Saturday, March 21, 2009

Legacy=Old Junk

"Broadening the TALF to include older, illiquid and lower- rated securities... " The rhetoric and misdirection will be in full force come Monday or Tuesday as Geithner and clones reveal an expansion of the TALF to purchase, among other things, "legacy assets." What the hell are these things? Good question. These are assets so old (mostly 2005 and 2006) and worthless that they make the MBS assets look good.

What should bother us about these purchases in addition to the rampant increase in money supply is, how the hell are we ever going to get rid of them. Our government is creating an artificial market for these bad assets. When inflation (super, hyper, or otherwise) kicks in, we usually try to reign it in by selling treasuries and other assets. Some estimates have us increasing our money supply 15-fold in the next few years. To retire that debt, we'll have to sell these products and that ain't happening.

For all of the talk about deflation, it was interesting to see the $70 one-day spike in gold and the resurgence in oil above $50 on Ben's announcement. He's been wrong, both in theory and in practice, about everything so far. So when he asserts that inflation is an easily reversible process, I'm more than a bit skeptical.

So let's see where Geithner's big pitch takes us next week. My guess is the market's will celebrate and re-reward the 400 points they took away from him last time. I would expect commodities to continue to rise under this surge in money, however.


Tiger Coach said...

Ax... In your humble opinion, do you believe there is any chance that the program to purchase "legacy assets" under TALF has already been factored in to this market?

Interesting that financials would sell-off before the big announcement...maybe nothing more than options X day...


AX said...

Unfortunately not. I think as the details are intentionally leaked this weekend, futures will shoot up. Then, after announcement, we'll see reality return as it did post Bernanke.