Quantitative Easing: Assets Are Bubbling


Last month we rambled on about the Federal Reserve program of Quantitative Easing that had lowered the interest rate to member banks like Citibank, JP Morgan Chase, Wells Fargo and others to almost zero while simultaneously injecting approximately $85 billion each month into the economy through the purchase of long-dated government bonds. The whole subject is so boring to most people, but we managed to flower it up with a lot of blather and turn it into the majority of the article. Last month’s blather basher also contained an expose about the hypocrisy of President Obama between ending public tours of the White House while continuing to spend $181,000 an hour to operate Air Force One taking him on political jaunts over hill and dale.

Ben Bernanke

Well if Quantitative Easing can have more than one iteration, and it has, so can we. So in this episode, we are going to look at the inevitable end of QE and what it means to peeps like you and me. For those of you One Percenters who already have as much money as the Federal Reserve, go directly to the next section and read how our President is blowing close to $100 million on his upcoming trip to Africa.

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But first, as they say on TV, let’s look at Quantitative Easing. For the majority of observers familiar with this program, it was the force of salvation following the financial meltdown back in 2008. That, however, merely takes the short-term view of the underlying issue. Since the 1990s, the good old US economy has been facing something that nobody really talks much about. The word is deflation.

Deflation is like buying a Mercedes 500SL for $100,000. No matter how you plan to care for that car, no matter how you only drive it on Sundays, the car loses 15% of its value starting the minute you drive it off the lot and every year thereafter. Now just for fun imagine you took out a loan at 6% interest. Over the course of 60 months, you have paid about $130,000 for a car worth less than $50,000. Deflation with cars is inescapable, so we live with it and sometimes even laugh at ourselves for the absurdity of it.

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Now imagine this happening with everything like our homes, our 401Ks, IRAs, our baseball card collection, literally almost everything going down in value. Hey wait, that’s exactly what has been happening! Oh yes, one thing we left out that has been losing the most value: our income! In fact about the only thing that has been going up consistently over the past 30 years is our personal debt. The amount of debt is over a dozen trillion dollars. But who can afford to pay $130,000 for a $50,000 car if incomes are falling? Moreover, who in their right mind would be so stupid to even try? But what would happen if everyone woke up and decided it was more important to put food in their belly than to pay Jamie Dimon at JPMorgan Chase (the nation’s largest issuer of credit cards)? For nearly 15 years now, this is one of the major issues that the Federal Reserve has watched carefully at each step, avoiding the use of the term “deflation.”

printing-moneyQuantitative Easing is just another program for fighting deflation. Critics of the program have long argued that the Fed’s injecting over $ 1 trillion of cash into the economy represents the most irresponsibly inflationary program in the history of the union. It is the logic that gave advocates of gold the reason to drive prices of the metal to record levels. But guess what? The inflation rate remains at a subdued 2% even after multiple years of Quantitative Easing. We suspect that the real rate would be well under 2% if the ripple effects of energy and retail gasoline price increases were factored out. Remember, over the next decade the US is very likely to become energy independent thanks to low-cost domestically produced sourcing.

So what has Quantitative Easing done? If it has single handedly prevented deflation, then logically it has created asset inflation, also known as a bubble. Nomura Securities Fixed Income Strategists Bob Janjuah recently put his digital pen to electronic paper, declaring not only that the Fed will taper QE, but also was honest enough to offer reasons why. According to Econ Bob, ending QE is not about unemployment, or anything directly related to the economy. That, according to our guy Bob includes concern about inflation.

Rather, I feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the U.S. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy.

And what is the most inflated asset that we can think of? The Dow Jones Industrial Average; the very asset that benefits the top 10% of America.

Hello, hello, earth to Bob, isn’t the definition of a bubble where prices of certain assets become inflated? So when you say the Fed isn’t concerned about inflation, what you mean is that the Fed really isn’t concerned about the 90% of the population that isn’t affected by the Dow Jones Average. Are you saying the Fed is only concerned about the bubble of its own creation? Yeah, but Bob, you are forgetting something: Isn’t the $1 trillion really taxpayers’ money? You say NO, the Fed creates its own digital money. Wow, that is totally not gnarly.

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For you Ten Percenters that have your fortunes tied to the stock market, Bob (a.k.a. the Nomura bear) has issued a warning. As the QE tapering begins to take hold, it could knock the market down 25% to 50%. We hope Bob is dead wrong because something of that magnitude could cut the number of billionaires by at least 10%, not to mention the irreparable damage to the summer rental market in South Hampton.

But wait you Ninety Percenters, you are not off the hook entirely, because the fact that other investors agree that the Fed will taper QE sometime in the next year has sent mortgage rates popping. Remember a few weeks ago when you were rejected for a 15-year mortgage at less than 3.5%? Well now you are going to be rejected for the very same loan at over 4.0%. A respected mortgage broker (yes there are such rare animals) told me recently that in spite of the real estate market recovery, 75% of her applicants are being rejected. Oh well, we can always move to Ecuador.

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Obama Caught Impersonating The Federal Reserve

We noted that Ben Bernanke has amazing power to create digital money at will, spending $85 billion each month. Well, President Obama got wind of this and said screw this crap. I am the most powerful man in the world’s most powerful country. I can’t let Ben outshine me.

President Obama and Bernanke

This month the President is taking a trip to Africa at a cost of upwards of $100 million. The cost of the trip was contained in a secret memo first reported by The Washington Post and verified by The White House. We mention the source of the information because otherwise you would be entitled to think that it we were total lying idiots.

As you read the article try to keep in mind neither is there any question raised by WP nor explanation offered by The White House as to why this trip is being taken. There are no names of African officials mentioned or lofty goals to be accomplished during the seven-day, $14.3 million per day visit. Here are data from the WP article:

Military cargo planes will airlift 56 support vehicles, including 14 limousines and three trucks loaded with sheets of bullet¬≠proof glass to cover the windows of the hotels where the first family will stay. Fighter jets will fly in shifts, giving 24-hour coverage over the president’s airspace, so they can intervene quickly if an errant plane gets too close.

The first family is making back-to-back stops from June 26 to July 3 in three countries where U.S. officials are providing nearly all the resources, rather than depending heavily on local police forces, military authorities or hospitals for assistance.

The president and first lady had also planned to take a Tanzanian safari as part of the trip, which would have required the president’s special counter-assault team to carry sniper rifles with high-caliber rounds that could neutralize cheetahs, lions or other animals if they became a threat, according to the planning document.

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But officials said Thursday that the safari had been canceled in favor of a trip to Robben Island off the coast of Cape Town, South Africa, where Nelson Mandela was once held as a political prisoner. (Editorial note: Nelson Mandela no longer lives on Robben Island).

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