Posted 9 months ago on Feb. 15, 2013, 8:29 p.m. EST by whaddyathink
from Millville, NJ
This content is user submitted and not an official statement
What I'm seeing is the Dow kicking above 14,000 and the typical cheerleaders clamoring for more dupes to join in the bull market. I see folks who are noted for their past achievements and investing acumen totally puzzled by the "lack of fundamentals" yet the market continues to climb. Is it really that hard to figure out? I claim the answer is a resounding, "no". Here's a few points to consider:
As we know, the level of "excess reserves" the large banks have on deposit with the Federal Reserve went from 1.8 billion in January of 2008 to 1.08 TRILLION in January of 2010 to 1.4 TRILLION in January 2013. What are these "excess reserves" and why would banks deposit them with the Fed? Well, they can consist of cash, Treasuries, or anything else that the banks and the Fed agree has value. They "deposit" them with the Fed because the Fed pays interest on them (supposedly only .25% but that is not necessarily an accurate number). So, that yields roughly 3.5 billion per year for doing nothing. Furthermore, these same excess reserves can be used as collateral to borrow money from the Fed discount window at 0% to do with whatever the hell they feel like. We also know that the Fed is buying 45 billion <per month> in Treasuries from the banks (who bought them from the Treasury using monies borrowed from the Fed at 0%). They will typically sell these to the Fed at a profit, sometimes as much as .5%, or 6% per year (or roughly 32 billion per year in profit for nothing). Since the Fed is conjuring this $45 bills per month out of ether, that money then goes directly to banks who then use it to gamble in the stock market. It is therefore small wonder that the market continues to climb in defiance of all logic. (There is also the 401K continual input but numbers for that are harder to come by.) See this and this
In addition, the banks are "selling" mortgage-backed securities to the Fed to the tune of $40 large per month. Keep in mind that these securities are backed by mortgage pools that are heavily impaired by delinquent loans, bad title transfers, HELOCs and 2nd mortgages, NINJA/Alt-A loans, and others. Ordinarily, these securities, if forced to be marked to an actual market value, might be worth 40-50 cents on the dollar or less. (Keep in mind that Fannie and Freddie just recently won some put-backs to the banks for crap loans. Care to guess where these will end up with Uncle Sugar buying $40 billion a month?) As it is, these banks can and are selling these securities to the Fed at full par. So, as they decrease their pool of bad debt (by transferring it to the public balance sheet), they have two bennies: one, the direct infusion of cash and two, reduction in their loan-loss reserve requirements and bad-debt write-downs - a win-win for the banks and a lose-lose for the rest of us. So, these $40 billion per month have to go somewhere don't they? How 'bout them commodities, eh? And, our favorite HFTs. And it allows them to continue their risky derivative gambling like the $399 billion in credit risk from derivatives or the $227 trillion in total, 80% of which are, guess what, interest rate derivatives - meaning, that if interest rates rise even .5%, enough of these will trigger to implode the top 5 banks. See here
There is no exit strategy for the Fed because there can't be. Once the monetary crack cocaine stops flowing via 10ft. mains, the system that has been levitating the stock market collapses. Further, only thru these massive wealth-transfer schemes have the major banks been kept from collapse. The Fed's balance sheet keeps growing and growing because it has to. Furthermore, they can't "sell" their portfolio because there are no buyers (and, in the case of the MBSs, it's impossible for them to get out what they paid for them and the Treasury can't take the loss. So, they can NEVER sell them, which, is the same as being worthless.) If they stop artificially containing interest rates, the top 5 banks implode simultaneously and the Federal Government goes broke instantly.
This is the problem with Ponzi schemes and moral hazard. Once they start, it's difficult to stop, and, if they go on for very long, they become systemic and totally supplant the original market. This is where we're at now. The market has been supplanted by smoke and mirrors.