Wednesday, August 10, 2016

Greater Fool Theory

- "A sucker is born every minute."

- American Promoter, Gamblers and Confidence Men

Do you know who is the greatest sucker? No, it is not the guy who paid $4,000 for a watermelon in Japan. This is 1,000 times worse. Clue: Lucky you and me, it is taking place in the here and now. Need another clue? How about some background music like on an elevator while you think about it? By the way this coach is going down just like our economy because of the destructive nature of the subject.

Badfinger, "Would you walk away from a fool and his money. If you want it, here it is, come and get it. But you better hurry 'cause its going fast."

Want better singers for your ride down? How about the Beatles?

"Did I hear you say that there must be a catch. Will you walk away from a fool and his money..."

Smart money is jumping on every new negative issue because they realize that they have a safety cushion. The issue is backed by the greater fool to which the smart money can dump. It is the best con because the fool is so stupid that there is actually no "con" at all. For those of you who put the clues together, congrats. The answer is the European Central Bank who is subsidizing anyone who borrows from them.
Hamilton In Vogue
He is the biggest on Broadway, but interest rates haven't been this low since our first Secretary of the Treasury was in office. In fact, Bank of America released a study showing that rates are at 5,000 year lows. 
Yes, there are other negative issues in the market. Japan has the most, but the Bank of Japan buys the entire issue. The ECB sponsors both public and private debt, and this leaves some open tranches to be filled.
Who Wants To Be A Millionaire?
The issues in question are in terms of billions of dollars and for example, say the issue moves thirty basis points. The original issue was plus 0.3%. It paid pittance, but returned full principle. Now, the smart money grabs the opening bid. When the issue hits the open market, the fool moves the bond into negative territory. Someone just made $30 million dollars. They cash out and leave the "fool" holding an issue that will pay less than the cost. The economy gains nothing. Society gains nothing except a few hedge fund managers or money institutions who picked the pocket of stupid policymakers. By the way, some day, down the road, the ECB balance sheet will be technically bankrupt. They don't fret. They will just print more even though the citizens of the union will oppose this concept and approach. So much for democracy, but then again, after the Brexit vote, the EU will be in the mood to appease all members and the printing presses will be working overtime!
It is like this quote from Alan Greenspan, "There is no other agency of government which can overrule actions that we take."
US Negative?
Yes. Foreign hedge funds have been buying US Treasuries and even with currency differences, they have made money until now. US yields have fallen so low that they cannot produce positive yields after returning to their native currency. Is this the harbinger of negative rates in the US? Heaven forbid!
What It All Means
We may know what they are doing, but they write the rules. Even if we had the money, the central banks and treasurer's won't allow us to participate in their auctions. This leaves the question: who really is the fool? Maybe it is us for allowing them to control our financial independence. 
But hey, who listens to populism? These financial engineers aren't elected and are not subject to democratic elections. Together, this is another reason to End the Fed!