress tests to submit plans for repaying the governments capital injections, according to a person familiar with the situation, says Bloomberg.
There are three ways to interpret this potential move:
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The relay race is on pace; the government-sponsored euphoria has passed the baton to corporate America, who has rolled mountains of corporate debt and issued oodles of equity into the hands of an unsuspecting public (rinse and repeat, over and over, consistent with the definition of insanity).
- The government, having now replenished the coffers of those too big to fail, will redirect those (read: our) funds to a litany of looming shoes, be them state bankruptcies, commercial real estate sinkholes, unfunded pension messes or messy municipalities.
- The cumulatively imbalanced, debt-ridden finance-based global economy—you know, the one with massive deficits and upwards of $500 trillion of derivatives tying an increasingly acrimonious world together—has been magically fixed by…drum roll please…more debt!
I don’t mean to sound saucy, Béarnaise—those who know me will tell you that I’m an optimistic person who believes in solutions, community and camaraderie. Seriously, I’m an Oakland Raider fan; need I say more?
Yesterday, while hosting a Town Hall Chat at NYU, I tried to walk a delicate line of truth and trust while not sugarcoating the plain and painful truth that the bar tab of our societal largess will be picked up by the citizens of tomorrow. How -- and, more importantly, when -- that manifests very much remains to be seen.
The corporate credit markets are telling us it may not matter for a few more years.
The currency markets feel like an unwind is imminent.
The geopolitical landscape is the definition of fragility, seemingly one sneeze away from protectionism, isolationism or perhaps something worse.
It -- the world, our roles, and the choices we make -- often feels over-whelming. As I said to the students, however, we’re blessed to be in a position to take a stand, make our mark and do our part to affect positive change. That is not to be squandered.
Society is the sum of the parts; as part of society, it’s not only our right to question the status quo, it’s our responsibility. That doesn’t mean we should grab pitchforks and vilify our leaders.
It simply means we should be heard, for there is strength in numbers and unity in benevolence.
Good luck today.
R.P.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.
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Thanks for the "Crazy Eddie" link. Brought back memories, and laughs.
"Prices that are insane", indeed
I still say we are turning Japanese, so don't expect any high GDP numbers for a long, long, time (especially after subtracting out any stimulus). It's the swap personal debt for government debt play.
But so far all the stimulus has done is inflate some assets, by weakening the dollar. I think homes are the key, and no job=no income=no house price appreciation. Higher costs for essentials also means less money for a house. Inflation? Just try and ask for a raise right now to compensate(remember the COLA adjustments).
The Berries are just squeezing the lower classes to avoid the debt issue.
Just like in Japan, I expect it to take a long time to play out. The more the "berries" fight debt restructuring and re-pricing, the longer it will take, and the higher the government debt will go.
So we might as well prepare, and have a few laughs along the way.
When our leaders stop listening and leading, choosing rather to ignore and rule over us, we must at that point reevaluate what it means to take a stand. When questions go unheard and unheeded, when hundreds of thousands of average people march on Washington only to be insulted and called domestic terrorists, it is then time to do more than question. It is then time to vote out ALL the politicians if you can, but mark my words, short of that happening we are doomed as a Nation. You cannot have socialism and Freedom too, in order for socialism to exist you must surrender your Free will, to give it up to the State, to accept whatever burden is asked in the name of the greater good regardless of whose choice it is as to what you must sacrefice and what you may or may not gain.
Debt, Debt, Debt.
So far we seem to be on the Japanese path. This approach could take decades to deal with the problem. But what if we don't have decades? If one assumes oil demand>supply in 2011,13,15 then the GDP of the country will be falling, rather than "muddle through" (the Japanese scenario). Muddle through allows for a slightly positive GDP. An oil crisis will cause a falling GDP. This will not support a mountain of debt(pointed out by Colin Campbell).
Specifically regarding, "There are three ways to interpret:"
When it comes to "Berries" the game they mostly play is "kick the can down the road". With the nine banks, they have changes the accounting rules, infused money, and opened up the zero percent buffet. But that doesn't mean they are solvent. Just like Japan they could potentially hide the problem for a while. But the high unemployment must be causing some new stress, beyond that predicted by the stress tests. They don't want it to blow up again, but it might.
Policy:
Kick can down the road, sweep under rug.
But you are right, now the states need cash. So I would expect another round of bailouts, followed by more kick the can down the road.
But kicking the can down the road, may have to be wound up by 2011,13,15 when oil demand>supply. You therefore may have to draw a graph with debt/GDP at 350% now, and something like 50% in 2011,13,15. But as is typical, the "berries" won't see this one coming either. They want to increase the debt/GDP level or at least keep it constant.
Hope to be very wrong about this one.
