Posts Tagged ‘US Treasury’

Who am I to say that Ben Bernanke is wrong? After all, Bernanke went to Harvard and graduated with honors and his economics PHD from MIT. Then of course he has all of the political appointments and now is the Federal Reserve Chairman. There was someone else who had a list a mile long of credentials. In fact, he was the former Federal Reserve Chairman – Alan Greenspan. It is documented with a list a mile long of critical mistakes that were made in his part in blowing up one of the greatest debt bubbles of all time.

So, don’t let the credentials fool you. In short, Ben Bernanke wants to save the planet by purchasing billions of dollars of US Treasuries or said in another way, lend billions of dollars to the US to keep US debt a float. Buying a Us Treasury Bond is the equivalent of lending money to the United States. His logic? The Fed buys billions of dollars of US Treasuries, then mortgage rates will go down and interest rates on loans will do down further encouraging businesses and consumers to borrow and spend. This in turn might invigorate the economy and ease unemployment.

Let’s take a look at the main reason why this is a dangerous bet. I have many more. The problem is limited space.

Have you ever seen a kid blow a bubble as big as it will go? The child keeps blowing and blowing and the bubble gets bigger and bigger. The eyes of the child show the disbelief that the bubble hasn’t popped yet as more air is forced into the gum. Our bond market is one big juicy fruit bubble already. Let’s blow some more air into that bubble and see what happens.

By pouring billions of dollars into Tresuary bonds, prices of bonds (in theory) will continue to go up and interest rates fall. Common sense will tell you that prices of bonds are going up for no good reason. Thus they turn into the equivalent of worthless internet stocks that went up in price based on nothing material. This has the makings of a massive bubble. Riddle me this – what happens when that bubble bursts? Interest rates sky rocket. Isn’t that what he is trying to prevent in the first place?

There is also the notion that people are going to spend, spend, and spend because of low rates. If that were the case, people and companies would have already been doing it. Let’s face it, you need confidence to borrow money. I will just say two words why that isn’t going to happen – OBAMA ADMINISTRATION.

Further, how did that first round of 100’s of billions of dollars do for us? I don’t think that I need to answer that question.


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In the book Manias, Panics, and Crashes:  A History of Financial Crises, Charles Kindleberger writes about the various financial panics that have occurred throughout the world over time.  There is one consistency that exists amongst all of the examples written about in the book.  There was always a lender of last resort.  The lender of last resort is the country that steps in and saves the country in crisis.  We have been the lender of last resort and we have needed a lender of last resort before.


Well, guess who the lender of last resort is in this financial crisis?  We are the lender of last resort for ourselves.  Yes, the Federal Reserve made it clear in their announcement last week that they were going to make available another trillion dollars or so to save the system.  That is just another trillion dollars on top of an estimated $14 trillion already committed.  We don’t talk in billions anymore.  Trillion is new billion.    


If no one else will step in to save us, we will just print our way out of this mess.  Bernanke is running a huge Ponzi scheme.


The Fed has just assured us that this problem will get even bigger.  Never in the history of mankind has this type of self prescribed bail-out EVER worked. Washington talks as if the economy will bottom out sometime early next year and we are off to the road to recovery.  Just like that – POOF – and the financial crisis and all of its trillions of dollars left in its wake will be just that OK.


For this reason, it is going to be dangerous being a buy and hold investor.  Although I do think that we have a very strong bear market rally that we may have already started or is on the horizon.  The primary market is a bear market where buy and hold investors will just give back anything that they made during the bear market rally.


You have 3 choices over the next however many years that we face this mess.  First, you can just go along with the ride and buy and hold.  This strategy will put you in harms way every time an irresponsible decision is made in Washington.  Second, you can just go to safety by placing the majority of your investments in safe investments.  I think that strategy is better than the first.  Third, you can learn to identify risk and develop a game plan for when to invest and when to be safe. 


Of course, that is the purpose of understanding price levels (which is the focus of the Prudent Money Outlook).  Last week the market failed to make it above a crucial price level and is obviously very leery of the politician’s game plan to be the lender of last resort.  I believe that the market is leery when President Obama goes on the tonight show where he just jokes and laughs while people are losing their jobs and homes.  Of course, he also has those weekly cocktail parties (Wednesday night Happy Hour) at the White House every week.  It is nice to throw weekly parties while the rest of the country is hurting.  Have you ever stopped to think that we are paying for those Wednesday night cocktail parties?


This morning, the market is opening up very favorably to the latest bail-out attempt announced by the US Treasury.  It will be important to see how the market holds up from here.   


So here we find ourselves watching these price levels again.  We are trying to figure out the following question – Is this the start of a meaningful bear market rally or is it a break in the selling and we are about to decline down to the S&P 500 price level of 600? 


The price levels to watch are 741 and 800 to 825.  Any price level below 741 is extremely bearish and would suggest a decline down to 600 and anything above 800 to 825 would indicate that we are in a very strong bear market rally that could stick around for a while. 

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