Back to the Future Recession
2 4/24/09throw up. But we are going to get quarterly or semi-annual announcements, saying, we are goingto do another $300 billion here, another $500 billion there. Pretty soon it will be a really largetotal number.When we first started out with TALF and everything, it was a couple hundred billion, andnow we just throw the word
around and it just drips off of our tongues and we don’teven think about it. A trillion is a lot. It’s a big number. And the total guarantees and backupsand all this stuff we are into – I saw an estimate of $10-12 trillion. That’s a lot of money.Understand, the Fed is going to keep pumping money until we get inflation. You cancount on it. I don’t know what that number is; I’m guessing maybe as much as $2 trillion. I’veseen various studies. Ray Dalio of Bridgewater thinks it’s about $1.5 trillion. It’s some very bignumber way beyond $300 billion, and they are going to keep at it until we get inflation.Side point: what happens if the $300 billion they put in the system comes back to theFed’s books because banks don’t put it into the Libor market because they are worried aboutcredit risks? It does absolutely nothing for the money supply. Okay? It’s like, goes here, goesback there – it doesn’t help us. The Fed has somehow got to get it into the financial system.They’ve got to figure out how to create some movement.Will it create an asset bubble in stocks again? I don’t know, it could. Dennis [Gartman]talked about being nervous yesterday. I would be nervous about stock markets both on the longside, as I think we are in a bear market rally, but also there is real risk in being short. BillFleckenstein will be here tonight. He is a very famous short trader. He closed a short fund acouple of months ago. He says he doesn’t have as many good opportunities, and basically he’sscared of being short with so much stimulus coming in. So it’s going to work, at least in terms of reflation, but the question is, when? A year? Two years?
Financial Innovation: The Round Trip
Financial innovation is one of the drivers of the velocity of money. We started inapproximately 1991 creating the first securitizations and CDOs. It was done at Merrill Lynch, if Iremember right. But they started getting copied, and then we went into warp speed, creating allkinds of new CDOs and SIVs that invested in loans, securitized mortgage debt – most of whichwas rated AAA – banks loans, credit card debt, etc. Without thinking about it, we created ashadow banking system that funded a huge chunk of our total credit markets. It was outside thebailiwick of the normal regulatory authorities.Then in 2007 we began to destroy the shadow banking system. If it was working so well,why did we do that? Because they mismatched their liabilities and assets. They were borrowingshort-term and lending long-term, and doing it highly leveraged. They were buying up long-termassets at 4-5-6%, some (or most) of them rated AAA. Then they were selling commercial paperat 1% or 2% – so you get a 2-3% profit spread.A 2-3% spread doesn’t really make you anything, you’re not really excited about that; sosince we’re dealing with AAA investments that everyone believes to be absolutely safe, let’s