Out of the Box: The Ultimate Bear Case

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“I’m not lost for I know where I am. But however, where I am, may be lost.”

There are few, if any, more sensible literary figures than the “Silly Old Bear.” His common sense is grounded, and his words of wisdom are among the best, that the world has to offer. With $17 trillion in negative yielding bonds now, globally, he is spot on that “where I am may be lost,” because this type of economic manipulated catastrophe, is surely a losing bet. Just wait until the nations of Europe try to find their way out of the mess they have created.

“Think it over. Think it under.”

Don’t get fooled, by the drivel, that is too often found in the Press. The negative yielding phenomenon, which we are currently experiencing, is not being caused by investors, or even the central banks. Yes, the ECB and the SNB and the Bank of Japan are doing their Masters’ bidding, of that there is no doubt. However, these central banks are “not” the culprits.

The culprits are, in fact, the nations of the European Union and Switzerland and Japan. They are manufacturing money, from computer keystrokes, and then using it to buy bonds to force down their interest rates into negative territory so that their budgets, and social programs, can be afforded.

You can buy a lot of stuff, I point out, when you don’t have to pay for it, and that is exactly, and specifically, what these nations are doing. This also means that all of these countries, both economically and politically, do not have the resources to support themselves, and their ambitious agendas. These nations have, I assert, gamed the financial system, even if no one but me, wants to point it out.

“There’s the South Pole, said Christopher Robin, and I expect there’s an East Pole and a West Pole, though people don’t like talking about them.”

In a way, I feel sorry for our Federal Reserve Bank. They are going to have to do something. They have never been confronted with anything like this before, there is no historical precedent. Yet, here we are, and something must be done. There is no avoiding it.

Their response has nothing to do with housing starts or our inflation rate, or jobs or growth and I wish they would stop blaming things, which are not the blame at all. I say, “Come on, be big boys and girls and look at the problem squarely in the eye.” It is only when the real culprit is identified, and called out, that you can respond in an appropriate manner. Otherwise, you are playing Don Quixote and fighting with windmills. Such a ridiculous task.

The Fed needs to stand up and say that the nations of Europe are causing these Sub-Zero yields and that, they are causing “collateral damage,” to the United States. The nations of the EU, through the manipulations of the European Central Bank, are damaging our yields, our savers, our pension funds, and grotesquely helping our borrowers. They are driving the American Dollar ever higher, versus the Euro. They are forcing European money into American securities as the only stable place left, with positive yields. That is not their primary purpose, I agree, but there are causing damage to the American financial markets, none the less. There is just no way around it. The Fed just has to get on with it.

“Oh, help!” said Pooh. “I’d better go back.”
“Oh, bother!” said Pooh. “I shall have to go on.”
“I can’t do either!” said Pooh. “Oh, help and bother!”
-A.A. Milne

The Fed, America’s central bank, not the world’s central bank, for whatever reasons, obviously, does not want to call the other central banks out. One might think that they are trying to be polite, but I doubt if that is their motivation. Perhaps, it is because they haven’t figured all of this out yet. Perhaps, they are only staring at American events, but then that would be a mistake of the first order. There are a number of people at the Fed that get what I write every day.

“Hello, hello, are you paying attention?”

My suggestion is for the Fed to lower American interest rates to just the positive side of Zero, and then stop. I also suggest that they do not add to their balance sheet. I further suggest that they start buying Treasury Bills and end the ridiculous debate about the consequences of a yield inversion that is only caused by the simple fact that the Fed has not been buying in this space.

The Dollar/Euro issue may have to be addressed by the Treasury Department, and the Fed. If the nations of Europe keep pressing on, which I suspect they will, with a bigger balance sheet, and more debt buying, and more Quantitative Easing, then the government of America will have to respond. Pretending all of this isn’t happening is not the appropriate manner, to respond, in my estimation. I have never been fond of any strategy which involves the ostrich like posturing of burying your head in the sand. So hard to see and so tough to get the stuff out of your eyes.

“Pooh went into a corner and tried saying ‘Aha!’ in that sort of voice. Sometimes it seemed to him that it did mean what Rabbit said, and sometimes it seemed to him that it didn’t.”

“I suppose it’s just practice,” he thought. “I wonder if Kanga will have to practice too, so as to understand it.”

I wonder if it is possible for our “Silly Old Fed” to say, “Aha.”

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
[email protected]
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.  Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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