August 07, 2009

There's a Sign Post Up Ahead

In some ways it just doesn't matter why the Dow Jones and S&P are climbing: they are. Various Baroque theories are advanced to explain the improvement. For example, a lot of the trading is actually the result of Wall Street banking institutions playing games in the equity markets with essentially free cash from the Federal Reserve. This one makes particularly good sense. The Wall Street-Washington Axis is now one of the more seamless connections in world finance. It's all manipulation, all the time. One must titter a little at those who are terribly concerned that Obama is a "Socialist." (Even stranger are the claims that he's a Fascist; huh?) Where were such critics when George W. Bush and Paulson held a gun to Congress's head and said, give us the $700 billion or we blow this place up? From TARP to TALF to giving Goldman Sachs a library card as a "bank holding company" so it could have free cash from the Federal Reserve's discount window, the federal government has essentially taken over the financial sector completely. Add that control to its ownership of the military-industrial complex, and what's really left that you would call "private?" Why is what has happened under Obama any different at all from the policies of his predecessor? Okay, aside from the fact that Obama is partly African-American?

My own current obsession is an attempt to understand the Treasury-Fed Reserve-Wall Street shell game. It's fascinating. Is Bernanke conducting business as usual, or is something really funky going on? You have to read around to get any feel for this area. For example, when approaching the latest stats on unemployment from the Bureau of Labor Statistics, you might notice first that Rod Serling, for some reason, is standing on the right hand shoulder of the road. Smoking, of course. "Consider Wally Swimmer, just an average blogger going about his day like any other. Driving down a quiet road, he sees a sign - 'BLS Ahead.' The next stop: The Twilight Zone." (Cut to creepy horn fanfare.)

We lost another 250,000 or so jobs last month, as computed by the Bureau, but the unemployment rate dropped a tenth of a point or so. How can that be? you wonder. Well, hell -- you have to understand "seasonal adjustment" where people get hired this time of year in the auto industry (although they don't get actually get hired, of course), and stuff like "nonfarm payrolls," et cetera and -- just stop asking so many questions. The unemployment rate is better, ok? That's the important thing. The market goes up again. Because of the job numbers? Not really. The pros will tell you all of that has already been "priced in." The market's going up because the market's going up, and if you had invested about a million in the Dow Jones Index in May, maybe you would have made about $350,000 or so by now.

But nah - you're addicted to "conspiracy theories" about Wall Street. Look, just because the Big Boyz are down below with a hand crank and that's what is making the escalator rise doesn't mean you won't ride up with them if you get on board. See? So tell me - why isn't Obama an unqualified financial success? The Dow is going up, isn't it? What happened to all that talk of an "Obama Recession?" Remember? The First Dude was being blamed for absolutely everything before he had a chance to unpack his good suit.

Confusing, isn't it? Infuriating, frustrating? Welcome to The Twilight Zone. What the hell is the Treasury/Fed (Tred?) doing? Paul Craig Roberts, the former Treasury official in the Reagan Admin, has been busting the U.S. pretty good for quite a while about its deficits. His idea: there just isn't enough loose cash in the world to buy up $2 trillion in deficits. So what's the answer? Are Ben Bernanke (BB) and Tim Geithner (Eraserhead) monetizing the deficit? That's another word for printing money and calling it....well, money. (Great line from Danny DeVito in some movie: "Money's really important. That's why they call it money.") The truth is, there have been a couple of dodgy Treasury auctions lately that were almost cancelled for lack of interest. So at a very recent auction, the participating banks (member banks of the Federal Reserve which are required by the terms of their charter to participate in such auctions - the "PBs") bought a bunch of Treasuries of various terms, held them about a week - and then the Fed Reserve stepped in and bought them right back. The same Treasuries, down to the identifying CUSIP number (see? I've been doing a lot of reading for you). Does that make you wonder whether a deal was set up beforehand so it would look, you know, like the auction was real and there were actual banks interested in buying Treasuries, instead of the Fed (the Treasury's bank) bidding on Treasuries auctioned by the Treasury? It made some people wonder that very thing.

Was that a case of the snake eating its own tail? Does this indicate that the famous Chinese, Bank to the Americas, were losing interest in this low quality scrip that pays virtually no interest? I ask questions - you decide. BB (no doubt with Eraserhead's concurrence) announced just now that the Fed would cease its purchases of Treasuries in September, no doubt to mollify our Dragon-Country Bankers who are wondering about the bona fides of this cannibalistic financing we're doing. You know, they're doing what I'm doing - not reading the New York Times, but behind-the-scenes stuff to try to figure out just what the hell we think we're doing. I mean, isn't this a shell game? If we're financing our own debt by printing money and using it to buy our own Treasuries, isn't something a little shaky going on? Wouldn't that dilute the hell out of the dollar, and is that related to the dollar slump?

Well, maybe not. The Fed always buys Treasuries - it's one of the ways it stabilizes interest rates and maintains a market. Yeah, but the way it gets the money these days is by, is by...

Sorry, it's only a half hour show. Tune in next week when Wally Swimmer sees a carousel and realizes for some reason not only is everything black and white, it's 1955.

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