Archive for October, 2011

Math Too Hard: Qualitative Easing a Literal No-Brainer

Unfortunately it seems that, when we recommended Quantitative Easy, even though it was super easy, it didn’t gain a lot of traction. The markets haven’t been nearly as easy as Ben had hoped. So we here at LoS went back to the blackboard for a new idea, something on which we could write a clean, articulate white paper.

(Aside: yes we have a BLACKboard. Funny story because see last election cycle we realized that voting for Obama was a sweet get out of racism card, like buying carbon offsets so you feel ok about how much “damage” you do every time you fly in a plane, and while this came in very handy as a guilt hedge, based on his performance we don’t think we can vote for him again, plus it wont be nearly as “urban cool” to vote for a candidate with the slogan “Change, Again, Seriously.” So we thought, what else could we do to show cultural diversity? And we came up with installing a blackboard as the most obvious answer.)

After furious sessions, much chalkyness and vigorous eraser banging, what did we come up with? Qualitative Easing. As mentioned in our last Easy piece math is hard, almost as hard as lifting weights (which are VERY heavy by the way, just found this out). But Ben, the Bernank, is a hard man, capable of bearing an Atlassian load without so much as a shrug.

Qualitative Easing will have no math (rejoice!), it will just be a touchy, feely, sensual qualitative description of how the Bernank is going to increase prices for things that you OWN (stocks, bonds, homes) and keep prices the same for things you BUY a lot (gas, food, chia pets, viagra, tickets to Japanese hologram concerts).

Assuming he accepts my draft of his Qualitative Easing announcement speech (practically a fait accompli), it would go something like this:

Dear Americans,

I, the Bernank, am going to buy all of your assets from you at much higher prices and, like a hot shower with mango body wash, it is going to feel so good for both of us. I know you’re worried about the fact that the cost of everything is going up more than your income, but worry not: it is always darkest before dawn, and a beautiful dawn it will be with the prices of all the things you want to be more valuable growing like the rising hot solar star in space that we call the sun. Simultaneously, congruently, and coincidentally, the price of everything you want to be lower will fall like the delicate summer rain which wets the earth and promulgates the freshest of smells: moisty asphalt.

My warmest and kindest and biggest love to you,
Ben Bernanke

Things Are Too F**king Complicated

Sept 29th’s FT contains two alarming articles. Martin Wolf calls for the EU to get the printing presses running because everything else has failed. We respect Mr. Wolf as one of the only three journalists in the world today who thinks for himself and does not have his head wedged up his ass. We respect his idea as well. He may be wrong but his idea is simple, to the point, and he admits it’s desperation (he calls it “the unthinkable”).

In the second article, George Soros explains how to prevent a “Second Great Depression.” Mr. Soros is an investing genius and a very smart man. Perhaps too smart. Because I have no f**king idea what he is talking about.

“This is how it would work. Since a eurozone treaty establishing a common treasury would take a long time to conclude, in the interim the member states have to appeal to the ECB to fill the vacuum….

It would require a newly created intergovernmental agency to enable the EFSF to cooperate with Europe’s central bank. This would have to be authorised by Germany’s Bundestag and perhaps by the legislatures of other states as well….

The EFSF would be used primarily to guarantee and recapitalise banks. The systemically important banks would have to sign an undertaking with the EFSF that they would abide by the instructions of the ECB as long as the guarantees were in force. Banks that refused to sign would not be guaranteed. Europe’s central bank would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own account…

To relieve the pressure on the government bonds of countries such as Italy, the ECB would lower its discount rate. It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills and encourage the banks to buy the bills. The banks could rediscount the bills with the ECB but they would not do so as long as they earned more on the bills than on the cash.”

Ok, so I skipped a bunch of parts but WTF George? What are you talking about? I read this article excited to learn the solution to our woes but now I just need a stiff drink. I have literally no idea what he is talking about.

Neither do the regulators. Unfortunately, that will not stop them from implementing some inferior version of his plan. After all, they love complicated stop-gap measures that buy them a few more days/weeks/months and pass the buck to the next unlucky legislator.

As a society, we have outsmarted ourselves. Things are too complicated. No one — not George Soros, not The Bernank, not The Maestro — can understand how all the pieces fit together and where all the unintended consequences will pop up. And yet we add more towers to our castle built on sand.

Recommendation: Initiate a complication index spread trade. Get long short-term complication and confusion while shorting the out-year complication basket. Things are going to simplify, one way or the other.