Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20
Global "Debt Mountain": Beware of This "New Peak" - 13th Nov 20
Overclocking Zen 3 Ryzen 5600x, 5800x, 5900x and 5950x to 4.7ghz All Cores Cinebench R20 Scores - 13th Nov 20
Is Silver Leading Bitcoin or is Bitcoin Leading Silver? - 13th Nov 20
How Elliott Waves Simplify Your Technical Analysis - 13th Nov 20
How to buy Bitcoins using debit/credit card? - 13th Nov 20
Will COVID Vaccine Kill Gold and Silver? - 12th Nov 20
Access to Critical Market Reports - 12th Nov 20
Stock Market Dow Futures Reach 30,000 on News of COVID-19 Vaccine Trials Success - 12th Nov 20
8 Terms & Conditions You Must Know Before Asking For Life Insurance Policy Quotes - 12th Nov 20
Gold Stocks Post 2020 US Election Outlook - 11th Nov 20
Champions’ League Group Stage Draw: All You Need To Know - 11th Nov 20
Stock Market Secular Trend - 11th Nov 20
Stock Market Correction Curtailed by US Election - 11th Nov 20
What Causes a Financial Bubble? - 11th Nov 20
Ryzen 9 5900X RTX 3080 - Scan.co.uk vs Overclockers.co.uk UK Custom PC System Builder Review - 10th Nov 20
Killing Driveway Weeds FAST with a Pressure Washer - Saving Block Paving from LOTS of WEEDs - 10th Nov 20
Trump Fired, Biden Hired, What Next?  - 10th Nov 20
Looking for a Personal Loan? Here Is What You Have To Know  - 10th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Bernanke Torching the U.S. Economic Recovery with Quantitative Easing

Economics / Quantitative Easing Nov 01, 2010 - 03:29 AM GMT

By: Paul_Lamont

Economics

Best Financial Markets Analysis ArticleInvestors Burned by Bernanke’s QE Demonstrations
While Chairman Bernanke has his theory on quantitative easing, we suspect QE will turn out more like this Turkish firefighter demonstrating fire safety (no one was hurt in this video). Instead of limiting losses to those that took risks, Bernanke’s first round of bailouts in 2008-9 spread the fire to all American taxpayers. Ben’s next demonstration of quantitative easing is likely to create uncertainty and chaos by torching the credit markets. 


As the Wall Street Journal reports, “Bond investors are buying almost anything the market throws at them.” Wall Street has turned this mania, into refinancing that has sustained subprime companies. “Nearly two-thirds of the junk debt issued this year has gone to refinance existing debt.” October was a record month for issuance “on confidence the Federal Reserve will flood the economy with money.” What the Bloomberg article fails to mention is that when Mr. Bernanke fuels the economy with money, long term rates could erupt. This of course will burn bond investors (and recently that is everybody!). Credit markets will shut down again. Without refinancing, there will be widespread defaults. It is no wonder that Goldman Sachs is getting all it can, for as long as it can.

So why is Bernanke attempting this?

 “Banks are literally dying from lack of yield on assets due to the Fed’s ZIRP (Ed Note: Zero Interest Rate Policy).”  - Chris Whalen, Institutional Risk Analytics.

He is trying to give them what they want. In this case however, the interests of the banks are diametrically opposed to the borrowing needs of the economy.

Mortgage Putbacks
Not only is a “lack of yield on assets” a problem for banks, but losses on assets are still a problem as well. The similarities to the early 1930s are still evident:

“Banks had also issued real estate mortgage bonds and sold them with an understanding they would repurchase them if the sellers became dissatisfied, a provision the banks would later regret. By the end of 1930 many of these banks in outlying areas were in ‘dire distress.’ The value of real estate assets plummeted and dissatisfied holders of mortgage bonds attempted to sell them back to the banks from which they were purchased.” - The Banking Panics of the Great Depression, Elmus Wicker 1996.

Currently the “dissatisfied holders of mortgage bonds” are attempting to force Bank of America to repurchase $47B in bonds. Bank of America’s stock price has subsequently fallen 14% this October. J.P. Morgan says this is the “biggest issue facing banks” and estimates losses as high as $120B according to Bloomberg.

In the Spring of 1931, when banks stopped repurchasing mortgage bonds the bank runs started. Credit markets are already marking Bank of America’s debt below investment grade quality. Losses assumed during the Countrywide merger, where the putback issue is concentrated, are very similar to the events surrounding the Creditanstalt failure. This was the tipping point of the Great Depression.

“If we have more stress, if house prices continue to go down, as they've started to do just a little smidgen…if they go down another 5%, that is going to put a lot of stress on financial institutions.” - Robert Shiller, creator of the S&P Case-Shiller Housing Index and author of Irrational Exuberance.

European Troubles Grow
After passing the European stress test in July, the Irish banking system imploded in September. Ireland’s Finance Minister Brian Lenihan (after providing a 50B euro bailout) declared: “The Irish banking system is at rock bottom today.” Investors are now questioning his definition of rock bottom. Allied Irish Bank investors have watched their stock plunge to 2009 lows. Similarly, Anglo Irish Bank bondholders are fighting with the government over what their bonds are now worth. We should expect this to occur in the U.S. as the government’s mood changes (the reason cited for the Irish bond discount).

Besides Ireland, Greece, Portugal and Spain are all still deteriorating. According to Jonathan Tepper, an analyst at Variant Perception; “All the leading indicators for the peripheral economies are negative.” These countries are also increasingly relying on the European Central Bank. But time may be limited, as Germany’s mood, like Ireland, has changed. They are pushing for a state default proposal. According to the AP, Germany is “now pushing to let hopelessly indebted governments do exactly that -- admit they can't pay and hit bond investors with the costs instead of taxpayers.” For bond investors who have been investing on the bailout thesis, things could become more complicated.

Seek Value, Do Not Chase Yield
As investors rushed into the subprime (high yield) bond market this fall, we were reminded of May 2008:

“How Long Do We Sit In Cash? How do we know we are correctly positioned? Because most investors cannot stand being in cash. One advisor describes ‘clients have been ‘kicking and screaming’ about low yields.’ They are eager to ‘pursue riskier investments in search of higher yields.’”

As we now know, investors in mid-2008 were getting rid of their dollars at the precise time they should have been accumulating them. Where is the value now? Who wants to hold cash when everyone knows Bernanke is going to print more? We do. Why? Value is not just a low price; it exists more specifically where few are looking. In June 2008, we observed: “The advertising scheme currently emanating from Wall Street is ‘buying the bottom.’” When most investors are looking for the bottom, you can expect that markets will continue to fall. This answers the Wall Street Journal’s question last week: Bank of America: Has it Hit Bottom?

By Paul Lamont
www.LTAdvisors.net

At Lamont Trading Advisors, we provide wealth preservation strategies for our clients. For more information, contact us . Our monthly Investment Analysis Report requires a subscription fee of $40 a month. Current subscribers are allowed to freely distribute this report with proper attribution.

***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions.

Copyright © 2010 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama . Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.

Paul Lamont Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules