Darshan's Blog

Darshan's Daily Market Ponderings

Bernanke Time Person of the Year - Shame

Wednesday 16th December, 2009

Afternoon all!

There has been a delay in today's blog because I've been in shock all morning. A day before Bernanke is due to be confirmed for a second term as FED chairman - he is crowned Time Magazine's Person of the Year 2009. Now a lot of people will look at this and think "He deserves it - everything seems to be getting better with my 401k.". Those who actually don't just live off CNBC and Fox News, will realise that Bernanke is living a lie. More so, the timing of it seems to convenient for his career. This is the man who in 2006, told the world that he saw no reason to think that the housing industry was in a bubble and so no risks to the system. A year later, he was dealing with serious risks and two years later two of the biggest banks in history had gone under - three years later in 2009 alone, a 130 banks have collapsed! If they're going to hand him Person of the Year, they might as well give Mugabe an award for humanity and Tiger Woods an award for fidelity.

Here are a few reminders of why Bernanke is just as much to blame for this mess, as Greenspan was before him.

Mar 28, 2007: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Jun 20, 2007: "the subprime will not affect the economy overall.''

Oct 15, 2007: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

Feb 29, 2008: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

Jun 9, 2008: "Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned."

Jul 16, 2008: (Freddie and Fannie) will make it through the storm , " in no danger of failing."," adequately capitalized"

Need I say more?

If I ran the printing presses at the rate Bernanke has, then I too could pump the market up with enough liquidity to sink the world - and yet that is exactly what he has done and just been rewarded for. The risk here is that that liquidity willl now need to be sucked back out and at the moment, all the profits created from it - are not sitting in your pocket - they are sitting as bank reserves, which are now up to $1.2 trillion vs a mere few billion last year. If you thought the first bit of 2009 was a crazy rollercoaster, then 2010 is going to be the ride of your life. You know why that money is being held as reserves and not being leant out as it should be? Well it's quite simple - the banks know that they need to hold back cash, so they can continue to deleverage over the next year. So far only $260 billion (I use the word only, because the word 'billion' means nothing anymore) of private debt has been wiped away. According to economist, David Rosenberg, the level of outstanding US private debt is $27 trillion. Yes $27 trillion!

What on earth do you think is going to happen when this debt starts getting written off or defaulted on? Especially with Options ARM mortgage resets coming over the next three years? If homeowners cannot afford their mortgage at today's low rates, they most definitely are going to struggle down the line. The US dollar is going to soar as margins get called and risk is taken off the table. This is going to be a nightmare and Time magazine's editor will look back at this year and think of it as their biggest mistake. Banks like Citi and Wells Fargo have made big noise talking about paying back TARP - but Citi's share price fell 7% the day it announced this and well, WFC is looking to raise more capital from a secondary offering, to make up for returning $25bn. Sound good? Not really. Essentially, the markets have been pumped up, they've sold the sheep with secondary offerings and now they're handing the free money back - while the FED holds most of the toxic debt. Well done Bernanke, 'rescue' the system by shifting the problem from one set of accounts to another. Ultimately, this is going to blow up in the FED's face in years to come. Not my problem, as I truly believe, the world is a better place without the private Federal Reserve.

Now look, you might think I'm overreacting but this market has no power behind it! Look at where we are - we have barely gone in anywhere in four weeks. In the last month we have barely moved up at all! This is December, it is meant to seasonally be a period of strong moves up and yet everytime a move up arrives, it happens in the futures and then gets sold during the cash session. More importantly, it seems the big investors do not care for the risk either - no matter how many stories we hear about money waiting on the sidelines. Want proof? Well if there is so much money waiting to be invested, then why is it not already in the market and why are investors willing to pile into short term treasuries for zero yield? (They are paying to park their money somewhere 'safer' than stocks). Does this make sense to you? Does this sound like a financial system that has been rescued? We're at a stage where they either stage a last gasp rally or this whole thing collapses into January. My money is more extreme spikes but ultimately a collapse in January - most probably Jan 22nd, when the NFP numbers come out and the miraculous figures from December are revised to be worse and the seasonal tempory employment is factored in.

I'll let you think that over and then see what you think of superman Bernanke. For now, the market is definitely struggling and today we have the FOMC accouncement. What if anything can they say that is different? They now have all this 'positive' data to deal with, especially the surprise 100,000 jobs gained last month - surely they have to address this? Will they be more hawkish and keep the USD recovery going? Or will they play it safe? Of course, they will not want to spook the markets and so the language will state that things are getting better but there are headwinds, which require caution and blah blah blah. If they give more details about the March 2010 first bout of QE reversal, then that could spook the markets for sure. So really, I see it as the mornal set-up - a spike in one direction and then once everyone is on the wrong side, a move in the opposite direction. Standard play really. I think the market will be looking at the removal of liquidity at the end of the week with $50bn of TAF maturing.

Personally, I wouldn't even bother trading this week. It's just not worth your time. At one point yesterday, the market didn't move for a good half hour - at all! The real moves will come right at the end of December and more likely into January. I'll keep you updated but my posts will be less frequent over the Christmas period - if there is anything important happening, I will most definitely make time and keep you informed.

In the meantime, I would love to hear your opinions of Bernanke and generally the economy. How are you feeling about things?

Happy and safe trading,

Darshan

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