Jun 1, 2011

Do you believe? Really believe?

It isn't this morning's ADP report holding that the recovery is a politcally inspired myth.  Every hour brings reams of such excited reports about whether we were up or down last month or last quarter. Or, Hell,  in the time elapsed since you wiped and stepped into your shower this morning.

In and of themselves they serve mostly as marketing bullshit designed earn broker commissions by persuading the gullible to get into or out of one stock, bond, option or another -- what ever the brokers behind the reports are pushing.  "Quick, Widget is up and the Zloty is down. Time to make a move, Bunkie."

But taken over a long time, they get amalgamated into a database which can be sensibly interpreted. As  Michale Penta does in explaining his view  there is almost certainly a QE3 in our futures.  QE3?  It's the third round of "Quantitative Expansion," weasel words for massive money printing.

Penta dissects the Federal Reserve promise to defend the dollar by beginning to soak up a tiny bit of the extra funny money it created and distributed during QE1, QE2, and the earlier bailouts and giveaways to the too-biggies-to-failies.

To do that, the Fed must sell something. Trouble is, it has nothing much  to sell. It is leveraged about 50 to 1, meaning it already owes $50 for every $1 it possesses.

Through quantitative easing efforts alone, Ben Bernanke has added $1.8 trillion of longer term GSE debt and Mortgage Backed Securities (MBS). (In fact, the Fed now holds more of these mortgage instruments than their entire balance sheet before the crash.) 

Conceptually, it is no different from cleaning out your kitchen miscellaneous junk drawer and hoping the contents will pawn for enough to pay off your Lexus. 

And yes, the Fed does in fact count as an asset the mortgage your idiot brother-in-law left behind when he finally found a stripper desperate enough to run off to Mexico with him.


So what?

So it explains why the dollar bill which a few years ago would buy a pound of nice bacon will now buy three thin slices of nitrated pig fat with a thin red line inked on. (Buy bacon today; tomorrow it will be two slices.)

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