The End of QE?

Michael Krieger was formerly a macro analyst at Bernstein Research (widely recognized as Wall Street's premier sell-side research firm) and currently runs his own fund, KAM LP.

He has come out with some thoughts on the US Federal Reserve's on going money printing and the ensuing current propaganda that is flooding the financial news waves.

Kreiger classifies US Federal Reserve Chairman Ben Bernanke as a misguided Keynesian witch doctor central planner who is attempting a grand experiment based on completely insane and nonsensical theories that have no chance at success.

He argues that Bernanke claims to have all sorts of “tools” but in reality he has nothing.

When faced with a complete credit collapse of proportions never seen before in recorded history there were and are only two “tools.” And those 'tools' are the two P’s: Printing and Propaganda.

And Kreiger laments the propaganda tool is in full vigor right now.

He reminds us of that which we alreday know: that the central planners believe the tail wags the dog.

To them, the economy doesn’t lead to higher stock prices but higher stock prices will lead to a better economy.

Insane?

Absolutely. But it is the religion of the central planners... 100%.

And Kreiger cautions that investors need to be aware that - when they are comparing the current state of affairs to what many lived through in the 1970’s - that the central planners have learned some lessons.

Central planners will never renege on their core philosophy which is that an elite academic and political class in their wisdom are better stewards than free humans interacting in a marketplace.

That said, most people do not share their worldview for obvious reasons (who wants their lives micromanaged) so the trick of the central planners is to micromanage your life while you think you are in charge.

As Goethe said “None are more hopelessly enslaved than those who falsely believe they are free.”

He didn’t just make up this clever quote, it is a tried a true method of the most successful control systems throughout history. 

Price controls were tried in the 1970’s and failed. We also know why. Therefore, the last thing the current group of central planners will want to do is announce price controls. That doesn’t mean they don’t attempt them anyway.

Bernanke has already publicly proclaimed he is attempting to inflate the stock market through direct intervention.  They have been rigging stocks in the United States consistently for the past two years and most people get this and accept it as a part of the current state of emergency economic action we are in.

Kreiger now argues we have now entered Phase 2 of that action. This was represented by the recent raid on commodities. 

• A tried and true strategy that the powers that be have used in precious metals for years has been to create such tremendous volatility in gold and silver and especially the shares that most investors stay away since they can’t stomach it. This strategy is now seemingly being employed to a much wider spectrum of commodities.  Unfortunately, this battle between finding a safe haven and the authorities’ desire to render it ‘unsafe’ is only in its earliest stages. Our manta since 2007 – governments can and will do anything to survive.

Kreiger asks you to put yourself in The Bernank’s shoes for a moment. This guy loves printing more than Hewlett Packard. He is despondent beyond belief that the markets and an increasing amount of financial commentators have criticized his precious QE insanity.

Meanwhile, the economic data is starting to roll over and housing looks set to launch into another spiral lower. So what is a Bernank to do? Bluff the heck out of the markets.

He knows that the only way he can have cover for his printing party is to smash commodities because the rise in commodities is the biggest point of contention amongst the masses.

• Unfortunately, most people don’t delve deep enough into how the system works to have the serious moral and philosophical issues with the central planning system as I and many others do. The Bernank knows this. Bread and circus is a tried and true method. Problems emerge when the bread runs out. So the period we are in right now is huge for the Bernank and his merry band of mental patients. They don’t have to make any decision on more printing until June when the current fiasco ends. It is during this window when they think they can have their cake and eat it too. They can print like mad yet at the same time claim they are about to stop and maybe even tighten. Yeah, and the Easter Bunny is sitting next to me trading LinkedIn shares.

Kreiger contends this is The Bernank Bluff and he is milking it for all it is worth while at the same time orchestrating raids on commodity futures.

Kreiger further contends that this is just a massive psychological game against the investors class to keep them from the assets that will actually provide protection.

• Well Bernank you’ve got a month left. Make the most of it because after that you need to act. I can’t wait to see you try to tighten as the economy rolls over.

The reality is QE 2 is not the end of the money printing.

But then... you knew that already, right?

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The Law of Unintended Consequences

A cautionary posting for you today.

If you plan on taking advantage of QE2 in the stock market, remember that history does not repeat... it does but follow similar patterns.

A subtle, but crucial distinction.

When it was first announced I expected much of QE1 to find it's way into all segments on the stock market. Which is why, back on March 12th, 2009 I said, "One thing is for certain, all this money printing is going to juice the economy in the short term like nothing any of us have seen in our lifetime. Look for commodities in the stock market to take off like a rocket."

The stock market has gained back 60% of what it lost in September 2008.

Back in late August 2010 the Federal Reserve announced QE lite and promised QE2. What has happened since then?

Essentially we are in an inflation trade melt-up.

Everything that is an inflation hedge has exploded since late August. Gold is up 15%. Silver is up 48% (courtesy of the manipulators finally getting taken to court). Agricultural commodities are up 25%. Oil is up 20%.

And stocks?

Stocks are only up 17%.

Right now money is flowing to commodities, especially precious metals and agricultural commodities, as well as emerging markets.

The Federal Reserve's continued goosing of equities is (by Mr. Bernanke's own admission) designed to spark a "virtuous cycle" in which a rising market lures investors in, further driving up prices, which creates new wealth which then triggers "the wealth effect:" people who see their 401K accounts swelling will open their wallets and spend, spend, spend.

But the folly of this approach is already getting push back as this Wall Street Journal Op-Ed by Kevin Warsh, Federal Reserve Board Governor and former member of the President's working group on capital markets.

• "But if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case—even with the unemployment rate still high—we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially."

Much of the rising values in the stock market have come as volume drops. It appears much of the 'gains' are coming solely on the back of Federal Reserve injections of POMO.

In 2010 individuals have withdrawn $92 Billion from mutual funds.

As I said on the weekend, the watchword for what lies ahead is volatility. We are going to see violent swings in all areas.

Be aware and beware.

History is governed by the Law of Unintended Consequences.

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No Limits

So we are now into QE2. Anyone else make a lot of money this week?

Today's post will be about Real Estate in Vancouver AND about the economy.

First the economy.

Do you remember QE1? I do.

Back on March 10th, 2009 I commented that I fully expected a lot of the QE1 stimulus would be misdirected and end up in the stock market.

On March 12th, 2009 I said, "One thing is for certain, all this money printing is going to juice the economy in the short term like nothing any of us have seen in our lifetime. Look for commodities in the stock market to take off like a rocket."

And on March 13th, 2009 I said, "This (the rise of both stocks and gold/silver/oil) insiders say points to a bottoming out of the worst Bear market since the Great Depression and the start of the predicted hyper-inflationary period. If they're right, buckle up folks, it means things are gonna take off like a rocket if that is the case. It's not the end of the recession or hard times in Canada, but the market is usually six to eight months ahead of the economy. My recommendation? Now's the time to play the market. Silver stocks like First Majestic, commodities like Tech Resources and oil stocks. But beware! A rapid blowing up of the market could lead to another rapid collapse. Study the 1930s! The market recovered almost 60% after the crash of 1929. All the stimulus that has been announced will find it's way into the market - mark my words."

I'm kinda proud of that.

Note I refered to entering a hyperinflationary period. I still believe that if we do enter one, that people will look back on the week of March 9th, 2009 as the Genesis point that instigated Hyperinflation.

As you can see QE1, for me, meant that the stock market was about to embark on an incedible run.

18 months later I don't think anyone would dispute that.

And the stocks I referred to?

On March 13th, 2009 First Majestic Silver Corp. (TSE:FR) was trading at $1.76. Yesterday it closed at $9.96.

On March 13th, 2009 Tech Resources Limited (TSE:TCK.B) was trading at $5.04. Yesterday it closed at $49.71.

As for Oil. It had dropped to about $30 a barrell. Now it is over $85. A Canadian Oil Income Trust like Provident Energy Trust was trading for $3.99 on March 13th, 2009 and yesterday closed at $8.00. More importantly it has been paying out a dividend of $0.06 per share each and every month since then (with the occasional double dividend).

Anyone who properly recognized the impact of QE1 back in March 2009 will be laughing today.

That's why I sit back and chuckle at all the R/E aficionado's who chortle at the R/E bears.

"Poor Bear," they say. "Wrong again," they intone about Real Estate in the Village on the Edge of the Rainforest in 2009/2010.

Ummm... I don't think so.

Yes... it is true that the high interest rates I have warned will decimate the Vancouver Real Estate bubble have failed to materialize... yet.

But the advice in Spring 2009 was to bail out of Real Estate and invest in Silver, Equities and Oil. If you were looking to enter the Real Estate market as a first time buyer, the advice was to take your downpayment and put it into the same markets instead.

A first time buyer, with a $30,000 downpayment (5%) on a $600,000 home, would be looking at about at 23% return on his R/E investment. Minus, of course, $3,000 a month in mortgage payments (the majority of which would go to interest, not principle).

If he turned around and sold the house today (if it sold) he would be looking at a profit of around $80,000. And that's if you bought in an area that did, in fact, rise about 23%. Most areas beyond the westside of the City of Vancouver have remained stagnant and have not risen at all.

So, at best, a profit of $80,000, after applicable fees. Big deal.

$30,000 invested in a commodities stock like Tech Resources would have given you a return of $266,000.

$30,000 invested in a silver mining fund like First Majestic would have given you a return of about $140,000. And if the lawsuit against JP Morgan I spoke of earlier this week pans out, the return on silver will dwarf Tech Resources.

Real Estate has been an extremely poor investment over the past year.

Meanwhile, as someone who had sold their real estate and capitalized on the equity from the stunning housing bubble... well your profits would have made you a multi-millionaire.

Just look at what the first time buyer would have reaped.

But now the question is... what can we expect from QE2?

As already mentioned, the Federal Reserve will continue with quantitative easing for the foreseeable future. There will be many episodes of QE, often combined with other initiatives such as inflation targeting.

I believe you will see far more QE than the announced $600 Billion. Much will depend upon the amount of economic growth or shrinkage that the U.S. economy experiences…and the recurring fear of many professional economists at the Federal Reserve that the U.S. is slipping into a Japanese-style deflation/stagnation. As explained yesterday, a QE2 of almost a Trillion will do nothing to counteract the amount of debt delveraging that is about to occur.

Add to this the issue of whether or not the Bush tax-cuts are renewed.

Non-renewal or expiration of the tax cuts means the Fed is on its own in stimulating the economy, and that means even more QE.

The amount of budget-cutting done by Congress (especially if it is rapidly implemented) could have deflationary consequences, prompting more QE from the Fed.

The majority of the economists at the Federal Reserve believe that inflation targeting and QE is the only way to prevent millions more U.S. jobs from disappearing. The language in the Fed’s announcements repeatedly states that they believe inflation is too low.

Inflation will be a longer-term focus of the Fed.

They have already come out and said they want to stimulate investment in real estate, commodities, and stocks by institutions and the public.

Fed officials want the U.S. economy to grow and they want individuals to start new businesses to increase employment and salaries. A long-term policy of continuing QE will be part of that process.

Side effects of QE are: a lower dollar, stronger commodity prices, and increased demand for stocks that can grow in the U.S. and abroad.

It must also be stressed that QE is going on in many places.

Every country engaged in printing money to buy dollars and thus keep their currency from rising too much is engaging in QE.

Japan, Brazil, and many other Asian and Latin American countries are in this category.

QE is everywhere and the additional liquidity from it is flowing into the markets of Asian and Latin countries with good growth prospects. It is also flowing into some non-U.S. currencies, gold, silver, oil, copper, food, cotton, rubber, and many other commodities, in addition to U.S. and European stocks.

Currency intervention, trade wars, and volatility will become the norm.

Expect to see trade wars break out in a major way as this game progresses. We’ve already had a hint of this with China’s decision to cut rare earth elements exports. However, this is just the tip of the iceberg. Things are going to be getting very messy going forward. Expect to see capital controls, tariffs, and outright trade wars break out. As a result, prices of various goods will skyrocket.

Inflation is coming sooner rather than later. The cost of just about everything is going to be going up... a LOT.

One thing that is different this time around, however, is that QE1 will not be like QE2.

In the prior instance, the short-term fuel led to short-term complacency about the economic trajectory. QE1 was presented an an Emergency Effort.

Everyone sees what QE2 is about.

Compounding that reality is that the Fed has no ability to direct its fire.

What’s likely is that much of the investment capital freed up by Fed purchases of Treasury debt will overshoot its target — the U.S. economy — and flow to emerging markets and especially into commodities that serve as a hedge against a falling dollar.

Be aware of this difference.

Back in March 2009 I referenced a couple of specific stocks. I was deluged with emails for advice about what to do. People literally freaked out when the stocks I recommended dropped in value.

I won't make that mistake again.

That's what triggered the disclaimer you see at the bottom of this blog.

I won't recommend any specific stocks this time.

What I can guarantee you is that the immediate future is one of great volatility, especially in anything related to gold/silver/commodities.

I can also guarantee you that the Federal Reserve will be resolute in it's mindset on this issue. Bernanke, an intellectual, wrote a doctoral thesis on how to respond in times like these. He won't do anything to deviate from that thesis.

Predictability is you ally here, use it wisely.

All the information you need to know on what is going to happen over the next 6-12 months have been covered in the last 3 days of posting.

Do you own research.

If you click on the youtube video I have posted above, you will hear a catchy tune from 1993 which I think you will find could serve as the Federal Reserve Theme song for QE.

• No no limits, we'll reach for the sky!
  No valley to deep, no mountain to high
  No no limits, won't give up the fight
  We do what we want and we do it with pride

Bernanke has made it clear what he intends to do.

Study the past, study what is happening, and position yourself to take advantage of it.

We are living in a once-in-a-lifetime moment in history.

Don't let it pass you by.

PS. Be warned now, I give whatever commentary I offer in my posts you are reading on this blog. Please read the disclaimer at the bottom of this blog and DON'T email me for investment advice.

I won't reply to your email if you are asking for investment advice.

Hell, I don't respond to 75% of the emails I receive as it is, (although I do read every single one of them).

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Why QE 2 won't work - Part 2

Today will be another long post, and I apologize.

If you read yesterday's discussion of QE1 you know that, as a plan to "get the economy on its feet again," QE1 was deemed insufficient.

Enter QE2.

If you have not seen it, Ben Bernanke wrote an OP-ED piece in the Washington Post defending the Federal Reserve's latest actions. You can read it here.

Will it succeed?

As mentioned yesterday, in the normal cycle of classical Capitalism the expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.

It is precisely that excess which occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble; mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.

And given that the economy faces $15 trillion in writedowns in collateral and credit, the bottom line is that the Federal Reserve's QE1 and QE2 in new credit/liquidity is insufficient to achieve the Federal Reserve's objectives.

It cannot help but fail.

Consider the size of the U.S. economy: $14 trillion. The probable size of QE2, when all is said and done, will be about $1 trillion.

That means QE2 is perhaps 7% of GDP. Even a whopping $2 trillion QE would equal about 14% of GDP.

(In contrast, by some measures China opened the floodgates of credit to the tune of fully 35% of their GDP to combat the contraction caused by the global financial meltdown in late 2008)

How much collateral and credit will be destroyed as the U.S. economy rolls over into recession/depression in 2011-14? Based on the latest (September 17, 2010) Fed Flow of Funds, Charles Hugh Smith provides the following rough estimates of losses yet to be booked in assets (collateral) and credit (debt):

• Residential real estate: current value, $18.8 trillion. Estimated value in 2014: $13.8 trillion, i.e. a decline of $5 trillion or 26%. If all impaired mortgages are written down or sold for fair market value, a full $5 trillion will need to be written off by somebody, somewhere. And Smith's 26% estimate is conservative; according to the Case-Shiller Index chart, a decline of 40% would be required to return the index to the year-2000 level.
• Commercial real estate (CRE): The Flow of Funds only reports "nonfarm nonfinancial corporate business" so the CRE number of $6.5 trillion is a few trillion light (that is, we need to add in CRE owned by financial corporations). Smith estimates writedowns of $3 trillion - a number others have also guesstimated. Empty malls, empty office parks, empty warehouses, empty retail: they're all worth essentially zero. The cost of bulldozing them is higher than their auction value.
• Consumer durable goods: All this "stuff" is supposedly worth $4.5 trillion, but when the millions of bulging storage units are emptied and sold, the actual market value of all this will be more like $3 trillion at best. So knock off another $1.5 trillion in collateral.
• Corporate bonds: A huge amount of junk bonds have been sold in the last year, bonds which will be useless once inflated profits and corporate balance sheets adjust to the 2011-14 reality. Smith tags the losses here at $1 trillion, which is probably conservative.
• U.S. stocks: Roughly $14 trillion: $6.7 trillion owned outright, $4 trillion in mutual funds and another $4 trillion in pension funds (which total about $11.6 trillion total). Once skyhigh estimates of future profits fall to Earth and the risk trade fades, then equities will get a $4 trillion haircut (i.e. they are about 30% overvalued). Investors are already exiting equities as an asset class (once burned, twice shy, and they've been burned twice in 8 years) and the next downturn will accelerate this prudence.
• Equity in noncorporate business: The Fed sets this at $6.6 trillion, and as the economy rolls over, households and business deleverage their massive debts and taxes rise, then a fair accounting of this non-publicly-traded equity would probably drop by at least $1 trillion.

Many analysts consider each of these estimates to be conservative, and they total $15 trillion.

The Fed estimates total assets of households and nonprofits (which is of modest size compared to households) at $67 trillion, and net worth at $53 trillion (that is, liabilities are "only" $14 trillion).

A reduction in collateral of $15-$20 trillion (including the $3 trillion in CRE losses) would still leave tens of trillions in assets. But it would certainly impair the economy's ability to leverage up trillions more in new debt.

The reality is that this uncollectible, impaired or defaulted debt would have to be written down or written off. Those holding the debt - the "too big to fail" banks - would be bankrupted by these reductions in collateral.

So how do you generate the "modest inflation" which is the Fed's stated goal when $15 to $20 trillion in collateral and credit are disappearing from balance sheets? How do you goose credit enough to inflate a new asset bubble?

Excessive debt and speculative bubbles cannot be "fixed" with additional doses of debt and speculation. The Capitalist reality is this: if the Fed truly wanted to fix the U.S. economy rather than protect its over-extended, debt-ridden Financial System, then it would force the liquidation of trillions in bad debt and force a "marked to market" valuation on every balance sheet, household and corporate alike.

Anyone who believes a meager one or two trillion dollars in pump-priming can overcome $15-$20 trillion in overpriced assets and $10 trillion in uncollectible debt is in for a profound disappointment.

The Fed's tinny little QE "bazooka" will be rolled over by the M-1 tanks of deleveraging and the recognition of $15-$20 trillion in losses.

And as long as Bernanke is Chairman of the US Federal Reserve, and this philosophy is followed, you can be assured there will be a QE3, 4 and 5.

It is inevitable.

Tomorrow some thoughts on the best way to position yourself.

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Update #1: QE2 announcement

So the US Federal Reserve has come out and said that QE2 will be $600 Billion at basically $100 Billion a month.

The best comments (and I shudder here) came from Jim Cramer on CNBC...

• "What we heard from Ben Bernanke today is he is going to adopt a Malcolm X strategy. He is going to get things to go right by any means necessary. And those who want to fight that, be my guest... you are fighting a man who will get the job done by any means possible."

The whole conversation with Cramer came down to this fact: the Federal Reserve has made it their mandate to interfere with the stock market and get stock prices to go up by directly printing money and investing in the market.

I am firmly in the camp that believes this will not rescue the economy. I completely agree with Cramer that Bernanke will try and get things done by "any means possible".

That means QE3, 4 and 5.

More on this to come.

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QE2 Day - some humour while we wait

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Afternoon Update on QE2... or "MOM, I banged my head on the ceiling again!"

The US Treasury has released its revised debt issuance/funding schedule for the fourth quarter of 2010 as well its fresh estimates for the first quarter of 2011 borrowing needs.

I won't bore you with all the details. There are only two things you need to take away here. (1) It will be revised upward again and, (2)the bottom line is that when all the debt funding is added up it results in US debt of $14.357 trillion.

That figures just happens to be $63 billion more than the recently revised debt ceiling of $14.294 trillion. Thus the US debt ceiling will have to be revised higher at some point in 2011.

Make no mistake... the money printing is only just getting started.

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Every breath you take...

A couple of points for a post that is being written late on Hallow's Eve.

This week the US Federal Reserve is going to announce QE2.

Personally I suspect that it will be lower than what the market is expecting. The announcement of the amount, that is.

The real amount will far exceed expectations.

Bernanke is an intellectual, and a predictable one at that. He has neither said anything up to now nor will he dare process a thought that deviates from his doctoral thesis.

I personally expect that the announcement will be for moderate QE and over the weeks and months ahead additional QE will be implemented a little at a time.

And as I have said before, get ready for inflation.

The announced (and stealth) monetization that is coming is going to accelerate the inflation that already exists.

The Federal Reserve has already stated the objective is increased inflation. A recent Fed Report, released in September, even argues that such unacknowledged CPT shocks (like the surges in the price of oil we will likely experience courtesy of a fresh trillion in liquidity) are beneficial to GDP and stimulative to the interest-rate sensitive parts of the economy. "In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion."

But this surge is not something we have to wait for. As I have said, inflation is already here.

The two key commodities that have been rising lately are oil and grains, specifically wheat, corn and livestock feed (see the BLS report on Producer Price Index of commodities).

Grains as a class have risen over 33% year-over-year. Refined oil products have risen just shy of 13%, and home heating oil 18% year-over-year.

That means food, gasoline and heating oil have risen by double digits since 2009.

Looming issues with the foreclosure crisis, the looming pension crisis', the looming individual US state budget crisis', all portent a massive amount of QE coming down the pike regardless of the amount announced by Bernanke this coming week.

Count on it.

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Riddle me this

The big debate in the financial world right now is "how large will next week's second round of American Quantative Easing be?"

it's the wrong question for a variety of reasons and I hope to touch on them at some point during the week.

The mantra being repeated over and over is the looming threat of deflation. The supposed intent of QE 2 is to lower interest rates to promote job growth and avoid the apparently growing threat of deflation. But the very idea that the economy is weak because interest rates are too high is laughable.

One of the greatest elements that threatens deflation, as the US Federal Reserve is quick to point to, is falling real estate prices.

But here's a question for you.

Why, when real estate prices were rising, didn't the Federal Reserve (or our own Bank of Canada) raise interest rates to bring them down?

Now that they are falling, the US central bank (as well as the BOC) feels compelled to lower rates to prop them up.

If falling real estate prices threaten deflation, why was there not concern about an inflation threat when real estate prices were rising?

Under the new way CPI is calculated, housing is neither inflationary or deflationary.

In his weekly Op Ed column, Peter Schiff has a theory. He thinks the spectre of deflation is a red herring;

• "All this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem. If the truth were known, a real panic would ensue. So, the Fed pretends buying treasuries is simply part of its master plan to boost the economy, even though, in reality, it is simply acting as the buyer of last resort."

Monetization of the debt under the guise of economic stimulus. More on this as the week goes on.

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Mid Morning Update: Run Turkey Run - it's a Ponzi Scheme!

(This is the 2nd post of the day: below is a post on collapsing new unit real estate sales)

Bill Gross is a hugely successful bond fund manager and the co-chief investment officer of Pimco. He personally manages the company's flagship, the Total Return Fund, which has $158 billion in assets.

Gross is highly influential and US Treasury secretaries call him for advice. Warren Buffett, the Berkshire Hathaway chairman, and Alan Greenspan, the former Federal Reserve chairman, sing his praises.

So keen attention is being paid to comments Gross made today in an investment outlook report he put out this morning.

He calls next Wednesday's planned QE2 by the Federal Reserve an attempted hypodermic straight to the economy’s heart; an adrenaline injection with a following morphine drip.

Gross then makes a stunning statement. He says:

• We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QE2 asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole

Gross supports Bernanke's moves because "it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do."

But while Gross gives Bernanke his 'qualified endorsement', he admits bondholders will likely eventually be delivered on a platter to more fortunate celebrants.

• (Cheque) writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic.

Then Gross delivers this stunning conclusion which so many bloggers have been saying for over two years now. Remember... this is not a tin foil hat blogger, but a respected confidant of both Buffet and Greenspan:

• Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time.

The Ponzi of all Ponzi schemes. Couldn't have said it better, Bill.

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