Join The Trading Room

Fed Is the Banking System’s Colostomy Bag

By Rick Ackerman Posted on January 7, 2013, 12:01 am EST Last Updated January 10, 2013, 1:45 am EST

Dow 20,000?  We seriously doubt it, although our good friend James Tolard explained why he thought it could happen in a guest commentary here last week. What were his reasons?  Okay, you’re having a little trouble remembering why he was so bullish. So are we. His arguments didn’t quite stick to our ribs. You may recall there was a lumber chart that accompanied the essay. What was that all about?  Well, Jim mentioned that rising lumber prices imply that the uptick in the housing sector is no fluke.  Our take is that the uptick is pretty feeble considering how many trillions of dollars the Fed has shot at the singular objective of inflating home prices. We think the housing mini-boom will end by mid-year, followed by a resumption of real estate deflation that eventually will reduce values to 30% of the peak valuations achieved in 2007.

Jim also mentioned that big companies can borrow for practically nothing. While that may sound like a good thing, the bad news is that they have found little productive use for all of that cheap money.  Actually, the best reason they’ve been able to come up with for borrowing it is that they can.  Some companies are doing it even though they hold surplus cash of $10 billion or more. And why not?  It never hurts to have as much cash on hand as possible for that rainy day, right?  Our take is that the rainy day is not going to be quite what corporate treasurers are expecting.  While they are looking ahead to the next recession, we see a financial cataclysm taking shape that will turn U.S. corporations’ supposed $2 trillion surplus into digital fumes overnight.

A Nutty Idea

After all, It’s not as though the firms have stored this unused, and currently unusable, sum in gold and silver coins and ingots.  In fact, most of it is parked in assets directly tied to the financial system’s quadrillion dollar, Rube Goldberg derivatives-machine.  Ultimately, we see the banks themselves, supposedly flush with reserves, as being in the same boat as cash-glutted corporations.  The popular wisdom holds that the banks are in great shape because they’ve offloaded all of their bad paper onto the Federal Reserve.  This transparently nutty idea is one of the great delusions of this era. The truth is, the Fed is a financial colostomy bag that no one has figured out how to empty.  Our guess is that it is bound to burst with the Dow Average well short of 20,000.

***

[Click here for a free trial subscription to Rick’s Picks that includes access to a 24/7 chat room and timely trading touts.]

  • CRLaRue January 10, 2013, 6:18 am

    I have provided this narrative to a number of folks
    and receive nearly unanimous condemnation of the Federal Reserve. This information unfortunately did not alter their voting habits! Stockholm syndrome?

  • gary leibowitz January 9, 2013, 11:09 pm

    I do not think the term limit on a president will ever make it to the floor for a vote. As for the Federal Reserve the article was a fairly concise representation of how it works. Do we need it set up this way as a last resort? While the jury is still out on the long term prospects, the “last resort” measure that took hold 4 years ago has worked so far. Some will argue that the future cost is too high, but given the collossal greed and world blunder, I would be hard pressed to allow the “free market” to accept the consequences. The reserve was set up this way to entice borrowing at a time when the will to take risks halted. The notion on this board seems to be one of penance. Even with this free 6 percent return and receiving interest on the money created out of thin air, the lending facilities fell to a trickle right after the crash.

    As for fairness, or playing by citizens rules, I must agree this is an outrage. If one was to play fair than all the perks set up for very wealthy and powerful institutions should also go. Corp. subsidies, low or no taxes on hedge funds, low tax rates on stocks, death tax revisions, millionares using existing loop-holes to drive average tax rate in the teens, all disproportionately favor the wealthy.

    If the above was not so how can you explain away the huge disparity between rich and poor, and the 4 fold increase in profits over the last 10 years by the top tier? I have not found one plausible argument to dispute these facts. I have found many arguments that run tangent, such as governments shouldn’t be in the welfare program. Government spending and bloated bureaucracy is way out of control. Taxes are already too high on businesses along with extra costs imposed by this government for forced social welfare.

    While you lynch the black man (todays’ illegal immigrants) for taking away your jobs, and blame governments for squandering your hard earned money on ill advised and mismanaged programs and rules, the real culprit has always been the powerful and wealthy. To suggest they give up their money grab freely is truly naive.

    The irony in all this is that had the corrupt government politicians only catered to the top tier these many decades there would be no arguments today on wasteful government. We would already be in a two caste system where only one would be free to voice an opinion. Once again I haven’t heard any arguments to the contrary regarding who benefited the most in the last decade, and where we would be if the “fair” use of government spending was enacted decades ago.

    The really sad disclaimer I must make is that I agree the “policies” and “manipulation by this government” only forestalls the inevitable. There I uesd the word manipulation once again. My contention has always been that governments are much smarted that most on figuring out how to stay in office and push the hard choices forward. Another sad admission is that I am coming closer to the conclusions most on this site have pronounced years ago. The time of reckoning is near. Should be seen this year if my guesstimate is correct.

    • Buster January 10, 2013, 2:23 am

      I must agree with much of your thinking here. The concentration of wealth is the instinctive objective of those who have control. The objection of those higher earners among us who don’t want to see their taxes rise is based on the misunderstanding of themselves being the culprits of this concentration. The genuine entrepreneurs & more successful in society aren’t the super rich who have really screwed the system for their own sick minded privileged & status over all others. Once again divide & rule is being used to set the sheeple at odds with each-other instead of focus on the real criminals.
      Further, since it is government failure in it’s responsibility to uphold just law & giving away the power to issue money to corrupt private interests, which has thereby created the growing number of dependents needing welfare as a consequence, the provision of that welfare is in line with it’s failure. The only failure of responsibility falling where it is due is that government then demands payment for that welfare/it’s failure from everybody else rather than those who have set the system up & continue to screw society over & increasingly on a massive scale.

  • Rich January 8, 2013, 6:47 pm

    http://www.govtrack.us/congress/bills/113/hjres15

  • Rich January 8, 2013, 6:47 pm

    Posting this again re private nominee Fed ownership with 6% dividends after expenses:

    http://www.globalresearch.ca/who-owns-the-federal-reserve/10489

    &&&&&

    Excellent source of little-understood facts, thanks. RA

  • Marc Authier January 8, 2013, 6:46 pm

    Nice metaphors. And the American taxpayers and citizens are the ultimate anuses. Well, we are talking methaphorically indeed. It’s the scientific term. Ordinary Americans are the laughing stock in this epic drama.

  • Constman January 8, 2013, 6:46 pm

    As someone who purchases lumber products almost daily let me explain the uptick in prices. Lumber prices are up sharply over the past six to eight months. The reason is an uptick in the amount of construction relative to the past few years. What happened is when housing and then commercial construction CRASHED lumber prices dropped like a rock. As prices dropped the mills were selling materials at a loss, thusly they began to shut down production. It costs thousands of dollars to shut down production and thousands to bring production back on line. The recent uptick has finally given the mills some pricing power, but they are not about to bring production back on line unless there is sustained growth (which I doubt).
    The same is true for contractors. After slogging along and taking projects for “break-even” or less for quite some time there is finally some pricing power for us as well. That is due to less competition. There are a number of companies that just could not survive.
    My company has gone from an office staff of 15 and field crews of more than 100 to an office staff of FOUR (two full time) and field crews of 20 max.
    The interesting thing is even if I was able to sign enough work to put 100 carpenters back to work I could not find them. In 2008/2009 we would receive calls daily for carpenters looking for work…. No more. They have “left the work force” moved South or East or both.
    Frankly, I like it this way and intend to keep my business in the 3.5-5 million per year range. I am very picky about the jobs/projects I bid (I am my own estimator and project manager) and the owners/General Contractors I work with.
    I just don’t see the “Real” economy picking up soon. I can make a living and provide jobs for a few people and continue to weave my way thru the morass of laws, regulations, taxes etc….. Right now there is really no incentive to try to grow my business. The way things are you either need to stay small or somehow leap to doing ten times to volume without losing your shirt.

  • DK January 8, 2013, 6:42 pm

    H.J. Res 15 Bill.
    ‘Nuff said.

    We welcomed in the New Year last year with NDAA, now this?
    When I mentioned this a few weeks back, I was being sarcastic. This isn’t funny.

  • Wayne Siggard January 8, 2013, 6:40 pm

    Most of the houses being bought in Phoenix are from investors, a lot from Canada. It costs about the same to buy as to rent, if you can get a loan. But supply and demand works both ways. We are starting to see rental houses that have had “for rent” signs out for more than 6 months. When there are more houses for rent than there are renters, the rents go down to fill the house.
    If house that was 120 now goes for 160 and the rent goes from 1000 to 600, and the fixed costs (taxes, gardening, maintenance, mortgage payments) are 300,the return goes negative. If the house was bought by cash, the net return goes from 700 to 300, or a reduction in return of over 50%; and that is IF you have no down time where the house is unrented.
    If Freddie and Fannie continue selling big blocks of houses to investor groups with a restriction against selling for a period of years, the rental pool will accelerate at an unsustainable rate. If they fill the houses by lowering the rate, the incentive to buy will dissipate.

  • PhotoRadarScam January 8, 2013, 6:39 pm

    “followed by a resumption of real estate deflation that eventually will reduce prices to 30% of the peak valuations achieved in 2007.”
    Why 30%? That sounds like a pretty random number when the reality is that the price reduction will vary by location. Housing is different than most assets because it is an income producing asset for an investor. As we’ve seen in Phoenix, price drops stop around the level where investors can buy properties and cash flow them for 10-15% from day 1. If prices get lower than that, investor demand spikes and drives prices back up.

    • Rick January 8, 2013, 6:41 pm

      ‘Pretty random number’? Perhaps to someone who reads my commentaries only closely enough to disagree with me gratuitously, as you seem to enjoy doing.

      Why fall to 30%? Because my original prediction — repeated here dozens of times over the past decade, and well before that in think-pieces I wrote for various publications — is that home prices would fall 70% ON AVERAGE. I’ve also predicted that the collapse will hit vacation properties much harder, with your basic $15 million Aspen ski chalet eventually changing hands for back taxes once squatters burning furniture in the living room to keep warm have been evicted. I also wrote here, more than once, that $10M West Side co-ops would ultimately sell for $250k. However, I now think that crazed Russian bidders who keep ingots and tens of millions of cash dollars in shopping bags in their closets could delay that day.

      Concerning housing being a “different” kind of asset, it will produce income only if occupied by tenants who are gainfully employed. Although the investment money pouring into foreclosed homes these days may seem like the sure thing to you, I think it will prove to have been rashly speculative once the Second Great Depression gets rolling.

  • John Jay January 8, 2013, 6:39 pm

    Nice analogy Rick!
    You can add the $1 trillion in Student Loan debt that is already being set up for a back door bailout by Uncle Sam.
    New, lower payments for all, and after 20 years, the balance is forgiven! And I heard some young guy at the gym telling his pals how he does not care how much he has to borrow to go to college, because Uncle Sam will just forgive it all anyway. The “Obamaphone” mentality on steroids and acid. It now pervades our economy and the psyche of all Americans.

    I heard a girl at the gym saying her house had gone from 600k at the peak to 150k at the bottom, and now it was back up to 300k.
    Sounds like plenty of evidence for an unstable financial system to this old timer.
    And the Fiat Currency begat a Fiat Economy and a Fiat Society.
    And the Fed saw that it was good!

    To cheer us all up, here is a link to a fringe website where I found this little quote that they allege is from George Bush the First. I don’t know if it is true, but it sure sounds like what the elite 400 families think of us.
    Link: http://tinyurl.com/bje8msd

    “The American People, The BUD People, The Broke Useless and Depressed. We are the MPBs, Money, Power and Brains. As long as we keep food on the BUDSTERS tables, a roof over their heads, a car in their driveway and gas in their gas tanks to go to and from work. We can keep the BUDSTERS at bay.–President George H. W. Bush”

    I see there has been a change.
    They used to call themselves the “Beautiful People” and we were the “Nasties”
    Now we are the “BUD” people, and they are the “MPBs”.
    Duly noted!
    Thanks George!

  • Cam Fitzgerald January 8, 2013, 6:38 pm

    The Fed will own everything??

    You mean to imply that it could make an apt analogy for a Dark Star that sucks in all the stray energy within its galactic universe before finally issuing all its pent-up energy in the massive bursting that we know as a Supernova?

    And so I might therefore contribute todays missing image from the article above. It is an artists rendering of this Supernova of epic proportions which was witnessed here on earth in the 11th century.

    Supernova SN 1054 was a monster. It was only recorded in detail in the ancient cultures of Japan and China of the day. It is most interesting because it was witnessed live on the 4th of July, 1054.

    Yes friends….the Fourth of July.

    Coincidence you say? I don’t think so………

    http://www.google.com/imgres?imgurl=http://starcraftscience.com/wp-content/uploads/2010/09/supernova_3.jpg&imgrefurl=http://starcraftscience.com/2010/09/13/what-is-a-supernova/&usg=__Px43S0aJZVug_ZlG0aY_9dGD-Zo=&h=1200&w=1600&sz=291&hl=en&start=1&zoom=1&tbnid=y569LhMYDFpo8M:&tbnh=113&tbnw=150&ei=i7XqUIaSO4qFhQfR2YHIBw&prev=/search%3Fq%3Dimage%2Bof%2Bsupernova%26hl%3Den%26sa%3DX%26tbo%3Dd%26rls%3Dcom.microsoft:en-us:IE-Address%26rlz%3D1I7LENN%26tbm%3Disch&itbs=1

    Supernova 1054 from Wiki
    http://en.wikipedia.org/wiki/SN_1054

    &&&&&&

    And, to add a relevant detail: as the late C.V. Myers use to point out, the Fed itself is not “owned,” at least not by equity shareholders. RA

  • Buster January 8, 2013, 6:37 pm

    As important a question as what rate of interest is being paid to the schemers of the scam is, it being the rate of transfer of money to them for doing a job that the government once did for nothing, ie printing a nations money as in the US case of Colonial Scrip, the ability to hoard money & starve the economy of the lifeblood of commerce is the real reason why the power to issue a nations money cannot be held by any group for their own benefit over that of others in a society. The Fed is just the latest in a long line of privately controlled central banks created for their own interests. They come & the go but still we have these problems of money due to man’s nature & governments failure to keep just law for all. Limiting power by decentralization, though the obvious solution, also leads to invasion by a centralized regime from another land that has been willing to worship the beast.
    The wisdom of the age is not just realizing the problems which we have been blinded to by these vested interests, it is also perhaps realizing that there is no solution within us, since all attempts have failed throughout history. The US Constitution was perhaps the best attempt since King David, who’s own successful rule through just government with the consequent peace & prosperity, naturally ended with his death.

  • Buster January 8, 2013, 6:36 pm

    Brian Hemeryck January 4, 2013 at 5:15 pm wrote:
    “Can someone explain to me how QE works? I understand that the Fed buys treasuries by crediting the accounts of the banks they are buying them from (thus creating a payable) or do they pay with Cash. How does this filter down to the general populace.”

    OK. I’ll try.

    There’s little Joe, Buster, Gary & Damien playing a game called Monopoly, with Damien’s brother Stan acting as the Banker. Joe’s OK but not too bright, Buster’s a bit of a moaner, Gary seems like a smart enough lad, Damien is a real cool dude & Stan is very calculating & mysterious. While Joe, Buster & Gary were out playing marbles, Damien & Stan decided that the rules of this Monopoly game were wrong, & so they changed them….. just a little. Instead of collecting $200 when you pass ‘Go’ you must instead now pay $200 to Stan, the banker. However, this apparent drawback is made up for in now also being able to borrow money from Stan, the banker, at interest. This seemed like a good enough idea to Gary, who figured he could still win the game, Joe didn’t really care much either way as he had lost his marbles & just wanted to play any game going, while Buster just did what he always did, find fault & moan about the rule changes.
    The game started off OK as all go around the board buying up places they like the look of with the money each started out with going to & fro between them when landing on each-other’s properties.
    But as the game progresses everyone starts to find that they haven’t got the $200 to pay Stan the Banker when passing go apart from Damien, who has borrowed lots of money from Stan & is managing to keep paying as Joe, Buster & Gary land on the numerous properties he bought with the extra money he got in loans. Gary, being quite smart, has been watching how Damien’s been playing & starts copying him, Joe’s scratching his head trying to figure out how to pay his bills & Buster keeps saying something about the rules being in violation of the original ones.
    Gary’s copying of Damien seems to be paying off as he looks to be gaining too now, but Joe is really struggling badly. He has had to sell most of his properties & is down to his last one when he suddenly ‘get’s it’, & in a flash of inspiration he decides to copy both Gary & Damien & borrow money from Stan the banker to pay all the fines & charges he has incurred going round & round in circles. Buster is really kicking off now for some reason, saying something about the end of the game & that this was his final warning, but Joe’s having none of it. Damien & Stan tell him that everything will be OK if he just embraces the game & Gary doesn’t disagree with either of them as he’s doing pretty well embracing it himself. So embrace the game Joe certainly does & the game continues on, with Buster’s complaining drowned out by the excited chatter of self congratulation of the others for being right. The game is surely going to go on indefinitely so long as everyone simply embraces the concept that Damien & Stan the Banker had envisioned in their rule changes.

    But gradually the Monopoly money seems to be getting short again as interest payments & bills seem to be harder to pay as oddly there seems to be less & less money on the table. However, it is then discovered that this problem can be easily fixed if one of the boys simply borrows some more money to pay his bills & interest, thus allowing the game to proceed unhindered apart from further self congratulation due to this new found understanding & wisdom of how to play the game. Joe was particularly impressed at how Damien’s & Stan’s rules were allowing him to stay in the game despite a few close calls, when suddenly, & most unexpectedly, the sound of chatter is replaced by overacted gasps of shock from Damien, as Stan declares that he can’t lend out any more money as he’s run out. This is a real shock to everyone apart from Buster who is typically kicking off. Joe & Gary look to Damien & ask him what he thinks, & Damien looks at Stan & says they need to come up with a solution or the game will be over for everyone, particularly himself as he is owed loads of money by the others. So Stan declares that this is most unexpected & that in this special circumstance there is only one thing to do. He then proceeds to open up a draw with a label on the front entitled ‘In Unexpected Circumstances, Open Me’, which incredibly contained a massive new supply of Monopoly money. Everyone was suitably impressed by this show of authority by Stan, apart from Buster who was by now banging his forehead on the table while muttering something about knowing what comes next. Stan says that in order to save the game he will pay all the debts owed by Joe, Buster, Gary & Damien to the Bank with the new money & proceeds to do so. To the relief of all the game continues but when Joe tries to buy one of his previously sold properties he is told that his debts are still on record as being owed, so he can’t borrow enough to buy them back. Damien steps in & buys them instead, with the odd one going to Gary, who seems to have got the hang of this great game. A few more rounds later & Joe is unbelievably out of the game entirely as he has no property & so no income & isn’t allowed to borrow any money either. What a loser he is! Damien & Stan, feeling sympathetic to poor Joe, tell him that if he goes & gets them some sodas they’ll let him continue playing the game rather than sit it out by himself. Quite a few sodas, sweets & other favours later, Joe wishes he hadn’t lost his marbles & could have stayed playing with them instead of this stupid game that seems to be dragging on for ages now. The only interesting thing is wondering who’ll be next out, Gary or Damien, as Buster’s already gone home in disgust, declaring that he’s never playing another game with Damien & Stan ever again. But inevitably there’s only one winner & Gary loses all his properties to Damien after a long & hard fight. Damien & Stan aren’t exactly happy bunnies themselves, however, as they’re both feeling sick from over doing it with the sodas & sweets, but at least they won the game, & that’s what matters most to them.
    So endeth the game.

    Many years later, all five of the kids went to work for a big company owned by a very hard but fair entrepreneur. Joe was fortunate because this guy made allowances for his shortcomings & didn’t take advantage of him, Gary got to do a worthwhile job & never had to waste his time trying to outwit crooks, Buster found much to be positive about, whilst both Damien & Stan were put to work within a tight business structure that prevented them from screwing over others they worked with. Occasionally they would err, as old habits do die hard, but the Big Boss was really not someone to be messed with, & was even quite prepared to give the pair of them a bloody good hiding when necessary to make sure his company remained a positive place to work for all, including them. None of the others disagreed with this tough love as they well remembered how awful & drawn out the game of Monopoly was & what a ruthless pair of scoundrels they were.

    And so it was that they all lived happily ever after.

    There is a far more terrifying ‘18′ certificated version of the story which is particularly brutal & has no Big Boss to set the children straight & keep them in order, but this is a family show & I prefer happy endings.

    So, QE is simply a mechanism to prolong the current system & keep the existing rules in place. It doesn’t change much as far as Joe Public is concerned, as it was worked out by the Satanic schemers of our monetary system to benefit themselves & their own devils offspring, who keep the prison running & play out the dramatics every so often to fool the likes of Joe into acceptance of it.
    It may all sound like conspiracy theory to some, but this story is in fact the biggest case of corruption of the game of Monopoly ever disclosed, so there!

  • Mac January 8, 2013, 6:34 pm

    * well, more likely the Fed will own everything in America.
    The Fed prints and Lends the new money printed out of thin air, lends it for interest payments.
    The Fed has the military and puppets as heads of state all over the world.
    If the US can not pay then the Fed will take its Gold and whatever else it wants, too.
    The Banks work for the Fed, not the other way around.
    Have a bright day.


Exit From This Page Back to Trades