Make-A-Wish Foundation Rings Opening Bell, Tanks Stocks. Seismic Collapse in Bond Market Yields Benefits Non-Profits Everywhere. Quantitative Easing!

The Make-A-Wish foundation destroyed the stock market today. Charity is even more out of style than clowns and Kiss.

This is ironic because a properly run foundation should have the majority of their investments in bonds. Well lets hope they do because the entire yield curve collapsed to below the rates where the Treasury has ever issued bonds. Assuming Make-A-Wish is properly run, they racked up massive gains today as the collapse in Treasury rates make their bond holdings extremely profitable.

As the market moves to price in quantitative easing, banks are aggressively hedging their exposure to the bond swap market, in which they have guaranteed long term rates for borrowers. This has kept swap rates below the bonds they're linked to... previously considered to be a mathematical impossibility. This is because banks normally charge a premium over the market rate on bonds to compensate them for the long term risk they're taking on.

Let's review the Bernanke playbook for conducting monetary policy in a zero Federal Funds rate environment which we spoke about a week and a half ago.

1) Take the Federal Funds rate to zero. Check.

2) Lower the rates on long term (5-30 year) bonds, by either promising to keep short term rates low for a number of years or commit to make unlimited purchases of long term bonds until their interest rate falls. Check.

3) Push down interest rates on private securities by buying them as well. Check for Commercial Paper (short term debt) Not much impact on long term corporate bonds, unfortunately.

4) Intervene in the Foreign Exchange market to weaken the dollar and raise the price of imports. No action yet.

5) Coordinated easing of both monetary and fiscal policy, for example tax cuts financed by issuing money so there is no increase in government debt. Check, sort of.

So it appears the majority of their gunpowder remains only in Foreign Exchange intervention. This is an extremely politically sensitive measure and is unlikely to be implemented except as a last resort.

But what is truly shocking about this whole thing is that the Fed has not come out to announce these courses of action. Very strange for a Fed that prides themselves on transparency.

The (un)Thinkable is happening. Panic now. Thankfully we have the Bernanke Experimental Economics Playbook

Vol. 1: "Soft Landings..."

Dr. Ben Bernanke, in a speech on November 21, 2002 laid out a playbook of options for the Federal Reserve to run should it ever lose control of monetary policy in the face of massive deflation. Intended primarily as a thought experiment, this graph shows the Fed losing control as we speak. Witness the (relative) stability of the federal funds rate until the bankruptcy of Lehman Brothers and the reverse take-under of A.I.G.. Up until today, the effective federal funds rate has never approached its zero limit... never-ever.

We are truly balancing on the edge of economic science and there is no chart for where we are going. This is a Ph.d level, alchemy lab improvisation called "Quantitative Easing." The Federal Reserve is synthesizing a powerful medicine, but they don't know if they're missing an ingredient, and they have no idea what size dose to give. To much and the patient will OD chasing the inflation dragon. To little and he'll go into cardiac arrest.














Click here to understand what I'm talking about.

And here to read "The Unthinkable Has Happened" by Tracy Alloway, Ftalphaville.ft.com

And here to read "Obama Can Be a Roosevelt, Not a Carter" by David Blake, Ft.com

One way bets... Vallejo, CA

Amidst a financial crisis of the worst kind, let's put things in perspective. For at least a decade, my fiancee's grandfather, Grampa Moe, was convinced that the "bad times" were coming. He prepared for one scenario, a repeat of the Great Depression. This required land, a house, several watercraft, 30 pressure cookers and ample stockpiles of gold and silver. In light of recent events, this seems extraordinarily prescient. If he were alive today (he got tired and frustrated waiting so long for it to happen) he would tremendously enjoy his vindication and his transformation in his family's eyes from eccentric to genius.

But history will not repeat the past because we have in our employ Chairman Ben Bernanke, the foremost scholar on the Great Depression, and possibly the most creative, trenchant, and able authority to sit on the Reserve Board since Marriner S. Eccles presided over the New Deal.

Grampa Moe prepared for the crisis in broad strokes. But eight years into a recession which has now reached its crisis phase, it is time to make some refinements to his strategy.

The gold and silver he stockpiled has trebled in value. The pressure cookers are most likely rusted. And while the house has fallen in price, its value is unchanged. If five years from now when the crisis abates and life returns to some semblance of normality, the gold and silver will fall and the value of the home will rise again.

In this situation then it seems prudent to sell the metals now while they are extremely valuable, in the hopes that everything will eventually be okay. Under no circumstances could it possibly make sense to sell the home at its extremely distressed price, because after all this is Monterey, California.

In the Dust Bowl where did everyone go? California. California, the most fertile state in our nation, the epicenter of our innovation, is gift from God which appeared to its immigrants literally on a golden platter.

With that in mind lets turn our attention to the focus of this installment of "One way bets..." Vallejo, California.

Vallejo sits at the mouth of the Sacramento river, on the border of Napa County, in the North of San Francisco Bay. It is a 45 minute ferry ride to the Ferry Building in San Francisco, surely the most pleasant commute in the entire Bay Area. It is filled with charming Craftsman-era bungalows and is a short 10 minutes away from the new 300 million dollar cancer research facility at Turou University.

It is currently in the embroiled in the largest city bankruptcy in California history and is one of the largest casualties of the sub-prime collapse with thousands of foreclosures citywide. Houses are down in many cases 70% from their peak in early 2006. With all of the foreclosures, rental rates have gone through the roof as people struggle to find adequate housing. In this climate, it is easy to find a bungalow for a hundred thousand dollars which, at a 6% rate, require monthly payments of $600. With rents averaging $750-1000, this is a steal even if you assume the house sits vacant for a few months every now and then.

Prepare to kick yourself in 15, in 30 and again in 45 years if you miss this opportunity now.