Qualitative Easing from Jackson Hole


Once again, everything is backwards. The worse news gets, the higher markets go. That’s because it brings government meddlers with their wacky ‘solutions’ back into the fray. (The irony here is that the rallying markets, anticipating the wacky solutions, make those solutions seem less necessary to those that might choose to implement them. Hence the bipolar nature of markets these past two weeks.)

Mr Market is under siege from all the institutions and authorities created by men. They lob their legislation over the walls, set off money bombs under the walls and try to bribe the gatekeeper with something they call stimulus.

But Mr Market doesn’t eat, drink or sleep – and he has one hell of a life expectancy. So you know he will be the last one standing. It’s just a matter of time before the rest of us give up on telling him what to do. That doesn’t make what goes on in the meantime less interesting. So let’s take a look…

Credit default swaps on many bank bonds around the world, known to you and me as insurance against their default, are priced higher than they were in 2008. That implies the likelihood of their default is at its highest yet.

” target=”_blank”>Philipp Bagus calls ‘Qualitative Easing’. That’s when the central bank swaps high quality assets for the banks’ poor quality assets. That improves the position of the banks.

Not necessarily in the way you would expect. Here is how it works: Central banks can hand out cash to banks if banks lodge collateral with them. That collateral has to be of a certain quality, based on the ratings agencies’ ratings. So what the central banks do is swap high quality assets on their own balance sheets for low quality assets on the private banks’ balance sheets and then use those high quality assets as collateral in lending agreements. This leaves the central banks holding the low quality assets and the banks holding the cash, with the high quality assets posted with the central bank as collateral. All without violating the rules of how central banks are allowed to operate.

This is already taking place in Europe with Greek bonds, where the bailouts are not simply handing out money, but handing out assets that can be posted as collateral with the ECB, which then hands out the money.

If you’re confused then you’ve discovered why they do it all so complexly.

Most likely, this sort of thing is going on in the US already.

But rather than berating the Fed for the terrible nature of all its intervention, we’ll accentuate the positives.

Blogger ” target=”_blank”>research paper connecting the dots between the retiring baby boomers and stock prices. The thinking is that the boomers will divest themselves of stocks as they retire and eat into their savings.

[Their] conclusions are just horrendous! The suggestion is that there is a 15-year bear market in front of us. [Price to earnings] multiples will fall by 50%.’

Our guess is that much of the same will apply here in Australia. From memory, the US’s demographics aren’t as bad as our own. Nor were Americans forced into superannuation-type investing to the same extent.

Oops. We’re not supposed to mention super.

Usually, licences allow you to do something. Driving licences allow you to drive. Gun licences allow you to shoot. But Australian Financial Services Licences do the opposite. They prevent you from doing things. If our publishing firm, Port Phillip Publishing, didn’t have an AFSL, we’d be able to write about superannuation all we liked. But because we have one, we can’t.

We can however, write about retirement savings. But that’s toeing the line a little too close for a goody two shoes like us.

So here goes:

Isn’t it rather telling that the most marketable benefit fund management companies can come up with regarding your government-mandated retirement savings is that they can find them?

Seriously, take a good look at your TV screens, advertising mail and tram stop billboards. Everywhere you look, the biggest Aussie funds management companies are advertising their ability to find your lost super, erm… retirement savings.

Our fingers are tied with red tape on this topic, so we will finish with a ‘happy birthday’ to Slipstream Trader Murray Dawes, whose subscribers are in several risk-free positions, awaiting Bernanke’s speech. That means they have taken enough profit on their trades so far that the overall position cannot lose money, but is poised to make a packet if the markets moves as Murray expects.

To find out what Murray expects will happen next, check out his YouTube channel

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.