For more than two years students of Econ-101 have been chattering about how the irrefutable logic of the “insanity-of-America’s-money-printing and fiscal mismanagement” would cause yields on long-term US debt to skyrocket.
One of the more flamboyant proponents of that theory was the author of The Black Swan, Nassim Taleb, who pronounced in February 2010:
“So long as you see the picture of, what’s his name, Bernanke, and he still has that job, you gotta run to make sure that you are short” (Treasury bonds).
That was over a year ago when the 10-Year was 3.7%.
Today it’s less than 3% so it looks suspiciously like he was completely wrong….and so was almost every hedge fund manager’s newsletter and Opinion Leader since 2009. So was Mark Faber, so was the explanation put up by Bill Gross of PIMCO when he announced in March, with much fanfare, that he had sold all his Treasuries in January and February, at what looks like pretty-much a (temporary?) bottom of the market. Perhaps he had a better deal elsewhere? Perhaps eventually his thesis will be vindicated; meanwhile The Students debate about how long he will have to hold his breath?
So what’s with the Chimpanzee?
In the Black Swan Taleb talks disparagingly about “prediction”; he makes a point that a chimpanzee throwing darts at a piece of paper with numbers on it, will generally do better than The Students and The Opinion Leaders. He is of course absolutely right (generally), depending, of course, on the chimpanzee.
What’s ironic is Taleb also wrote, “I don’t make predictions”; so that pronouncement in February 2010 signaled a “coming out” of the closet; sadly it looks like his first attempt didn’t score much better than a blind chimpanzee with arthritis could have.
Therefore, according to the well-known principles of Euclidean logic and the inscrutable philosophy of Econ-101, theoretically, [IF] “he/she” is not totally wrong most of the time, [THEN] “he/she” must be a Chimpanzee?
I think that’s right? I did philosophy once (briefly – before they kicked me out for being “disruptive”), I have a vague recollection it was all about [IF] and [THEN].
Anyway, philosophy aside, this is how the Chimp did:
Some Chimp eh?!
Although to be fair the he got the timing wrong; he said 3% would be hit by the end of April. Sorry about that, the problem with employing jungle-trash is they got no sense of time!! I got to remember, ultra-ripe bananas are essential if you want to get precise answers.
But not everyone got it wrong; I noticed a quote from Hugh Henry in early 2010, trawling through the history on Google:
We all know that the U.S. Treasury has gotten itself into a jam with too much of the national debt now financed with short term paper.
This is a problem for two reasons. First, it creates rollover risk. Second, you can’t “inflate away” debts of very short tenor, for the simple reason that your creditors will have the opportunity to demand higher coupons at frequent intervals. They see you inflating and you end up digging a deeper hole because you are rolling over debt so often!
In retrospect that could perhaps explain the real logic behind QE-2 which might in reality have been nothing more than a cunning plan, for Ben & Tim-Boy to replace short-term paper with longer-term stuff.
[IF] so [THEN] QE-2 was nothing to do with stimulating the economy or creating inflation, or even hyper-inflation.
In any case, it did not have any perceptible effect on either and it’s not as if it encouraged banks to rush out to write 125% LTV mortgages to people with trashed credit scores so as to “re-boot” the housing market and “get things back to normal”, as in to recreate the “happy-days” of 2006/7.
The Students must be awfully disappointed. Since longer than anyone can remember there has been a blind belief that the Federal Reserve is like Elvis Presley’s doctor, who can “make things better” by just injecting one more shot of the drug that used to work so well, in the “happy days”. But now, sadly, even a shot of $600 billion, appears to have no effect, outside of the initial rush of anticipation.
That’s why there will be QE-3:
When Ben announced QE-2, he spoke at length, and at more length, and on-and-on until everyone fell asleep, about how the “program” would help reduce long-term interest rates, and that would be “good for the economy…good for corporate America…and good for the housing market”. Significantly he didn’t say “good for the US Treasury” trying desperately to avoid a roll-over crisis.
As if under-employed consumers aren’t spending because they pay too much for credit, or as if that would make any difference to the rates pay-day lenders charge? As if corporate America (the healthy (non-unionized) part at least) isn’t sitting on a pile of cash they don’t know what to do with, and as if a tick-down in the mortgage rate will make any difference to a household that is underwater; where the breadwinner has lost his/her job, and they have a fixed-rate anyway?
The next thing that happened, right after that announcement, was that the 10-year headed up from 2.4% to 3.7%, which was quite funny, like Err…didn’t Ben say it should go the other way?
Joking aside, (as is explained in the links below the chart), a possible reason for that was because in about June the traders got hold of the rumor of QE-2 and started to front-run the Fed. Those guys know from bitter experience that “you never fight the Fed”, but there again you can always lead it around by its nose if you know how, and so that’s what they did, using the money they got from TALF to finance that little game.
The result was that for a good part of his purchase program Ben paid top-dollar for what he bought, because, as was explained in words of two syllables (also in the links) the “correct”, fundamental/intrinsic/other-than-market value for the 10-Year Treasury (use whichever term you like), right now, is about 3%.
That’s of course if you believe a black-swan-chimpanzee who wouldn’t know what to do with an Econ-101, even if you peeled it, cut it in slices and served it up with vanilla ice cream.
Of course that doesn’t mean 3% will stick, in point of fact, the chimp says it’s quite likely that it could go up to 4.2% for a while in the not too distant future, temporarily, as in it will go down towards 3% after, unless there is a miracle and the US economy starts to grow (nominal).
But that’s another story and for the avoidance of doubt, that’s not a prediction…the poor little thing is tired.
So what has been learned from this episode?
1. Contrary to what Econ-101 says and a huge body of conventional thought which says that things like “Fed Policy” and “expectations” drive yields (albeit both highly subjective numbers to put into a spreadsheet, which helps the “experts” avoid actually putting a number on their procrastinations), contrary to all that baloney, there is absolutely nothing the Fed can do to influence long-term Treasury yields.
Except temporarily…for example by announcing they are willing to pay too much for them , as in standing on a street-corner and giving dollar bills away to anyone with the right credentials; in which case the market will happily oblige.
2. Doing a “helicopter-drop” of $600 billion when the National Debt is $14 trillion, and the private sector (which owes over $30 trillion) is frantically de-leveraging, won’t cause much inflation (if any) and it certainly won’t cause hyper-inflation.
3. Dropping the base-rate to zero when no one wants to borrow is just a way of handing out dollar-bills to banks, so they can repair their balance sheets, pay bigger bonuses and speculate in commodities.
So obviously, it’s a good idea to “Give-it-to-me-one-more-time…BABY”, as in help the Treasury swap more short-term notes for long-term ones. And who knows, the next shot “might” do some good, certainly QE-2 has proved that it can’t do any harm, so what the heck?
Death by a thousand syringes.
Drug addicts have short memories and bad tempers; you can see that in the frustration in The Students boiling over against Dr. Ben for not “fixing” the mess that they say “the Federal Reserve Created”.
But perhaps at some point the penny will drop somewhere in the blinkered minds of the 200,000 or so PhD’s who make a living pontificating about Econ-101 that (a) the Federal Reserve did not “cause” the problem (although they didn’t do anything to prevent it), and (b) they can’t fix it.
The “problem” was caused in the first instance by the democratically elected representatives of every single American; and it’s debatable although how “democratic” that process was, those elected representatives, in between lining their pockets with “entitlements”, were supposed to have been “in charge”.
That was their job, that’s what they were paid to do, to protect America from danger, and the recent financial Armageddon has affected more Americans, that some deranged rich-kid with kidney disease, ever did.
If they were Chinese they would have by now have been rounded up, paraded in the middle of a soccer stadium, and shot. But then that’s not “democratic”; although I have no doubt that if that notion was put up as a motion in a referendum, where the vote would go.
Joseph Stiglitz worked out that by the end of 2008 the campaigns in Afghanistan and Iraq that were designed to achieve…I am still unclear about exactly what (?), had cost up to that point, $3 trillion. My pet-chimp keeps asking me, “OK, so where did the money to pay for that come from?”
Was it a divine gift from God that rained-down on the “Chosen-Ones” like manna from heaven?
Well actually, only “up to a point”, or in other words they borrowed it, plus they borrowed easily another $350 billion a year to “wave a big stick” as in make the Somali pirates and other “terrorists” quiver in their flip-flops. Let’s say $7 trillion of the $14 trillion can be attributed to America’s “Rambo Complex”.
Then of course there was that brilliant idea, started by Clinton and carried forwards by Bush to do what they could to make house prices more expensive so that the 70% of Americans who “owned” (as in owned a bit of) their own houses, felt richer, which was great for votes…”I will make the “value” of your house skyrocket – vote for me!!” How could anyone resist that campaign pledge in the World’s-Greatest-Democracy…well perhaps the second, don’t forget the birth-place of democracy…Greece?
And the stroke of genius was that thanks to the wonders of Econ-101, “ordinary” (i.e. poor) Americans would be able to “afford” to buy their dream house in the suburbs, because…wait for it…wait for it…houses were more expensive!!!
Only in America!!
So putting aside the kickbacks that were paid by Fannie and Freddie to “supportive” members of Congress (in brown enveloped and in kind), how much did that exercise in drug-induced insanity cost? Well to figure that out, since no one of “The Representatives” is inclined to put a number on it, requires the wisdom of a chimpanzee, my pet-chimp says “$7 trillion by the time the dust settles”.
So there you have it, $7 trillion playing Rambo, plus $7 trillion playing “City-Ville”, and you can explain why the American National Debt is $14 trillion. And that’s got nothing to do with Ben Bernanke or the Federal Reserve.
So Who’s fault was it?
The credit crunch was not “caused” by Alan Greenspan dropping interest rates after 9/11 (which is why he says he kept them low for so long), it was caused by deliberate and cynical fraud in the process of securitization. If it hadn’t been possible to borrow money against what turned out to be lousy collateral, the credit crunch would not have happened.
But so far no one is talking about fixing securitization, which is a much better source of finance than relying on the “good intentions” of sovereign governments, or the threat of trashing someone’s credit scores.
No one is talking about setting up laws to make it illegal for manufacturers and sellers of that type of debt, to disguise the value of the underlying collateral. Nor for that matter is anyone talking about how come the PIIGS managed to pile on enough debt to bankrupt the Euro, by the simple expedient of cooking their books (with the helpful aid of God’s Workers).
Fraud is what Joseph Stiglitz was on about when he talked about “asymmetry of information”; ironically that’s what Alan Greenspan was talking about in his autobiography, when he wrote:
“An area in which more rather than less government involvement is needed, in my judgement, is the rooting out of fraud. It is the bane of any market system. Fraud is a destroyer of the market process itself because market participants need to rely on the veracity of other market participants”.
In July 2003 International Valuation Standards wrote to the Bank of International Settlements saying that “the valuations of assets used to determine capital adequacy (of banks), were fundamentally flawed and bound to be misleading”. They might have been a tribe of chimpanzees for all the attention that got. Yet that’s fundamentally what went wrong in the housing bust in USA and that is what slowly unravelling in Europe; the valuations of the collateral; were wrong.
The “prediction” presented initially in general terms in March 2010, more precisely of 3% or there-about in December 2010, was not a “prediction”.
It was a valuation (opinion). The only “prediction” in that was the knowledge that markets always return to their fundamental value (even if just for a moment), regardless of how badly they were distorted in the past.
That’s called Bubbleomix which is a clever way of doing valuation; not yet “approved” by International Valuation Standards; but give them time, after all they don’t even have the word (market) “disequilibrium” in the index.
The two points I would like to make are
(A): It is possible to make a reliable prediction, if you understand the principles of valuation, as is demonstrated here. And as was demonstrated when the “Chimp” said in January 2009 “the S&P will bottom at 675 then go up in a smooth line to 1,200, then reverse by 15% to 20%, but not for long)”.
(B): Students of Econ-101 are taught to see “the price of everything and the value of nothing”; perhaps it’s time for the science of valuation to get included in the curriculum? In which case moronic bankers wouldn’t have to put their hands in the pockets of decent, ordinary people, and steal their money. Like they have done over the past few years.
No comments:
Post a Comment