I wonder, I wonder

New York
Sept 22/23, 2206

So, today has been one hell of a frustrating day. I guess it
takes the special trader that I am to come in short, make
profits on the night session, then give 'em up, make 'em
up again, and then lose out all profits of the past two days. 

I got a bunch of emails in response to my missive a few
days ago. So here are a few things (in no particular order)
for your own clarification.

* This Quantitative Easing 2 animal is very misunderstood
by the talking heads at CNBC, politicians on the street, and
even many economists. So here's the true real deal of reserve
bank accounting :

When the Federal Reserve intervened for QE2 they did NOT
alter the economy in any meaningful way. QE2 is simply a
swap of assets and it did not decrease or increase net
financial assets in the economy. The Fed is NOT printing
money (as many politicians and people on CNBC would like
you to  believe), the amount of cash in circulation just stays
where it is. What QE2 did do is change the composition of
the balance sheets of banks by having them hold more
reserves with the Fed.

Before QE (Quantitative Easing) at Bank Fido

    Reserves    100       
    Loans        +30
    T-Bonds    +50 = 180

    Deposits    100
    Capital    20

After QE (Quantitative Easing) at Bank Fido

    Reserves    150       
    Loans        +30
    T-Bonds    +0      = 180

    Deposits    100
    Capital    20

So the bank gave the Federal Reserve the T-Bonds and the Fed
changed a bunch of reserve numbers on some electronic tape
someplace. All that has changed is the composition of the balance
sheet of the bank.

So, there is no new injection of money into the public. So banks
do NOT have "new money" to put to work.

* Recent Fed action in a way showed the world at large that the
Fed cannot save the economy by some magical printing press,
which they don't do in the first place. All that the Fed has continued
to do is to alter psychology of market participants. I say "misguided"
policy because the interactions have tried to create nominal
wealth with a hope of creating real wealth. It won't work because
in the long run it destabilizes things.

* Just finished reading a FANTASTIC book called "The Holy Grail of
Economics - Lessons from Japan's Great Recession" by Richard Koo.
Absolutely great!!

So drawing on that new knowledge and thinking about what's
happening here, we're in the midst of Japan 2.0 -- As a country,
the United States now has similar  Employment/Population ratio,
lousy wages, an overburdened entitlement system, and an anemic
economy with the icing being the staggering debt overhang.
FOLKS!!! Deleveraging of debt has not really started here, and
businesses will get a lot more defensive. PLEASE DON'T listen to
the talking heads on CNBC or read mainstream media and believe
that the shape of the yield curve matters now -- it did matter before
but it does not matter now as the Fed is playing around with it.

* Politicians clamoring and blaming "short term", "high-frequency",
or "short  side" traders is nothing more than a blatant ignorance of
market dynamics, and especially market microstructure. Banning
short sales or getting rid of short term traders is very similar to
wanting 70 degree weather all year around, regardless of the
place where you reside. Not possible! This is a long lengthy
conversation to be had over several bottles of wine.

* With respect to Campaign Finance Reform, here's a thought….all
candidates use the same amount of money, and a set timeline to go
out and campaign and make their case. Money raising should not be
a factor in getting elected. At the least, it will attenuate the noise of
lobbying groups that always seem to say, "I pat your back now, and
you pat mine later!"

* I'm wondering why nobody from the financial sector has had to go
to prison in the whole mortgage fiasco. Not one! Would it be that
somebody going to prison would open up a Pandora's box where
relationships with the political bodies at large are revealed!?

I wonder…I wonder….

- aLV