From Brian Rogers of Fator Securities
All Glory Is Fleeting
“For over a thousand years, Roman conquerors returning from the wars enjoyed the honor of a triumph - a tumultuous parade. In the procession came trumpeters and musicians and strange animals from the conquered territories, together with carts laden with treasure and captured armaments. The conqueror rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot, or rode the trace horses. A slave stood behind the conqueror, holding a golden crown, and whispering in his ear a warning: that all glory is fleeting.” -from the movie Patton (1970)
Yet More QE3 on the Way
Markets are slightly negative this morning with Europe off by about -1.5% while the US is down about -0.5%. All eyes and all thoughts today will be focused on what the Fed will say at 2:15pm. For my part, I think the Fed will surprise to the upside in a big way. To be fair, this does not at all seem like the market consensus, but I think the elephant in the room for the Bernank is US Treasury issuance.
Specifically, during the period of QE2, the Fed purchased roughly half of all the new US Treasury issuance. This was critical to keeping rates low and confidence relatively high in the primary market. Going forward, the US Treasury will be borrowing on average between $200-300bn per month as we finance our enormous 2011 fiscal deficit and roll previously issued Treasuries that mature. What sense would it make for the Fed to peg the short-end to 2013 and enact Operation Twist to compress the 10yr Treasury yield another 25bps only to see a weak Treasury auction blow yields out by an equivalent or even higher amount?
After 3 years of QE, is the Bernank really willing to risk rising rates simply because he didn’t print enough? For a man who has publicly advocated dropping buckets of money out of helicopters, I doubt it. That’s why I think today’s announcement from the Fed will have a shock and awe component of between $500bn - $1tr of asset purchases. They may buy corporate CP, Treasuries, mortgages and maybe even European debt while they’re at it. Politicians, the inflation-istas and gold and silver will all go nuts, but it’s hard for me to imagine that one Ben S. Bernanke will go gently into that good night. He has one tool at his disposal that no other central banker on the planet has, a currency printer with unlimited ink. And you can bet your kids college money he’s going to use it.
The Next Salvo in the Global Currency Wars
Which brings me to a theme that has become more pronounced in the financial press over the last few months, the ongoing Global Currency Wars. In fact, Jim Rickards has written a book on the theme that comes out this November. I’ve already pre-ordered my copy. No matter what the Fed ultimately does today, the medium and long-term options for the Bernank are limited in the extreme. We’ve got $15tr in on-balance sheet debt, another $6tr in GSE debt we simply ignore and somewhere north of $50tr in NPV of entitlements. For those keeping score at home, this is a mountain of debt we will NEVER pay off. Ever. No way.
Of course, we won’t actually default on this debt in the honorable way by simply acknowledging we can’t pay it, default, restructure and move on. No. We will default the good, ol’ fashioned central banker way - we will print our way to oblivion. The powers that be in DC and NY can’t see things any other way. We’ve got the printing press, ergo we use it. Inflation you whine? Confidence in the USD you cry? Such worries are for pansies. We are the world’s super power, have the biggest, most lethal military on the planet by a large factor and have basically been able to engineer the world’s economy post-Bretton Woods in a decidedly pro-USD way. With that kind of hubris and over 65 years of success with chants of “USA, USA” echoing in the background, you know the false flag-wavers that run our country will take the easy way out for the simple reason that they can.
So the Fed will keep printing because they can and because they really have no choice. The rest of the world’s central banks are acutely aware of this and they are scared. As they should be. Because this means that in the fullness of time, the USD will go down and their currency - EUR, CHF, JPY, GBP, AUD, BRL, (insert fiat currency here) - will rise. Which in turn means their exports will get more expensive, pressuring revenues, margins and economies in general. Their reaction is predictable, they print their own currencies in a valiant, yet ultimately vain, effort to weaken. The Swiss and Brazil central banks’ recent moves are indicative of the actions other central banks will soon have to replicate. But no matter what other central banks do – cut rates, peg currencies, monetize debt, etc – they will ultimately be trumped by the Printer-in-Chief, Chairman Bernanke. Only precious metals will escape this imbalance accumulation led madness.
The Missing Canteen
When I was much younger (and in better shape, thinner, etc), I served our country for 8 years in the US Marine Corps. I’ll never forget one event that happened during my 3-month stay in purgatory, otherwise known as Marine Corps Boot Camp. During boot camp in the Marines, you spend the first week basically getting processed into the system. You get lots of shots and a battery of medical tests done. You fill out mountains of paperwork and sign numerous documents. You also get all of your uniforms and most combat gear assigned. After this first week, you are transitioned from the drill instructors who have been “helping” you through this process to the drill instructors that will spend the next 12 weeks turning you into a freshly graduated Marine.
For those that don’t know much about the Marine Corps drill instructors, let me tell you, they are a tough bunch, big time. These are some of the meanest, toughest, most in-shape, disciplined men our country has to offer. They command respect because they earn it, believe me.
In any case, when my platoon was being transitioned over to our future drill instructors, those same nice gentlemen came in to our barracks and initiated an inspection to make sure that whatever gear we were supposed to have been issued, was issued. So the main drill instructor would call out an item like, “Hold up 2 pairs of camouflage trousers, do it now!” At which point, 3 other drill instructors would walk up and down the barracks inspecting each and every one of us to make sure we were holding up 2 pairs of camouflage trousers. At one point in the process, the call goes out for 2 canteens. Hold up 2 canteens, do it now!
Unfortunately, the guy next to me only had 1 canteen. It wasn’t his fault, the supply depot that gave us our canteens had simply run out of canteens when we were there. So they gave the guy a chit and told him to come back later. However, the simple fact was the guy only had 1 canteen. One of the drill instructors, who later turned out to be one of the toughest men I’ve ever met in my life, Sgt. Salazar, noticed that this guy was only holding up 1 canteen and proceeds to sprint down the length of the barracks and slide-stop to a position about 2 centimeters in front of the guy holding 1 canteen.
Sgt. Salazar is in his face barking at this guy like a pitbull about a whole litany of topics, most of which I have forgotten by now. However, the last thing he said was classic, “Recruit, you’ve got about 2 seconds to sh%$ me a canteen! Do it now!” Of course, this guy didn’t have another canteen and couldn’t produce one under any circumstance. However, to see this guy turn around and manically start digging through his sea bag praying to magically find a canteen in there, you knew for a fact that if it was physically possible for this guy to actually squat down and sh%$ out a canteen, he would gladly do it in a heartbeat!
All Glory is Fleeting
That was a long story (probably too long) to make the point that we have reached the point with Greece where it is no longer practical to pretend there is another canteen for them to find. There is not. The current Greek debt is dead money walking. Anyone with this debt on its’ balance sheet at par or anywhere close to par is fooling themselves, their investors and analysts who think their balance sheet has any semblance of reality in it. The discussion in Europe needs to be practical and needs to focus on how they are going to backstop their banks and the global financial system WHEN Greece defaults, not if. After all, the whole problem with Greece has never really been about Greece, it’s about the leverage the large banks have to Greek debt.
Blow up the debt, you blow up the banks. Blow up the banks, you blow up the $700tr derivatives market. Blow up the $700tr derivatives market and the world we’ve known since Bretton Woods changes forever. It’s the same thing that had Hank Paulson corralling senior members of Congress into a wood-paneled room telling them that if he doesn’t get TARP the world will end. He was wrong then and the fear-mongers in Europe are wrong now. Let the banks blow up, let the equity holders get wiped out and the debt holders take haircuts. Guess what? The sun will continue to rise. Sensible, solvent players will move in to pick up the pieces and the real business of healing a horribly broken economy can finally begin but not one second before we force real capitalism down the throats of the current crop of pseudo-capitalists running the world.
We’ve had a nice run as the world’s super power. Almost 66 years at the top of the world isn’t too shabby. And no matter what happens during the next few years that would see the US knocked off its perch as sole super power, we will still be an economically important, vital member of the global community. The sooner we acknowledge that the current economic system, that we in the US sit firmly on top of, is broken and needs massive, perhaps even painful fixing, the sooner we can get back to being a great country. In the meantime, the Bernank will tell you how he plans on extending the bad system at 2:15pm. Enjoy.
* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).
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