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The Fed had but one message for all of us: buy riskier assets and get out of Cash as it soon would be worth-less as Helicopter Ben provided more and more and more.

Tell Me You Are Not Surprised

June 1st, 2012 by Kurt L. Smith
  • Behold, Helicopter Ben Bernanke’s best laid plans are coming up short. Asset prices are no longer rising, nor are they holding. Asset prices are falling and the US Dollar is rising. Think this is just temporary? Asset prices peaked a year ago and once again they are moving in the direction of the long-term trend: down. The sound you now hear from the Federal Reserve is uh oh; the next sound we may hear is oh…

    The Federal Reserve came into this recovery with the upper hand. Fresh from saving the world from another Great Depression, the Fed told us it would crank up the printing presses and even drop Dollars from helicopters if needed to reflate this economy. Helicopter Ben had read the book: he tripled his balance sheet with Quantitative Easing, followed by QE2 and the ever-present hope of QE3. The Fed had but one message for all of us: buy riskier assets and get out of Cash as it soon would be worth-less as Helicopter Ben provided more and more and more.

    Many took note of Helicopter Ben’s message. After all, over the past decades we learned not to fight the Fed. The best assets would be hard, tangible assets like Gold, Real Estate, Oil and other commodities. Higher asset prices would also support bond prices as so many bonds are backed by such assets (mortgages, for example).

    More Dollars would mean more inflation, which would give our leveraged entities (junk bonds, mortgages and bank loans) an opportunity to pay off their debts with cheaper dollars from higher asset prices. Of course the good news just goes on and on because it is wonderful when a plan comes together, especially a plan that reinforces all we learned about finances these past decades. When the economy hiccups, the job of government is to pick up the slack. Together with the actions of Helicopter Ben, the Administration has done its part by spending trillions of dollars on just about everything it could think of.

    The problem, we are slowly discovering, is we have learned it all wrong these past decades. The Federal Reserve does not control credit and it cannot control the printing of Dollars. You control it. Here I am using the Big Inclusive You, which really means the middle class because only the middle class has the mass to move the needle when it comes to extending credit in meaningful amounts. It was the middle class that moved credit expansion into an exponential trajectory orbit so no group except the middle class could get us back on track. Credit Expansion Finished leaves all of the Fed’s hopes and dreams of reflation waiting and wanting. With so much credibility heading into 2009, no one doubted Helicopter Ben and his plan but as we take a look at the results we see credit expanded, it just didn’t expand enough. Without the economic engine of the middle class Helicopter Ben’s plan is now D-E-A-D and as this realization becomes recognized, the repercussions are enormous.

    The Fed had convinced us that it was in control and it could create money on its own terms. But money today is created by extending credit and credit had expanded exponentially because the middle class was tapping it like never before. In the early 2000s the middle class was using their home as an ATM and mortgages could not be created fast enough. Now that was credit expansion! Lately it has largely been banks and corporations making use of the Fed’s largesse. Sure credit has expanded for them, but this is a nit com-pared to the (former) economic powerhouse of a credit binging middle class. The Fed, the Administration and corporations have focused on credit creation; slowly the market is focusing on the lack of credit creation. The failure of the middle class to expand credit marks the failure of Helicopter Ben’s Federal Reserve.

    The initial hope of the Fed printing all that money provided a tremendous surge in the marketplace. With fresh fears of inflation, commodity prices headed straight up. Corporations dependent on commodity prices like transportation, utilities and consumer goods now had pricing power and the willingness to use it. Earnings rocketed forward (from a base of zero in 2008 this wasn’t hard) and when pricing failed to do the trick the corporations could then cut costs, I mean people, in order to keep the earnings moving forward. Government entities could do the same cost cutting of employees, pensions and benefits making their prospects rosier for their bond buying constituencies. More money floating around meant Meredith Whitney’s prognostication of municipal bond defaults was all talk and no substance. Even junk bonds and crummy bank loans should be worth more as Helicopter Ben went to work.

    All the while the market has tried of so desperately to ignore the driver of everything big and great: the middle class consumer. Fresh off losing trillions in residential real estate, certainly the actions of Helicopter Ben and the Administration would come to the aid of the homeowner. Certainly inflation, or perhaps the fear of it, would boost housing prices back up. How about no, no and no! The 800 pound gorilla in the room is D-E-A-D and please do not notice that smell as it would detract from all of the “progress” this economy has made. Get real! The middle class is tapped out and the race among the biggest corporations in America seems to be who can pick the carcass clean before there is no longer a middle class. We are focused on public corporations and their earnings and governments and their budget but no one seems to be focused on the health of the engine of it all: the middle class consumer.

    DUE 2/15 DATED 5/15/12 MATURITY: 2/15/2028
    SALE AMOUNT: $25,750,000
    2 2014 2.00% 0.50%
    3 2015 4.00% 0.65%
    4 2016 4.00% 0.82%
    5 2017 4.00% 1.10%
    6 2018 4.00% 1.37%
    7 2019 4.00% 1.62%
    8 2020 4.00% 1.87%
    9 2021 4.00% 2.08%
    10 2022 4.00% 2.23%
    11 2023** 4.00% 2.49%
    12 2024** 4.00% 2.75%
    13 2025** 4.00% 2.92%
    14 2026** 3.00% 3.06%
    15 2027** 3.00% 3.14%
    16 2028** 3.00% 3.22%
    *Yield to Worst (Call or Maturity) **Par Call: 2/15/2022Source: Bloomberg
    This is an example of a new issue priced the week of 5/21/12
    Prices, yields and availability subject to change.



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