Fish or Cut Bait

Written By Christian DeHaemer

Posted March 10, 2011

Back in November 2011, the Federal Reserve declared it would instigate a program to bankrupt the United States through creating money out of thin air.

But because you can’t call something “The Bankrupt the U.S. Program”, they called it “Quantitative Easing”.

And because this was the second such program created by Fed Chairman Ben Bernanke, it was proclaimed Quantitative Easing Two, or QE2 for short.

During QE1, the Fed bought $1.25 trillion in mortgage-backed securities from large banks like Goldman Sachs.

No one knows how to value these bits of paper, but they are worth much less than Ben (you) paid for them…

This time, it’s different

In QE2, the Fed isn’t paying full price for those crazy worthless mortgage bonds. Instead, it is creating dollars to buy $600 billion in long-term treasury bonds.

Remember during World War II, when there used to be celebratory events that got people to buy bonds?

No need for that stuff anymore… The Fed will buy them.

All of this was done in an effort to push down long-term rates, save the housing market, and get people back to work.

rate chart march 10 As you can see by the chart above, it has failed.

Rates have gone up since November and are about to break out.

You start to believe them

Back in college, I used to know this kid that would get in all sorts of scrapes. He was the type of guy who always had his car towed, was fighting with the kids down the hall, or was hiding from some girl.

His catch line was “So what? I’m a jackass.”

I’m sure you know this guy. Everyone has met him. At first you laugh and think he is a loveable scamp… But as time goes on, you take him at his word.

Yeah, you realize, he is a jackass.

That’s the same game Ben Bernanke is playing.

Ben is saying, “I will destroy the dollar and cause inflation by creating money out of thin air, giving it to Goldman Sachs at 0.25% and buying it back at 3.5%.” (Goldman recently paid $430,000 in bonuses per employee.)

Guess what?

I believe him.

The Dollar Index

dollar index march 10 a

The problem is that banks have lots of money to lend, at reasonable interest rates. 

It’s just that no one wants to build new factories when they are running at 70% of capacity…

No one wants to buy a house when the price of houses keeps falling…

And no one wants a new car when the price of gas just went up another 40 cents.

The only people borrowing money are hedge funds, and they are buying stocks and


Hedge funds seek to make the most gains for their clients. They are risk takers. 

Over the past six months, the easy way to do that is borrow cheap money and invest in things like oil, gold, silver, or equities.

This is why the market has only gone up for the last two years.

 sp500 march 10 b

But what will the Fed do now?

QE2 is set to run out on June 30, 2011. And seeing how the market looks ahead three to six months, even your lunkhead broker is starting to wonder what happens next…


The Fed can either announce QE3 — in which case the debt load goes up, the dollar breaks below support, and long-term interest rates skyrocket, killing off whatever’s left of the housing market…

You may have heard that Bill Gross, the head chef at Pimco (the world’s largest bond fund) has reduced its T-bills to zero. That’s right — Mr. Gross has gone to cash rather than trust the full faith and credit of the U.S. Government.

He knows that rates will be higher after June.

Or Charybdis

The second option the Fed has is to not do QE3 and let the chips fall.

This will destroy the stock market.

I fully expect that one of these Tuesdays (I’m guessing sometime in March), the Dow will open down 600 points and we’ll all be treated to pictures of sweaty, worried, crestfallen schmucks in the NYSE pits.

I never went to Harvard, nor was I good enough to work for the government…

But even I’m smart enough to know you can’t spend your way out of a debt crisis.

You can make up whatever pretty name you want for it… but at some point, the check bounces. June 30, 2011, is the deadline.

Personally, I’m 60% cash with the remainder long oil, gold, and other things you can drop on your foot.

The day will come — maybe as soon as next week — when the experts are rending their clothes and gnashing their teeth…

At this point, the buys will be plentiful and sweet.

It’s time to go to cash.


christian dehaemer

Christian DeHaemer
Editor, Energy and Capital

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