Bernanke's Course Means All Hands on Deck

Sign in

Become a MarketWatch member today

Jon Markman's Speculations

Nov. 18, 2010, 12:01 a.m. EST

View all Jon Markman's Speculations "?

"? Previous Column

Emerging markets consumers fill their carts

First Take "?

Hey, Warren Buffett, thanks for nothing

By Jon Markman

SEATTLE (MarketWatch) "� No matter how much U.S. trading partners and politicians in Congress squawk, the Federal Reserve's unpopular effort to kick up the U.S. economy by cornering the market on government debt is not going away.

If the Fed were to cancel the program known as quantitative easing, its already vaporous credibility would be blown to the winds and commodity prices plastered.

So practical, opportunistic investors "� which is to say, ones that intend to survive "� need to be smart about not liking the Fed's plan. We have to understand and accept it while also planning for its consequences. That makes QE a little like living with teen-agers. You pray it's just a phase.

Whether you're retired or still planning your retirement, taxes are a major concern. MarketWatch's Robert Powell talks to experts about some unusual tax strategies to take before 2010 ends, including harvesting investment gains, rather than losses.

Let me explain what's really going on, and offer one special stock pick that might work no matter how much the government screws this up.

The basic problem of QE is that it is not being honestly explained by Fed officials. They are trying to describe it as normal "� one called it little more than a 75-basis point rate cut.

The truth is that QE is the subprime of monetary policy. It's a last-resort borrowing option with a balloon payment you hope will never come due. It provides the money for a spending spree on non-productive assets "� the government equivalent of a new kitchen and speed boat "� but not the means with which to pay it back. QE cynically creates a false sense of national wealth that will later be yanked away like a foreclosed home in the California desert.

One of my sources in the fund management world used to describe the securitized mortgage market that underlay the mid-2000s housing bubble as "gilded assets, fraudulently conveyed."? He meant that the securities were pieces of junk "gilded"? with shiny paint to make them look attractive "� and then sold to fund managers under a deceitful narrative.

This fund manager called me again this week to argue that QE is much the same: Fake money wrapped in a lie that the effort will help the U.S. create jobs. The manager argues that there is no independent academic or practical evidence that this is true, but the Fed and the Administration keep repeating it because they have run out of other options.

If war is "?'diplomacy through other means,"? paraphrasing Von Clausewitz, then you might say that QE is wealth creation through value destruction.

Beijing officials have led the chorus of cussing because they fear U.S. officials have failed to recognize that QE forces China to confront a mismatch of assets and liabilities.

You see, the People's Bank of China takes yuan deposits from the country's workers and compensates them in yuan at local interest rates of 2.5%. The bank then invests a large portion of these deposits in U.S. Treasuries paying 0.5% in dollar terms.

This means the PBOC is engaged in an epic reverse carry trade "� paying out more than they're taking in. And now the United States is haranguing them to increase the value of their currency, which would force them to pay more in yuan rates while also accepting less in Treasury rates. In effect, they are asking the Chinese to subsidize quantitative easing.

If the yuan were to suddenly rise sharply against the dollar as President Obama and Treasury Secretary Tim Geithner demanded in meetings in South Korea and Japan last week, the PBOC would be forced to repay local depositors and banks a growing "real currency"? deficit of almost two percentage points.

Letting politicians and economists mess around with the financial balance of power is extremely dangerous. It's like letting children handle Ming vases. It might work out, but it's not recommended. Obama, Geithner and Fed chief Ben Bernanke took a fragile situation and destabilized it further.

Buffett's New York Times op-ed misses the mark. What he fails to say was that the bailouts mostly benefited the status quo of power-elite finance, including himself and his investment firm, Berkshire Hathaway.

10:59 a.m. Nov. 17, 2010

You are incorrect about your statement:"Fears on the continent have led investors are dump euros and buy dollars. That's exactly the opposite of what the Fed wanted and expected..."On the contrary, that is exactly what the Fed wanted and expected. Initially, when QE-2 began, the primary dealers of the Fed began to hold a percentage of both the newly printed and previously..."

- TTolstoy | 12:59 a.m. Today12:59 a.m. Nov. 18, 2010

"British retail sales increase 0.5% in October http://on.mktw.net/c8txue" 4:38 a.m. EST, Nov. 18, 2010 from MarketWatch

"Japan's Nikkei Average rallies 2.1% to end about 10,000 for first time since June http://on.mktw.net/djqtEv" 1:06 a.m. EST, Nov. 18, 2010 from MarketWatch

"Hong Kong stocks rise early, helped by Shanghai gains; Hang Seng Index up 0.8% http://on.mktw.net/d0fGZT" 9:04 p.m. EST, Nov. 17, 2010 from MarketWatch

"Japanese stocks edge higher as banks strengthen; Nikkei Average up 0.2% http://on.mktw.net/91v1BK" 7:04 p.m. EST, Nov. 17, 2010 from MarketWatch

"Chief of airport security defends screening http://bit.ly/aRUAma" 5:56 p.m. EST, Nov. 17, 2010 from MarketWatch

Jon Markman

Speculations

Fed's course calls all hands on deck

Nick Godt

Market Medics

Controlling narrative on debt, inflation

Therese Poletti

Tech Tales

VC smackdown: Silicon Valley vs New York

Peter Brimelow

Wall Street Irregulars

Is China the key?

Darrell Delamaide

Political Capital

Memo to Obama: Can't beat 'em? Join 'em!

Lisa Twaronite

This Week in Japan