Thursday, September 19, 2013

Brain Damage - And, Uh, QE Is Working (I'll Explain)

The Fed has lost control of the markets and Wall Street economists, media analysts and most blog writers suffer from tragic and terminal mental disabilities.
First off, I'd like to say that I'm really quite amazed at the degree of "surprise" over the FOMC policy statement yesterday.  Anyone who understands the nature of QE and why it's being done knew back in May when Helicopter Ben first mumbled the word "taper" that the Fed wouldn't reduce QE.  Given the response reflected by the media and the fact that 100% of Wall Street's brain trust expected a $10-15 billion "taper," I'd say that every single Wall Street economist is brain damaged.  What he hell are they getting paid for when they get their forecasts so egregiously wrong every god damn week?  Seriously.

And now I'm seeing articles which are reporting that now the big debate is the timing of an eventual taper.  Einstein is credited with attributing insanity to the act of making the same mistake repetitively.  I guess Wall Street, and the media who regurgitates Wall Street's vomit, must not only be brain damaged, but they all must be insane as well.  Analyze this you brutes:   Ben Bernanke said - almost verbatim - that the Fed will reduce its stimulus policy when the unemployment is below 6.5%.  He specifically said that  "we are tied to the data, we don't have a fixed calendar schedule" and that a low interest rate policy will be in effect until unemployment goes below 6.5% The Fed is tied to the data not the calendar.  Bold, italics, underlined.  If you know how to use google you can find the exact quote from Bernanke's mouth.  If Wall Street's overpaid finest - and paid with taxpayer largesse, I might add - wants to figure out when the Fed will "taper," then they should spend their time figuring out what it will take to get unemployment below 6.5%.  Here's my call:  we won't see that number in our lifetime.

Now I'll explain for Zerohedge, CNBC, Fox Business, Bloomberg News and ALL the severely mentally challenged Wall Street analysts exactly why the Fed is printing money.   Follow the f#cking money.

The Fed is printing money in order to keep the banks - both the domestic too big to fails AND the foreign too big to fails - from failing.  That's the policy.  In fact, I believe that in the whirlwind of wealth transfer in 2008 - led by the Obama Government - that Congress may have even legislated into law the too big to fail idea.

If QE is about the economy and jobs, why is more than 50% of the money being printed going to - and sitting in - the Fed bank account held by the U.S. subsidiaries of foreign-owned banks?  Here's the money trail.   Since "QE" began, the Fed has printed up roughly $2.8 trillion dollars.  I've gone through this exercise in past posts, but here's the updated numbers.  Of that $2.8 trillion,  roughly $2.3 trillion is sitting in the banks' "excess reserve" account at the Fed.  Of that $2.3 trillion, $1.193 trillion has gone to U.S. banks charted in this country.  However, $1.225 trillion has gone to the foreign banks with operations in the U.S.  You can find these numbers in the Federal Reserve Board report on Assets and Liabilities in the United States, Table H.8 - here's the pdf for you:  LINK

I'm not sure I need to state the obvious here, but if QE is all about trying to stimulate an economic recovery, then how come 82% of everything the Fed has printed up is sitting in the "cash accounts" of the banks at the Fed?  The only explanation is that the Fed is engaging in this money printing in order to prevent the banks from collapsing.  There can be no other explanation.  None.  Not to throw salt on the wound but, as I've demonstrated ad nauseum in previous posts, the economy is not recovering.

And this is why I never believed that the Fed would "taper."  Especially after that interest rate spike in May.  I think the Fed actually wanted to extend a token taper, which it knew would have to be reversed, but could not even do a meaningless token amount after Helicopter Ben's mid-May faux pas caused the biggest interest rate spike in 50 years of data.

The fact that they can't even dish up a token taper really says a lot about how bad things are behind the scenes with bank balance sheets. The banks that have a big exposure to interest rate derivatives got crushed when the interest rates spiked up in May. That spike was the biggest spike in 50 years of data. What that means is that bank hedge models weren't even close to predicting that event AND the banks weren't even close to being properly hedged against this mega-multi-trillion dollar interest rate derivatives exposure. 

Think about Long Term Capital. Remember that abortion?  It was "outlier" black swan type market movements that sent LTCM to its grave. That's the kind of market movement we had in May with interest rates in the context of the kind of interest rate derivatives exposure that the banks have when there's an outlier move like that.  There is no other explanation and this is why the Fed kept injecting money into the system that went directly to the banks cash account at the Fed even after Bernanke mumbled something about it being time to pull back on QE.

Here's how it works:  the banks need that $2.3 trillion in cash to put up as collateral against their multi-trillion dollar market-to-market losses on their interest rate (and credit default) swaps.  That keeps them in the game longer and extends the amount of time they have for a divine miracle to come along and save them from completely incinerating from a big nuclear derivatives melt-down.   The fact that the Fed can't even pull back by a token amount tells us that the situation is still unstable and probably getting worse.  You could see that I'm right in the expressions on Bernanke's face and in his eyes when he was giving his post-FOMC press conference.  He's frightened and that's why he's leaving the Fed.

Any other analysis of this is nothing more than sound and fury, a tale told by an idiot.  Anyone who thinks that QE is about helping "main street" and the middle class is severely brain damaged. And, by the way, as long as the banks don't collapse, QE is indeed working.  It will probably take a collapse of the dollar for it to fail, but stay tuned on that one because if you pay close attention to what China is doing with the yuan and with gold, on a clear day you can see the dollar's cliff.


  1. Excellent and thought provoking commentary Dave... nobody else I have read has put the pieces together in such a coherent manner.. I really do think you may have hit the nail on the head here in pointing to the effect of interest rate derivatives on (or off, as the case may be) bank balance sheets. Understanding the root drivers.. the "why" things happen vs. what the MSM and/or the bankers and/or our leaders say is the path to enlightenment. Thanks for putting it out there Dave.

    1Kg Lunar Dragon.

  2. Your conclusions are difficult (impossible) to refute. It's obvious you've eschewed the market's "kool-aid". The only answer to this mess is a return to the gold standard. Fiat currencies must ultimately fail (and always do)because humans have no discipline and cannot control their greed.

    1. The only answer to this mess is to eliminate the Fed and let the U.S. regulate and print it's own currency instead of letting some private corporation do it.

  3. We no longer have a market that allows consequences, at least in the way it was previously. Although I can't argue with your analysis making this statement "Any other analysis of this no more than sound and fury, a tale told by an idiot." Is just the sort of narrow-minded "I am right and you are wrong" tale they continue to present as analysis.

    The quote "so right you end up being wrong" is what the lack of consequences produces.

    The header on your home page seems honest however you make statements regarding banks being insolvent for a short period of time but the real reason is that credit was simply shut-off to them. They were already insolvent and they have already failed. The only reason any of them exist is the QE, complete lack of enforcement of derivative exposure, fake P/L, to name but a few.. the list is endless. The die was cast when FASB sold out to the bank lobby and also what was presented as financial reform failed to address the root cause of all of this, leverage and lack of enforcement.

    Don't end up like Reggie Middleton who goes out of his way to congratulate himself on "seeing" that a tired man (Bernanke) just is not going to do anything overt to change the conditions of his exit. He wants out just like Greenspan did so that he can then come back and be the apologist for all these things he didn't seem to accept...but buy my book.

    1. We no longer have consequences....period.

      Dimon’s JPMorgan Broke Securities Laws, Pays $920 Million

      At Bank One I headed up capital markets risk management when Jamie Dimon was CEO. Today, the SEC filed Release No. 70458 today as JPMorgan Chase admitted it violated federal securities laws. Dimon is both the Chairman and CEO. JPMorgan agreed to pay a $920 million fine to resolve several probes into the $6.2 billion trading loss in its Chief Investment Office (CIO) unit based in London.

      The fine will satisfy claims by the Federal Reserve, the Securities and Exchange Commission (SEC), the U.S. Comptroller of the Currency (OCC), and the U.K. Financial Conduct Authority (FCA). The FCA’s share is $220 million. The Justice Department and the Commodity Futures Trading Commission (CFTC) are still pursuing the matter. The CFTC informed JPMorgan it will recommend enforcement action.

      In April 2012, senior management, defined by the SEC as “one or more of the following individuals who held the listed positions as of May 10, 2012: the JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor,” already knew the CIO unit used aggressive valuations that obscured $750 million in losses.

      There are ongoing questions about JPMorgan’s quarterly filings, in particular the filing for the first quarter of 2012, and JPMorgan’s corporate governance is also under fire.

      Earlier I stated that Jamie Dimon should resign. I’ll have more on this in my next post.

  4. Bravo, Dave. Goldman's call for a December taper is simply them talking their book to continue fleecing the Muppets.

    Almost always lost in all of the rhetoric is the reason the Fed was created in the first place... to be there to lend when no one else would. Why did anyone ever think that they wouldn't lend to the banks themselves?

    And at zero interest, no less.

    Gary North has been saying this for years, if Bernanke wanted this money to circulate all he had to do was charge 0.25% interest on the excess reserves and it would flow. He doesn't do that, so he obviously does not want that to happen.

    The next phase is when those $5.6 trillion in USTs get sold and replaced by someone else's bonds. Yields will continue to rise along with QE and the dollar price of gold.

  5. Fantastic piece of work Dave. Like you on on my Blog I called no Taper, as I stated in my own comments " Who is gonna buy our Paper " Watching all the Gold short callers going to one side of the trade I also posted to remind everyone that the trade is one sided DO NOT FOLLOW THE CROWD YOU WILL BE SLAUGHTERED " and slaughtered they we're. Again great writing Dave it went Viral.

    Be well


  6. > "He's frightened and that's why he's leaving the Fed."

    The FED Does Not Control the Federal Funds Rate

    Each Private company protects and serves the interests of its shareholders.
    Federal reserve is a private company and serves the tbtf banks who are its shareholders.

    Good luck to the next chairman after bernanke.

  7. It could also be an intentional plan that was laid out decades ago to bankrupt and enslave entire populations of naive human beings with a ton of people unknowledgably working towards that goal as stormtroopers and now are caught in a credibility trap of epic proportions. Studying dark and light creative and destructive energies helps to see through the manifestation of money as a controlling factor. Giddyup! Love your work Dave.

  8. Great article, Dave. Explaining that the taper is tied to data and not the calendar is something a lot of people are ignorant of. Zerohedge, CNBC, Fox Business, Bloomberg News and ALL the severely mentally challenged Wall Street analysts are there for entertainment-purposes only. They have to meet their quotas from their networks to do the shows and those shows have to produce the "goods" that advertizers and corporate heads want. If you tell the audience the truth, you run out of material to milk the shows from.

    Besides, the audience is having a great time. There's too much happiness in the world to be negative like the rest of us here (one of my relatives said this about myself when telling them about the economic crash coming so I couldn't resist saying this as this is the type of thinking going on in this country right now. However, they also hate everytime I mention the word "cyprus" as they have full trust in their pensions).

  9. I have been told that the reason for QE was to keep rates low so housing can improve, wealth effect, etc. The fed buys bonds, driving up price and driving down yields, which mortgage rates key off of. I won't argue that it has been worth it as there has been no real wealth effect on an economywide basis. But rates were pushed down even though the QE money is now largely on reserve at the fed, no? I keep arguing that QE has as much to do about bailing out banks to a coworker, and he says it's all about bailing out "the dirty homeowner who is underwater" by pushing down rates.

  10. Liberals now want Mr Obama to mint a $1 trillion platinum coin, providing all the spending room the government needs to finance the budget for the coming year.

    Sooooo......precious metals IS money. So much that it can be used to finance our government.

  11. One of your best pieces ever, Dave. Even I, one who is incapable of counting his balls and arriving at the same number twice, am finally starting to get it. If ever we cross paths, I'm gonna ask you to sign my left tittie like a rock 'n roll star.

    1. Thanks! LOL if you ever come to Denver I'd be more than delighted to do that!!!

  12. As far as I know, Bernanke is not leaving the Fed. He will step down as the Chairman but his term as a board member at the Fed will end in 2016 not 2014.

  13. To be honest, I was surprised. The Fed even didn't extend a token amount despite all the management of perception. If the Fed doesn't extend a token amount now, it will NEVER have the chance again. The federal deficit will expand again shortly. The Fed will have to expand the asset purchase.

  14. Going Postal
    The husband of US Senator Dianne Feinstein has been selling post offices to his friends, cheap.

    The Berkeley crowd is not acting alone: From the beaches of Santa Monica to the avenues of the Bronx to the orange farms of Nalcrest, Florida, people who like the US Mail are getting mad. "Hey, wait a minute, Mr. Postman! That is our community post office — "

    To which the federal flak-catchers reply: "The Internet is killing us. The Postal Service is broke. We have to sell. Get used to it."

    But email is not the problem and the budget deficit is easy enough to fix, so there must be other reasons for the forced sales, say save-the-post-office activists. The post office is being killed for political reasons, they assert, pointing out that the corporation with the exclusive contract to negotiate sales for the Postal Service's $85 billion real estate portfolio is C.B. Richard Ellis (CBRE). And that the company is chaired by Richard C. Blum, who is the husband of US Senator Dianne Feinstein and a member of the University of California Board of Regents. CBRE's connection to a politically powerful family with a history of accessing public pension funds to make private investments has caused more than a few activists to suspect wrongdoing — even though no evidence of any conflicts of interest tied to the CBRE contract have been revealed.

    Until now.

    My yearlong investigation has uncovered evidence of multiple conflicts of interest and problems with post office sales supervised by Blum's company, including:

    • CBRE appears to have repeatedly violated its contractual duty to sell postal properties at or above fair market values.

    • CBRE has sold valuable postal properties to developers at prices that appear to have been steeply discounted from fair market values, resulting in the loss of tens of millions of dollars in public revenue.

    • In a series of apparently non-arm's-length transactions, CBRE negotiated the sale of postal properties all around the country to its own clients and business partners, including to one of its corporate owners, Goldman Sachs Group.

    • CBRE has been paid commissions as high as 6 percent by the Postal Service for representing both the seller and the buyer in many of the negotiations, thereby raising serious questions as to whether CBRE was doing its best to obtain the highest price possible for the Postal Service.

    • Senator Feinstein has lobbied the Postmaster General on behalf of a redevelopment project in which her husband's company was involved.

    The Backstory

  15. as all await the next fed statement as to what they will do ...the liars and thieves in DC..rape ,plunder and loot for themselves and the same bunch on wall street get theirs before anyone else.....corporations bribe politicians as employee's take one for the gipper...or in most cases in the ass.....this will only end ..when we 5 million strong camp out on the DC mall and shut down the cesspool...or we can believe that by electing yet another more honest politician to replace the last one,things will change.....I put my faith in 5 million strong for a camp out......hell that's only 25% of the unemployed....

    1. Why the American Economy Is a House of Cards

      Put all this together and it is clear that while those at the top of our society are getting richer everyday, those at the bottom are actually getting poorer, both in relative and absolute terms, due to a severely lopsided allocation of gains and resources.

      The culture of gaming the system for personal gain, which lies behind this, is bound to be destructive since for someone to win, someone must lose. The perfect example of this was the subprime mortgage debacle, in which banks, ratings agencies, and debt packagers created a massive asset bubble in the housing market by lending to unsound borrowers and then packaging and selling those dubious loans on to others, all of which was wildly profitable for them but caused suffering for everyone else when the bubble burst...

      So is Wall Street or in a broader sense Corporate America to blame for our current scenario?

      There are two parts to the answer. The first involves the brazen exploitation of our economic system by our largest corporations. We need look no further than the energy market manipulation at JPMorgan Chase (despite Enron!), the rigged IPO of Facebook, the insider trading at Galleon, the questionable business practices of Walmart and McDonalds, the tax dodging by Apple, Starbucks, Google, and Microsoft, and the shocking indifference by American and European retailers to the safety of the workers who manufacture garments for them in Bangladesh, to recognize how morally bankrupt and reckless our economic system has become.

      It is not so much that these companies do not innovate or add value to our economy but that they add a fraction of the value that they should be adding because of corporate greed. Wall Street, in particular, has gone from being the financial engine of our economy to a money machine whose sole purpose is to feed itself. It is not hard to see how such trends adversely impact the nation.
      The second part to the answer involves the exploding influence of money in politics.

  16. As to ... "the whirlwind of wealth transfer in 2008 - led by the Obama Government - that Congress may have even legislated into law the too big to fail idea."

    If you want to blame the Obumma Government, then you need to change 2008 to 2009.

    If you stay with 2008, the only Obumma culprit is Senator Obumma.


  17. Funny, funny things you said at the bottom of the housing market:

    Dave in Denver said...To conclude, based on the spin-free data presented above, a bottom to the housing market is nowhere in sight. In fact, I would argue that housing prices have at least another 30-40% to fall from where they are now. July 26, 2009

    Every so often, I come across an old prediction like this and I just laugh and laugh and laugh!!!

  18. Brain damage....what a title...

    Buffett Calls Federal Reserve History’s Greatest Hedge Fund

    “The Fed is the greatest hedge fund in history,” Buffett told students yesterday at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said. “And that wasn’t the case a few years back.”

    The central bank has been buying $85 billion of bonds a month to help the U.S. recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S. Bernanke and other Fed policy makers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy.

    The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

    doesn't mention mtm....the worlds biggest ponzi....doublespeak by a master...underwater is the new pikes peak?

  19. We are in deep doo-doo, professionally speaking. How could the Fed possibly 'taper' - the real mandate for QE (both overt operations and covert) is two-fold. Save the banks as Dave pointed out, but also fill in the huge void at the U.S. debt auctions. Even if (I should say "when") the Fed prints enough monopoly money to stabilize the Banks balance sheets - it will and has done so at the cost of completing destroying any legitimate market there was for U.S. Treasuries. In other words, we are already 'over the cliff' financially, now it's just a matter of finding out how high the cliff is, and what our speed of descent is. We can't taper. Instead of letting the banks fail - which would have let the people flourish - the banks bailed themselves out by their own central bank - the Fed.