Bernanke Has Brett Favre Moment As QE2 Hail Mary Picked Off, Going The Other Way

If lowering bond yields was in the playbook, Ben needs to go back to the drawing board

The Fed’s additional round of quantitative easing through large purchases of Treasury bonds was aimed at driving long-term interest rates lower.? That’s not how it’s worked out so far.

As soon as the Fed started hinting at QE2 in early September, interest rates on bonds began rising instead, driving bond prices down significantly. (Bond prices decline when bond yields rise and vice verse.)

It’s been a trying experience for the large number of investors who have piled into bonds and bond funds over the last couple of years on expectation they would be a safe haven.

The bubble that formed in late 2008 as a result of that period of record buying burst and bond prices plummeted. Bonds have now given back most of the gains made in the early months of this year.

Thirty-year Treasury bonds have now lost 9% of their value in three months. The popular iShares Barclays 20+ Year Treasury Bond ETF (TLT) has declined 15% in value.

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I hope you listened when I warned you of our sell signal on Treasury bonds. The ProShares Short 20+ Year Treasury (TBF) inverse bond ETF, designed to move opposite to long bond prices, has been the real safe haven, moving up as fast as bonds have been declining.

Then there is the U.S. dollar. The Fed’s additional round of quantitative easing was also expected to drive the value of the dollar down further, helping to boost the U.S. economy by making U.S. exports less expensive in global markets.

The dollar did begin plunging again in September when the Fed first began talking about the possibility of QE2, and spiked down in early November after the Fed announced its decision.

However, sentiment for the dollar was at a record extreme of bearishness, and short-selling of the dollar was at near record levels. But the dollar found support at the trendline drawn through its lows of 2008 and 2009, our technical triggered a buy signal on the dollar, and the dollar has also defied the Fed by rising steadily since.

Which brings us to gold.

Another of the Fed’s stated goals for QE2 was to create some inflation, in an effort to inflate the economy into a stronger recovery. Gold, the age-old hedge against inflation, initially responded by continuing its bull market, spiking up to a new high.

But after gold spiked up intraday Tuesday to a new record high at $1,431 an ounce, it suddenly reversed to the downside by a big $23 an ounce, to close down $7 at $1,408. Today it plunged another $26 an ounce and at $1,382 is under $1,400 again.

Gold is being whipsawed by government actions, spiking up on the Fed’s easing decision, on expectations it will create inflation, and declining the last few days on expectations that China will raise its interest rates to ward off inflation.

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Five Filters featured site: So, Why is Wikileaks a Good Thing Again?.

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What WikiLeaks Should Say About Regulators Who Knew Shady Deals Were Going On

While I can-not pre-dict what Wik-iLeaks will leak about some major banks, I have a hunch that one of the rev-e-la-tions might be from a spe-cial New Con-structs report pro-vided to the Sen-ate Bank-ing Committee’s Sub-com-mit-tee on Secu-ri-ties, Insur-ance, and Invest-ment in late Octo-ber?2009.

In that report, we revealed that reg-u-la-tors, if they were pay-ing atten-tion, would have seen that many Wall Street firms were engag-ing in alarm-ing lev-els of credit deriv-a-tives trading (credit default swaps or CDS).

For exam-ple, the notional value of Bank of America’s (BAC) credit deriv-a-tives con-tracts at the end of 2007 was over $3 tril-lion and 5328% greater than the $57 bil-lion at the end of 2001. For Amer-i-can Inter-na-tional Group (AIG) the notional value of its credit deriv-a-tives con-tracts at the end of 2007 was $562 bil-lion and 447% greater than the $126 mil-lion at the end of 2001.

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It is a won-der that Bank of Amer-ica was able to sur-vive the finan-cial cri-sis with-out the same level of bailout/takeover by the U.S. gov-ern-ment expe-ri-enced by AIG given that BAC’s credit deriv-a-tive expo-sure was so much greater. Per-haps, Wik-iLeaks will offer some insight into how that happened?

The growth in expo-sure to credit deriv-a-tives was so high that any-one pay-ing atten-tion would have noticed. So, either the reg-u-la-tors knew and chose to do noth-ing about it (i.e. Bernie Mad-off) or they sim-ply were not pay-ing atten-tion (i.e. Enron, World-Comm?etc).

The point is not that reg-u-la-tors missed or ignored clear and obvi-ous early warn-ing sig-nals of the impend-ing finan-cial fall-out that occurred years later. The point is that they seem to miss these sig-nals quite?often.

None of this sur-prises me given my expe-ri-ence work-ing with the SEC, Sen-ate Bank-ing Com-mit-tee, FDIC, Sen-a-tor Corker, and the Con-gres-sional Over-sight Panel. My pre-sen-ta-tions to them focused how to improve the integrity of the cap-i-tal mar-kets most effi-ciently by imme-di-ately fill-ing holes in the cor-po-rate finan-cial report-ing sys-tem. I high-lighted sev-eral major breaches of finan-cial dis-clo-sures that had gone unde-tected and remain uncor-rected by the SEC. For exam-ple, over the last 5 years we found 10 com-pa-nies whose income state-ments do not add up cor-rectly and 20 com-pa-nies in the last 11 years whose bal-ance sheets do not bal-ance. For more exam-ples, see the Cor-po-rate Finan-cial Dis-clo-sure Trans-gres-sions report I sub-mit-ted to the SEC and the Sen-ate Bank-ing Com-mit-tee. What you read in that report will surprise?you.

In my hum-ble opin-ion, our reg-u-la-tory frame-work (before and after over-haul) is woe-fully ill-equipped to find, track and address the finan-cial machi-na-tions con-stantly invented on Wall Street and in cor-po-rate America.

As I stated in Pri-vate Sec-tor to the Res-cue, “Given that our abil-ity to trust polit-i-cal lead-ers is low, we must rely more than ever on pri-vate enter-prise to lead our society.”

There is no sub-sti-tute for “doing the dili-gence.” Watch your back when investing in this mar-ket because no one else is watch-ing it for?you.

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Five Filters featured article: Beyond Hiroshima - The Non-Reporting of Falluja's Cancer Catastrophe.

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